Trade Finance 629 v1

Trade Finance
Sub Code - 629
Developed by
Prof. Abasaheb Chavan
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
!
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe 2. Dr. B.P. Sabale 3. Prof. Dr. Vijay Khole 4. Prof. Anuradha Deshmukh
Group Director Chancellor, D.Y. Patil University, Former Vice-Chancellor Former Director
Welingkar Institute of Navi Mumbai (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

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1st Edition, March 2019

BIO SKETCH
!
Abasaheb Chavan: Bio sketch
Abasaheb Chavan is a Professional Banker currently working with one of

the fastest growing private sector bank as Head - Trade Compliance. He is
handling International Trade Compliance, Advisory and Regulatory matters.
He is professional banker with more than 40 years of banking experience.
His areas of expertise include International Trade Finance; Corporate and

Retail Banking; Rupee drawing arrangements with International Banks and
Exchange Houses, NRI business,External Commercial Borrowings (ECB);
Capital investment under Foreign Direct Investment in India (FDI);
Overseas Direct Investment (ODI); Setting up of offices in India by
overseas entities such as Liaison Office (LO), Branch Office (BO), Project
office (PO) and also establishing Office overseas.
Mr. Chavan is experienced in preparation of policies and issuance of

procedural guidelines for various trade products and other regulatory
matters which includes project finance, mergers, acquisitions,
amalgamation, take over etc and other capital account deals pertains to
venture capital and crowd funding.
! !3
BIO SKETCH
Mr. Chavan was an Executive Committee Member of International Chamber

of Commerce (lCC), Paris Delhi Chapter, Managing Committee Member of
Foreign Exchange Dealers Association of India, Mumbai (FEDAI),and
Examiner for Indian Institute of Banking and Finance (IIBF), Foreign
Exchange and Risk Management and a Nodal Officer to the Reserve Bank of
India.
Mr. Chavan holds a Master's degree in Science (M.Sc.) and is a Certified

Associate of Indian Institute of Banking and Finance (CAIIB).
He is also a professional trainer and is providing training to bank

employees at various levels on various subjects. He provides the advisory
Services and conducts the seminars for Importers, Exporters and investors
and participated in the conferences organized by renowned bodies and
government/semi government organization.
! !4
CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 Foreign Trade 6-31
2 Exchange Control in India 32-71
3 Asian Clearing Union, ACU European Currency Unit: 72-88

ECU And Libor
4 Free Trade Zones and OBU 89-108
5 International Commercial Terms: Incoterms 109-119
6 Foreign Trade: Documents 120-166
7 Import Trade: Guidelines 167-191
8 Import Trade: Regulations 192-228
9 Documentary Credit: Method of Financing Imports 229-259
10 Establishment Of LC, Import Bills Under LC, Collections 260-293

And Other Import Regulations
11 Other Methods of Import Financing 294-314
12 Export: Guidelines and Regulations 315-343
13 Export: Obligations and Role of AD Banks 344-374
14 Export Finance — Pre-shipment Credit in Rupee 375-397
15 Export Finance — Pre-shipment Credit in Foreign 398-414

Currency
16 Export Finance — Post-shipment Credit in Rupee 415-434
17 Export Finance — Post-shipment Credit in Foreign 435-445

Currency
18 Project Export and Export under Deferred Payment 446-477
19 Export Promotion Incentives 478-515
20 ECGC: Role in Export Promotion 516-543
21 Guarantees for Imports and Exports 544-573
22 Export Promotion Measures 574-678
23 Foreign Trade Policy
! !5
FOREIGN TRADE
Chapter 1
Foreign Trade
Objectives
After going through the chapter, students should be able to understand

some of the important terms used in foreign trade as well as in a day-to-
day economical life. These firms will help students to understand the trade
finance better.
Structure
1.1 Foreign Trade Introduction
1.2 Foreign Trade Meaning
1.3 Dumping
1.4 Balance of Trade
1.5 Balance of Payment (BoP)
1.6 Disequilibrium
1.7 Correcting the Deficit
1.8 Summary
1.9 Questions
! !6
FOREIGN TRADE
1.1 Foreign Trade: Introduction
The foreign trade of the country refers to its Imports and Exports of
merchandise from and to other countries under the contract of sale. No
country in the world produces all the commodities it requires.
The country which produces more commodities has greater advantage of

exporting the commodities than the country which imports the
commodities. During last 75 years, India’s foreign trade has undergone a
complete change in terms of composition and direction. The exports covers
a wide range of traditional and non-traditional items while imports consist
mainly of capital goods, petroleum products, raw materials, and chemicals
to meet the ever-increasing needs of a developing and diversifying
economy. Government of India introduced a series of reforms to liberalise
and globalise the Indian economy. Reforms in the external sector of India
were intended to integrate the Indian economy with the world economy. In
recognition of the growing importance of foreign trade in driving the
economy, importance is given to understand the Foreign Trade Policy,
export strategy, tariff policy, current account dynamics, exchange rate
management, foreign exchange reserves, capital account liberalisation,
external debt and aid and foreign investments.
1.2 Foreign Trade: Meaning
Any trade is nothing but exchange of goods and services between

purchaser and seller. When both are in the same country, and trade
happens between them is called inland trade, but when residents of two or
more countries do the purchase and sale of goods and services is called
foreign trade or international trade. Foreign trade or International trade, in
principle, is not different from domestic trade as the motivation and the
behaviour of the parties involved in a trade do not change fundamentally
regardless of whether trade is across a border or not. The main difference
is that international trade is typically more costly than domestic trade
because there are several factors/elements attached to international trade
than inland trade. For better understanding, some major affecting the
international trade are summarised in the pictorial manner as under:
! !7
FOREIGN TRADE
Globalisation Outsourcing
Tariff
Pricing
Import
Law International Trade
Cost
Customs
Origin
Exchange Rate
Freight
Documents
!
Typically, features of foreign trade can be grouped into following four
parameters:
a. Involvement of different monetary units — Pricing

b. Imposition of restrictions on import and export by various countries
c. Imposition of restrictions to release the foreign currency
d. Existence of multiple regulations, legal practices and rules in different
countries
Foreign trade is of two types:
a. Import: When seller is abroad/across the border and buyer is in home

country, this type of trade is known as Import
b. Export: When the seller is in the home country and the buyer/
purchaser is abroad/across the border the trade is known as export
! !8
FOREIGN TRADE
Considering the visibility, trade can also be grouped in to two types:
a. Visible trade: Visible trade is one which can be seen, e.g., trade of
goods and merchandise. Thus, transfer or exchange of goods is visible
and exchange of services between the purchaser and seller is invisible.
b. Invisible trade: Invisible is not visible but it exists, e.g., shipping,

transfer of technical know-how, insurance, transportation, fees for the
professional services rendered, Bank charges, commission, exchange,
etc., are the examples of invisible trade.
1.3 Dumping
In international trade, the export by a country or company of a product at

a price that is lower in the foreign market than the price charged in the
domestic market. As dumping usually involves substantial export volumes
of the product, it often has the effect of endangering the financial viability
of manufacturers or producers of the product in the importing nation.
Dumping is also a colloquial term that refers to the act of offloading a stock
with little regard for its price.
A standard technical definition of dumping is the act of charging a lower

price for the like goods in a foreign market than one charge for the same
good in a domestic market for consumption in the home market of the
exporter. This is often referred to as selling at less than “normal value” on
the same level of trade in the ordinary course of trade. Under the World
Trade Organisation (WTO) Agreement, dumping is condemned (but is not
prohibited) if it causes or threatens to cause material injury to a domestic
industry in the importing country.
! !9
FOREIGN TRADE
1.3.1. Types of Dumping
1. Sporadic Dumping: Occasional sale of a commodity at below cost in

order to unload an unforeseen and temporary surplus of the commodity
such as cheese, milk, wheat, etc., in the international market without
reducing domestic prices.
2. Predatory Dumping: Temporary sale of a commodity at below its

average cost or a lower price abroad in order to drive foreign producers
out of business, after which prices are raised to take advantage of the
monopoly power abroad.
3. Persistent Dumping: Continuous tendency of a domestic monopolist

to maximise total profits by selling the commodity at a higher price in
the domestic market than internationally (to meet the competition of
foreign rivals).
1.3.2. Causes of Dumping
Dumping usually occurs because of the following reasons:
1. Producers in one country are trying to stay competitive with producers

in another country,
2. Producers in one country are trying to eliminate the producers in

another country and gain a larger share of the world market,
3. Producers are trying to get rid of excess stuff that they can’t sell in their
own country,
4. Producers can make more profit by dividing sales into domestic and
foreign markets, then charging each market whatever price the buyers
are willing to pay.
! !10
FOREIGN TRADE
1.4 Balance of Trade
• Meaning
Balance of trade means position of Imports and exports of the country as

against other countries. This is also called the net difference between the
value of the commodities imported and exported. When the export of the
country exceeds the imports of the goods it is said to have surplus, positive
or favourable balance of trade, but when the imports of goods and services
exceeds the export of goods and services it is said to have deficit, negative
or unfavourable or adverse balance of trade position. When the country
exports commodities it gains foreign exchange. If the import exceeds
exports, it results into net payment by the country of foreign exchange to
other countries from its reserve or borrowing from other countries. It may
be known that imports and exports, during any period, are seldom equal,
the balance of trade will not ordinarily balance.
• India’s Balance of Trade:
India's trade deficit widened sharply to USD 11.45 billion in July 2017 from
USD 7.76 billion in the same month of the previous year and below market
expectations of a USD 12 billion gap. Exports advanced 3.9 per cent from a
year ago to USD 22.54 billion, as sales increased for engineering goods
(15.2 per cent); petroleum products (20.3 per cent); organic and inorganic
chemicals (20.7 per cent); cotton, handloom products (5.4 per cent) and
marine products (30.5 percent). Shipments of non-petroleum and non
gems and jewellery grew 6.9 per cent. Meanwhile, imports jumped 15 per
cent to USD 33.99 billion, as purchases increased mainly for petroleum,
crude and products (15 per cent); electronic goods (22.5 per cent);
machinery, electrical and non-electrical (7.3 per cent); pearls, precious and
semiprecious stones (6.9 per cent); and gold (95 per cent). Considering
April-July 2017-18, the trade gap widened to USD 51.50 billion from USD
27.00 billion in the same period of the previous fiscal year. Balance of
Trade in India averaged -2240.52 USD Million from 1957 until 2017,
reaching an all time high of 258.90 USD Million in March of 1977 and a
record low of -20210.90 USD Million in October of 2012.
! !11
FOREIGN TRADE
India has been recording sustained trade deficits since 1980 mainly due to
the high growth of imports, particularly of crude oil, gold and silver. In
recent years, the biggest trade deficits were recorded with China, Saudi
Arab, Iraq, Switzerland and Kuwait. India records trade surpluses with US,
Singapore, Germany, Netherlands and United Kingdom. This page provides
the latest reported value for — India Balance of Trade — plus previous
releases, historical high and low, short-term forecast and long-term
prediction, economic calendar, survey consensus and news.
India Balance of Trade – (updated on September of 2017)
Actual Previous Highest Lowest Dates Unit Frequency
Current
USD
–11449.80 –12959.90 258.90 –20210.90 1957-2017 Monthly Prices,
Million
NSA
! !12
FOREIGN TRADE
• Balance of Trade: By Country
Country Last Previous Highest Lowest Currency unit Frequency

Australia 856.00 Jun/ 2024 4546 –4152 AUD Million Monthly
17
Brazil 5599.00 Aug/ 6298 7661 –4067 USD Million Monthly
17
Canada –3601.90 Jun/ –1360 8525 -4257 CAD Million Monthly
17
China 467.36 Jul/ 428 628 –320 USD HML Monthly
17
Euro Area 26587.50 Jun/ 20324 30092 –16510 EUR Million Monthly
17
France –4657.00 Jun/ –4432 2674 –8219 EUR Million Monthly
17
Germany 22324.00 Jun/ 22018 25751 –536 EUR Million Monthly
17
India – Jul/ –12960 259 –20211 USD Million Monthly
11449.80 17
Indonesia –271.20 Jul/ 1664 4642 –2329 USD Million Monthly
17
Italy 4502.18 Jun/ 4344 7903 –6389 EUR Million Monthly
17
Japan 418.77 Jul/ 440 1609 –2795 JPY Billion Monthly
17
Mexico –1522.60 Jul/ 61.53 1710 –3471 USD Million Monthly
17
Netherlan 6620.00 Jun/ 4631 6620 –908 EUR Million Monthly
ds 17
Russia 8690.00 Jun/ 8519 20356 –185 USD Million Monthly
17
South 7013.00 Aug/ 10288 12862 –4043 USD Million Monthly
Korea 17
Spain – Jun/ –1431044 634935 – EUR Thousand Monthly
1259000. 17 9834766
00
Switzerla 3511.05 Jul/ 2764 4774 –1479 CHF million Monthly
nd 17
Turkey –8842.94 Jul/ –6036 24.51 –10453 USD Million Monthly
17
! !13
FOREIGN TRADE
Country Last Previous Highest Lowest Currency unit Frequency

United –4564.00 Jun/ –2516 2946 –6058 GBP Million Monthly
Kingdom 17
United – Jun/ -46391 1946 –67823 USD Million Monthly
States 43642.00 17
• Causes of Reduction/Enhancement in Balance of Trade:
There are two factors for variation in Balance of Trade position, viz.,
External Factors and Internal Factors.
1. External Factors:
a. The sudden rise in price of essential commodities of imports like edible

oil, sugar, machinery, drugs and medical equipment etc.
b. Migration from countries where Indians are target for violence. This
affects the inward remittances.
c. Position of worldwide inflation or recession in the developed countries

like USA, Germany, Japan, France, England, etc., with whom regular
foreign trade is carried out.
d. Trade restrictions imposed by developed countries as regards limits of

quantities of Imports restrictions under other bilateral agreements.
e. Continuous upsurge of U.S Dollar. This pushes up the price of the items
imported.
2. Internal Factors:
a. Domestic shortage of agriculture and industrial products.
b. Low Industrial and agricultural production due to high production cost
c. Absence of hi-technology
d. High consumption of internal production making it unable to export.
! !14
FOREIGN TRADE
e. Increasing tendency in population growth, which compels consumption

of domestic production and even ever-increasing imports of minimum
necessities.
f. Inadequate knowledge of export-markets.
g. Neglect of export profitability.
Corrective Measures
To come out of the above unfavourable balance of trade position, certain

corrective measures are taken. Many measures have been taken to
overcome the overall trade deficit. These include implementation of
Merchandise Exports from India Scheme (MEIS) and Services Exports from
India Scheme (SEIS), implementation of Niryat Bandhu Scheme, Single
Window Interface for Facilitating Trade (SWIFT) clearance project as part of
‘Ease of doing Business’, Interest Equalisation Scheme in pre-and post-
shipment credit, Special Advance Authorisation Scheme, Trade
Infrastructure for Export Promotion (TIES) Scheme etc.
Generally, following corrective measures are available to Government to

improve Balance of Trade:
a. Export promotion: The government should take adequate steps to

encourage exports, reduce the cost of production, and improve the
quality of the goods to make the price of exported goods competitive in
international market.
b. Import Restrictions: Presently our economy is liberalised economy.

Even then the central government should take such steps which restrict
the imports, make it costly by imposing heavy duty on goods imported,
ban the items of less importance, fix quota for essential items of import,
and allow import against licence only.
c. Finance: The deficit in the balance of payment by borrowing overseas,

take all proper measures to increase the exports.
d. Monetary Measures: The Reserve Bank of India as a monetary

authority should adopt a policy of credit squeeze, put restrictions on
bank credit, make costly by raising the bank rate (Bank rate with effect
! !15
FOREIGN TRADE
from October 07, 2013 is 9.0 per cent) and Base rate (which replaced
prime lending rate) with effect from July 1, 2010, put restrictions on
bank for lending and reduce their capacity to extend the credit facilities
by imposing certain economic measures, that is, selective credit controls
and/or open market operations.
e. Fiscal measures: To take drastic steps to curtail public expenditure,

budgeting for surplus levying lower rate of taxes and recover taxes
speedily.
f. Devaluation: Devaluation in country’s official rate of exchange between

its own currency and other currency is one of the important corrective
measures which are employed to set right fundamental disequilibrium.
The devaluation makes country’s export cheaper and imports costly and
stop further drains on countries foreign exchange resources.
1.5 Balance of Payment (BoP)
Meaning:
The balance of payment of country is systematic record of all trade

transactions, visible and invisible imports and exports during a given
period. A country must pay for its import of goods and services and in turn
for its export of goods and services it receives the payment from other
countries. The Balance of payment is a difference between international
transfer of funds for countries imports and exports during certain period of
reference.
International Monetary Fund (IMF) defines the Balance of Payments (BoP)

as a statistical statement that summarises economic transactions between
residents and non-residents during a specific time period. The BoP, thus,
includes all transactions showing: (a) transactions in goods, services and
income between an economy and the rest of the world, (b) changes of
ownership and other changes in that economy’s monetary gold, special
drawing rights (SDRs), and financial claims on and liabilities to the rest of
the world, and (c) unrequited transfers. These transactions are categorised
into (i) the “current account” including “goods and services”, the
“primary income”, and the “secondary income”, (ii) the “capital account”,
and (iii) the “financial account”.
! !16
FOREIGN TRADE
Thus, the balance of payment is more comprehensive than balance of

trade. Balance of payment includes balance of trade and other invisible
items of foreign trade. Balance of Payment is a record pertaining to a
period; usually it is all annual statement. All the transactions entering the
balance of payments can be grouped under three broad accounts;
(1) Current Account,

(2) Capital Account, and
(3) Official International Reserve Account.
However, it can be vertically divided into many categories as per the

requirement.
1. Current Account: The term “current account transaction” is

defined in section 2(j) of Foreign Exchange Management Act, 1999. It
means a transaction other than a capital account transaction and
includes:
i. Payments due in connection with foreign trade 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
According to section 5 of FEMA, 1999 any citizen may sell or draw foreign
exchange to or from an authorised person if such sale or draw is a current
account transaction. Provided that the Central Government may in public
interest and in consultation with the Reserve Bank, impose such reasonable
restrictions for current account transactions as may be prescribed. Further,
any person may sell or draw foreign exchange to or from an authorised
person for a capital account transaction subject to the provisions of Section
6(2).
! !17
FOREIGN TRADE
2. Capital Account: Section 2(e) of Foreign Exchange Management Act,

1999 states that ‘capital account transactions’ means (a) a
transaction which alters the assets or liabilities, including contingent
liabilities, outside India of person’s resident in India (b) a transaction
which alters assets or liabilities in India of persons resident outside
India and includes transactions referred to in section 6(3). According to
the said definition, a transaction which alters the contingent liability will
be considered as capital account transaction in the case of person
resident in India, but it is not so in the case of person resident outside
India.
Guarantee will be considered as a capital account transaction in the

following cases:
1. Guarantee in respect of any debt, obligation or other liability incurred by

a person resident in India and owed to a person resident outside India.
2. Guarantee in respect of any liability, debt or other obligation incurred by

a person resident outside India.
The balance of payment thus includes the imports and exports of

merchandise and services, inflows and outflows of capital, interest and
dividend on account of foreign investment, tourist’s income and
expenditure, gifts, donations etc. Further since it is not possible always to
have sufficient information to effect the complete record of international
transaction, an item for “errors and omission” is added to the balance of
payments to strike a balance between the two sides of the accounts.
! !18
FOREIGN TRADE
Receipts (Credits) Payments (Debits)

(1) Exports of goods (1) Imports of goods
Trade Account Balance

(2) Exports of services (2) Imports of services
(3) Interests, profits and dividends (3) Interests, profits and dividends paid
received
(4) Unilateral receipts (4) Unilateral payments
Current Account Balance

(1 to 4)
(5) Foreign investments (5) Investments abroad
(6) Short-term borrowing (6) Short-term lending
(7) Medium and long-term borrowing (7) Medium and long-term lending
(8) Statistical discrepancy (Errors and omission)
Capital Account Balance

(5 to 8)
(9) Change in reserves (+) (9) Change in reserves
Total Receipts = Total payments
A. Use: The most important use of balance of payment for most countries
is that it describes, in a concise fashion the state of international
economic relations of the country as a guide for its government for
framing its monetary, fiscal, exchange and other policies
B. Broad Division: The balance of payment is broadly divided into:
I. Balance of payment on current account, i.e., the balance of payments

concerning the imports and exports of merchandise and services and
II. Balance of payment of capital accounts, i.e., the balance of payments

which includes the transactions of balance of payments on current
account and reflects the changes in the foreign assets and liabilities
of the country.
! !19
FOREIGN TRADE
C. Balances within the total: For the purpose of analysis, the items of
balance of payments are classified in to different groups. there are at
least five separate types of balances viz.:
1. Merchandise/trade balance, i.e., the balance of the import and exports

of the merchandise
2. Current account balance, i.e., the balance of the import and exports of
the merchandise and services
3. Basic Balance, i.e., the current account balance plus long-term capital
4. Net liquidity balance or balance on regular transactions, i.e., basic

balances plus errors and omissions plus short-term non-liquid capital
flows and
5. Official transactions balance, i.e., Net liquidity balance plus liquid

liabilities to foreigners.
1.6 Disequilibrium
The debit and credit items in the balance of payments seldom balance. As
a result, the balance of payments is either in surplus or in deficit. When the
country happens to have a favourable balance of payments over the years,
inflows of foreign capital takes place, provided that the rates of interest
prevailing there are high and there is confidence in the country’s currency;
that is, no devaluation of countries currency is apprehended. When on the
other hand, country has an unfavourable balance of payments its foreign
exchange resources get depleted.
1.7 Correcting the deficit
Solution to correct balance of payment disequilibrium lies in earning more

foreign exchange through additional exports or reducing imports.
Quantitative changes in exports and imports require policy changes. Such
policy measures are in the form of:
• monetary measures
• fiscal and non-monetary measures.
! !20
FOREIGN TRADE
A. Monetary Measures for Correcting the BoP:
The monetary methods for correcting disequilibrium in the balance of

payment are as follows:
1. Deflation
Deflation means falling prices. Deflation has been used as a measure to

correct deficit disequilibrium. A country faces deficit when its imports
exceeds exports. Deflation is brought through monetary measures like
bank rate policy, open market operations, etc., or through fiscal measures
like higher taxation, reduction in public expenditure, etc. Deflation would
make our items cheaper in foreign market resulting in rise in export. At the
same time, the demands for imports fall due to higher taxation and
reduced income. This would build a favourable atmosphere in the balance
of payment position. However, Deflation can be successful when the
exchange rate remains fixed.
2. Exchange Depreciation
Exchange depreciation means decline in the rate of exchange of domestic

currency in terms of foreign currency. This device implies that a country
has adopted a flexible exchange rate policy. Suppose the rate of exchange
between Indian rupee and US dollar is $1 = Rs. 60. If India experiences
an adverse balance of payments with regard to U.S.A, the Indian demand
for US dollar will rise. The price of dollar in terms of rupee will rise. Hence,
dollar will appreciate in external value and rupee will depreciate in external
value. The new rate of exchange may be say $1 = Rs. 65. This means
8.33% exchange depreciation of the Indian currency. Exchange
depreciation will stimulate exports and reduce imports because exports will
become cheaper and imports costlier. Hence, a favourable balance of
payments would emerge to pay-off the deficit.
! !21
FOREIGN TRADE
Limitations of Exchange Depreciation
1. Exchange depreciation will be successful only if there is no retaliatory

exchange depreciation by other countries.
2. It is not suitable to a country desiring a fixed exchange rate system.
3. Exchange depreciation raises the prices of imports and reduces the

prices of exports. So, the terms of trade will become unfavourable for
the country adopting it.
4. It increases uncertainty and risks involved in foreign trade.
5. It may result in hyperinflation causing further deficit in balance of

payments.
3. Devaluation
Devaluation refers to deliberate attempt made by monetary authorities to

bring down the value of home currency against foreign currency. While
depreciation is a spontaneous fall due to interactions of market forces,
devaluation is official act enforced by the monetary authority. Generally,
the international monetary fund advocates the policy of devaluation as a
corrective measure of disequilibrium for the countries facing adverse
balance of payment position. When India’s balance of payment worsened in
1991, IMF suggested devaluation. Accordingly, the value of Indian currency
was reduced by 18 to 20% in terms of various currencies. The 1991
devaluation brought the desired effect. The very next year the imports
declined while exports picked up.
When devaluation is effected, the value of home currency goes down

against foreign currency, Let us suppose the exchange rate remains $1 =
Rs. 60 before devaluation. Let us suppose, devaluation takes place which
reduces the value of home currency and now the exchange rate becomes
$1 = Rs. 70. After such a change our goods becomes cheap in foreign
market. This is because, after devaluation, dollar is exchanged for more
amount of Indian currencies which push up the demand for exports. At the
same time, imports become costlier as Indians have to pay more
currencies to obtain one dollar. Thus, demand for imports is reduced.
! !22
FOREIGN TRADE
Generally, devaluation is resorted to where there is serious adverse balance

of payment problem.
Limitations of Devaluation
1. Devaluation is successful only when other country does not retaliate the
same. If both the countries go for the same, the effect is nil.
2. Devaluation is successful only when the demand for exports and imports
is elastic. In case it is inelastic, it may turn the situation worse.
3. Devaluation, though helps correcting disequilibrium, is considered as

weakness for the country.
Devaluation may bring inflation in the following conditions:
a. Devaluation brings the imports down, when imports are reduced; the
domestic supply of such goods must be increased to the same extent. If
not, scarcity of such goods unleashes inflationary trends.
b. A growing country like India is capital thirsty. Due to non-availability of

capital goods in India, we have no option but to continue imports at
higher costs. This will force the industries depending upon capital goods
to push up their prices.
c. When demand for our export rises, more and more goods produced in a
country would go for exports and thus creating shortage of such goods
at the domestic level. This results in rising prices and inflation.
d. Devaluation may not be effective if the deficit arises due to cyclical or

structural changes.
4. Exchange Control
It is an extreme step taken by the monetary authority to enjoy complete

control over the exchange dealings. Under such a measure, the central
bank directs all exporters to surrender their foreign exchange to the central
authority. Thus, it leads to concentration of exchange reserves in the hands
of central authority. At the same time, the supply of foreign exchange is
restricted only for essential goods. It can only help controlling situation
! !23
FOREIGN TRADE
from turning worse. In short it is only a temporary measure and not

permanent remedy.
B. Fiscal and Non-monetary Measures for Correcting the BoP
A deficit country along with monetary measures may adopt the following
non-monetary measures too which will either restrict imports or promote
exports.
1. Tariffs
Tariffs are duties (taxes) imposed on imports. When tariffs are imposed,
the prices of imports would increase to the extent of tariff. The increased
prices will have reduced the demand for imported goods and at the same
time induce domestic producers to produce more of import substitutes.
Non-essential imports can be drastically reduced by imposing a very high
rate of tariff.
Drawbacks of Tariffs
A. Tariffs bring equilibrium by reducing the volume of trade.
B. Tariffs obstruct the expansion of world trade and prosperity.
C. Tariffs need not necessarily reduce imports. Hence, the effects of tariff
on the balance of payment position are uncertain.
D. Tariffs seek to establish equilibrium without removing the root causes of

disequilibrium.
E. A new or a higher tariff may aggravate the disequilibrium in the balance

of payments of a country already having a surplus.
F. Tariffs to be successful require an efficient and honest administration

which unfortunately is difficult to have in most of the countries.
Corruption among the administrative staff will render tariffs ineffective.
! !24
FOREIGN TRADE
2. Quotas
Under the quota system, the government may fix and permit the maximum
quantity or value of a commodity to be imported during a given period. By
restricting imports through the quota system, the deficit is reduced and the
balance of payments position is improved.
Types of Quotas
I. The tariff or custom quota,

II. The unilateral quota,
III.The bilateral quota,
IV. The mixing quota, and
V. Import licensing.
Merits of Quotas
• Quotas are more effective than tariffs as they are certain.
• They are easy to implement.
• They are more effective even when demand is inelastic, as no imports

are possible above the quotas.
• More flexible than tariffs as they are subject to administrative decision.

Tariffs on the other hand are subject to legislative sanction.
Demerits of Quotas
• They are not long run solution as they do not tackle the real cause for
disequilibrium.
• Under the WTO quotas are discouraged.
• An implement of quotas is open invitation to corruption.
! !25
FOREIGN TRADE
3. Export Promotion
The government can adopt export promotion measures to correct

disequilibrium in the balance of payments. This includes substitutes, tax
concessions to exporters, marketing facilities, credit and incentives to
exporters, etc. The government may also help to promote export through
exhibition, trade fairs; conducting marketing research and by providing the
required administrative and diplomatic help to tap the potential markets.
4. Import Substitution
A country may resort to import substitution to reduce the volume of

imports and make it self-reliant. Fiscal and monetary measures may be
adopted to encourage industries producing import substitutes. Industries
which produce import substitutes require special attention in the form of
various concessions, which include tax concession, technical assistance,
subsidies, providing scarce inputs, etc. Non-monetary methods are more
effective than monetary methods and are normally applicable in correcting
an adverse balance of payments.
Drawbacks of Import Substitution
• Such industries may lose the spirit of competitiveness.
• Domestic industries enjoying various incentives will develop vested

interests and ask for such concessions all the time.
• Deliberate promotion of import substitute industries goes against the

principle of comparative advantage.
! !26
FOREIGN TRADE
1.8 Summary
Foreign trade is nothing but trade between the different countries of the
world. It is also called as International trade, External trade or Inter-
regional trade. It consists of imports, exports and entrepot. The inflow of
goods in a country is called import trade whereas outflow of goods from a
country is called export trade. Many times, goods are imported for the
purpose of re-export after some processing operations. This is called
entrepot trade. Foreign trade basically takes place for mutual satisfaction
of wants and utilities of resources.
Foreign Trade can be divided into following three groups:
Import Trade: Import trade refers to purchase of goods by one country

from another country or inflow of goods and services from foreign country
to home country.
Export Trade: Export trade refers to the sale of goods by one country to
another country or outflow of goods from home country to foreign country.
Entrepot Trade: Entrepot trade is also known as re-export. It refers to

purchase of goods from one country and then selling them to another
country after some processing operations.
Need and Importance of Foreign Trade
Following points explains the need and importance of foreign trade to a

nation.
1. Division of labour and specialisation

Foreign trade leads to division of labour and specialisation at the world
level. Some countries have abundant natural resources. They should export
raw materials and import finished goods from countries which are
advanced in skilled manpower. This gives benefits to all the countries and
thereby leading to division of labour and specialisation.
2. Optimum allocation and utilisation of resources

Due to specialisation, unproductive lines can be eliminated, and wastage of
resources avoided. In other words, resources are channelised for the
production of only those goods which would give highest returns. Thus,
! !27
FOREIGN TRADE
there is rational allocation and utilisation of resources at the international

level due to foreign trade.
3. Equality of prices
Prices can be stabilised by foreign trade. It helps to keep the demand and
supply position stable, which in turn stabilises the prices, making
allowances for transport and other marketing expenses.
4. Availability of multiple choices

Foreign trade helps in providing a better choice to the consumers. It helps
in making available new varieties to consumers all over the world.
5. Ensures quality and standard goods

Foreign trade is highly competitive. To maintain and increase the demand
for goods, the exporting countries have to keep up the quality of goods.
Thus, quality and standardised goods are produced.
6. Raises standard of living of the people

Imports can facilitate standard of living of the people. This is because
people can have a choice of new and better varieties of goods and services.
By consuming new and better varieties of goods, people can improve their
standard of living.
7. Generate employment opportunities

Foreign trade helps in generating employment opportunities, by increasing
the mobility of labour and resources. It generates direct employment in
import sector and indirect employment in other sector of the economy.
Such as Industry, Service Sector (insurance, banking, transport,
communication), etc.
8. Facilitate economic development

Imports facilitate economic development of a nation. This is because with
the import of capital goods and technology, a country can generate growth
in all sectors of the economy, i.e., agriculture, industry and service sector.
9. Assistance during natural calamities

During natural calamities such as earthquakes, floods, famines, etc., the
affected countries face the problem of shortage of essential goods. Foreign
trade enables a country to import food-grains and medicines from other
countries to help the affected people.
! !28
FOREIGN TRADE
10. Maintains balance of payment position

Every country has to maintain its balance of payment position. Since, every
country has to import, which results in outflow of foreign exchange, it also
deals in export for the inflow of foreign exchange.
11. Brings reputation and helps earn goodwill

A country which is involved in exports earns goodwill in the international
market. For e.g. Japan has earned a lot of goodwill in foreign markets due
to its exports of quality electronic goods.
12. Promotes World Peace

Foreign trade brings countries closer. It facilitates transfer of technology
and other assistance from developed countries to developing countries. It
brings different countries closer due to economic relations arising out of
trade agreements. Thus, foreign trade creates a friendly atmosphere for
avoiding wars and conflicts. It promotes world peace as such countries try
to maintain friendly relations among themselves.
1.9 Questions
A. Answer the following questions
1. What are the main types of Dumping? Explain in brief.

2. Explain the factors affecting Balance of Trade?
3. Explain the components used in calculating the Balance of Payment.
4. What are the Monetary Measures for correcting the BoP?
5. What are the Non-Monetary Measures for correcting the BoP?
B. Multiple Choice questions (Mark X against most appropriate

alternative)
1. Balance of Trade means __________ (fill in the blanks)
a. Position of import and export of country as against other country

b. Difference between countries Import of merchandise and its export
c. Difference between receivables and payments by country
d. Difference between value of commodities purchased and Sold
! !29
FOREIGN TRADE
2. What are the major corrective measures for unfavourable balance of

trade position along with other measures?
a. Export promotion
b. Import restrictions
c. Both above
d. None of the above
3. What is balance of payment?
a. Systematic record of all trade transaction, visible & invisible import and
export during the given period.
b. Difference between international payment and receipts
c. Difference of import payment and export receipts during the year
d. Balance amount at the end of the year
4. Solution for correcting deficit lies in __________ (fill in the blanks)
a. Monetary
b. Fiscal
c. Non-monetary
d. Monetary, Fiscal and non-monetary measures
5. Under the quota system, the government may fix and permit the
maximum quantity or value of a commodity to be __________ during a
given period
a. Exported
b. Imported
c. Export and import both
d. Domestically used
Answers:
1. (b), 2. (c) 3. (a) 4. (d) 5. (b)
! !30
FOREIGN TRADE
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
! !31
EXCHANGE CONTROL IN INDIA
Chapter 2
Exchange Control in India
Objectives

various objectives of Exchange Controls in India, why the exchange control
is required, currencies involved and short informative role of various
agencies, types of trade and accounts used for exchange control purposes.
Structure
2.1 Introduction
2.2 Definition
2.3 Objectives
2.4 Control of Exchange Rates
2.5 Transactions Subject to Control
2.6 Permitted Currencies
2.7 Approved/Permitted Method of Receipts and Payments
2.8 Convertible Currencies
2.9 Choice of Currency in International Transaction
2.10 Authorised Dealers
2.11 FEDAI
2.12 Correspondent
2.13 Bank Accounts
2.14 Foreign Currency Accounts
2.15 Countertrade
2.16 Escrow Account
2.17 Barter Trade
2.18 Summary
2.19 Questions
! !32
2.1 Introduction
There are various forms of controls imposed by a government on the

purchase/sale of foreign “currencies” by residents or on the purchase/sale
of local currency by non-residents.
Common foreign exchange controls include:
• Banning the use of foreign currency within the country

• Banning locals from possessing foreign currency
• Restricting currency exchange to government-approved exchangers
• Fixed exchange rates
• Restrictions on the amount of currency that may be imported or exported
Countries with foreign exchange controls are also known as “Article 14

countries”, after the provision in the International Monetary
Fund agreement allowing exchange controls for transitional economies.
Such controls used to be common in most countries, particularly poorer
ones, until the 1990s when free trade and globalisation started a trend
towards economic liberalisation. Today, countries which still impose
exchange controls are the exception rather than the rule.
Often, foreign exchange controls can result in the creation of black markets
to exchange the weaker currency for stronger currencies. This leads to a
situation where the exchange rate for the foreign currency is much higher
than the rate set by the government, and therefore creates a shadow
currency exchange market. As such, it is unclear whether governments
have the ability to enact effective exchange controls
The exchange control regulations has been liberalised over the years to
facilitate the remittances of funds both in to and out of India. The changes
have been introduced on continuous basis in line with Government policy of
economic liberalisation. Still in some of the cases, specific approvals are
required from the regulatory authorities for Foreign Exchange Transaction/
Remittances.
The exchange control regulations in India are governed by the Foreign

Exchange Management Act (FEMA). The apex exchange control authority in
India is Reserve Bank of India, which regulates the law and responsible for
all key approvals.
! !33
FEMA is not only applicable to all parts of the India but also applicable to
branches, offices, agencies outside India which are owned or controlled by
a person resident in India. FEMA regulates all aspects of Foreign Exchange
and has direct implications on external trade and payments. FEMA is an
important legislation which impacts foreign nationals who are working in
India and also Indians who have gone outside India. It is important to be
compliant with Exchange Control Regulations.
2.2 Definition
Exchange control means official interference in the foreign exchange

dealing of the country. The control may extend over wide area, covering
the import and export of goods and services, remittances from the country,
inflow and outflow of the capital, rate of exchange, method of payment
maintenance of balance at foreign centres, acquisition and holding of
foreign securities, financial relations between residents and non-residents
etc. Exchange control in short, involves rationing of foreign exchange
among various competing demands for it, and is effected through control
of receipts or of payments or of both as in India. The control of receipts is
intended to centralise the country’s means of external payments in
common pools in the hand of its monetary authorities to facilitate judicious
use thereof and the control of payment is intended to restrain the demand
for foreign exchange broadly in consonance with the national interests
within the limits of available resources.
2.3 Objectives
(i) Protection of Balance of Payments

One of the important objectives of exchange control is protection of
balance of payments. When the balance of payments deficit of a nation
becomes large and chronic an automatic correction is not possible,
certain active measures have to be adopted. In normal times, the adverse
balance of payments caused and value of country's currency falls and helps
in restoring equilibrium. But there are conditions under which a fall in the
exchange value and currency has no effect on imports and exports. Under
such situations, measures are adopted to stabilise the exchange value of
currency at level higher than would be possible under free conditions.
! !34
(ii) Reducing Burden of Foreign Debt

The exchange value of a currency is sometimes fixed and maintained at
higher level to lighten the burden of foreign debts contracted in terms of
foreign currencies. By overvaluing currency, the foreign exchange earnings
of the country from exports are increased in cases where the demand is
inelastic and the prices in terms of the home currency to be paid for
essential imports get reduced.
(iii) Raising the Level of Prices

Sometimes the currency is undervalued to help in raising certain conditions
in thought desirable to stabilise the exchange rate at what can be called
the equilibrium level, i.e., the level determined by market forces. Short-
term fluctuations are eliminated by deliberate action of authorities.
(iv) Elimination of Short-term Fluctuations in Exchange Rate

Exchange regulation in certain conditions is thought desirable to stabilise
the exchange rate at what can be called the equilibrium level, i.e., the level
determined by market forces. Short-term fluctuations are eliminated by
deliberate action of authorities.
(v) Prevention of Export of Capital

When the country suffers from exceptionally heavy outflow of capital
caused by loss of confidence on the part of nationals of the country or
foreigners in the economy of the country or its currency, certain exchange
controls over remittances from the country are necessary.
(vi) Economic Planning

Exchange control is an important part of economic policy in any planned
economy. Planning involves a very careful use of foreign exchange
resources of the country so that only those goods are imported which are
essential for the implementation of the plans. Exchange controls are
resorted to regularise the exports and imports in the light of plans.
(vii) Encouragement of Certain Economic Activities

One of the objectives of exchange regulations is to encourage certain
economic activities in the country. Certain industries can be developed by
reducing the imports of commodities produced by the demand restricting
the availability of foreign exchange to pay for them. For example, tourist
traffic in the country is encouraged by making available to the tourists
home currency at favourable rates. Different methods are adopted by
! !35
Governments to ensure that suitable foreign exchange controls imposed

and operated for the achievement of the desired objectives. Foreign
exchange control was introduced in India in 1939 at the outbreak of World
War II - as a measure under the Defence of India Rules. The primary
objective of this control was to conserve foreign exchange resources of the
country for obtaining necessary raw materials. It was taken as a temporary
device to meet the situation created by war. But since then the country has
almost throughout faced the problem of foreign exchange deficit. The
authorities, therefore, had to continue with the foreign exchange control.
In the year 1947 the Foreign Exchange Regulation Act was passed which
has been replaced by Foreign Exchange Regulation Act 1973. (FERA). The
exchange regulation and control has acquired a special meaning and
significance in the context of planning in India. The imports of capital
goods, components and raw materials for the developmental programmes
of the country have necessitated large borrowings from other countries to
finance them. The growing demand for imports and the servicing of foreign
debt have made payment restrictions increasingly important. It is because
of this that some system of exchange control to keep our external finance
in sound condition is necessary.
(viii) Administrations
The exchange control policy is determined by the Ministry of Foreign Trade,
Government of India, on the basis of Foreign Exchange Management Act
1999, while the day to day administration thereof is left to the Reserve
Bank of India. To achieve the objective of control, the Foreign Exchange
Department of Reserve Bank of India woks hand in hand with Trade control
authorities who controls the imports and exports of goods.
(ix) Control of Exchange Earning and Spending

The legal framework for administration of foreign exchange transactions in
India is provided by the Foreign Exchange Management Act, 1999. Under
the Foreign Exchange Management Act, 1999 (FEMA), which came into
force with effect from June 1, 2000, all transactions involving foreign
exchange have been classified either as capital or current account
transactions. All transactions undertaken by a resident that do not alter
his/her assets or liabilities, including contingent liabilities, outside India are
current account transactions. In terms of Section 5 of the FEMA, persons
resident in India are free to buy or sell foreign exchange for any current
account transaction except for those transactions for which drawl of foreign
exchange has been prohibited by Central Government, such as remittance
! !36
out of lottery winnings, remittance of income from racing/riding, etc., or

any other hobby, remittance for purchase of lottery tickets, banned/
proscribed magazines, football pools, sweepstakes, etc., payment of
commission on exports made towards equity investment in Joint Ventures/
Wholly Owned Subsidiaries abroad of Indian companies, remittance of
dividend by any company to which the requirement of dividend balancing is
applicable, payment of commission on exports under Rupee State Credit
Route, except commission up to 10% of invoice value of exports of tea and
tobacco and payment related to “call back services” of telephones. Foreign
Exchange Management (Current Account Transactions) Rules, 2000 -
Notification [GSR No.381(E)] dated May 3, 2000, as amended from time to
time
1. For the propose of Foreign exchange, every person, firm or company or

authority in India earning Foreign exchange expressed in the currency
other that the currency of Nepal and Bhutan by the export of goods and
services or in any other way required to surrender the foreign exchange
to authorised dealer and obtain a payment in Rupees within the
stipulated period.
2. Permissible foreign exchange can be drawn 60 days in advance. In case

it is not possible to use the foreign exchange within the period of 60
days, it should be immediately surrendered to an
authorised person. However, residents are free to retain foreign
exchange up to USD 2,000, in the form of foreign currency notes or TCs
for future use or credit to their Resident Foreign Currency (Domestic)
[RFC (Domestic) Accounts]
3. Foreign exchange for travel abroad can be purchased from an

authorised person against rupee payment in cash only up to Rs.
50,000/-. However, if the Rupee equivalent exceeds Rs. 50,000/-, the
entire payment should be made by way of a crossed cheque/ banker’s
cheque/pay order/demand draft/ debit card/credit card/prepaid card
only.
4. On return from a foreign trip, travellers are required to surrender

unspent foreign exchange held in the form of currency notes and
travellers cheques within 180 days of return. However, they are free to
retain foreign exchange up to USD 2,000, in the form of foreign
! !37
currency notes or TCs for future use or credit to their Resident Foreign
Currency (Domestic) [RFC (Domestic) Accounts].
5. The residents can hold foreign coins without any limit.
6. Any resident individual, if he so desires, may remit the entire limit of

USD 250,000 in one financial year under LRS as gift to a person residing
outside India or as donation to a charitable/educational/religious/
cultural organisation outside India. Remittances exceeding the limit of
USD 250,000 will require prior permission from the Reserve Bank.
7. A person resident in India is free to make any payment in Indian Rupees

towards meeting expenses, on account of boarding, lodging and
services related thereto or travel to and from and within India, of a
person resident outside India, who is on a visit to India.
8. The spending of the foreign exchange is almost fully controlled, except

for the few items listed in the free importability. Import policy is
announced by the government every year and import licence is granted
by DGFT permitting import of goods carries with it permission to pay for
them while RBI prescribes the currencies as well as the manner in which
payment should be made.
9. For the Import of services or the remittances otherwise than in payment

of imported goods or the foreign exchange required for foreign travel,
the licensing authority is RBI. The control is exercised through the
permits granted by the RBI against an application in prescribed format.
10.The issue of foreign exchange in any form, such as travellers cheques,

notes, coins, etc. to persons resident in India even under instructions
from an overseas branch/correspondent of an authorised dealer requires
prior permission of RBI.
! !38
2.4 Control of Exchange Rates
The earliest exchange rate system was popularly known as Gold standard,
this system existed during 1879-1934. In this exchange rate system, the
value of currencies of different countries was fixed in terms of gold. Hence,
under gold standard exchange rate system there could be only fixed
exchange rates. After the end of World War II to 1971, another Fixed
Exchange Rate System known as Bretton Woods System prevailed. After
1971, the exchange rate system was not purely flexible; hence it was
called Managed Float System.
Exchange Rate System
• Fixed Exchange Rates
IMF was established with the object of stabilising the rates of exchange
between the member countries. Under its charter, every member country
was required to fix and declare the par value of its currency in terms of
gold or dollar and maintain it. The system of fixed exchange is known as
pegged exchange rates. The Government determines the exchange rate by
pegging operations (i.e. buying and selling foreign exchange at particular
exchange rate).
In pegging operation, Government fixes an official exchange rate and

enforce it through Central Bank. A exchange stabilisation fund may be set
up in order to maintain the exchange rate by buying its currency when
market exchange rate falls below specified exchange rate and vice-versa.
The major defect in this system was that if the market exchange rate falls
consistently pegging operations will be very expensive as it will lead to
heavy reduction in reserves.
Under gold standard, rate of exchange varied within a small range of gold
export point and gold import point. But gold standard was given up by all
countries in 1930s. Since the fixed exchange rates do not reflect true value
of currencies, flexible exchange rates were adopted by countries.
! !39
• Flexible Exchange Rate
Flexible exchange rates are determined by forces of demand and supply in

the foreign exchange market without the interference of Government. The
relative positions of demand and supply depends on the deficit or surplus
in the balance of payments of the country. The exchange rates are not
rigidly fixed up but allowed to float with changing conditions. The relative
value of currencies alters far more rapidly with automatic devaluation or
revaluation.
The free-floating rate is allowed to seek its own level as no par of exchange
is fixed. Since 1980s, as many countries were in favour of the flexible
exchange rates; IMF was forced to adopt flexible exchange rates.
• Managed Exchange Rate System: Managed Flexibility
A system of managed flexibility came up to take the merits of fixed and

flexible exchange rate and to overcome their demerits. This system is
based on the par value concept under IMF guidelines. In managed
flexibility of exchange rate system, the range of flexibility around fixed par
values is determined by the country as per its economic needs and the
prevailing trend in international monetary system. This system of exchange
rate requires the country to interfere in foreign exchange market from time
to time in view of the emerging disequilibrium.
The Central Bank of the country holds large amount of foreign exchange.
Hence the Central Bank can control the exchange rate by manipulating the
magnitude of demand or supply in the forex market. For instance, the
Central Bank resorts to large scale buying of foreign currency when there is
an excess supply of foreign currency and vice-versa.
• RBI’s intervention and Exchange rate Management
In 1939, the Exchange Control Department of RBI was set up. In order to
conserve the scarce foreign exchange reserves, the Foreign Exchange
Regulation Act (FERA) was passed in 1947. India adopted fixed exchange
rate of IMF upto 1971, whereby the Indian Rupee external par value was
fixed. In 1973, FERA was amended and it came in force on January 1st,
1974. It gave wide powers to RBI to administer exchange control
mechanism properly.
! !40
In 1992, RBI introduced LERMS (Liberalised Exchange Rate Management

System) Under LERMS a dual exchange rate was fixed. The 1993-94
Budget made Indian Rupee fully convertible on trade account. LERMS was
withdrawn. Developing countries allowed market forces to determine the
exchange rate. Under flexible exchange rate system, if demand for foreign
currency is more than that of its supply, foreign currency appreciates, and
domestic currency depreciates and vice-versa. To minimise the
disadvantages of flexible exchange rate, most of the developing countries
including India have adopted the concept of Managed Flexible Exchange
Rate (MFER).
Under MFER, the Central bank intervenes to bring stability in exchange

rate. RBI’s intervention involves purchase of foreign currency from market
or release (sale) of foreign currency in the market, to bring stability in
exchange rates.
2.5 Transactions subject to Control
The transactions having International Financial implications are regulated

by the Foreign Exchange Department of Reserve Bank of India, which
includes:
1. Purchase and sale of Foreign Exchange
2. Export and import of currency, cheques, drafts, travellers’ cheques and

other international elements
3. Export of securities
4. Procedure for realisation of export proceeds
5. Foreign travel exchange
6. Acquisition and holding of foreign securities, portfolio investment
7. Acquisition, holding and disposal of immovable property beyond certain

prescribed limit from time to time.
8. Transfer of securities between residents and non-residents.
! !41
9. Maintenance of balances at certain centres
10.Trading, Commercial and Industrial activities in India of foreign firms,

companies and foreign nationals
11.Acquisition of business undertaking and holding of shares in Indian

companies by foreign nationals, firms, companies as well as by
corporate bodies predominantly owned by non-resident Indians
12.Appointment of non-residents and foreign nationals and companies as

agents or technical/management advisors in India
13.Employment, profession etc undertaken in India by foreign nationals
14.Setting up of Joint Ventures/wholly Owned Subsidiaries by Indian

companies within the investment limit linked to Net Worth of the
investee company (currently it is 400% of net worth of parent/Indian
company)
2.6 Permitted currencies
The expression ‘permitted currency’ is used to indicate a foreign currency

which is freely convertible, i.e. a currency which is permitted by the rules
and regulations of the country concerned to be converted into major
reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly
active market exists for dealings against the major currencies. Accordingly,
authorised dealers may maintain balances and positions in any permitted
currency. Authorised dealers may also maintain positions in Euro of the
European Currency Area.
Freely convertible currencies or permitted currencies are those that anyone

can convert in to another foreign currency without any restrictions or
intervention by government of the original country.
! !42
Sr. No. Freely convertible currencies of the world
1 Australian Dollar
3 Canadian Dollar
4 Danish Kroner
5 Euro
6 Hong Kong Dollar
7 Kenya Shilling
8 Kuwait Dinar
9 New Zealand Dollar
10 Norwegian Kroner
11 Pound Sterling
12 Singapore Dollar
13 South African Rand
14 Saudi Arabian Riyal
15 Swedish Kroner
16 Swiss Franc
17 UAE Dirham
18 US Dollar
! !43
2.7 Approved/permitted method of Receipts and payments
A. Manner of Receipt in Foreign Exchange
(1)Every receipt in foreign exchange by an authorised dealer, whether by

way of remittance from a foreign country or by way of reimbursement
from his branch or correspondent outside India against payment for
export from India, or against any other payment, shall be as mentioned
below:
(A) Members of the Asian Clearing Union
(i) Bangladesh, Myanmar, Pakistan, Sri Lanka and Republic of Maldives –
a. Receipts for export of eligible goods and services by debit to the

Asian Clearing Union Dollar account and/or Asian Clearing Union Euro
account in India of a bank of the member country in which the other
party to the transaction is resident or by credit to the Asian Clearing
Union Dollar account and/or Asian Clearing Union Euro Account of the
authorised dealer maintained with the correspondent bank in that
member country;
b. Receipt may also be made in any freely convertible currency in all

other cases.
c. In respect of exports from India to Myanmar, payment may be

received in any freely convertible currency or through ACU
mechanism from Myanmar.
(ii) Nepal and Bhutan –
a. Receipt may be in Rupees
b. Receipts for export of goods to Nepal may be made in free foreign

exchange, provided the importer resident in Nepal has been
permitted by the Nepal Rashtra Bank to make payment in free
foreign exchange. However, such receipts shall not be routed through
the ACU mechanism.
! !44
(iii) Islamic Republic of Iran —
a. Receipts for export of eligible goods and services, in any freely

convertible currency and/or in accordance with the directions issued
by the Reserve Bank to the authorised dealers from time to time.
b. Receipt in any freely convertible currency and/or in accordance with

the directions issued by the Reserve Bank to the authorised dealers
from time to time in all other cases.
(B) All countries other than those mentioned in A above
(i) Receipt in rupees from the account of a bank situated in any country
other than a member country of the Asian Clearing Union.
(ii) Receipt in any freely convertible currency.
(2) (a) In respect of an export from India, receipt shall be made in a

currency appropriate to the place of final destination as mentioned in the
declaration form irrespective of the country of residence of the buyer.
(b) Any other mode of receipt of export proceeds for an export from India
in accordance with the directions issued by the Reserve Bank of India to
authorised dealers from time to time.
(3) Authorised dealers have been permitted to allow receipts for export of
goods/ software to be received from a Third party (a party other than the
buyer) as per the guidelines issued by the Reserve Bank.
Payment for export in certain cases:
Notwithstanding anything contained in Regulation 3, receipt for export may

also be made by the exporter as under, namely,
• in the form of a bank draft, cheque, pay order, foreign currency notes/
travellers cheque from a buyer during his visit to India, provided the
foreign currency so received is surrendered within the specified period to
the authorised dealer of which the exporter is a customer;
! !45
• by debit to FCNR/NRE account maintained by the buyer with an

Authorised Dealer or an Authorised Bank in India;
• in rupees from the credit card servicing bank in India against the charge
slip signed by the buyer where such payment is made by the buyer
through a credit card;
• from a rupee account held in the name of an Exchange House with an

authorised dealer if the amount does not exceed fifteen lakh rupees per
export transaction or an amount prescribed by RBI, in consultation with
Government of India in this regard;
• In accordance with the directions issued by the Reserve Bank to

Authorised Dealers, where the export is covered by the arrangement
between the Central Government and the Government of a foreign
country or by the credit arrangement entered into by the Exim Bank with
a financial institution in a foreign state; in the form of precious metals
i.e. gold/ silver/platinum equivalent to value of jewellery exported by
Gem & Jewellery units in Special Economic Zones and Export Oriented
Units on the condition that the sale contract provides for the same and
the value is declared in the relevant EDF.
(B) Manner of payment in Foreign Exchange
(1)A payment in foreign exchange by an Authorised Dealer, whether by

way of remittance from India or by way of reimbursement to his branch
or correspondent outside India against payment for import into India, or
against any other payment, shall be as mentioned below:
(A)Members of the Asian Clearing Union
(i)Bangladesh, Myanmar, Pakistan, Sri Lanka & Republic of

Maldives –
a. Payment for import of eligible goods and services by credit to Asian

Clearing Dollar account and/or Asian Clearing Union Euro account in
India of a bank of the member country in which the other party to
the transaction is resident or by debit to the Asian Clearing Union
Dollar account and/or Asian Clearing Union Euro account of the
! !46
authorised dealer maintained with the correspondent bank in that

member country;
b. Payment may also be made in any freely convertible currency in all

other cases.
c. In respect of imports to India from Myanmar, payment may be made

in any freely convertible currency or through ACU mechanism from
Myanmar.
(ii) Nepal and Bhutan –
Payment may be in Rupees
(iii) Islamic Republic of Iran
a. Payment for import of eligible goods and services, in any freely

convertible currency and/or in accordance with the directions issued
by the Reserve Bank to the authorised dealers from time to time.
b. Payment in any freely convertible currency and/or in accordance with

the directions issued by the Reserve Bank to the authorised dealers
from time to time in all other cases.
(B) All countries other than those mentioned in A above
(i) Payment in rupees from the account of a bank situated in any country
other than a member country of the Asian Clearing Union.
(ii)Payment in any freely convertible currency.
(2) In respect of import into India –
a. Where the goods are shipped from a member country of the Asian
Clearing Union (other than Nepal and Bhutan) but the supplier is
resident of a country other than a member country of the Asian
Clearing Union, payment may be made in a manner specified for
countries in Group B of Regulation 5;
! !47
b. In all other cases, payment shall be made in a currency appropriate

to the country of shipment of goods;
c. Any other mode of payment in accordance with the directions issued

by the Reserve Bank of India to authorised dealers from time to time.
(3) Authorised Dealers have been permitted to allow payments for import
of goods/ software to be made to a Third Party (a party other than the
supplier) as per the guidelines issued by the Reserve Bank.
(C) Manner of Payment in certain cases
(1)Notwithstanding anything contained in Regulation 5, a person resident

in India may make payment for import of goods.
In foreign exchange through an international card held by him/in rupees

from international credit card/debit card through the credit/debit card
servicing bank in India against the charge slip signed by the importer/as
prescribed by Reserve Bank from time to time.
Provided that;
a. the transaction for which the payment is so made is in conformity with

the provisions of the Act, rules and regulations made thereunder; and
b. the import is also in conformity with the provision of the Foreign Trade
Policy in force.
(2) Any person resident in India may also make payment as under;
(i) in rupees towards meeting expenses on account of boarding, lodging

and services related thereto or travel to and from and within India of a
person resident outside India who is on a visit to India;
(ii) by means of a crossed cheque or a draft as consideration for

purchase of gold or silver in any form imported by such person in
accordance with the terms and conditions imposed under any order issued
by the Central Government under the Foreign Trade (Development and
Regulations) Act, 1992 or under any other law, rules or regulations for the
time being in force;
! !48
(iii) a company or resident in India may make payment in rupees to its

non-whole time director who is resident outside India and is on a visit to
India for the company’s work and is entitled to payment of sitting fees or
commission or remuneration, and travel expenses to and from and within
India, in accordance with the provisions contained in the company's
Memorandum of Association or Articles of Association or in any agreement
entered into by it or in any resolution passed by the company in general
meeting or by its Board of Directors, provided the requirement of any law,
rules, regulations, directions applicable for making such payments are duly
complied with.
2.8 Convertible currencies
A convertible currency is a currency which can be converted into gold or

any other currency freely, i.e., without having obtained the prior
permission of monetary authorities of the country concerned.
The convertibility of the currency is said to be internal when such

conversion is permissible only to the resident in the country and external
when it is permitted to non-resident as well.
A currency is said to be fully convertible when there is no restriction,

except the exchange rate of the currency in terms of the other currency on
its conversion in to gold or any other currency or in respect of transactions
in it covering import and export of goods and services – transaction of
current account as well as capital account between resident and non-
resident or among the non-residents themselves.
Fully convertible currency used to be referred as to the “hard currency”

while a currency not convertible was called as “soft currency”. These terms
are not in much use now a days, but when used hard currency implies a
currency of which the supply is limited in relation to its demand and soft
currency implies a currency of which supply is plentiful relative to its
demand.
The convertibility is said to be partial or limited when conversion is

permitted only to the specified holders of the currency, or for holding
acquired after certain date, or for transactions on current account but not
on the capital account.
! !49
2.9 Choice of currency in International Transaction
While there are no restrictions form the exchange control viewpoint on any
foreign currency being chosen in international transactions comprising
import/export trade, consultancy services etc. The current foreign trade
policy stipulates that;
• All export contracts and invoices (except for those payments are to be
received through Asian Clearing Union (ACU) should be denominated
only in freely convertible currency and
• All settlements of payment in terms of contract with overseas parties

have to be made in permitted currency
Further, although Authorised Dealers are allowed to provide cover to

resident customers in any permitted currency, they should never lose sight
of the fact that there is no forward exchange market in India and on the
top of that if the concerned overseas centre suffers from the same
disadvantage. The contracting resident may go unprotected against the
exchange risks even in the case of some of the permitted currencies in
spite of the need for such protection.
2.10 Authorised Dealer
‘Authorised Dealer’ means a person authorised as an authorised dealer

under subsection (1) of section 10 of the foreign Exchange Management
Act. This authorisation is effected through a licence granted by Reserve
Bank of India. This delegation of authority was necessary as the RBI did
not, and still does not deal in foreign exchange with public. Thus, the
intended exchange control is exercised to a large extent by authorised
dealers on behalf of the Reserve Bank.
Authority: An authorised dealer may have authority to deal in all foreign

currencies or only in specified currencies, or to undertake transactions of
all descriptions in foreign currencies or only certain specified transactions.
Authority may be for specific period or within the specified amounts and
may be revoked by RBI for reasons appearing to it to be sufficient for the
purpose.
! !50
Number: There are at present 98 authorised dealers, holding full-fledged

licences consisting of the State Bank of India and its subsidiaries,
nationalised banks, private sector banks, foreign bank operating in India
and urban co-operative banks. There are also 9 financial institutions having
restricted authorisations to deal in foreign exchange.
In addition, AD Category II Money Changers FFMCs, FFMCs and established

firms such as hotels, shops, etc., have been authorised by the Reserve
Bank of India for restricted money changer business, to deal in foreign
currency notes, coins and travellers cheques.
Obligations: Sec.10 of FEMA 1999. An authorised dealer must comply

with all the directives of the Reserve bank and except with previous
permission of the Reserve Bank, must not engage in any transaction
involving any foreign exchange which is not in conformity with the terms of
his appointment. He must, before undertaking any transaction in foreign
exchange on behalf of any person, satisfy himself that the transaction will
not involve any contravention or evasion of any Exchange Control
Regulation for the time being in force.
Powers: An authorised dealer in foreign exchange may, within limits, if

any, prescribed by the Reserve Bank:
(i) Deal in foreign currencies and, for that purpose, open and maintain
accounts abroad in such currencies;
(ii)Approve application from residents for the purchase of foreign

currencies; and
(iii)Maintain rupee accounts in the name of non-residents and pass debits

in such accounts.
In other words, an authorised dealer, i.e. a bank authorised to deal in

foreign exchange, may;
i. Purchase TTs, MTs, drafts, bills, etc, drawn in any permitted foreign
currency freely against rupees from banks and the public in India;
ii. Purchase any permitted foreign currency from his overseas branch/
correspondent of the purpose of keeping in funds the latter’s non-
! !51
resident rupee account in India and/or making payments to residents in

India;
iii. Purchase foreign currency notes and coins from any person, bank or
money changer in India, subject to realisation of the proceeds thereof
through his overseas branch/correspondent;
iv. Make remittances by way of draft, MTs, and TTs, freely in some cases,
within certain limits in some other cases and beyond those limits in still
other cases;
v. Collect the import and export bills of customers;
vi. Open letters of credit or issue travellers cheques, etc; subject to

Exchange Control regulations;
vii.Purchase, discount, or negotiate export bills;
viii.Sell and purchase pound sterling for spot deliveries to and from the
Reserve Bank, and sell to that institution pound sterling for forward
deliveries, and U.S. dollars, Deutsche marks and yen for both spot and
forward deliveries;
ix. Sell and purchase foreign currencies on spot or forward basis up to six
months to and from customers and/or to correct imbalances in his own
exchange position in any currency or currencies on account of genuine
merchant transactions from the interbank market in India and in certain
cases from foreign markets, and for the same purpose, do “swaps”;
x. Give guarantees on behalf of customers to foreign buyers or sellers

freely, except deferred payment guarantees for which prior approval of
the Reserve Bank is necessary; and
xi. Open and maintain non-resident rupee accounts of foreign banks or

branches and of persons, firms or companies stationed outside India.
! !52
2.10.1 Authorised Dealer’s Transactions with RBI
• Authorised dealers have recourse to Reserve Bank to sell/buy U.S. dollars

to the extent the latter is prepared to transact in the currency at a given
point of time.
• Reserve Bank will buy/sell only U.S. dollar. It will not ordinarily buy/sell
any other currency from/to authorised dealers.
• Reserve Bank will quote its spot buying rate for US dollar to any
authorised dealer who makes a specific request to Reserve Bank Dealing
Room in the Department of External Investments & Operations (DEIO),
Central Office, Mumbai. The rate quoted by the Dealing Room will hold
good only for the specific transaction and is subject to change unless deal
is concluded immediately.
(a)Legal Obligation of RBI
Under section 40 of the Reserve Bank of India Act,1934, read with the
Central Government notification No. S.O. 140 (E) dated 27th February,
1993, the Reserve Bank of India is under obligation to sell U.S. dollars to
the authorised dealers for purposes approved by the Central Government.
And in terms of the said notification the Reserve Bank has also to buy U.S.
dollars from the authorised dealers to the extent it can at its rate of
exchange calculated with reference to the prevailing market rate.
(b) For Cover Operations for Merchant Transactions only
This recourse to the Reserve Bank for transactions in foreign currencies is

available to the authorised dealers for their cover operations only, more
precisely for cover of their actual merchant transactions, and not for their
anticipated purposes of the currency from their constituents.
However, the authorised dealers may sell to the Reserve Bank U.S. dollars
purchased from their overseas branches/corresponds for funding the
latter’s rupee accounts in India to meet their bonafide needs.
! !53
(c) Currencies dealt in by Reserve Bank
The Reserve Bank buys spot only of US dollars, and does not ordinarily buy
either spot or forward any other currency, nor does it sell forward any
currency to an authorised dealer.
Exception: However, the Reserve Bank purchases spot and forwards the
Asian Clearing Union (ACU) currencies and sells such currencies for spot
delivery.
(d) Hours, Days and RBI Offices for Currency Transactions
i. Hours/Days: The currency transactions with the Reserve Bank have to

be undertaken during business hours on days when its concerned
branch office remains open for business, except on Saturdays when no
foreign currency transaction is made by the Reserve Bank.
ii. Branch offices of RBI Selling/Purchasing Dollars: The settlement

of Rupee leg of the transactions can be effected at the request of
authorised dealer at any of the Reserve Bank Offices (Deposit Accounts
Department) at Ahmedabad, Bengaluru, Kolkata, Chennai, Kanpur,
Mumbai, Nagpur and New Delhi. While concluding the deal, the
authorised dealer should clearly indicate the office of Reserve Bank at
which settlement of the Rupee leg is desired.
(e) Minimum and Multiple of Sales/Purchases

The purchases and sales of U.S. dollars will be made by the Reserve Bank
in multiples of U.S. dollars 500,000 with a minimum of U.S. $ 1million.
(f) Forms to be used

Confirmation of the sale and purchase of U.S. dollar to/from the Reserve
Bank may be sent immediately in the form RBM 1 and RBM 2 respectively
to the Backup Section of DEIO, Central Office, Reserve Bank of India,
Mumbai. The confirmation may be sent by hand delivery, telex, or fax.
(g) Advice to Federal Reserve Bank, New York

In the case of purchase by an authorised dealer, the Reserve Bank will
send necessary information to the Federal Reserve Bank of New York to
arrange payments of funds to the New York office or agent of the
authorised dealer on the value date.
! !54
(h) Payment of Rupee Value

The payment of rupee value against sale of foreign currency to the Reserve
Bank will be made by the Reserve Bank’s concerned account of the
authorised dealer on the appropriate value date without waiting for the
credit information from the Reserve Bank’s correspondent.
If the foreign currency amount is not delivered to the overseas

correspondent of the Reserve Bank on the value date, interest will be
charged at the Reserve Bank’s rate on the rupee value credited to the
account of the authorised dealer for the days of default. In order that the
overdue interest may be recovered automatically by debit to the authorised
dealer’s account with concerned office of the Reserve Bank, the authorised
dealer should lodge a complaint to standing authority to that effect with
the Reserve Bank. Cases of undue delay will attract, apart from overdue
interest, penalties under the Foreign Exchange Management Act, 1999.
(i) Standing Instructions to Overseas Correspondent

Authorised dealers should give standing instructions to their overseas
branch/correspondent to mention clearly the name of the principal, i.e. ,
the authorised dealer, as well as the name of the concerned branch thereof
on whose behalf the foreign currency amount is delivered to the Reserve
Bank’s account with the Federal Reserve Bank of New York.
(j) Submission of Statement

All transactions with the Reserve Bank should be reported to the Reserve
Bank in appropriate return. Form A2 need not be completed in respect of
sale of foreign currencies to the Reserve Bank.
! !55
2.11 FEDAI
Foreign Exchange Dealers Association of India (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-à-vis public and liaison with
RBI for reforms and development of Forex market.
Presently some of the functions are as follows:
• Guidelines and rules for forex business.

• Training of bank personnel in the areas of foreign exchange business.
• Accreditation of forex brokers
• Advising/Assisting member banks in settling issues/matters in their
dealings.
• Represent member banks on Government/Reserve Bank of India/Other
bodies.
• Announcement of daily and periodical rates to member banks.
Due to continuing integration of the global financial markets and increased

pace of de-regulation, the role of self-regulatory organisations like FEDAI
has also transformed. In such an environment, FEDAI plays a catalytic role
for smooth functioning of the markets through closer co-ordination with the
RBI, other organisations like FIMMDA, the Forex Association of India and
various market participants. FEDAI also maximises the benefits derived
from synergies of member banks through innovation in areas like new
customised products, benchmarking against international standards on
accounting, market practices, risk management systems, etc.
As on August, 2017, there are 102 members of FEDAI which constitutes 21

public sector banks, 44 foreign banks operating in India, 20 private sectors
banks, 17 cooperative banks and other financial institutions.
! !56
2.12 Correspondent
A correspondent is an overseas bank with which a bank in the home

country maintains an account and through which it routes its business in
connection with the foreign exchange transaction undertaken by it. The
types of business that a correspondent performs include:
i. Advising and, where necessary, confirming letters of credit opened by

the domestic bank to the beneficiaries;
ii. Negotiating bills drawn under letters of credit;
iii. Collecting export bills purchased/discounted or negotiated or accepted
for collection by the domestic bank;
iv. Honouring drafts, MTs, TTs, traveller’s cheques, traveller’s circular letters
of credit issued by the domestic bank;
v. Making payments on behalf of the domestic bank, etc.
vi. Granting/Guaranteeing of loans and overdrafts.
vii.Furnishing of credit information such as report on business houses.
2.13 Bank accounts
a. Nostro Account: For the purpose of foreign exchange transactions; a

bank authorised to deal in foreign exchange in India requires to
maintain accounts in foreign currencies with its overseas branches or
correspondents in different countries. Such an account in a foreign
currency with an overseas branch or correspondent is known as Nostro
(an Italian word meaning ours) account.(Our account with their banks,
in their country, in their currency.)
b. Pro forma/Mirror Account:
(i) The transactions routed through a Nostro account are recorded in a Pro
forma or mirror account in the books of the bank in the home country on
the “mirror principle”, i.e., in a reverse order. In other words, what is debit
in the Nostro account will be credit in the Pro forma account and vice
versa. The entries may originate at either end. For instance, if a TT is
drawn by the bank in the home country on its foreign correspondent, the
amount of the TT will be credited to the Proforma account at the time of
issue, while the Nostro account will be debited with the TT amount
subsequently at the time of payment. Similarly, if a bill drawn under a
letter of credit opened by the bank in the home country and advised
! !57
through its overseas correspondent, is negotiated by the latter, the

payment to the beneficiary of the credit will be made to the debit of the
Nostro account, that is to say, the entry will originate at the foreign centre,
and this debit will be responded to afterwards by the bank in the home
country on receipt of the debit advice together with the bill and the
shipping documents, by credit of the Pro forma account.
(ii) The Pro forma account is maintained both in the concerned foreign
currency and the home currency, i.e., rupees, and the rate of exchange at
which the conversion of one currency into the other is made is also
recorded.
23.13.1 INR account of Foreign Banks
Vostro Account: The account maintained by an overseas branch or

correspondent with the bank at home is known, as Vostro (an Italian word
meaning your) account. In other words, the rupee account of a foreign
branch or correspondent in the books of a bank in India is a Vostro
account. (Their account in our country, with our bank, in our currency.)
As is clear from the foregoing paragraphs, the same account may be

Nostro or Vostro, depending upon the approach. The rupee account, as
indicated above, is Vostro account from the point of view of the foreign
branch or correspondent, and the Nostro account referred to in
paragraph (a) above will be Vostro account from the point of view
of the foreign branch or correspondent.
2.13.2 LORO account
(a) Loro account: The word Loro means their. Thus, an account
maintained by a bank in a foreign country with a bank in India will be a
Loro account from the point of view of another bank in the same or any
other foreign country.
! !58
2.14 FOREIGN CURRENCY ACCOUNTS
2.14.1 Of Authorised Dealers
a. Opening of account: An authorised dealer may freely open and

operate an account in any permitted currency with his branch or
correspondent in the country of the currency. A report containing the
name and address of the branch or correspondent is required to be sent
to the office of the Reserve Bank to which R returns are submitted as
soon as such an account is opened.
b. Credit Facility: Credit facilities in the form of a loan or overdraft

through its Nostro account abroad to the maximum limit of Rs. 20 lakhs
may be enjoyed by the authorised dealer. This limit includes all such
facilities availed of by all the branches in India of the authorised dealer
from all its overseas/correspondents, but excludes the lines of credit
under revolving arrangement for the provision of foreign exchange
facilities to exporters by the Export Credit Guarantee Corporation Ltd.
If the limit is ever exceeded by reason of unexpected drawings under

letters of credit etc.; the position should be squared within 3 days.
Overdrawings in excess of the overall limit of Rs. 20 lakhs are permissible
only when such loans/overdrafts are in replenishment of rupee resources of
the foreign branch/correspondent for financing its normal business
operation in India, subject to reporting such loan or overdraft to the
Reserve Bank on the following day.
2.14.2 Of Persons
The Reserve Bank has, however, granted under its notification FERA 47/77-
RB dated 24, 11, 1977, general permission to Indian nationals who proceed
abroad for purposes, such as business, medical treatment, higher studies,
training, etc., to open foreign currency accounts with banks abroad and
operate them during their stay outside India, provided that the deposits
made into such an account are made only of foreign exchange:
(i) obtained from an authorised dealer or money changer in India, or

(ii) received outside India by way of scholarship or stipend, or
(iii) received by way of salary or payment for services not arising from
any business in India or anything done while in India.
! !59
2.14.3 Of Indian Exporters
i. Exporters in India having a good track record except those who are
members of the Asian Clearing Union;
ii. Those designated Export or Trading Houses, Star Trading or Super Star
Trading Houses; and
iii. Those whose net foreign exchange earnings during the preceding year
on account of exports after adjusting payments towards imports were
not less than Rs. 4 crores may be permitted selectively by the Reserve
Bank against Application on Form EFC to open foreign currency accounts
with banks abroad for crediting the proceeds of export shipment made,
subject to certain terms and conditions.
A designated branch of an authorised dealer in India will monitor the

operations in the account abroad.
2.15 Countertrade
Countertrade means exchanging goods or services which are paid for, in

whole or part, with other goods or services, rather than with money. A
monetary valuation can however be used in countertrade for accounting
purposes. In dealings between sovereign states, the term bilateral trade is
used. OR “Any transaction involving exchange of goods or services for
something of equal value”
There are six main variants of countertrade:
• Barter: Exchange of goods or services directly for other goods or

services without the use of money as means of purchase or payment.
Barter is the direct exchange of goods between two parties in a

transaction. The principal exports are paid for with goods or services
supplied from the importing market. A single contract covers both flows, in
its simplest form involves no cash. In practice, supply of the principal
exports is often held up until sufficient revenues have been earned from
the sale of bartered goods. Furthermore, during negotiation stage of a
barter deal, the seller must know the market price for items offered in
trade. Bartered goods can range from hams to iron pellets, mineral water,
! !60
furniture or olive oil all somewhat more difficult to price and market when
potential customers must be sought.
• Switch trading: Practice in which one company sells to another its

obligation to make a purchase in a given country.
• Counter purchase: Sale of goods and services to one company in other

country by a company that promises to make a future purchase of a
specific product from the same company in that country.
• Buyback: Occurs when a firm builds a plant in a country - or supplies

technology, equipment, training, or other services to the country and
agrees to take a certain percentage of the plant's output as partial
payment for the contract.
• Offset: Agreement that a company will offset a hard-currency purchase

of an unspecified product from that nation in the future. Agreement by
one nation to buy a product from another, subject to the purchase of
some or all of the components and raw materials from the buyer of the
finished product, or the assembly of such product in the buyer nation.
• Compensation trade: Compensation trade is a form of barter in which

one of the flows is partly in goods and partly in hard currency.
Thus, countertrade is a kind of foreign trade under a voluntary agreement

between two countries, involving adjustment of the value of goods
imported into one of the two concerned countries from the other country
against the value of goods exported from that country to the other. Such
an agreement requires prior permission of the Reserve Bank.
The Reserve Bank gives the permission, provided that-
a. the imports and exports take place at the international prices and
b. the transactions are routed through an Escrow account in conformity

with the Indian Trade and Exchange Control Regulations.
! !61
Although, the major reason for the substantial growth of countertrade is its
use as a strategy to increase exports, particularly by the developing
countries, countertrade has been successfully used by a number of
companies as an entry strategy. Countertrade’s main attraction is that it
can give a firm a way to finance an export deal when other means are not
available. Thus, if a firm is unwilling to enter a countertrade agreement it
may lose an export opportunity to a competitor that is willing to make a
countertrade agreement. Boeing, Airbus Co., often has to agree to counter
purchase agreements in order to capture orders for its commercial jet
aircraft. There are various forms of countertrade. Barter/buybacks/
compensation deal/counter purchase, etc.
Reasons for the Growth of Countertrade
There have been several reasons that have made countertrade popular.
Obviously, the countries or companies concerned have encouraged or
involved in countertrade due to certain specific advantages, although some
of the benefits may be purely temporary;
1. Countertrade was very common between the communist countries. It

also became popular with respect to trade between the communist bloc
and many developing countries were eagerly looking towards this bloc
for increasing their exports.
2. Countertrade became popular in the East-West trade mainly due to the

foreign exchange problems.
3. Countertrade has also been resorted to by several companies to

mitigate the effects of recession.
4. Some countries have also made the countertrade a means to increase

sales through disguised undercutting of the cartel prices (for example,
the oil price fixed by the OPEC).
! !62
2.16 Escrow Account
In terms of Notification No FEMA 20/2000-RB dated May 3, 2000, as

amended from time to time, and A.P. (DIR Series) Circular No. 62 dated
May 24, 2007, AD Category-I banks were permitted to open Escrow
account and Special account on behalf of non-resident corporate for
acquisition/transfer of shares/convertible debentures of an Indian company
through open offers/ delisting/exit offers, subject to compliance with the
relevant SEBI [Substantial Acquisition of Shares and Takeovers (SAST)]
Regulations, 1997 and other applicable SEBI regulations.
In all other cases of opening/maintaining of Escrow accounts for FDI

related transactions, prior approval from the Reserve Bank is necessary.
Escrow mechanism facilitates FDI transactions in cases where parties to

the share purchase agreement desire to complete the due diligence
process before they finalise the agreement for the same and accordingly,
there is a time lag between payment of purchase consideration and the
receipt of the shares. To provide operational flexibility and ease the
procedure for such transactions, AD Category-I banks are permitted to
open and maintain, without prior approval of the Reserve Bank, non-
interest-bearing Escrow accounts in Indian Rupees in India on behalf of
residents and/or non-residents, towards payment of share purchase
consideration and/or provide Escrow facilities for keeping securities to
facilitate FDI transactions subject to the terms and conditions as given
below.
SEBI authorised Depository Participants, are permitted to open and

maintain, without prior approval of the Reserve Bank, Escrow accounts for
securities subject to the terms and conditions as given below. These
facilities will be applicable for both issue of fresh shares to the non-
residents as well as transfer of shares from/to the non-residents.
1. The Escrow account in INR would be maintained only with an AD

Category-I bank in India. The Escrow account may be opened jointly
and severally. Further, securities kept/linked with such Escrow accounts
may be linked with demat account maintained with SEBI authorised
Depository Participants.
! !63
2. The account shall be non-interest bearing.
3. No fund or non-fund based facilities would be permitted against the

balances in the Escrow account.
Permitted credits
a. Receipt of foreign inward remittance as consideration towards issue or

transfer of shares through normal banking channels; or
b. Receipt of rupee consideration through the normal banking channels

from India by the resident acquirers of shares who proposes to acquire
them from non-resident holders by way of transfer.
Permitted debits
a. Remittance of consideration for issue of shares or transfer of shares

directly into the bank accounts of the beneficiary (issuer in India or
transferor of shares in India or abroad); or
b. Remittance of consideration for refund to the initial remitter of funds in

case of failure/non-materialisation of the FDI transaction for which the
Escrow account was opened.
• The underlying FDI transaction for which the Escrow account is

opened should be compliant with extant FEMA provisions. Further, for the
purposes of FDI reporting, date of transfer of funds into the bank account
of the issuer or transferor of shares, shall be the relevant date of
remittance.
• Where the transaction is governed by SEBI guidelines/regulations,

operation of the Escrow accounts shall also be in accordance with the
relevant SEBI regulations.
• Balance in the Escrow account, if any, may be repatriated at the then

prevailing exchange rate (i.e., the exchange rate risk will be borne by the
person resident outside India acquiring the shares), after all the
formalities in respect of the said acquisition are completed. In cases,
where proposed acquisition/transfer does not materialise, the AD
Category-I bank may allow repatriation/refund of the entire amount lying
! !64
to the credit of the Escrow account on being satisfied with the bonafides
of such remittances.
• The Escrow account shall remain operational for a maximum period of six
months only and the account shall be closed immediately after
completing the requirements as outlined above or on completion of six
months from the date of opening of such account, whichever is earlier. In
case the Escrow account is required to be maintained beyond six months,
specific permission from the Reserve Bank has to be sought.
• Requirement of compliance with KYC guidelines issued by the Reserve

Bank /SEBI shall rest with the AD Category-I bank/ SEBI authorised
Depository Participants.
• The terms of the Escrow account shall be laid down strictly in the Escrow
agreement, Share purchase agreement, conditions of issue of shares,
etc.
No overdraft or loan is to be granted against funds in an escrow account.
2.17 Barter Trade
Barter is a system of exchange by which goods or services are directly

exchanged for other goods or services without using a medium of
exchange, such as money. It is distinguishable from gift economies in that
the reciprocal exchange is immediate and not delayed in time. It is
usually bilateral, but may be multilateral (i.e., mediated through barter
organisations) and usually exists parallel to monetary systems in most
developed countries, though to a very limited extent. Barter usually
replaces money as the method of exchange in times of monetary crisis,
such as when the currency may be either unstable
(e.g., hyperinflation or deflationary spiral) or simply unavailable for
conducting commerce.
! !65
The limitations of barter
Barters’ limits are usually explained in terms of its inefficiencies in easing

exchange in comparison to the functions of money.
• Need for presence of double coincidence of wants: For barter to

occur between two people, both would need to have what the other
wants.
• Absence of common measure of value: In a monetary economy,

money plays the role of a measure of value of all goods, so their values
can be measured against each other; this role may be absent in a barter
economy.
• Indivisibility of certain goods: If a person wants to buy a certain

amount of another's goods, but only has for payment one indivisible unit
of another good which is worth more than what the person wants to
obtain, a barter transaction cannot occur.
• Lack of standards for deferred payments: This is related to the

absence of a common measure of value, although if the debt is
denominated in units of the good that will eventually be used in
payment, it is not a problem.
• Difficulty in storing wealth: If a society relies exclusively on

perishable goods, storing wealth for the future may be impractical.
However, some barter economies rely on durable goods like pigs or cattle
for this purpose.
The advantages of barter
• Direct barter does not require payment in money (when money is in

short supply) hence will be utilised when there is little information about
the creditworthiness of trade partners or there is a lack of trust.
• The poor cannot afford to store their small supply of wealth in money,
especially in situations where money devalues quickly (hyperinflation).
! !66
The Reserve Bank of India, in consultation with Govt. of India decided to

do away with barter system of trade at the Indo-Myanmar border and
switched over completely to usual trade with effect from December 1, 2005
(FQMA 347/205) dated July 24, 2015. Accordingly, all the trade
transactions with Myanmar would be settled in ACV and also permitted
currencies.
2.18 Summary
There are various forms of controls imposed by a government on the

purchase/sale of foreign currencies by residents or on the purchase/sale of
local currency by non-residents. Common foreign exchange controls
includes Banning the use of foreign currency within the country, Banning
locals from possessing foreign currency, Restricting currency exchange to
government-approved exchangers, fixed exchange rates, Restrictions on
the amount of currency that may be imported or exported. Exchange
control means official interference in the foreign exchange dealing of the
country. One of the important objectives of exchange control is protection
of balance of payments.
Control of Exchange Rates is system of managed flexibility came up to take

the merits of fixed and flexible exchange rates. This system is based on the
par value concept under IMF guidelines. In managed flexibility of exchange
rate system. To minimise the disadvantages of flexible exchange rate, most
of the developing countries including India have adopted the concept of
managed Flexible Exchange Rate (MFER). Under MFER, the Central bank
intervenes to bring stability in exchange rate. RBI’s intervention involves
purchase of foreign currency from market or release (sale) of foreign
currency in the market, to bring stability in exchange rates.
The transactions having International Financial implications are regulated

by the Foreign Exchange Department of Reserve Bank of India, which
includes Purchase and sale of Foreign Exchange, Export and import of
currency, cheque, drafts, travelers cheque and other international
elements, Export of securities, Procedure for realisation of export proceeds,
Foreign travel exchange, Acquisition and holding of foreign securities,
portfolio investment, Acquisition, holding and disposal of immovable
property beyond certain prescribed limit from time to time.
! !67
Freely convertible currencies or permitted currencies are those that anyone

can convert in to another foreign currency without any restrictions or
intervention by government of the original country. Every receipt in foreign
exchange by an authorised dealer, whether by way of remittance from a
foreign country (other than Nepal and Bhutan) or by way of reimbursement
from his branch or correspondent outside India against payment for export
from India, or against any other payment should be as described under
FEMA. Similarly payment in foreign exchange by an authorised dealer,
whether by way of remittance from India or by way of reimbursement to
his branch or correspondent outside India (other than Nepal and Bhutan)
against payment for import into India, or against any other payment also
should be as per FEMA regulations. A convertible currency is a currency
which can be converted in to gold or any other currency freely, i.e., without
having obtained the prior permission of monetary authorities of the country
concerned.
While there are no restrictions from the exchange control viewpoint on any
foreign currency being chosen in international transactions comprising
import/export trade, consultancy services etc.
Authorised dealer means a person authorised as an authorised dealer

under subsection (1) of section 10 of the Foreign Exchange Management
Act. In addition, AD Category II Money Changers FFMCs, FFMCs and
established firms such as hotels, shops, etc., have been authorised by the
Reserve Bank of India for restricted money changer business, to deal in
foreign currency notes, coins and travellers cheques.
Reserve Bank will buy/sell only U.S. dollar. It will not ordinarily buy/sell any
other currency from/to authorised dealers.
Foreign Exchange Dealers Association of India (FEDAI) is authorised for

framing of rules governing the conduct of interbank foreign exchange
business among banks vis-à-vis public and liaison with RBI for reforms and
development of Forex market.
A correspondent is an overseas bank with which a bank in the home

country maintains an account and through which it routes its business in
connection with the foreign exchange transaction undertaken by it.
! !68
For the purpose of foreign exchange transactions a bank authorised to deal

in foreign exchange in India requires to maintain accounts in foreign
currencies with its overseas branches or correspondents in different
countries these accounts are called as Nostro accounts. Similarly, Vostro
accounts are also permitted to open by AD banks for their overseas
correspondent banks.

whole or part, with other goods or services, rather than with money. The
countertrade includes Barter, Switch trading, counter purchase, offsets etc.
AD Category-I banks were permitted to open Escrow account and Special
account on behalf of non-resident corporate for acquisition/transfer of
shares/ convertible debentures of an Indian company through open offers/
delisting/ exit offers, subject to compliance with the relevant SEBI.
Barter is a system of exchange by which goods or services are directly

exchanged for other goods or services without using a medium of
exchange, such as money. It is distinguishable from gift economies in that
the reciprocal exchange is immediate and not delayed in time.
2.19 Questions
A. Answer the following Questions
1. Write notes on functions and responsibilities of authorised dealer.
2. Explain the objectives of exchange control and methods of exchange

control.
3. What is countertrade? Explain.
4. Write brief note on Barter trade.
5. Write short notes on:

• Nostro account
• Vostro account
• Correspondent Banks
! !69
B. Multiple choice questions
1. The exchange control regulations in India are governed by

__________..
a. Foreign Exchange Management Act (FEMA)
b. Foreign Exchange Regulation Act (FERA)
c. Reserve Bank of India Act
d. All above
2. Foreign Exchange for Travel Abroad can be purchased from Authorised

Person against the Rupee Payment in cash only up to Rs. __________.
a. 25,000
b. 50,000
c. 10,000
d. Any amount
3. Exchange control policy is determined by ………………

a. Ministry of commerce
b. Ministry of Finance
c. Ministry of Foreign Trade
d. Director General of Foreign Trade
4. What is permitted currencies?

a. Foreign currencies which are freely convertible
b. Indian rupees converted into foreign currency
c. Currencies which are freely permitted to import
d. Currencies which are already permitted to sale freely.
5. Permitted method of payments means………………………

a. Currency appropriate to the country of origin of goods
b. Currency appropriate to the country of destination of goods
c. Settlement of export
d. Settlement in any currency
Answers:
1. (a) 2. (b) 3. (d) 4. (a) 5. (b)
! !70
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !71
ASIAN CLEARING UNION, ACU EUROPEAN CURRENCY UNIT: ECU AND LIBOR
Chapter 3
Asian Clearing Union, ACU European
Currency Unit: ECU And Libor
Objectives

mechanism of Asian Clearing Union, member countries requirement of
ACU, European Currency Union is also important to understand, while
understanding LIBOR.
Structure
3.1 Introduction
3.2 Objectives
3.3 ACU Member Countries and their Central Banks
3.4 The Procedure for Settlement of ACU Transactions
3.5 Mechanism for Settlement through the Union
3.6 The Benefits accruing from ACU
3.7 Most Favoured Nation Clause
3.8 European Currency Unit (ECU)
3.9 LIBOR
3.10 Summary
3.11 Questions
! !72
3.1 Introduction
Asian Clearing Union (ACU) is a payment arrangement whereby the

participants settle payments for intra-regional transactions among the
participating central banks on a net multilateral basis. The Asian Clearing
Union (ACU) was established with its headquarters at Tehran, Iran, on
December 9, 1974 at the initiative of the United Nations Economic and
Social Commission for Asia and Pacific (ESCAP), for promoting regional co-
operation. The main objective of the clearing union is to facilitate payments
among member countries for eligible transactions on a multilateral basis,
thereby economising on the use of foreign exchange reserves and transfer
costs, as well as promoting trade among the participating countries.
The Central Banks and the Monetary Authorities of Bangladesh, Bhutan,

India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are currently
the members of the ACU. All transactions to be settled through the ACU
will be handled by AD Category-I banks in the same manner as other
normal foreign exchange transactions, through correspondent
arrangements.
The Asian Monetary Units (AMUs) is the common unit of account of ACU
and is denominated as ‘ACU Dollar’ and ‘ACU Euro’, which is equivalent in
value to one US Dollar and one Euro respectively. All instruments of
payments under ACU have to be denominated in AMUs. Settlement of such
instruments may be made by AD Category-I banks through the ACU Dollar
Accounts and ACU Euro Accounts, which should be distinct from the other
US Dollar and Euro accounts respectively maintained for non ACU
transactions
! !73
3.2 Objectives
The objectives of the ACU are:
(1)To provide a facility to settle payments, on a multilateral basis, for

current international transactions among the territories of participants;
(2)To promote the use of participants’ currencies in current transactions

between their respective territories and thereby effect economies in the
use of the participants' exchange reserves;
(3)To promote monetary cooperation among the participants and closer

relations among the banking systems in their territories and thereby
contribute to the expansion of trade and economic activity among the
countries of the ESCAP region; and
(4)To provide for currency SWAP arrangement among the participants so

as to make Asian Monetary Units (AMUs) available to them temporarily.
3.3 ACU member countries and their central banks
Currently (2016), the members of ACU are the central banks of

Bangladesh, Bhutan, Iran, India, Maldives, Nepal, Pakistan, Sri Lanka, and
Myanmar. The central banking authority of member countries has issued
detailed instructions and modalities for channelling the monetary
transactions through the ACU. Membership in the ACU is open to central
banks located in the geographical area of ESCAP.
! !74
State Central Bank Year
Bangladesh Bank 1974

!
Bangladesh
Royal Monetary Authority of Bhutan 1999

!
Bhutan
Reserve Bank of India 1974

!
India
Central Bank of the Islamic Republic of Iran 1974

! Iran
Maldives Monetary Authority 2009

!
Maldives
Central Bank of Myanmar 1977

!
Myanmar
Nepal Rastra Bank 1974
! Nepal
State Bank of Pakistan 1974

!
Pakistan
Central Bank of Sri Lanka 1974

!
Sri Lanka
! !75
3.4 The procedure for settlement of ACU transactions
1. Majority of transactions should be settled directly through the accounts

maintained by AD Category-l banks with banks in the other participating
countries and vice versa; only the spillover’s in either direction is
required to be settled by the Central Banks in the countries concerned
through the Clearing Union. At all times, the balances maintained in the
ACU Dollar and ACU Euro accounts should be commensurate with
requirements of the normal business.
2. AD Category-l banks are permitted to settle commercial and other

eligible transactions in much the same manner as other normal foreign
exchange transactions.
Authorised Dealer Category-l banks are permitted to open ACU Dollar and
ACU Euro Accounts in the name of all banks in all member countries
including Pakistan without the prior approval of Reserve Bank of India
3.5 Mechanism for settlement through the Union
(i) The Reserve Bank has been undertaking to receive and pay U.S. Dollars,
effective 1st January 1996 and Euros, effective 1st January 2009, from/
to AD Category-I banks for the purpose of funding or for repatriating the
excess liquidity in the ACU Dollar and ACU Euro accounts respectively,
maintained by the AD Category-I banks with their correspondents in the
other participating countries. Similarly, the Reserve Bank has also been
receiving and delivering U.S. Dollar and Euro amounts for absorbing
liquidity or for funding the ACU Dollar (Vostro) and ACU Euro (Vostro)
accounts respectively, maintained by the AD Category-I banks on behalf
of their overseas correspondents.
(ii)Funding of ACU Dollar and ACU Euro account maintained with a

correspondent bank in another ACU participant country will continue to
be effected by the Reserve Bank only after receiving an intimation that
equivalent amount of U.S. Dollar and Euro is being credited to its
account with the Federal Reserve Bank of New York, New York, and its
account with the Deutsche Bundesbank, Frankfurt respectively, by the
AD Category-I bank on the value date. Similarly, Reserve Bank will
continue to arrange for payment of US Dollar and Euro from its accounts
with the Federal Reserve Bank of New York, New York and the Deutsche
! !76
Bundesbank, Frankfurt respectively, to the account of the correspondent

of the AD Category-I bank, in case it has received intimation of
surrender of surplus funds to the other participant Central Bank on
behalf of the AD Category-I bank in India.
(iii)In the case of funding of ACU Dollar and ACU Euro accounts maintained
by foreign commercial banks with the AD Category-I banks in India,
Reserve Bank on receipt of an advice from participant Central Bank will
arrange to credit U.S. Dollar and Euro amounts to the Nostro Accounts
of the AD Category-I banks. The AD Category-I banks will credit the
U.S. Dollar and Euro amounts to the ACU Dollar and ACU Euro accounts
respectively, of the foreign commercial banks of the participating
countries concerned on the value date. Similarly, the AD Category-I
banks will receive instructions from their overseas correspondents to
surrender excess liquidity in their ACU Dollar and ACU Euro accounts to
the Reserve Bank. In such cases the AD Category-I banks will have to
actually remit the U.S. Dollar and Euro amounts to the account of
Reserve Bank with the Federal Reserve Bank of New York, New York and
Deutsche Bundesbank, Frankfurt respectively, on the value date and
Reserve Bank will arrange to advise the other participant Central Banks
to make available the U.S. Dollar and Euro amounts to the commercial
banks in their countries.
• Payments Eligible to settle through ACU:
Transactions that are eligible to be made through ACU are payments –
a. From a resident in the territory of one participant to a resident in the

territory of another participant;
b. For current international transactions as defined by the Articles of

Agreement of the International Monetary Fund;
c. Permitted by the country in which the payer resides;
d. Not declared ineligible under following paragraph; and
e. For export/import transactions between ACU member countries on

deferred payment terms.
! !77
Note: Trade transactions with Myanmar may be settled in any freely

convertible currency, in addition to the ACU mechanism.
• Payments are not eligible to be settled through ACU:
i. Payments between Nepal and India and Bhutan and India, exception
being made in the case of goods imported from India by an importer
resident in Nepal who has been permitted by the Nepal Rastra Bank to
make payments in foreign exchange. Such payments may be settled
through ACU mechanism; and
ii. Payments that are not on account of export/import transactions

between ACU members countries except to the extent mutually agreed
upon between the Reserve Bank and the other participants; and
iii. All eligible current account transactions including trade transactions with
Iran should be settled in any permitted currency outside the ACU
mechanism until further notice
3.6 The benefits accruing from ACU
a. Appreciable savings of liquid foreign Exchange Reserves for some of the

member countries derived from the multilateral settlement of the net
position of the claims arising over a period of time.
b. Reduction of the working balances (including short term borrowings) in

the foreign Exchange the banks in the member countries so long needed
to maintain in London and/or New York for settlement of intra-regional
transactions in pound sterling or U.S. Dollars;
c. Elimination of the need for double conversion of currencies and thereby

savings in the cost of settlement; and
d. Curtailment of the time needed before for settlement of transactions by

the elimination of the intermediary correspondents in London or New
York.
! !78
3.7 Most favoured Nation Clause
In international economic relations and international politics, “Most

Favoured Nation” (MFN) is a status or level of treatment accorded by
one state to another in international trade. The term means the country
which is the recipient of this treatment must, nominally, receive equal
trade advantages as the “Most Favoured Nation” by the country granting
such treatment. (Trade advantages include low tariffs or high import
quotas) In effect, a country that has been accorded MFN status may not be
treated less advantageously than any other country with MFN status by the
promising country. There is a debate in legal circles whether MFN clauses in
bilateral investment treaties include only substantive rules or also
procedural protections.[1]
The members of the World Trade Organisation (WTO) agree to accord MFN
status to each other. Exceptions allow for preferential treatment of
developing countries, regional free trade areas and customs unions.
Together with the principle of national treatment, MFN is one of the
cornerstones of WTO trade law.
“Most Favoured Nation” relationships extend reciprocal bilateral

relationships following both GATT and WTO norms of reciprocity and non-
discrimination. In bilateral reciprocal relationships, a particular privilege
granted by one party only extends to other parties who reciprocate that
privilege, while in a multilateral reciprocal relationship the same privilege
would be extended to the group that negotiated a particular privilege. The
non-discriminatory component of the GATT/WTO applies a reciprocally
negotiated privilege to all members of the GATT/WTO without respect to
their status in negotiating the privilege
Trade experts consider MFN clauses to have the following benefits:
• A country that grants MFN on imports will have its imports provided by
the most efficient supplier. This may not be the case if tariffs differ by
country.
• MFN allows smaller countries, in particular, to participate in the

advantages that larger countries often grant to each other, whereas on
their own, smaller countries would often not be powerful enough to
negotiate such advantages by themselves.
! !79
• Granting MFN has domestic benefits: having one set of tariffs for all
countries simplifies the rules and makes them more transparent. It also
lessens the frustrating problem of having to establish rules of origin to
determine which country a product (that may contain parts from all over
the world) must be attributed to for customs purposes.
• MFN restrains domestic special interests from obtaining protectionist

measures. For example, butter producers in country A may not be able to
lobby for high tariffs on butter to prevent cheap imports from developing
country B, because, as the higher tariffs would apply to every country,
the interests of A's principal ally C might get impaired.
As MFN clauses promote non-discrimination among countries, they also

tend to promote the objective of free trade in general
India had granted MFN status to Pakistan and Vietnam. Pakistan had
committed in the past that it would grant MFN status to India. However,
there are increasing calls in Pakistan to grant the MFN status to China.
During the negotiations for the $6.64 billion bailout package from the
International Monetary Fund (IMF), Pakistan had given an undertaking that
it would take positive steps to grant MFN status to New Delhi
3.8 European Currency Unit (ECU)
The European Currency Unit was a basket of the currencies of

the European Community member states, used as the unit of account of
the European Community before being replaced by the euro on 1 January
1999, at parity. The European Exchange Rate Mechanism attempted to
minimise fluctuations between member state currencies and the ECU. The
ECU was also used in some international financial transactions, where its
advantage was that securities denominated in ECUs provided investors with
the opportunity for foreign diversification without reliance on the currency
of a single country.
The ECU was conceived on 13 March 1979 as an internal accounting unit. It

had the ISO 4217 currency code XEU.
On 1 January 1999, the euro (with the code EUR and symbol €)
replaced the ECU, at the value €1 = 1 ECU. Unlike the ECU, the euro is a
real currency, although not all member states participate. Two of the
! !80
countries in the ECU basket of currencies, UK and Denmark, did not join
the euro zone, and a third, Greece, joined late. On the other
hand, Finland and Austria joined the Euro zone from the beginning
although their currencies were not part of the ECU basket (since they had
joined the EU in 1995, two years after the ECU composition was “frozen”)
Legal implications
Due to the ECU being used in some international financial transactions,

there was a concern that foreign courts might not recognise the euro as
the legal successor to the ECU. This was unlikely to be a problem, since it
is a generally accepted principle of private international law that states
determine their currencies, and that therefore states would accept
the European Union legislation to that effect. However, for abundant
caution, several foreign jurisdictions adopted legislation to ensure a smooth
transition. Of particular importance here were the USA states of Illinois and
New York, under whose laws a large proportion of international financial
contracts are made. Both these states passed legislation to ensure that the
euro was recognised as successor to the euro is the single, official
European currency used by (currently) 17 Member States of the European
Union (EU). Together these Member States make up the euro area.
Stage III of economic and monetary union (EMU) began on 1 January 1999
with the introduction of the euro, which replaced the European currency
unit (ECU) on a 1:1 basis. On that date, the national currencies of 11 EU
Member States (Belgium, Germany, Ireland, Spain, France, Italy,
Luxembourg, the Netherlands, Austria, Portugal and Finland) were fixed to
the euro at irrevocable conversion rates. Greece joined them on 1 January
2001.
Until the end of 2001, the euro existed as book money only (cheque, bank
transfer, payment by card) and its use was voluntary (no compulsion – no
prohibition). Euro coins and notes were introduced on 1 January 2002,
when use of the euro became compulsory and national currencies were
progressively withdrawn.
On 1 January, 2007, Slovenia adopted the euro, followed by Cyprus and

Malta on 1 January 2008, Slovakia on 1 January 2009 and Estonia on 1
January 2011, bringing the current total number of Member States using
the euro to 17.
! !81
Fixed conversion rates: (in alphabetical order of currency code)
(EUR 1 =)
• 13.7603 ATS (Austrian schilling)

• 40.3399 BEF (Belgian francs)
• 0.585274 CYP (Cypriot pound)
• 1.95583 DEM (German marks)
• 15.6466 EEK (Estonian kroon)
• 166.386 ESP (Spanish peseta)
• 5.94573 FIM (Finnish mark)
• 6.55957 FRF (French franc)
• 340.750 GRD (Greek drachma)
• 0.787564 IEP (Irish pound)
• 1 936.27 ITL (Italian lira)
• 40.3399 LUF (Luxembourgish franc)
• 0.429300 MTL (Maltese lira)
• 2.20371 NLG (Dutch guilder)
• 200.482 PTE (Portuguese escudo)
• 239.568 SIT (Slovenian tolar)
• 30.1260 SKK (Slovak koruna)
There is also interbank deposit market in ECU for ECUU 10 billion or more
for maturities up to one year. There is also extremely active exchange
market in ECU throughout Europe. The ECU is quoted against U S Dollar
and cross rates are calculated against other currencies with very narrow
spreads. Invoicing in ECU has the distinct advantage of minimising
exchange risk due to spreading of the same over constituent currencies
and availability of fresh buyer in case of exports to and of fresh sellers in
case of imports from, the ECU countries where the original buyer or seller
as the case may be in defaults.
! !82
3.9 LIBOR
LIBOR is defined as the rate at which an individual Contributor Panel bank

could borrow funds, were it to do so by asking for and then accepting inter-
bank offers in reasonable market size, just prior to 11.00 London time.
This definition is amplified as follows:
• The rate which each bank submits must be formed from that bank’s
perception of its cost of funds in the interbank market.
• Contributions must represent rates formed in London and not elsewhere.
• Contributions must be for the currency concerned, not the cost of

producing one currency by borrowing in another currency and accessing
the required currency via the foreign exchange markets.
• The rates must be submitted by members of staff at a bank with primary

responsibility for management of a bank’s cash, rather than a bank’s
derivative book.
• The definition of “funds” is: unsecured interbank cash or cash raised

through primary issuance of interbank Certificates of Deposit.
The British Bankers' Association publishes a basic guide to the BBA LIBOR
which contains a great deal of detail as to its history and its current
calculation.
Technical features
Calculation
LIBOR is calculated and published by Thomson Reuters on behalf of

the British Bankers' Association (BBA). It is an index that measures the
cost of funds to large global banks operating in London financial markets or
with London-based counterparties. Each day, the BBA surveys a panel of
banks (18 major global banks for the USD LIBOR), asking the question, “At
what rate could you borrow funds, were you to do so by asking for and
then accepting inter-bank offers in a reasonable market size just prior to
11 am?” The BBA throws out the highest 4 and lowest 4 responses, and
! !83
averages the remaining middle 10, yielding a 23% trimmed mean. The
average is reported at 11:30 a.m.
LIBOR is actually a set of indexes. There are separate LIBOR rates reported
for 15 different maturities (length of time to repay a debt) for each of 10
currencies. The shortest maturity is overnight, the longest is one year. In
the United States, many private contracts reference the three-month dollar
LIBOR, which is the index resulting from asking the panel what rate they
would pay to borrow dollars for three months.
3.10 Summary
The Asian Clearing Union (ACU) was established with its headquarters at
Tehran, Iran, on December 9, 1974 at the initiative of the United Nations
Economic and Social Commission for Asia and Pacific (ESCAP), for
promoting regional co-operation. The main objective of the clearing union
is to facilitate payments among member countries for eligible transactions
on a multilateral basis, thereby economising on the use of foreign
exchange reserves and transfer costs, as well as promoting trade among
the participating countries.
In international economic relations and international politics, “Most

Favoured Nation” (MFN) is a status or level of treatment accorded by one
state to another in international trade. The term means the country which
is the recipient of this treatment must, nominally, receive equal trade
advantages as the “most favoured nation” by the country granting such
treatment.
The European Currency Unit was a basket of the currencies of the

European Community member states, used as the unit of account of the
European Community before being replaced by the euro on 1 January
1999, at parity. The European Exchange Rate Mechanism attempted to
minimise fluctuations between member state currencies and the ECU. The
ECU was also used in some international financial transactions, where its
advantage was that securities denominated in ECUs provided investors with
the opportunity for foreign diversification without reliance on the currency
of a single country.
The ECU was conceived on 13 March 1979 as an internal accounting unit. It

had the ISO 4217 currency code XEU.
! !84
On 1 January 1999, the euro (with the code EUR and symbol €) replaced
the ECU, at the value €1 = 1 ECU. Unlike the ECU, the euro is a real
currency, although not all member states participate (for details on Euro
membership see Euro zone). Two of the countries in the ECU basket of
currencies, UK and Denmark, did not join the euro zone, and a third,
Greece, joined late. On the other hand, Finland and Austria joined the Euro
zone from the beginning although their currencies were not part of the ECU
basket (since they had joined the EU in 1995, two years after the ECU
composition was “frozen")
The euro is the single, official European currency used by (currently) 17

Member States of the European Union (EU). Together these Member States
make up the euro area.
On 1 January 2007 Slovenia adopted the euro, followed by Cyprus and

Malta on 1 January 2008, Slovakia on 1 January 2009 and Estonia on 1
January 2011, bringing the current total number of Member States using
the euro to 17.
LIBOR is defined as the rate at which an individual Contributor Panel bank

could borrow funds, were it to do so by asking for and then accepting inter-
bank offers in reasonable market size, just prior to 11.00 London time.
The British Bankers’ Association publishes a basic guide to the BBA LIBOR
which contains a great deal of detail as to its history and its current
calculation.
LIBOR is actually a set of indexes. There are separate LIBOR rates reported
for 15 different maturities (length of time to repay a debt) for each of 10
currencies. The shortest maturity is overnight, the longest is one year.
! !85
3.11 Questions
1. What is the objective of ACU?

2. Explain the benefit accrued out of ACU.
3. What is most favoured nations clause. Explain
4. Write short note of European Currency Unit.
5. Write short note on: LIBOR
1. All instruments of payments under ACU have to be denominated in

__________.
a. AMU
b. USD
c. GBP
d. LIBOR
2. Authorised Dealer Category-l banks are permitted to open__________

Accounts in the name of all banks in all member countries including
Pakistan without the prior approval of Reserve Bank of India
a. ACU Dollar
b. ACU Euro
c. ACU Dollar and ACU Euro both
d. Indian Rupee for settlement
3. As MFN clauses promote non-discrimination among countries, they also

tend to promote __________.
a. the objective of free trade
b. only export
c. only import
d. only local trade
4. Invoicing in ECU has the distinct advantage of __________ exchange

risk due to spreading of the same over constituent currencies and
availability of fresh buyer in case of exports to and of fresh sellers in
case of imports from, the ECU countries where the original buyer or
seller in defaults.
a. maximise
! !86
b. minimising
c. maintain at level
d. currency
5. What is calculated and published by Thomson Reuters on behalf of the

British Bankers' Association (BBA)?
a. USD rate
b. LIBOR
c. EURIBOR
d. Sterling rate
Answers: 1. (a) 2. (c) 3. (a) 4. (b) 5. (b)
! !87
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !88
FREE TRADE ZONES AND OBU
Chapter 4
FREE TRADE ZONES and OBU
Objectives
After going through the chapter, students should be able to understand,

the process of liberalisation and upcoming of many free trade zones and
OBU’s that has been came into existence. Various agencies which are
involved while establishing the FTZ & OBU, their rule, functions etc. Is
discussed in this chapter.
Structure
4.1 Introduction
4.2 Banking Facilities
4.3 Role of Exim Bank
4.4 Free Port/Free Trade Zones
4.5 Offshore Banking
4.6 Offshore Banking Units (OBUs) in Special Economic Zones (SEZs)
4.7 Summary
4.8 Questions
! !89
4.1 Introduction
A free trade zone (FTZ) is a specific class of special economic zone. It is a

geographic area where goods may be landed, stored, handled,
manufactured, or reconfigured, and re-exported under specific customs
regulation and generally not subject to customs duty. To develop India
“Make in India” is a great initiative taken by the Government. But it is not
the only way that can bring foreign exchange, Tourism which plays a vital
role in earning foreign exchange in which India is not up to the mark to
attain the business. So, it is the time to think and make necessary changes
to fulfil the Business outcome in our country. Free Trade Zones (FTZ) and
Free Economic Zones (FRZ) have become increasingly important as
developing countries seek to attract foreign investment, to promote trade
and growth. A large number of FTZ/FEZ have to be put into operation in
the country, as it is very difficult to allow these tax-free zones within the
country, for this there should be a separate place to be identified and
develop that place into a World-class business centre so as to fulfil our
vision.
An offshore banking unit (OBU) is a financial service unit (normally a

branch or subsidiary of a non-resident bank), which plays an intermediary
role between non-resident borrowers and lenders. Generally, an offshore
banking unit is located in an international financial centre or in the case of
India found in Special Economic Zones. Offshore banking units are allowed
to accept deposits from foreign banks, from some onshore banks that
permit deposits and other offshore banking units, and the OBU may make
loans to non-resident companies as well.
The advantage of an offshore banking unit versus that of an onshore bank

is that the offshore banking unit is free of regulations and restrictions
normally imposed on domestic financial establishments as it pertains to
foreign exchange and sometime tax concessions and relief packages. The
activities of an offshore banking unit are not subject to the local
restrictions as there might be on foreign exchange or other banking
activities or regulations. Under law, offshore banking units (OBUs) are not
authorised to take domestic deposits or conduct activity with local
establishments or clients. All trade activity of the offshore banking unit
must be offshore.
! !90
4.2 Banking Facilities
The Indian merchants and manufacturers already engaged in or intending

to enter foreign trade, banks can render assistance in a number of ways.
For instance, to exporters and Importers in India a banker can provide the
names, addresses and status reports as to the credit worthiness and the
ability to fulfill the contracts of overseas buyer and seller of the goods they
want to export to or import from.
Secondly, when an Indian exporter or importer goes abroad on business

tour for purpose of export promotion through on the spot studies of the
taste and preferences of foreign buyers or of the manufacturing, packaging
and advertising techniques followed or for personal contacts with foreign
sellers for concessional terms, the banker can give instructions to his
correspondents in the countries concerned to render such help and advice
as the exporter or importer may need abroad.
Thirdly, the banker may, where required provide the names and addresses
of the foreign firms and organisations which may be interested in joint
ventures in India.
For importers in particular, the banker can collect the import bills drawn on
them and arrange remittances abroad in payment thereof. He can if the
overseas supplier so demands open on behalf of the importer documentary
credit in favour of supplier and arrange the payment through his
correspondents in supplier’s country on presentation of sight draft drawn
under the credit, provided that the draft is accompanied by the relative
shipping documents and other terms of the credit are complied with. If the
importer fails to honour the import bills drawn under LC on presentation,
banker may grant the credit to him by clearing and storing the goods
imported and allowing the partial deliveries against the part payments. Or
if the terms of the credit so stipulate, as in case of deferred payment
credit, the banker may accept bills drawn under it on behalf of the importer
and honour them on due date, whether or not importer deposits under
funds for such payments, and provide such exchange cover as is needed.
To exporters, the banker may render agency service by collecting their

foreign bills covering the exports made by them and realising the process
thereof in due course. He may allow packing credit to them to enable them
to procure or manufacture the goods for export, and then on shipment of
! !91
exports, may extend short term post shipment credit by negotiating the
export bills. He may also extend the medium or long-term export credit
facility to an exporter by furnishing, on his behalf, financial or performance
guarantee to foreign suppliers or governments, or by executing bid bonds
in favour of tender inviting foreign governments or other authorities.
The banker may also provide to importers and exporters information about
exchange control regulations, import licence procedure to be followed, etc.
Exim Bank lays special emphasis on extension of Lines of Credit (LOCs) to

overseas entities, national governments, regional financial institutions and
commercial banks. Exim Bank also extends Buyer’s credit and Supplier’s
credit to finance and promote country’s exports. The Bank also provides
financial assistance to export-oriented Indian companies by way of term
loans in Indian rupees or foreign currencies for setting up new production
facility, expansion/modernization or up gradation of existing facilities and
for acquisition of production equipment or technology. Exim Bank helps
Indian companies in their globalization efforts through a wide range of
products and services offered at all stages of the business cycle, starting
from import of technology and export product development to export
production, export marketing, pre-shipment and post-shipment and
overseas investment.
The Bank has introduced a new lending program to finance research and
development activities of export-oriented companies. R&D finance by Exim
Bank is in the form of term loan to the extent of 80 per cent of the R&D
cost. In order to assist in the creation and enhancement of export
capabilities and international competitiveness of Indian companies, the
Bank has put in place an Export Marketing Services (EMS) Program.
Through EMS, the Bank proactively assists companies in identification of
prospective business partners to facilitating placement of final orders.
Under EMS, the Bank also assists in identification of opportunities for
setting up plants or projects or for acquisition of companies overseas. The
service is provided on a success fee basis.
Exim Bank supplements its financing programs with a wide range of value-
added information, advisory and support services, which enable exporters
to evaluate international risks, exploit export opportunities and improve
! !92
competitiveness, thereby helping them in their globalization efforts and

improve competitiveness.
More details of Exim Bank on its role, initiatives, functions, schemes etc.
are discussed in Chapter 19.
4.4 Free port/Free Trade Zones
A free port is a port declared as such by Government of the country in

which it is located. At a free port ships belongs to any country may load or
unload cargo without having to pay customs or any other duties, barring
off course the harbour charges. Similarly, an area or zone may be declared
a free trade zone with a view to getting the benefits of free trade with
other countries.
A free trade zone is an area created within a country that does not allow
trade barriers. Trade barriers include, but are not limited to, quotas, tariffs
and high taxes on foreign goods.
4.4.1 Purpose of a Free Trade Zone
Free trade zones help to build budding economies. The reduction of trade
barriers benefits businesses by making it easier to sell their products. Once
businesses move into the free trade zone and develop, the area then needs
employees, so more people in the free trade zone are employed.
Employment has a direct influence on the state of the area's economy.
Some businesses use free trade zones as areas of manufacturing, while
others use the zone for selling merchandise. By manufacturing in a free
trade zone, the business is able to ship the product elsewhere without
additional payments. By selling merchandise in the area, the business can
import to the area without paying any tariffs.
In India the idea of establishing the free port or free trade zones was first
mooted in 1957 by Export Promotion Committee. The object was
stimulation of exports. Manufacturing concerns situated in free port or free
trade zone will get the advantage of duty free imports such urgently
needed things as capital goods, components and raw material for end
products for exports and in consequence may be in position to offer better
terms of trade to the foreign buyers of their manufactures, achieving in the
process increased exports. No doubt exporters of certain specified goods
! !93
residing in other places of the country get the benefit of cash assistance by
way of refund in part in a whole of the imports duties paid for the raw
materials of export, but this involves initially a larger working capital and
there are also procedural delays in getting the refund.
Free Trade Warehousing Zone (FTWZs) are a special category of Special

Economic Zone, offer services such as speedy delivery of cargo, one-stop
for Customs clearance capability; integrated solutions, such as packing
management, sorting, inspection, re-invoicing, strapping and kitting,
assembly of complete and semi-knocked down kits, and taxation benefits.
Basically, the Free Trade and Warehousing Zones (FTWZ) is a special
category of Special Economic Zones with a focus on trading and
warehousing.
In India, Free Trade and Warehousing Zone was introduced in the Exim
Policy with the objective to facilitate import and export of goods and
services. Each Zone was considered to have Rs. 100 crores outlay and 5
lakhs sq. mts built up area. Government of India introduced the FTWZ
Policy as a part of Foreign Trade Policy (FTP) 2004-2009 governed by the
SEZ ACT, 2005 and SEZ Rules, 2006 to leverage India’s strategic
geographical location and cost and skill arbitrage. For development and
establishment of FTWZ the government has permitted 100% Foreign Direct
Investment.
4.4.2 Concept
FTWZ is a ‘Sanitised Zone’ designated as Foreign Territory for carrying on

business. FTWZ’s are envisaged to be Integrated Zones and to be used as
‘International Trading Hubs’. Each Zone would provide ‘World Class’
Infrastructure for:
• Warehousing for various kinds of products

• Handling and Transportation Equipment
• Commercial office space
• All related utilities – telecom, power, water, etc
• One stop clearance of Import and Export of goods
• FTWZ would be a key Link in Logistic and Global Supply Chains –
servicing both India and the Globe.
! !94
4.4.3 Objective
The objective of FTWZ is to create trade-related infrastructure to facilitate

the import and export of goods and services with freedom to carry out
trade transactions in free currency. The scheme envisages creation of
world-class infrastructure for warehousing of various products, state-of-
the-art equipment, transportation and handling facilities, commercial office
space, water, power, communications and connectivity, with one-stop
clearance of import and export formality, to support the integrated zones
as ‘international trading hubs’. These zones are planned to be established
in areas proximate to seaports, airports or dry ports so as to offer easy
access by rail and road.
Free Trade and Warehousing Zones (FTWZs) are envisaged to be essential

logistics infrastructure to facilitate EXIM trade and to root out inefficiencies
associated with movement and valued addition of EXIM cargo in India.
4.4.4 Benefits for Imports in India
Flexibility to clear cargo in part consignments (unlike in the case in other

Container Freight Station (CFS)/International Container Depot (ICDs) thus
allowing flexibility towards consumption/end distribution duty deferment
benefits (freeing up working capital and reduction in costs) de-stuffing and
stuffing of cargo from shipping line containers into other containers for
avoiding shipping line detention charges and customised delivery. The
same product could also be stored in the warehouses within the FTWZ at
much lower costs as compared to detention charges that plague users. Few
of the envisaged benefits for imports into India are listed as below:
• Quality control prior to duty payment, hence no duty to be paid on

rejected products
• Exemption of SAD, VAT and CST on imports through FTWZ Service
• Tax exemption for handling and transportation of containers from Port to

FTWZ
• Availability of state-of-the-art container storage yard with world-class

safety, hazardous storage and maintenance and repair facilities within
the FTWZ with service tax exemption
! !95
• Free foreign exchange transaction capability for the services rendered

including CY/Container freight station services.
• Value addition services can be provided like labeling, packing, kitting, bar
coding, palletization and other authorised services.
All such activities are exempted from service tax as well as any purchases
of packaging materials, labels and the like from DTA into the FTWZ would
be treated as exports from such suppliers.
4.4.5 Benefits for Exports from India
Few of the envisaged benefits for exports from India are listed as below
• Factory stuffed containers entering the FTWZ are treated as deemed

export providing immediate export benefits
• Local tax exemption (e.g., CST, Sales Tax, Excise and VAT) on all
activities conducted inside the FTWZ
• Increased efficiency through lowered reverse logistics activities through

quality control before dispatch from India
• Lowering ‘back to town’ costs with better aggregation and consolidation
• Facilitating consolidation of cargo with other users of the FTWZ for cost
optimisation through last mile distribution
• Value addition services can be provided like labeling, packing, kitting, bar
coding, palletization and other authorised services with all fiscal and
regulatory benefits
• Availability of state-of-the-art container storage yard with world-class

safety, hazardous storage, maintenance and repair facilities within the
FTWZ with service tax exemption
• Free foreign exchange transaction capability for the services rendered

including ICD/CFS services
! !96
Thus, FTWZs are comprehensive infrastructure required for improving

India’s container volumes and enabling importers exporters efficiently and
cost effectively carry warehousing, trading and value addition activities.
4.4.6 Free trade zones in India
• Inspira Pharma and Renewable Energy Park, Aurangabad, Maharashtra,

India
• Sricity multi product SEZ, part of Sricity which is a developing satellite

city in the epicentre of Andhra Pradesh and Tamil Nadu, India
• Arshiya International Ltd, India's first Free Trade and Warehousing Zone:
The largest multi-product free trade and warehousing infrastructure in
India is Arshiya's first 165 acre FTWZ, is operational in Panvel, Mumbai,
and is to be followed by one in Khurja near Delhi. Arshiya's Mega
Logistics Hub at Khurja to have 135 acre FTWZ, 130 acre Industrial and
Distribution Hub (Distripark) and 50 acre rail siding. Arshiya International
will be developing three more Free Trade and Warehousing zones in
Central, South and East of India.
• Kandla Trade Free Zone, India
• Cochin SEZ is a Special Economic Zone in Cochin, in the state of Kerala in

southwest India, set up for export-oriented ventures. The Special
Economic Zone is a foreign territory within India with special rules for
facilitating foreign direct investment. The Zone is run directly by the
Government of India.
Cochin SEZ is a multi-product Zone. Cochin is strategically located. It is in

southwest India, just 11 nautical miles off the international sea route from
Europe to the Pacific Rim. Cochin is being developed by the Dubai Ports
International as a container transhipment terminal with direct sailings to
important markets of the world, which could position it as Hub for South
Asia.
! !97
4.5 Offshore Banking
Offshore banking is an altogether new system of banking which has come

in to vogue. This system is operated through the offshore banking unit of
overseas banks established in offshore banking zones, similar to free trade
zones in under developed countries.
The offshore banking unit of an overseas bank is required to maintain a

certain base as well as certain level of liquidity. It is precluded from
entering in to competition with the banks with the banks or from raising
the funds from the residents of the host country. The funds of the unit have
to bring in form of parent bank or from overseas money market.
Offshore banking unit (OBU) is the branch of an Indian bank located in a

special economic zone (SEZ), with a special set of rules aimed at
facilitating exports from the region. As laws define it, it’s a “deemed
foreign branch” of the parent bank situated within India, and it undertakes
international banking business involving foreign currency denominated
assets and liabilities. The concept comes from the practice prevalent in
several global financial centres. Here an OBU can accept foreign currency
for business but not domestic deposits from local residents. This was
conceived to prevent competition between local and offshore banking
sectors.
4.5.1 What was the need for OBUs?
In addition to providing power, tax and other incentives to SEZs,

policymakers felt a need to provide SEZ developers access to global money
markets at international rates. So in 2002, RBI instituted OBUs, which
would be virtually foreign branches of Indian banks. These would be
exempt from CRR, SLR and few other regulatory requirements. RBI
regulations make it mandatory for OBUs to deal in foreign exchange,
source their foreign currency funds externally, follow all prudential norms
applicable to overseas branches and are entitled for IT exemptions. Thus in
many respects, they are free from the monetary controls of the country.
! !98
4.5.2 What price, freedom from regulations?
In the eight years that they have been operational, concerns have been
raised that, funding by OBUs to SEZs would lead to increase in external
debt of India. Also, some have suggested that OBUs as vehicles for
extending dollar loans have no use as long as they are restricted to doing
business only in the zones in which are they located. This would create an
unnecessary regulatory arbitrage like booking business because there is
some arbitrage advantage on offer. Anyway, ground realities could not be
more different. Hardly a handful of banks have set up their OBUs, so the
argument looks very farfetched. SEZ, itself as a concept has been
struggling, given the issues that SEZ developers have faced over acquiring
land from farmers.
4.5.3 What is the future of OBUs?
Most international financial centres still house OBUs, so saying they are not
required may be incorrect. However, some analysts have said OBUs are
losing relevance at a time of increasing globalisation. They say OBUs will
be of no use after the economy opens up fully and the rupee is fully
convertible. These experts argue for one or two OBUs, instead of having
several of them spread across the country.
4.6 Offshore Banking Units (OBUs) in Special Economic

Zones (SEZs)
The Government of India has introduced the Special Economic Zone (SEZ)
scheme with a view to providing an internationally competitive and a
hassle free environment for export production. As per the Government's
policy, SEZs will be a specially delineated duty free enclave and deemed to
be a foreign territory for the purpose of trade operations and duties tariffs
so as to usher in export-led growth of the economy.
These units would be virtually foreign branches of Indian banks but located
in India. These OBUs, inter alia, would be exempt from CRR, SLR and give
access to SEZ units and SEZ developers to international finances at
international rates. With this background, RBI has prepared the following
scheme to facilitate banks operating in India to set up OBUs.
! !99
1. Eligibility Criteria
Banks operating in India viz. public sector, private sector and foreign banks
authorised to deal in foreign exchange are eligible to set up OBUs. Such
banks having overseas branches and experience of running OBUs would be
given preference. Each of the eligible banks would be permitted to
establish only one OBU which would essentially carry on wholesale banking
operations.
2. Licensing
Banks would be required to obtain prior permission of the RBI for opening
an OBU in a SEZ under Section 23 (1)(a) of the Banking Regulation Act,
1949. Given the unique nature of business of the OBUs, Reserve Bank
would stipulate certain licensing conditions such as dealing only in foreign
currencies, restrictions on dealing with Indian rupee, access to domestic
money market, etc. on the functioning of the OBUs. The parent bank's
application for branch licence should itself state that it proposes to conduct
business at the OBU branch in foreign currency only. No separate
authorisation with respect to the OBU branch would be issued under FEMA.
As currently in vogue with respect to designating a specific branch for
conducting foreign exchange business, the parent bank may designate the
branch in SEZ as an OBU branch.
3. Capital
Since OBUs would be branches of Indian banks, no separate assigned
capital for such branches would be required. However, with a view to
enabling them to start their operations, the parent bank would be required
to provide a minimum of US$ 20 million to its OBU.
4. Reserve Requirements
CRR: RBI would grant exemption from CRR requirements to the parent
bank with reference to its OBU branch under Section 42(7) of the RBI Act,
1934.
SLR: Banks are required to maintain SLR under Section 24 (1) of the
Banking Regulation Act, 1949 in respect of their OBU branches. However, in
case of necessity, request from individual banks for exemption will be
considered by RBI for a specified period under Section 53 of the B.R. Act,
1949.
! !100
5. Resources and deployment

The sources for raising foreign currency funds would be only external.
Funds can also be raised from those resident sources to the extent such
residents are permitted under the existing exchange control regulations to
invest/maintain foreign currency accounts abroad. Deployment of funds
would be restricted to lending to units located in the SEZ and SEZ
developers. Foreign currency requirements of corporate in the domestic
area can also be met by the OBUs. If funds are lent to residents in the
Domestic Tariff Area (DTA), existing exchange control regulations would
apply to the beneficiaries in DTA.
6. Permissible Activities of OBUs

OBUs would be permitted to engage in the form of business mentioned in
Section 6(1) of the BR Act, 1949 and subject to the conditions of the
licence issued to the OBU branches.
7. Prudential Regulations
All prudential norms applicable to overseas branches of Indian banks would
apply to the OBUs. The OBUs would be required to follow the best
international practice of 90 days’ payment delinquency norm for income
recognition, asset classification and provisioning. The OBUs may follow the
credit risk management policy and exposure limits set out by their parent
banks duly approved by their Boards. The OBUs would be required to adopt
liquidity and interest rate risk management policies prescribed by RBI in
respect of overseas branches of Indian banks as well as within the overall
risk management and ALM framework of the bank subject to monitoring by
the Board at prescribed intervals. The bank’s Board would be required to
set comprehensive overnight limits for each currency for these branches,
which would be separate from the open position limit of the parent bank.
8. Anti-Money Laundering Measures

The OBUs would be required to scrupulously follow "Know Your Customer
(KYC)" and other anti-money laundering instructions issued by RBI from
time to time. Further, with a view to ensuring that anti-money laundering
instructions are strictly complied with by the OBUs, they are prohibited
from undertaking cash transactions, and transactions with individuals.
! !101
9. Regulation and Supervision

OBUs will be regulated and supervised by RBI through its Exchange Control
Department, Department of Banking Operations and Development and
Department of Banking Supervision.
10. Ring fencing the activities of OBUs

The OBUs would operate and maintain balance sheet only in foreign
currency and would not be allowed to deal in Indian Rupees except for
having a special Rupee account out of convertible fund to meet their day to
day expenses. These branches would be prohibited to participate in
domestic call, notice, term, etc. money market and payment system.
Operations of the OBUs in rupees would be minimal in nature, and any
such operations in the domestic area would be through the Authorised
Dealers (distinct from OBUs) which would be subject to the current
exchange control regulations in force. The OBUs would be required to
maintain separate Nostro accounts with correspondent banks which would
be distinct from Nostro accounts maintained by other branches of the same
bank. The ADs dealing with OBUs would be subject to FED regulations.
11. Priority sector lending

The loans and advances of OBUs would not be reckoned as net bank credit
for computing priority sector lending obligations.
12. Deposit insurance

Deposits of OBUs will not be covered by deposit insurance.
! !102
4.7 Summary
A free-trade zone (FTZ) is a specific class of special economic zone. It is a

geographic area where goods may be landed, stored, handled,
manufactured, or reconfigured, and re-exported under specific customs
regulation and generally not subject to customs duty.
Governments develop certain underdeveloped or rural regions as industrial

parks, provide international standard amenities and designate such zones
as Special Economic Zones. These areas are normally exempt from most of
the normal trade barriers, tariffs and national laws and seek to promote
free market export oriented manufacturing activities. There are several sub
categories of Special Economic Zones (SEZ) namely Free Trade Zones
(FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Parks,
Free Ports etc.
The Governments give preference to large-scale manufacturing or

assembly units to be set-up by Multi-national Companies of repute and
provide tax holidays as well as waiver of many of the formalities required
to be followed by the companies in the said zone. Typically, the companies
import raw materials and manufacture goods locally thus using local
cheaper labour and export the goods outside the country. Both the Imports
and exports are exempt from customs duties and other levies. Only the
goods that enter the local market as domestic sale product are taxed. Such
manufacturing intensive zones help generate a lot of employment in the
rural sector and lead to the overall development of the area and in turn
stimulate economic growth in the area. Besides local growth of the area, it
helps country earn huge foreign exchange as well.
Ireland was the first country to set up Shannon Free Zone which was
followed up quickly by most of the developing countries like Philippines,
Malaysia, China, India, Mexico, Costa Rica, Honduras, and Guatemala etc.
The list of countries now having adopted EPZ has crossed 100 numbers.
While Jabil Ali FTZ made a huge impact on Dubai and its growth, China has
benefited from its most successful SEZ - Shenzhen which helped employ
over 10 million people. India has become one of the Asia’s largest
outsourcing hubs thanks to establishment of SEZs throughout the country.
! !103
Though in many countries the SEZs are implemented by the Governments,

quite a few SEZs have been implemented by private parties too as private
operator, private developers. Quite a few countries have adopted a mid
path of setting up public sector quasi-government agencies with a pseudo
corporate institutional structure and autonomy in operations. In some
other cases SEZs have also developed on the basis of public-private
partnership arrangements.
SEZs can be said to be the precursor for establishing liberal market

economy and free trade. Today, world over more than 3000 FTZs in over
116 countries are employing appx. 43 million people engaged in
manufacturing of various consumer items such as clothes, shoes, electronic
gadgets, computers and toys etc.
Some of the benefits of using an FTZ are as under:
• Deferral, reduction, or elimination of certain duties.

• Relief from inverted tariffs.
• Duty exemption on re-exports.
• Duty elimination on waste, scrap, and yield loss.
• Weekly entry savings.
• Improved compliance, inventory tracking, and quality control.
• Indefinite storage.
An offshore banking unit (OBU) is a financial service unit (normally a

branch or subsidiary of a non-resident bank), which plays an intermediary
role between non-resident borrowers and lenders. Generally, an offshore
banking unit is located in an international financial centre or in the case of
India. found in Special Economic Zones. Offshore banking units are allowed
to accept deposits from foreign banks, from some onshore banks that
permit deposits and other offshore banking units, and the OBU may make
loans to non-resident companies as well.
The advantage of an offshore banking unit versus that of an onshore bank

is that the offshore banking unit is free of regulations and restrictions
normally imposed on domestic financial establishments as it pertains to
foreign exchange and sometime tax concessions and relief packages. The
activities of an offshore banking unit are not subject to the local
restrictions as there might be on foreign exchange or other banking
activities or regulations. Under law, offshore banking units (OBUs) are not
! !104
authorized to take domestic deposits or conduct activity with local

establishments or clients. All trade activity of the offshore banking unit
must be offshore.
The benefits of offshore banking units may include tax exemptions on

withholding tax and other tax relief packages on specific activities, such as
offshore borrowing.
Legislation for offshore banking units are specific and defines the types of
activities that can be conducted by the offshore banking units, generally,
• at least one of the parties to transactions should be an offshore company

or person,
• the activity must be conducted by an offshore banking unit locate in the

jurisdiction and
• the offshore banking unit must be a resident of the jurisdiction or

conducting business at or through a permanent establishment in the
jurisdiction
Some of the offshore banking unit activities and offshore banking services
are: borrowing, lending, trading activities, investment activity, hedging
activity. Most entities who are eligible to be offshore banking unit are
banks, subsidiaries of such banks, other financial intuitions that are
permitted to foreign exchange activity, life insurance companies, and fund
managers.
! !105
4.8 Questions
(A) Answer the following questions
1. Define the Free Trade Zone and explain.

2. Explain the purpose of establishing Free Trade Zone.
3. What are the benefits of Export from Free Trade Zone?
4. What are the benefits of Import from Free Trade Zone?
5. Write brief note on Offshore Banking Unit.
(B) Multiple choice questions
1. A free trade zone is an area created within a country that does not allow
trade barriers. Trade barriers include __________.
(a) Quotas
(b) Tariffs
(c) high taxes on foreign goods
(d) Quotas, tariffs and high taxes on foreign goods
2. The purchases of packaging material, labels and the like from DTA into
the FTWZ would be treated as exports from such suppliers therefore
__________.
(a) Exempted from service tax

(b) Not exempted from service tax
(c) Not exempted from any other taxes
(d) Only exempted development tax
3. A branch of an Indian bank located in a special economic zone (SEZ),

with a special set of rules aimed at __________.
(a) Facilitating exports from the region

(b) Facilitating all trade business
(c) Granting credit facilities in any currencies including INR
(d) Less maintenance of CRR and SLR
! !106
4. The OBUs would be required to follow the best international practice of

__________ payment delinquency norm for income recognition, asset
classification and provisioning
(a) 6 months
(b) 1 year
(c) 90 days
(d) 120 days
5. OBUs will be regulated and supervised by __________.

(a) Development commissioned of SEZ
(b) RBI
(c) Government of India
(d) Unregulated
Answers: 1. (d), 2. (a), 3. (a), 4. (c), 5. (b)
! !107
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !108
INTERNATIONAL COMMERCIAL TERMS: INCOTERMS
Chapter 5
INTERNATIONAL COMMERCIAL TERMS:
INCOTERMS
Objectives

International Commercial terms used by importers and exporters across
the globe, meaning of these trms and at what point of time these terms
are used by international trading communities.
Structure
5.1 Introduction
5.2 Incoterms-2010
5.3 Incoterms-2010 – Explanation
5.4 Summary
5.5 Questions
5.1 Introduction
In any trade contract (whether Foreign or Inland) there exists certain

rights and obligations on the buyer and seller, these rights and obligations
are varying in accordance with convenience of the parties concerned and
agreed by them, The International Chamber of Commerce evolved a set of
international terms with definite and uniform meaning. These are called
Incoterms rules or International Commercial Terms. A series of three-letter
trade terms related to common contractual sales practices, the Incoterms
rules are intended primarily to clearly communicate the tasks, costs, and
risks associated with the transportation and delivery of goods.
The Incoterms rules are accepted by governments, legal authorities, and

practitioners worldwide for the interpretation of most commonly used
terms in international trade. They are intended to reduce or remove
! !109
altogether uncertainties arising from different interpretation of the rules in

different countries. As such they are regularly incorporated into sales
contracts worldwide.
First published in 1936, the Incoterms rules have been periodically

updated, with the eighth version — Incoterms 2010 — having been
published on January 1, 2011. “Incoterms” is a registered trademark of the
ICC.
5.2 Incoterms - 2010
The eighth published set of pre-defined terms, Incoterms 2010 defines 11

rules, reducing the 13 used in Incoterms 2000 by introducing two new
rules (“Delivered at Terminal”- DAT; “Delivered at Place” - DAP) that
replace four rules of the prior version (“Delivered at Frontier” - DAF;
“Delivered Ex Ship” - DES; “Delivered Ex Quay” - DEQ; “Delivered Duty
Unpaid” - DDU). In the earlier version of 2000, the rules were divided into
four categories, but the Incoterms 2010, 11 pre-defined terms of are
subdivided into two categories based only on method of delivery.
The larger group of seven (7) rules applies regardless of the mode of
transport, with the smaller group of four (4) being applicable only to sales
that solely involve transportation over water.
I. Terms: Goods are traded between two countries under contract of sale
purchase agreed upon by buyers and sellers. Such contracts not only
specify the quality, quantity, price and the period of supply of goods to
be bought and sold but they also stipulate the mode of delivery, the
terms of payment of freight and insurance charges and the mode of
payment for the goods.
II. Mode of Delivery: Delivery may be actual or constructive. Where the

goods are physically delivered to the buyer and delivery is actual. Where
documents of the title of goods, such as bill of lading, and not the
goods, are handed over to the buyer, the delivery is constructive. In
foreign trade delivery is always constructive.
III.Freight and insurance: In foreign trade, certain abbreviations are

used to indicate whether freight – i.e., Charges for the transportation of
goods from one country to another by ship or by air or by post should
! !110
be prepaid, and whether the shipment should be covered by insurance,

and if so, who should bear the charges
5.2.1 The Terms Eliminated from Previous Terms from Incoterms

2000
Following are the previous terms from Incoterms 2000 eliminated from
Incoterms 2010, but many times they are used in international trade,
therefore it is important to understand meaning of these terms also.
1. DAF – Delivered at Frontier (Named place of delivery)

This term can be used when the goods are transported by rail and road.
The seller pays for transportation to the named place of delivery at the
frontier. The buyer arranges for customs clearance and pays for
transportation from the frontier to his factory. The passing of risk occurs at
the frontier.
2. DES – Delivered Ex Ship (Named port of delivery)

Where goods are delivered ex ship, the passing of risk does not occur until
the ship has arrived at the named port of destination and the goods made
available for unloading to the buyer. The seller pays the same freight and
insurance costs as he would under a CIF arrangement. Unlike CFR and CIF
terms, the seller has agreed to bear not just cost, but also risk and title up
to the arrival of the vessel at the named port. Costs for unloading the
goods and any duties, taxes, etc. are borne by the Buyer. A commonly
used term in shipping bulk commodities, such as coal, grain, dry
chemicals; and where the seller either owns or has chartered, their own
vessel.
3. DEQ – Delivered Ex Quay (Named port of delivery)

This is similar to DES, but the passing of risk does not occur until the
goods have been unloaded at the port of discharge.
4. DDU – Delivered Duty Unpaid (Named place of destination)

This term means that the seller delivers the goods to the buyer to the
named place of destination in the contract of sale. A transaction in
international trade where the seller is responsible for making a safe
delivery of goods to a named destination, paying all transportation
expenses but not the duty. The seller bears the risks and costs associated
with supplying the goods to the delivery location, where the buyer
! !111
becomes responsible for paying the duty and other customs clearing
expenses.
5.3 Incoterms - 2010 — Explanation
A. Rules that Applies Regardless of the Method of Transport
1. EXW – Ex Works (Named place of delivery)

The seller makes the goods available at his/her premises. The buyer is
responsible for uploading. 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 seller has the goods ready for collection
at his premises (works, factory, warehouse, plant) on the date agreed
upon. The buyer pays all transportation costs and also bears 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.
2. FCA – Free Carrier (Named place of delivery)

The seller delivers goods, cleared for export, to the buyer-designated
carrier at a named and defined location. This is used for any mode of
transport. The seller must load goods onto the buyer's carrier. The key
document signifying transfer of responsibility is receipt by carrier to
exporter.
3. 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. This
term is used for all kind of shipments.
4. CIP – Carriage and Insurance Paid to (Named place of

destination)
The containerised transport multimodal are 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.
! !112
5. DAT – Delivered at Terminal (Named terminal at port or place of

destination)
The Seller delivers when the goods, once unloaded from the arriving means
of transport, are placed at the Buyer's disposal at a named terminal at the
named port or place of destination. "Terminal" includes any place, whether
covered or not, such as a quay, warehouse, container yard or road, rail or
air cargo terminal. The Seller bears all risks involved in bringing the goods
to and unloading them at the terminal at the named port or place of
destination.
6. 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. (An important difference from Delivered At Terminal DAT,
where the seller is responsible for unloading.)
7. 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-Incoterms "Free
in Store (FIS)". This term places the maximum obligations on the seller
and minimum obligations on the buyer.
B. 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 Incoterms 2010 for international trade where
transportation is entirely conducted by water are:
1. FAS – Free Alongside Ship (Named port of shipment)

The seller must place the goods alongside the ship at the named port. The
seller must clear the goods for export. Suitable only for maritime transport
but NOT for multimodal sea transport in containers. This term is typically
used for heavy-lift or bulk cargo.
! !113
2. FOB – Free on Board (Named port of shipment)

The seller must 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 buyer must instruct the seller 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 Incoterms
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,
uploading and transportation cost from the arrival port to destination. The
passing of risk occurs when the goods are on board the vessel.
3. 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. This term is
formerly known as CNF (C&F, or C+F). Maritime transport only.
4. 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. Maritime transport freight only.
To summaries, allocations of costs to buyer/seller according to Incoterms

2010 are as under:
! !114
Carriag
e (Sea
Unloa- Load- Unload Load- Carria
Carr- Freight Import
Export- ding of ing -ing ing on ge to
Inco- iage / custo Impo
Customs truck charges charge Insur- truck place
terms to Air ms rt
declara- in port in port s in ance in port of
2010 port of Freight cleara- taxes
tion of of port of of destin
export ) to nce
export export import import a-tion
port of
import
EXW Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer
FCA Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer No No
FAS Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer
FOB Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer
CPT Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer
CFR Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer
CIF Seller Seller Seller Seller Seller Buyer Seller Buyer Buyer Buyer Buyer
CIP Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer
DAT Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer
DAP Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer
DDP Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
! !115
5.4 Summary
To keep up with the rapid expansion of world trade and globalisation, the
Incoterms rules are revised about once a decade. Since the last revision in
2000, much has changed in global trade and the current revision will take
into account issues such as developments in cargo security and the need to
replace paper documents with electronic ones.
Among the changes in the Incoterms 2011 are:
Categories: The number of categories has been reduced from four to two
to assist Incoterm users to identify the correct terms for their particular
requirements. The two categories cover: -
1. Terms for any Mode or Modes of Transport,
2. Terms for Sea and Inland Waterway Transport
Number of Incoterms:
The current numbers of 13 Incoterms were reduced to 11. The following 4

Incoterms were also dropped:
DAF – Delivery At Frontier
DES – Delivery Ex Ship
DEQ – Delivery Ex Query
DDU – Delivery Duty Unpaid
Two new Incoterms were introduced:
DAT – Delivery At Terminal (replaces DEQ)
DAP – Delivery At Place (replaces DAF, DES and DDU)
! !116
5.5 Questions
1. Explain the INCOTERMS 2010.

2. Which incoterms are newly added in INCOTERMS 2010?
3. Explain dropped Incoterms.
4. Write short notes on: Incoterms for sea and inland waterway transport.
5. Explain the rules that applies regardless of the method of transport.
1. The predefined Incoterms are subdivided into ……………………. categories

based only on method of delivery.
(a) 2
(b) 3
(c) 11
(d) 13
2. Which incoterm is used when seller is made responsible for arranging

carriage and for delivering the goods, ready for unloading from the
arriving conveyance, at the named place?
(a) CIP
(b) DDP
(c) DAT
(d) DAP
3. What is EXW?
(a) The seller makes the goods available at his/her premises
(b) Buyer pick up the goods and stores at his workplace
(c) The seller makes the goods available at buyer’s premises
(d) The seller makes the goods available at port of shipment
! !117
4. Under which Incoterms, must seller pay the costs and freight to bring
the goods to the port of destination?
(a) FAS
(b) FOB
(c) CFR
(d) CIF
5. Under which Incoterm, must seller place the goods alongside the ship at
the named port?
(a) FAS
(b) FOB
(c) CFR
(d) CIF
Answers: 1. (a), 2. (d), 3. (a), 4. (c), 5. (a)
! !118
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !119
FOREIGN TRADE: DOCUMENTS
Chapter 6
Foreign Trade: Documents
Objectives

that there are large number of documents involved in Foreign Trade. They
are classified in different groups as per their nature. How to deal with these
documents and important characteristic features of each documents is also
explained.
Structure
6.1 Introduction
6.2 Commercial Documents
6.3 Official Documents
6.4 Insurance Documents
6.5 Transport Documents
6.6 Financial and Financing Documents
6.7 Summary
6.8 Questions
! !120
6.1 Introduction
Documents are used to record a written evidence of having carried out a

transaction in both local and International Trade. This section deals with
the documents used in International Trade where there is fairly large
number of documents require to satisfy the two basic requirements, viz.
Regulatory and Operational. These large number of documents are broadly
classified as under:
1. Commercial documents
2. Official documents
3. Insurance documents
4. Transport documents
5. Financial and financing documents
In this chapter we are going to understand characteristic features and

usage of each set of the documents.
6.2 Commercial documents
Commercial documents consist of following documents:
(i) Invoice
❖ Pro forma Invoice
❖ Commercial Invoice
❖ Certified Invoice
(ii) Certificate of Origin

(iii) Weight Notes or Weight Certificates
(iv) Packing List
(v) Quality or Inspection Certificate
Let us understand characteristic features of each of the above documents.
(I) Invoice: An Invoice is a document sent to a buyer that specifies the

amount and cost of products or services that have been provided by a
seller. An invoice indicates what must be paid by the buyer according to the
payment terms of the seller. Payment terms usually specify the period that
a buyer has to send payment to the seller for the goods and/or services
that they have purchased. In international trade, for different purposes
! !121
different invoices under different names are issued. Under letter of credit
Invoice is drawn as per the terms of the credit.
• Pro forma Invoice: A pro forma invoice is delivered to a buyer in

special circumstances – typically, when all details for the invoice are not
yet known or yet to be finalised. A pro forma invoice is a document that
states a commitment on part of the seller to deliver the products or
services as notified to the buyer for a specific price. It is thus not a true
invoice. Pro forma invoices are used if you need to produce a document
to a customer for products or services that you are yet to deliver. Pro
forma invoices are typically sent in order to declare the value of goods
for customs. Pro forma invoices should not be regarded as Tax invoices,
which means that they should contain the phrase 'This is not a Tax
invoice'. When the buyer agrees to the products or services included in
the pro forma invoice, and you deliver these items, you are obliged to
send a true Tax invoice within the given time-frame. Seller should not
register pro-forma invoice as an accounts receivable, and conversely the
buyer should not register this type of invoice as an accounts payable.
• Commercial Invoice: A commercial invoice is a document used

in foreign trade. It is used as customs declaration document provided by
the person or corporation that is exporting goods across international
borders. Although there is no standard format, the document must
include information such as the parties involved in the shipping
transaction, the goods being transported, the country of manufacture,
and the Harmonised System codes for those goods. A commercial invoice
must also include a statement certifying that the invoice is true, and a
signature. Please see below sample of the commercial invoice.
! !122
! !123
A commercial invoice is used to calculate tariffs, international commercial

terms (Like the Cost in a CIF) and is commonly used for customs purposes.
Commercial invoices are in European countries not normally for payment.
The definitive invoice for payment usually has only the words “invoice”.
This invoice can also be used as a commercial invoice if additional
information is disclosed.
• Certified Invoice: It is required when the exporter needs to certify on

the invoice that the goods are of a particular origin or manufactured at a
particular place and in accordance with the specified contract. In addition
to above there is one more type of important invoice which is called as
Customs invoice. The main characteristic feature of Customs Invoice is —
mainly it is needed for the countries like USA, Canada, etc. It is prepared
on a special form being presented by the Customs authorities of the
importing country. It facilitates entry of goods in the importing country at
preferential tariff rate.
II. Certificate of Origin: A Certificate of Origin (often abbreviated to C/O

or COO) is a document used in international trade. It is a printed form,
completed by the exporter or its agent and certified by an issuing body,
attesting that the goods in a particular shipment have been wholly
produced, manufactured or processed in a particular country. Or in
Short “A Certificate of Origin (CO) is a document which is used for
certification that the products exported are wholly obtained, produced or
manufactured in a particular Country. It is generally an integral part of
export documents. Sample of certificate of origin is as under:
! !124
The “origin” does not refer to the country where the goods were shipped
from but to the country where they were made. In the event the products
were manufactured in two or more countries, origin is obtained in the
country where the last substantial economically justified working or
processing is carried out. An often used practice is that if more than 50%
of the cost of producing the goods originates from one country, the
"national content" is more than 50%, then, that country is acceptable as
the country of origin.
! !125
When countries unite in trading agreements, they may allow Certificate of

Origin to state the trading bloc, for example, the European Union (EU) as
origin, rather than the specific country. Determining the origin of a product
is important because it is a key basis for applying tariff and other
important criteria. However, not all exporters need a certificate of origin,
this will depend on the destination of the goods, their nature, and it can
also depend on the financial institution involved in the export operation.
The Bombay Chamber of Commerce is officially authorised by the Ministry

of Commerce, Government of India to issue Certificate of Origin in respect
of goods exported from India. The Bombay Chamber also attests Export
Documents like Invoices, Packing List, and Declaration etc., as required by
the applicant for facilitating their trade activities. For Certificate of Origin, a
member needs to provide an Indemnity Bond on a Non-judicial Stamp
Paper of Rs. 200/-. On registration, the member will be provided with a
registration number which has to be quoted on each application for
certification.
III.Weight Note or Weight Certificate: This Document normally issued

by customs authorities of the exporting country, certifying the
correct gross weight of the goods being shipped.
IV. Packing List: A packing list is a catalogue of all the articles that are
included in a package that has been shipped from one place to another.
A packing list is helpful for confirming the number of items and make
sure that nothing has been misplaced. Itemised list of articles usually
included in each shipping package, giving the quantity, description,
and weight of the contents. Prepared by the shipper and sent to
the consignee for accurate tallying of the delivered goods.
Also called bill of parcels, packing slip, or unpacking note.
V. Quality/Inspection Certificate: An important aspect about the goods

to be exported is compulsory quality control and pre-shipment
inspection. For this purpose, Export Inspection Council (EIC) was set up
by the Government of India under section 3 of the Export (Quality
Control and Inspection) Act, 1963. It includes more than 1000
commodities which are organised into various groups for a compulsory
pre-shipment inspection. It includes Food and Agriculture, Fishery,
Minerals, Organic and Inorganic Chemicals, Rubber Products, Ceramic
! !126
Products, Pesticides, Light Engineering, Steel Products, Jute Products,

Coir and Coir Products, Footwear and Footwear Products.
Pre-shipment inspection, also called PSI, and is a part of supply chain

management and an important and reliable quality control method for
checking goods’ quality while clients buy from the suppliers. It ensures that
the production complies with specifications and/or the terms of purchase
order or letter of credit. The Final Random Inspection (FRI), or Pre-
Shipment Inspection (PSI), checks finished products when at least 80% of
your order has been produced and export-packed. Samples are selected at
random, according to standards and procedures. This way the buyer makes
sure, he gets the goods he paid for.
6.3 Official Documents
Following are the major official documents that are used in international
trade
(i) Consular Invoice

(ii) Legalised Invoice
(iii) Black-listed Certificate
(iv) Health, Veterinary and Sanitary Certificate, Certificate of Analysis
Characteristic features of each of the documents are as under:
(i) Consular Invoice: Mainly needed for the countries like Kenya, Uganda,
Tanzania, Mauritius, New Zealand, Burma, Iraq, Australia, Fiji, Cyprus,
Nigeria, Ghana, Zanzibar etc. It is prepared in the prescribed format and
is signed/certified by the counsel of the importing country located in the
country of export
(ii) Legalised Invoice: Legalised or Visaed Invoice is the document which

shows the seller's genuineness before the appropriate consulate or
chamber of commerce/embassy.
(iii) Black-listed Certificate: Black-list Certificate is required for countries

which have strained political relation. It certifies that the ship or the
aircraft carrying the goods has not touched those country(s) which are
black-listed.
! !127
(iv) Health, Veterinary and Sanitary Certificate, Certificate of

Analysis: Required for export of foodstuffs, marine products, hides,
livestock etc.
6.4 Insurance documents
Insurance documents and its coverage are defined in Article 28 of

UCP-600. The main highlights of the Article 28 are as under:
• Insurance policy, insurance certificate or declaration under open cover

should be issued and signed by insurance company, underwriter or their
agents or their proxies. Signature by agent or proxy indicated as being
for or on behalf of insurance company or underwriter
• All originals must be presented, if the document indicates that more than
one original has been issued, Cover Note not acceptable
• Insurance policy is acceptable in lieu of insurance certificate or

declaration under open cover
• Issued no later than shipment date, or it appears from the document that
cover is effective from a date no later than shipment date
• Min. 110% of CIF or CIP value, if L/C does not indicate insurance
coverage required
• If CIF or CIP value cannot be determined from documents – take the

greater of the following:
– Amount for which honour or negotiation is requested; or

– Gross invoice value of the goods
If transaction is covered under L/C, it should state type of insurance

required and additional risks to be covered. If L/C uses imprecise terms
such as “usual risks” or “customary risks”, bank will accept insurance
document without regard to any risks not covered. If L/C requires
insurance against “all risks”, bank will accept insurance document
containing any “all risks” notation or clause, without regard to any risks
stated to be excluded. Therefore, Insurance document may contain
! !128
reference to any exclusion clause indicate that cover is subject to franchise

or excess (deductible)
There are two major types of insurances:
(i) Marine Cargo Insurance

(ii) Marine Hull Insurance
(i) Marine Cargo Insurance

This policy covers goods, freight and other interests against loss or damage
to goods whilst being transported by rail, road, sea and/or air. Different
policies are available from insurance companies depending on the type of
coverage required ranging from an ALL RISK cover to a restricted FIRE
RISK ONLY cover. This policy is freely assignable and is basically an agreed
value policy.
The types of policies issued to cover these transits are:
a. Annual Turnover Policy: ATOP by agreement covers transit of raw

material, semi-finished and finished products pertains to insured's trade,
i.e., Export, Import, Inter Depot movement incidental storage from
originating point to destination point on seamless basis. Key features of
ATOP are:
• Sizeable saving in premium, which is charged only on your sales

turnover.
• Seamless cover with all movement of goods automatically covered.
• No hassles of submitting periodical declaration of movements to the
insurer. Only monthly/quarterly sales figures need to be submitted.
• Facility for payment of premium on half-yearly/quarterly basis.
b. Specific Voyage: In Marine Insurance, specific policies are issued to

cover a specific single transit. Cover ends as soon as arrival of cargo at
destination.
c. Open Policy: It is an Annual Cargo Insurance Contract expressed in

general terms and effected for a round sum sufficient to cover many
dispatches until the sum insured is exhausted by declarations. The Open
Policy, also known as the Floating Policy, saves the assured the
inconvenience of affecting individually the insurance of goods dispatched
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within the country. The policy may cover both incoming and outgoing
consignments from anywhere in India to anywhere in India. The sum
insured under the policy should ordinarily represent the assured
estimated annual turnover of the goods.
d. Annual Policy: Annual policy is granted in respect of goods belonging

to the Assured and or held in trust by the assured and not under
contract of sale and or purchase which are in transit by road or rail from
specified depots/processing units to other specified depots /processing
units. Important features of Annual Policy are-
• Insurable interest to remain with insured

• Policy not assignable or transferable
• Issue of Annual policy to transport operators/contractors, clearing and
forwarding agents
• Prohibited Policy is subject to the condition of average
e. Open Cover: An open cover is an agreement (not a policy) whereby the

insurer will accept insurance of all shipments made by the assured,
within the terms of the cover for a fixed period, usually for 12 months.
Being an agreement, it is not stamped. However, stamped policies or
certificates of insurance are issued against the declaration made by the
assured. The open cover is of great convenience to the clients engaged
in regular import/export trade.
There is also provision for add on covers inland transit policies can be
extended to cover the following perils on payment of additional premium:
1. SRCC - Strike, riot and civil commotion (Including Terrorist Act).
2. FOB - Where the inland transit is required to be extended to cover the

goods till they are loaded on board the vessel, this extension can be
taken.
Export/Import policies can be extended to cover war and/or SRCC perils on

payment of an additional premium. The other features need to understand
is:
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Who can take the policy?
The contract of sale would determine who buys the policy. The most
common contracts are:
• FOB (Free on Board)

• C&F (Cost and Freight)
• CIF (Cost, Insurance and Freight)
In FOB and C&F contracts, the buyer is responsible for insurance. In CIF
contracts, the seller is responsible for insurance from his own premises to
that of the purchaser.
How to select the sum insured?
The sum insured or value of the policy would depend upon the type of
contract. Usually, in addition to the contract value 10/15% is added to take
care of incidental cost.
How to claim?
The following steps should be taken in event of a loss or damage to goods

insured. The immediate steps to minimise loss are:
1. Inform nearest office of the insurance company or claim settling agent

mentioned on the policy.
2. In case of damage to goods whilst on ship or port, arrange for joint ship
survey or port survey.
3. Lodge monetary claim with carrier within stipulated time period.
4. Submit duly assigned insurance policy/certificate along with the original

invoice and other documents required to substantiate the claim such as:
• Bill of Lading/AWB/GR
• Packing list
• Copies of correspondence exchanged with carriers.
• Copy of notice served on carriers along with acknowledgment/receipt.
• Shortage/Damage Certificate issued by carriers.
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5. A survey fee is to be paid to the surveyor appointed by the insurance

company. These fees will be reimbursed along with the claim if the claim
is otherwise admissible.
Marine insurance covers the loss or damage of ships, cargo, terminals, and
any transport or cargo by which property is transferred, acquired, or held
between the points of origin and destination.
Cargo insurance is a sub-branch of marine insurance, though Marine also

includes Onshore and Offshore exposed property (container terminals,
ports, oil platforms, pipelines); Hull; Marine Casualty; and Marine Liability.
When goods are transported by mail or courier, shipping insurance is used.
(ii) Marine Hull Insurance
Typically, marine insurance is split between the vessels and the cargo.
Insurance of the vessels is generally known as "Hull and
Machinery" (H&M). Various specialist policies issued by insurance
companies include new building risks policy which covers the risk of
damage to the hull while it is under construction. General Hull insurance
does not cover the risks of a vessel sailing into a war zone.
There are various specialist policies exist, including:
• New Building Risks: This covers the risk of damage to the hull while it
is under construction.
• Open Cargo or Shipper’s Interest Insurance: This policy may be

purchased by a carrier, freight broker, or shipper, as coverage for the
shipper’s goods. In the event of loss or damage, this type of insurance
will pay for the true value of the shipment, rather than only the legal
amount that the carrier is liable for.
• Yacht Insurance: Insurance of pleasure craft is generally known as

“yacht insurance” and includes liability coverage. Smaller vessels such as
yachts and fishing vessels are typically underwritten on a “binding
authority” or “line slip” basis.
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• War Risks: General hull insurance does not cover the risks of a vessel
sailing into a war zone. A typical example is the risk to a tanker sailing in
the Persian Gulf during the Gulf War. The war risks areas are established
by the London-based Joint War Committee, which has recently moved to
include the Malacca Straits as a war risks area due to piracy. If an attack
is classified as a “riot” then it would be covered by war-risk insurers.
• Increased Value (IV): Increased Value cover protects the ship-owner

against any difference between the insured value of the vessel and the
market value of the vessel.
• Overdue Insurance: This is a form of insurance now largely obsolete

due to advances in communications. It was an early form of reinsurance
and was bought by an insurer when a ship was late at arriving at her
destination port and there was a risk that she might have been lost (but,
equally, might simply have been delayed). The overdue insurance of
the Titanic was famously underwritten on the doorstep of Lloyd’s.
• Cargo Insurance: Cargo insurance is underwritten on the Institute

Cargo Clauses, with coverage on an A, B, or C basis, A is having the
widest cover and C the most restricted. Valuable cargo is known
as specie. Institute Clauses also exist for the insurance of specific types
of cargo, such as frozen food, frozen meat, and particular commodities
such as bulk oil, coal, and jute. Often these insurance conditions are
developed for a specific group as is the case with the Institute Federation
of Oils, Seeds and Fats Associations (FOFSA) Trades Clauses which have
been agreed with the Federation of Oils, Seeds and Fats Associations and
Institute Commodity Trades Clauses which are used for the insurance of
shipments of cocoa, coffee, cotton, fats and oils, hides and skins,
metals, oil seeds, refined sugar, and tea and have been agreed with the
Federation of Commodity Associations.
! !133
In addition to above there are some main types of Marine Insurance

Policies depending up on requirement are also available and these are:
(i) Floating policy: Floating policy is taken for a relatively large sum by
the regular suppliers of goods. It covers several shipments which are
declared afterwards along with other particulars. This policy is most
situated to exporter in order to avoid trouble of taking out a separate
policy for every shipment.
(ii)Time policy: A time policy is taken for definite period of time, usually
not exceeding 12 months say from January 1, 2014 to December 31,
2014. This policy is most suitable for hull insurance
(iii)Voyage policy: Where the subject matter is insured for a specific

voyage, say from Karachi to Port Saeed it is named as voyage policy.
(iv)Mixed policy: This policy is the combination of time and voyage policy.
It, therefore, covers the risks for both particular voyage and for a stated
period of time.
(v) Valued policy: Under its terms the agreed value of the subject matter
of insurance is mentioned in the policy itself. In case of cargo this value
means the cost of goods plus freight and shipping charges plus 10% to
15% margin for anticipated profit. The said value may be more than the
actual value of goods.
(vi) Unvalued policy/Open policy/Blank policy: Where the value of the

subject matter of insurance is not declared but left to be ascertained
and proved later it is called unvalued policy.
! !134
Risk coverage and exclusion in Insurance policies
1. Risks covered under Institute Cargo Clauses (C)
This is the most restricted clause and covers only loss or damage
reasonably attributable to:
• Fire
• Explosion
• Vessel being stranded or sunk
• Overturning or derailment of the land conveyance
• Collision of the vessel
• Discharge of cargo at port of distress
• General Average Sacrifice
• Jettison
2. Risks covered under Institute Cargo Clauses (B)
This Cover is similar to “C” Clause, but in addition it covers:
• Earthquake, volcanic eruption or lightning

• Washing overboard.
• Entry of sea, lake or river water into vessel, craft hold conveyance,
container, lift van or place of storage.
• Total loss of any package lost overboard or dropped whilst loading/
unloading from vessels.
3. General Exclusions under the above Cargo Clauses
All three Clauses exclude the following risks:
• Wilful misconduct of the assured

• Ordinary leakage, ordinary loss in weight or volume or ordinary wear
and tear
• Insufficiency or unsuitability of packing or preparation of the subject
matter insured
• Inherent vice or nature of the subject matter insured
• Delay
• Insolvency
! !135
• Unseaworthiness and unfitness of vessel craft conveyance, containers,

etc.
• War
• Strikes
6.5 Transport documents
Following are the documents normally used as transport documents:
• Airway Bill/Air Consignment Note

• Mate's Receipt
• Bill of Lading
• Railway Consignment Note/Railway Receipt/Roadway Bill
• Post Parcel Documents
Let us understand characteristic features of all above Transport documents.
(i) Airway Bill/Air Consignment Note:
Airway bill (AWB) or air consignment note refers to a receipt issued by

an international airline for goods and an evidence of the contract of
carriage, but it is not a document of title to the goods. Hence, the airway
bill is non-negotiable. Article 23 of UCP -600 describes Air Transport
Document as under:
a. An air transport document, however named, must appear to indicate the

name of the carrier and be signed by:
— the carrier, or
— a named agent for or on behalf of the carrier.
Any signature by the carrier or agent must be identified as that of the

carrier or agent.
Any signature by an agent must indicate that the agent has signed for or
on behalf of the carrier.
b. Indicate that the goods have been accepted for carriage.
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c. Indicate the date of issuance. This date will be deemed to be the date of
shipment unless the air transport document contains a specific notation
of the actual date of shipment, in which case the date stated in the
notation will be deemed to be the date of shipment. Any other
information appearing on the air transport document relative to the
flight number and date will not be considered in determining the date of
shipment.
d. Indicate the airport of departure and the airport of destination stated in

the credit.
e. Be the original for consignor or shipper, even if the credit stipulates a

full set of originals.
f. Contain terms and conditions of carriage or make reference to another

source containing the terms and conditions of carriage. Contents of
terms and conditions of carriage will not be examined.
g. For the purpose of understanding, transhipment means unloading from

one aircraft and reloading to another aircraft during the carriage from
the airport of departure to the airport of destination stated in the credit.
1. An air transport document may indicate that the goods will or may be
transhipped, provided that the entire carriage is covered by one and the
same air transport document.
2. An air transport document indicating that transhipment will or may take

place is acceptable, even if the credit prohibits transhipment.
• The Airway bill (AWB) is the most important document issued by a carrier
either directly or through its authorised agent. It is a non-negotiable
transport document. It covers transport of cargo from airport to airport.
By accepting a shipment an IATA cargo agent is acting on behalf of the
carrier whose airway bill is issued.
• Airway bills have eleven-digit numbers which can be used to make

bookings, check the status of delivery, and current position of the
shipment. The number consists of:
! !137
i. The first three digits are the airline prefix. Each airline has been
assigned a 3-digit number by IATA, so from the prefix we know which
airline has issued the document.
ii. The next seven digits are the running number/s - one number for each
consignment
iii. The last digit is what is called the check digit.
Airway bills make sure that goods have been received for shipment by air.
A typical air waybill sample consists of three originals and nine copies. The
first original is for the carrier and is signed by export agent; the second
original, the consignee's copy, is signed by an export agent; the third
original is signed by the carrier and is handed to the export agent as a
receipt for the goods. Airway bills serves as:
• Proof of receipt of the goods for shipment.

• An invoice for the freight.
• A certificate of insurance.
• A guide to airline staff for the handling, dispatch and delivery of the
consignment.
The principal requirement for an airway bill is:
• The proper shipper and consignee must be mention.

• The airport of departure and destination must be mention.
• The goods description must be consistent with that shown on other
documents.
• Any weight, measure or shipping marks must agree with those shown on
other documents.
• It must be signed and dated by the actual carrier or by the named agent
of a named carrier.
• It must mention whether freight has been paid or will be paid at the
destination point.
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There are several purposes that an air waybill serves, but its main
functions are:
• Contract of Carriage: Behind every original of the Airway bill are

conditions of contract for carriage.
• Evidence of Receipt of Goods: When the shipper delivers goods to be

forwarded, he will get a receipt. The receipt is proof that the shipment
was handed over in good order and condition and also that the shipping
instructions, as contained in the Shipper's Letter of Instructions, are
acceptable. After completion, an original copy of the air waybill is given
to the shipper as evidence of the acceptance of goods and as proof of
contract of carriage
• Freight Bill: The airway bill may be used as a bill or invoice together
with supporting documents since it may indicate charges to be paid by
the consignee, charges due to the agent or the carrier. An original copy
of the airway bill is used for the carrier's accounting
• Certificate of Insurance: The airway bill may also serve as evidence if

the carrier is in a position to insure the shipment and is requested to do
so by the shipper.
• Customs Declaration: Although customs authorities require various

documents like a commercial invoice, packing list, etc. the airway bill too
is proof of the freight amount billed for the goods carried and may be
needed to be presented for customs clearance. The format of the airway
bill has been designed by IATA and these can be used for both domestic
as well as international transportation. These are available in two forms,
viz. the airline logo equipped airway bill and the neutral air waybill.
Usually, airline air waybills are distributed to IATA cargo agents by IATA
airlines. The airway bills show:
• the carrier's name

• its head office address
• its logo
• the pre-printed eleven-digit airway bill number
! !139
It is also possible to complete an airway bill through a computerised

system. Agents all over the world are now using their own in-house
computer systems to issue airlines' and freight forwarders' own airway
bills. IATA cargo agents usually hold airway bills of several carriers.
However, it gradually became difficult to accommodate these pre-
numbered airway bills with the printed identification in the computer
system. Therefore, a neutral air waybill was created. Both types of airway
bills have the same format and layout. However, the neutral airway bill
does not bear any pre-printed individual name, head office address, logo
and serial number.
The airway bill is a contract, i.e., an agreement enforceable by law. To

become a valid contract, it has to be signed by the shipper or his agent and
by the carrier or its authorised agent. Although the same individual or
organisation may act on behalf of both the carrier and the shipper, the
airway bill must be signed twice one each in the respective carrier and
shipper boxes. Both signatures may be of the same person. This also
implies that the airway bill should be issued immediately upon receipt of
the goods and letter in instructions from the shipper.
As long as the airway bill is neither dated nor signed twice, the goods do
not fall within the terms of the conditions of contract and therefore, the
carrier will not accept any responsibility for the goods. The validity of the
airway bill and thus the contract of carriage expire upon delivery of the
shipment to the consignee (or his authorised agent).
The airway bill is a contract — an agreement between the shipper and the
carrier. The agent only acts as an intermediary between the shipper and
carrier. The airway bill is also a contract of good faith. This means that the
shipper will be responsible for the haul also be liable for all the damage
suffered by the airline or any person due to irregularity, incorrectness or
incompleteness of insertions on the airway bill, even if the airway bill has
been completed by an agent or the carrier on his behalf.
When the shipper signs the AWB or issues the letter of instructions, he
simultaneously confirms his agreement to the conditions of contract.
Airway bills are non-negotiable documents unlike bills of lading which are
negotiable. The words non-negotiable are printed clearly at the top of the
airway bill. This means that the airway bill is a contract for transportation
! !140
only and does not represent (the value of) merchandise mentioned in the
box nature and quantity of goods. The ocean bill of lading, if negotiated,
may represent (the value of) the goods and must be endorsed by the party
ultimately accepting the goods.
Although the AWB is a non-negotiable document, it can be used as a

means of payment. This can be done only through the intermediary of a
bank and only when the carriage is subject to a letter of credit. The airway
bill executed according to the terms of a letter of credit allows the shipper
to present the original of the airway bill to the bank and collect the billed
value of the shipped goods from the bank. The amount paid by the bank to
the shipper will be debited to the consignee who ordered the goods. At the
destination, the carrier will only hand over the goods to the consignee on
receipt of a bank release order from the consignee's bankers.
The goods in the air consignment are consigned directly to the party
(the consignee) named in the letter of credit (L/C). Unless the goods are
consigned to a third party like the issuing bank, the importer can obtain
the goods from the carrier at destination without paying the issuing bank
or the consignor. Therefore, unless a cash payment has been received by
the exporter or the buyer's integrity is unquestionable; consigning goods
directly to the importer is risky.
For air consignment to certain destinations, it is possible to arrange

payment on a COD (cash on delivery) basis and consign the goods directly
to the importer. The goods are released to the importer only after the
importer makes the payment and complies with the instructions in the
AWB.
In air freight, the exporter (the consignor) often engages a freight

forwarder or consolidator to handle the forwarding of goods. The consignor
provides a Shipper's Letter of Instructions which authorises the forwarding
agent to sign certain documents (e.g., the AWB) on behalf of the consignor.
The airway bill must indicate that the goods have been accepted for
carriage, and it must be signed or authenticated by the carrier or the
named agent for or on behalf of the carrier. The signature or authentication
of the carrier must be identified as carrier, and in the case of agent signing
or authenticating, the name and the capacity of the carrier on whose behalf
the agent signs or authenticates must be indicated.
! !141
International airway bills that contain consolidated cargo are called master
airway bills (MAWB). MAWBs have additional papers called house
airwaybills (HAWB). Each HAWB contains information of each individual
shipment (consignee, contents, etc.) within the consolidation. International
AWBs that are not consolidated (only one shipment in one bill) are
called simple AWBs.
A house airway bill can also be created by a freight forwarder. When the
shipment is booked, the airline issues a MAWB to the forwarder, who in
turn issues their own house airway bill to the Customer.
(ii) Mate’s Receipt:
Mates Receipt is a document used in the shipment of a cargo. When the

goods are received by or for the sea carrier, a “mate’s receipt” is issued
either directly by the ship or by the ship’s agents. This is the first evidence
that the goods are received and statements on the document describe the
quantity of goods, any identifying marks and the apparent condition.
This information is inserted from visual evidence when the goods are
received. The quantity can be verified by a “tally” or count being made of
the number of packages and the tally clerk’s receipt may be attached to
the mate’s receipt. This information on the mate’s receipt is very important
because this information should also be transferred onto the bill of lading.
The bills of lading are usually required to be issued “in accordance” or “in
conformity” with the mate’s receipts and/or the tally clerk’s receipts.
Sometimes, the document that is issued by the agents of the carrier fulfills
the function of the mate’s receipt but is called the “dock receipt”.
Difference between bill of lading and mate’s receipt
Bill of lading is a legal document between the shipper of a particular good

and the carrier detailing the type, quantity and destination of the good
being carried. The bill of lading also serves as a receipt of shipment when
the good is delivered to the predetermined destination. This document
must accompany the shipped goods, no matter the form of transportation,
and must be signed by an authorised representative from the carrier,
shipper and receiver.
! !142
Mate’s receipt is a document originally issued by the first mate of the ship.
He was the officer responsible for cargo. The document would be issued by
him after the cargo was tallied into the ship by tally clerks. The shipper or
his representative would then take the mate’s receipt to the master or the
agent to exchange it for a bill of lading, which would incorporate any
conditions inserted into the mate’s receipt.
Bill of lading is basically a document which contains all details of cargo

whereas the use of Mate’s receipt is it describes the quality of each
package of cargo. Bill of lading is signed by master of vessel only but
Mate’s receipt is signed by vessel’s mate or 2nd officer.
(iii) Bill of Lading
Bill of Lading is a document given by the shipping agency for the goods
shipped for transportation form one destination to another and is signed by
the representatives of the carrying vessel.
Bill of lading is issued in the set of two, three or more. The number in the
set will be indicated on each bill of lading and all must be accounted for.
This is done due to the safety reasons which ensure that the document
never comes into the hands of an unauthorised person. Only one original
is sufficient to take possession of goods at port of discharge so, a bank
which finances a trade transaction will need to control the complete set.
The bill of lading must be signed by the shipping company or its agent, and
must show how many signed originals were issued.
It will indicate whether cost of freight/ carriage has been paid or not. When
notation is "Freight Prepaid”: it is paid by shipper and when notation is
"Freight collect”: it is to be paid by the buyer at the port of discharge
The bill of lading also forms the contract of carriage and to be acceptable
to the buyer, the B/L should:
• Carry an “On Board” notation to showing the actual date of shipment,

(Sometimes however, the "on board" wording is in small print at the
bottom of the B/L, in which cases there is no need for a dated "on board"
notation to be shown separately with date and signature.)
! !143
• Be “clean” having no notation by the shipping company to the effect that

goods/ packaging are damaged.
The main parties involve in a bill of lading are:
• Shipper: The person who send the goods.
• Consignee: The person who take delivery of the goods.
• Notify Party: The person, usually the importer, to whom the shipping
company or its agent gives notice of arrival of the goods.
• Carrier: The person or company who has concluded a contract with the
shipper for conveyance of goods
The bill of lading must meet all the requirements of the credit as well as
complying with UCP 600. These are as follows:
• The correct shipper, consignee and notifying party must be shown.
• The carrying vessel and ports of the loading and discharge must be
stated.
• The place of receipt and place of delivery must be stated, if different

from port of loading or port of discharge.
• The goods description must be consistent with that shown on other

documents.
• Any weight or measures must agree with those shown on other

documents.
• Shipping marks and numbers and /or container number must agree with
those shown on other documents.
• It must state whether freight has been paid or is payable at destination.
• It must be dated on or before the latest date for shipment specified in

the credit.
! !144
• It must state the actual name of the carrier or be signed as agent for a
named carrier.
Types of bill of lading
There are 12 Common Types of Bill of Lading. They are as under:
1. Straight Bill of Lading: This is typically used when shipping to a

customer. The "Straight Bill of Lading" is for shipping items that have
already been paid for.
2. To Order Bill of Lading: Used for shipments when payment is not

made in advance. This can be shipping to one of your distributors or a
customer on terms.
3. Clean Bill of Lading: A Clean Bill of Lading is simply a BoL that the
shipping carrier has to sign off on saying that when the packages were
loaded they were in good condition. If the packages are damaged or the
cargo is marred in some way (rusted metal, stained paper, etc.), they
will need issue a "Soiled Bill of Lading" or a "Foul Bill of Lading."
4. Inland Bill of Lading: This allows the shipping carrier to ship cargo, by
road or rail, across domestic land, but not overseas.
5. Ocean Bill of Lading: Ocean Bills of Lading allows the shipper to

transport the cargo overseas, nationally or internationally.
6. Through Bill of Lading: Through Bills of Lading are a little more

complex than most BoLs. It allows for the shipping carrier to pass the
cargo through several different modes of transportation and/or several
different distribution centres. This Bill of Lading needs to include an
Inland Bill of Lading and/or an Ocean Bill of Lading depending on its
final destination.
7. Multimodal/Combined Transport Bill of Lading: This is a type of

Through Bill of Lading that involves a minimum of two different modes
of transport, land or ocean. The modes of transportation can be
anything from freight boat to air.
! !145
8. Direct Bill of Lading: Use a Direct Bill of Lading when you know the
same vessel that picked up the cargo will deliver it to its destination.
9. Stale Bill of Lading: Occasionally in cases of short-over-seas cargo

transportation, the cargo arrives to port before the Bill of Lading. When
that happens, the Bill of Lading is then “stale.”
10.Shipped on-Board Bill of Lading: A Shipped On-board Bill of Lading

is issued when the cargo arrives at the port in good, expected condition
from the shipping carrier and is then loaded onto the cargo ship for
transport overseas.
11.Received Bill of Lading: It is simply a Bill of Lading stating that the

cargo has arrived at the port and is cleared to be loaded on the ship,
but has not necessary mean it has been loaded. Used as a temporary BL
when a ship is late and will be replaced by a Shipped On-board Bill of
Lading when the ship arrives and the cargo is loaded.
12.Claused Bill of Lading: If the cargo is damaged or there are missing

quantities, a Claused Bill of Lading is issued.
Being very important document in international trade, under Uniform

Customs and Practices for Documentary Credit (UCPDC), ICC publication
No 600 (Revision 2007) framed rules for handling the different types of
transport documents these are listed and describes as under:
I. As per UCP 600 Article 20, Bill of Lading is described as under:
a. A bill of lading, however named, must appear to:
1. Indicate the name of the carrier and be signed by;
- the carrier or a named agent for or on behalf of the carrier, or

- the master or a named agent for or on behalf of the master.
Any signature by the carrier, master or agent must be identified as

that of the carrier, master or agent. Any signature by an agent must
indicate whether the agent has signed for or on behalf of the carrier
or for or on behalf of the master.
! !146
2. indicate that the goods have been shipped on board a named vessel
at the port of loading stated in the credit by:
- pre-printed wording, or
- an on-board notation indicating the date on which the goods have
been shipped on board.
The date of issuance of the bill of lading will be deemed to be the

date of shipment unless the bill of lading contains an on-board
notation indicating the date of shipment, in which case the date
stated in the on board notation will be deemed to be the date of
shipment.
If the bill of lading contains the indication intended vessel or similar

qualification in relation to the name of the vessel, an on-board
notation indicating the date of shipment and the name of the actual
vessel is required.
3. Indicate shipment from the port of loading to the port of discharge

stated in the credit. If the bill of lading does not indicate the port of
loading stated in the credit as the port of loading, or if it contains the
indication intended or similar qualification in relation to the port of
loading, an on-board notation indicating the port of loading as stated
in the credit, the date of shipment and the name of the vessel is
required. This provision applies even when loading on board or
shipment on a named vessel is indicated by pre-printed wording on
the bill of lading.
4. Be the sole original bill of lading or, if issued in more than one
original, be the full set as indicated on the bill of lading.
5. Contain terms and conditions of carriage or make reference to

another source containing the terms and conditions of carriage (short
form or blank back bill of lading). Contents of terms and conditions of
carriage will not be examined.
6. Contain no indication that it is subject to a charter party.
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b. For the purpose of understanding, transhipment means unloading from

one vessel and reloading to another vessel during the carriage from the
port of loading to the port of discharge stated in the credit.
c. A bill of lading may indicate
• That the goods will or may be transhipped provided that the entire
carriage is covered by one and the same bill of lading.
• A bill of lading indicating that transhipment will or may take place is

acceptable, even if the credit prohibits transhipment, if the goods have
been shipped in a container, trailer or LASH barge as evidenced by the
bill of lading.
d. Clauses in a bill of lading stating that the carrier reserves the right to
tranship will be disregarded.
II. Article 21 of UCP 600 describes Non-negotiable Seaway bill as

under:
a. A non-negotiable seaway bill, however named, must appear to:
1. Indicate the name of the carrier and be signed by:- the carrier or a
named agent for or on behalf of the carrier, or the master or a named
agent for or on behalf of the master.
Any signature by the carrier, master or agent must be identified as

that of the carrier, master or agent. Any signature by an agent must
indicate whether the agent has signed for or on behalf of the carrier
or for or on behalf of the master.
2. Indicate that the goods have been shipped on board a named vessel
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The date of issuance of the non-negotiable seaway bill will be

deemed to be the date of shipment unless the non-negotiable
seaway bill contains an on-board notation indicating the date of
shipment, in which case the date stated in the on-board notation will
be deemed to be the date of shipment.
If the non-negotiable seaway bill contains the indication intended
vessel or similar qualification in relation to the name of the vessel, an
on-board notation indicating the date of shipment and the name of
the actual vessel is required.

stated in the credit. If the non-negotiable seaway bill does not
indicate the port of loading stated in the credit as the port of loading,
or if it contains the indication intended or similar qualification in
relation to the port of loading, an on-board notation indicating the
port of loading as stated in the credit, the date of shipment and the
name of the vessel is required. This provision applies even when
loading on board or shipment on a named vessel is indicated by pre-
printed wording on the non-negotiable seaway bill.
4. Be the sole original non-negotiable seaway bill or, if issued in more

than one original, be the full set as indicated on the non-negotiable
seaway bill.
5. Contain terms and conditions of carriage or make reference to

another source containing the terms and conditions of carriage (short
form or blank back non-negotiable seaway bill). Contents of terms
and conditions of carriage will not be examined.
6. Contain no indication that it is subject to a charter party.
b. For the purpose of this article, transhipment means unloading from one
vessel and reloading to another vessel during the carriage from the port
of loading to the port of discharge stated in the credit.
c. A non-negotiable seaway bill may indicate that the goods will or may be
transhipped provided that the entire carriage is covered by one and the
same non-negotiable seaway bill. A non-negotiable seaway bill
indicating that transhipment will or may take place is acceptable, even if
the credit prohibits transhipment, if the goods have been shipped in a
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container, trailer or LASH barge as evidenced by the non-negotiable

seaway bill.
d. Clauses in a non-negotiable seaway bill stating that the carrier reserves

the right to tranship will be disregarded.
(III) Article 22 describes Charter Party Bill of Lading as under:
a. A bill of lading, however named, containing an indication that it is

subject to a charter party (charter party bill of lading), must appear to:
1. be signed by:
- the master or a named agent for or on behalf of the master, or

- the owner or a named agent for or on behalf of the owner, or
- the charterer or a named agent for or on behalf of the charterer.
Any signature by the master, owner, charterer or agent must be

identified as that of the master, owner, charterer or agent.
Any signature by an agent must indicate whether the agent has

signed for or on behalf of the master, owner or charterer.
An agent signing for or on behalf of the owner or charterer must

indicate the name of the owner or charterer.
2. Indicate that the goods have been shipped on-board a named vessel
The date of issuance of the charter party bill of lading will be deemed
to be the date of shipment unless the charter party bill of lading
contains an on board notation indicating the date of shipment, in
which case the date stated in the on-board notation will be deemed
to be the date of shipment.
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stated in the credit. The port of discharge may also be shown as a
range of ports or a geographical area, as stated in the credit.
4. Be the sole original charter party bill of lading or, if issued in more
than one original, be the full set as indicated on the charter party bill
of lading.
b. A bank will not examine charter party contracts, even if they are
required to be presented by the terms of the credit.
(iv) Railway Consignment Note/Railway Receipt/Roadway Bill
Article 24 describes Road, Rail or Inland Waterway Transport Documents as

under:
a. A road, rail or inland waterway transport document, however named,

must appear to:
1. Indicate the name of the carrier and:
- be signed by the carrier or a named agent for or on behalf of the

carrier, or
- indicate receipt of the goods by signature, stamp or notation by the

carrier or a named agent for or on behalf of the carrier.
Any signature, stamp or notation of receipt of the goods by the

carrier or agent must be identified as that of the carrier or agent.
Any signature, stamp or notation of receipt of the goods by the agent

must indicate that the agent has signed or acted for or on behalf of
the carrier.
If a rail transport document does not identify the carrier, any

signature or stamp of the railway company will be accepted as
evidence of the document being signed by the carrier.
2. Indicate the date of shipment or the date the goods have been
received for shipment, dispatch or carriage at the place stated in the
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credit. Unless the transport document contains a dated reception

stamp, an indication of the date of receipt or a date of shipment, the
date of issuance of the transport document will be deemed to be the
date of shipment.
3. Indicate the place of shipment and the place of destination stated in

the credit.
b. 1. A road transport document must appear to be the original for
consignor or shipper or bear no marking indicating for whom the
document has been prepared.
2. A rail transport document marked duplicate will be accepted as an

original.
3. A rail or inland waterway transport document will be accepted as an

original whether marked as an original or not.
c. In the absence of an indication on the transport document as to the

number of originals issued, the number presented will be deemed to
constitute a full set.
d. For the purpose of this article, transhipment means unloading from one
means of conveyance and reloading to another means of conveyance,
within the same mode of transport, during the carriage from the place
of shipment, dispatch or carriage to the place of destination stated in
the credit.
e. 1. A road, rail or inland waterway transport document may indicate that

the goods will or may be transhipped provided that the entire carriage is
covered by one and the same transport document.
2. A road, rail or inland waterway transport document indicating that

transhipment will or may take place is acceptable, even if the credit
prohibits transhipment.
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(v) Post Parcel Documents and other documents to the title of

goods
Article 25 describes Courier Receipt, Post Receipt or Certificate of posting

as under:
(a) A courier receipt, however named, evidencing receipt of goods for

transport, must appear to:
1. indicate the name of the courier service and be stamped or signed by

the named courier service at the place from which the credit states
the goods are to be shipped; and
2. Indicate a date of pick-up or of receipt or wording to this effect. This

date will be deemed to be the date of shipment.
(b) A requirement that courier charges are to be paid or prepaid may be

satisfied by a transport document issued by a courier service evidencing
that courier charges are for the account of a party other than the
consignee.
(c) A post receipt or certificate of posting, however named, evidencing

receipt of goods for transport, must appear to be stamped or signed and
dated at the place from
(d) Which the credit states the goods are to be shipped. This date will be
deemed to be the date of shipment.
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6.6 Financial and financing documents
The following main documents are considered as Financial and Financing

documents in international trade:
(i) Bill of Exchange
(ii) Promissory Note
(iii) Trust Receipt
The characteristic features and importance of each document in

international trade are as under:
(1) Bill of Exchange
The definition and meaning of the bill of exchange:
• 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.
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Specimen of bill of exchange:
The role of bill of exchange in export business
How bill of exchange works in export trade? After shipment of goods, the
required documents for import along with bill of exchange are submitted
with exporter’s bank to send to foreign buyer through buyer’s bank. The
said bill of exchange draws in duplicate as per specified format. Bill of
exchange contains the reference details of shipment, amount of invoice to
be receivable from overseas buyer, the time of payment to be effected,
bank details etc. A sample body structure of a Bill of exchange consists
wordings as under:
• On 60 days from the date of bill of lading, please pay an amount of USD
0000 to this first of exchange (second of exchange unpaid), to the order
of xyz bank against invoice number 0000. To: xyz bank."
• The bill of exchange is drawn on the letter head of exporter and signs
under and sends to buyer through his bank. Once after reaching
documents to overseas buyer, he accepts bill of exchange by signing on
bill of exchange. On maturity date of bill of exchange, the buyer effects
amount of proceeds to the supplier of goods through his bank.
! !155
(2) Promissory Note
It is financial instrument that contains a written promise by one party to

pay another party a definite sum of money either on demand or at a
specified future date. A promissory note typically contains all the terms
pertaining to the indebtedness by the issuer or maker to the note's payee,
such as the amount, interest rate, maturity date, date and place of
issuance, and issuer's signature. The 1930 international convention that
governs promissory notes and bills of exchange also stipulates that the
term “promissory note” should be inserted in the body of the instrument
and should contain an unconditional promise to pay.
Promissory notes lie somewhere between the informality of an IOU and the
rigidity of a loan contract in terms of their legal enforceability. An IOU
merely acknowledges that a debt exists, but does not include a specific
promise to pay, as is the case with a promissory note. A loan contract, on
the other hand, usually states the lender’s right to recourse – such as
foreclosure – in the event of default by the borrower; such provisions are
generally absent in a promissory note.
Promissory notes that are unconditional and saleable become negotiable

instruments that are extensively used in business transactions in numerous
countries.
Sample of the Promissory Note is as under:
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Indian Currency Notes are also form of Promissory notes. The promise on
currency note reads as “I promise to pay the Bearer the sum of……Rupees”
— under the signature of Governor of Reserve Bank of India.
Why Promissory Notes?
A promissory note is used to record the financial details of a loan. Also

known as 'notes payable', promissory notes are used for personal loans,
business loans and real estate transactions. It is a legally binding contract
which can be used in a court of law if the borrower defaults on the
loan.Personal promissory notes are the most common form of note
payable. Like an "IOU," personal notes can be used when lending or
borrowing money from friends or family, or to document the intended
purchase of personal belongings such as jewellery, appliances, or vehicles.
In essence, promissory notes demonstrate a good faith effort on the behalf

of the borrower. Depending on the amount of the loan, the lender may also
request some sort of collateral to back the note. For instance, if you borrow
$5000 from your aunt, she might ask you to use your automobile or big
screen TV as financial security if you default on the loan.
Promissory notes can help prevent misunderstandings between family and

friends. When drafting the note, it should clearly state how much the loan
is for, the amount of interest being charged, and the dates which payments
should be made. Preformatted promissory notes can be purchased at office
supply stores or downloaded via the Internet.
Most states institute laws regarding the amount of interest lenders can
charge. When individuals charge interest rate on borrowed funds they are
typically required to charge less than lending institutions. When providing a
personal loan to family members or friends, it's important to investigate
local lending laws to ensure excessive interest fees are not charged. Those
who charge extraordinary interest rates can be charged with a criminal
offense and may face imprisonment. When borrowing money from a bank
or lending institution, a promissory note is almost always required. These
notes outline the repayment terms and rate of interest. If the borrower
defaults on the loan the lender has the right to demand full payment of the
note. If the lender is unable to collect on the note they can place a lien
against real property owned by the borrower or have their wages
! !157
garnished. If this occurs, it will have a negative impact on the borrower's

credit report.
Promissory notes are considered "unsecured" notes payable. This means if

the borrower defaults on the loan it is more difficult for the lender to
collect. Although lenders can file a lien against the property and take legal
action against the borrower, collection can be a lengthy and expensive
process with no guarantee for repayment. When offering to loan money to
an individual through an unsecured promissory note, it's a good idea
to never lend more than you can afford to lose. As an added precaution,
experts recommend hiring an attorney to craft a promissory note to ensure
it will hold up in court.
(3) Trust Receipt
This is notice of release merchandise to buyer from a bank, with the bank
retaining the ownership title to the released assets. In an arrangement
involving a trust receipt, the bank remains the owner of the merchandise,
but the buyer is allowed to hold the merchandise in trust for the bank, for
manufacturing or sales purposes.
The buyer of merchandise subject to a trust receipt is required to maintain

the merchandise, and any proceeds of the sale of the merchandise, for
remittance to the bank. In this way, the buyer is permitted use of the
merchandise for their business activities, but the bank's interest in the
ownership of the merchandise is protected.
Advantages of Trust Receipt/Import Invoice Financing
Buyer may enjoy the following benefits under TR/Import Invoice Financing:
• Do not need to effect payment immediately when documents are

presented under documentary credit, documentary collection or open
account.
• Financing can be up to 100% of the documentary credit, documentary

collection or invoice value.
• Enjoy credit terms pre-approved by the Bank, with principal and interest
only payable on maturity.
! !158
• Buyer’s working capital or cash flow is not tied up and can be deployed
for other business purposes.
Prerequisites for Trust Receipt/Import Invoice Financing
The following prerequisites must be in place in order to apply for TR/Import

Invoice Financing:
1) For TR Financing
• Duly executed TR agreement;
• Bill of Exchange accepted by the buyer; and TR facility line of credit

granted by the Bank.
2) For Import Invoice Financing
Customer’s letter declaring that:
• They have not and will not obtain other financing pertaining to this
transaction from another bank or financial institution, which in aggregate
(including this financing) would exceed the value of this trade
transaction; and
• The underlying transactions are genuine and undertake to furnish the

Bank for inspection
This is for information only and is designed to provide a general description

of the trade products and services. The information in this document
relates to services offered to clients as of April 2010 and may be subject to
change. All relevant original documents in support thereof at the Bank’s
request.
Customer’s letter should contain the following information:

- Remittance and loan amount
- Name of supplier/beneficiary
- Supplier/Beneficiary bank’s particulars and account number
- Financing Tenor and Currency
- Charges information
- Bill of Exchange accepted by the buyer
! !159
- Copy of invoice and transport document

- An import invoice financing facility granted by the Bank
- Proceeds of the import finance will be paid directly to the exporter
(3) Other Documents:
There are some other important documents used in International Trade,

these are as under:
i) Dock, Wharfinger's Receipt
Wharfinger’s receipt is an acknowledgement of the receipt of goods at the

wharf. It is issued by the wharfinger. It has a legal value similar to that of a
warehouse receipt. Bills of lading and Wharfinger’s’ receipts are commercial
instruments, and their transferability, or, as it is sometimes termed, their
“quasi negotiability,” depends on the custom of merchants and the
conveniences of trade.
It is receipt for goods given by a dock warehouse or wharf, acknowledging

that the goods are awaiting shipment. A more formal document is a dock
warrant or Wharfinger’s warrant (see warrant), which gives the holder title
to the goods.
(ii) Dock Warrants, Warehouse Warrants
This is a document used by shipping port authority that certifies title of

goods to consignee or consignor while a shipment is stored in a warehouse
or storage lot.
Dock warrant, in law, a document by which the owner of a marine or river

dock certifies that the holder is entitled to goods imported and warehoused
in the docks.
In the Factors Act 1889 it is included in the phrase “document of title” and
is defined as any document or writing, being evidence of the title of any
person therein named ... to the property in any goods or merchandise lying
in any warehouse or wharf and signed or certified by the person having the
custody of the goods. It passes by endorsement and delivery and transfers
the absolute right to the goods described in it.
! !160
In England in 1911, a dock warrant was liable to a stamp duty of three

pence, which was denoted by an adhesive stamp, to be cancelled by the
person by whom the instrument is executed or issued.
(iii) Delivery Orders
In freight-prepaid shipments, written directions from

a consignor (or shipper) of a shipment to a carrier or freight
forwarder to release the shipment to the named delivery party. In freight-
collect (free on board) shipments, order by a carrier to
the port authorities to release a shipment to the named delivery party
on payment of the specified freight charges. Not to be confused
with delivery instructions document which pertain to inland transportation.
Delivery Order (abbreviated as D/O) is a document from a consignor,

a shipper, or an owner of freight which orders the release of the
transportation of cargo to another party. Usually the written order permits
the direct delivery of goods to a warehouseman, carrier or other person
who in the course of their ordinary business issues warehouse
receipts or bills of lading.
According to the Uniform Commercial Code (UCC) a delivery order refers to

an “order given by an owner of goods to a person in possession of them
(the carrier or warehouseman) directing that person to deliver the goods to
a person named in the order.”
A Delivery Order which is used for the import of cargo should not to be
confused with delivery instructions. Delivery Instructions provides “specific
information to the inland carrier concerning the arrangement made by the
forwarder to deliver the merchandise to the particular pier or steamship
line.”
“A delivery order was not regarded as a document of title at common law

with the result that the transfer of the delivery order did not effect the
transfer of constructive possession of the goods. Attornment on the part of
the bailee was required (i.e., an acknowledgement that the bailee held the
goods on behalf of the transferee). The Uniform Documents of Title Act
permits the use of negotiable delivery orders (if the order directs delivery
to a named person or order). However, it is still necessary to single out
! !161
delivery orders for special treatment. Until the delivery order is accepted
by the bailee, there is no basis for imposing obligations on the bailee.
(iv) Shipping bill
Shipping Bill/ Bill of Export is the main document required by the Customs
Authority for allowing shipment. A shipping bill is issued by the shipping
agent and represents certificate for all parties, included ship’s owner, seller,
buyer and some other parties. For each one represents a kind of certificate
document.
In case of export by sea or air, the exporter must submit the ‘Shipping Bill’,
and in case of export by road he must submit ‘Bill of Export' in the
prescribed form containing the prescribed details such as the name of the
exporter, consignee, invoice number, details of packing, description of
goods, quantity, FOB value, etc. Along with the Shipping Bill, other
documents such as copy of packing list, invoices, export contract, letter of
credit, etc. are also to be submitted.
The shipping bill shall be submitted in duplicate to the authority concerned

(Commissioner of Customs or the SEZ, if the export is made through it).
(i) After verifying and authenticating, the authority concerned shall hand
over to the exporter, one copy of the shipping bill marked ‘Exchange
Control (EC) copy’ for being submitted to the AD bank within 21 days from
the date of export for collection/negotiation of shipping documents.
However, in cases where EC copy of shipping bill is not printed in terms of
CBEC’s circular No. 55/2016-Customs dated November 23, 2016 and data
of shipping bill is integrated with EDPMS, requirement of submission of EC
copy of shipping bill with the AD bank would not be there.
(ii) The manner of disposal of EC copy of Shipping Bill shall be the same as
that for EDF. The duplicate copy of the form together with a copy of invoice
etc. Shall be retained by ADs and may not be submitted to the Reserve
bank.
The question of disposal of EC copy of shipping bill will, however, not arise
where EC copy of shipping bill is not printed in terms of CBEC’s Circular No.
55/2016-Customs dated November 23, 2016 and data of shipping bill is
integrated with EDPMS.
! !162
6.7 Summary
Documents which are used in international trade are used to record a

written evidence of having carried out the transaction in both local and
international trade and are required to satisfy the two basic requirements,
i.e., Regulatory and Operational. As mentioned in this chapter various
important documents are required in cross border trade are commercial
invoice, bill of lading/ airway bill, marine insurance policy, bill of exchange,
invoices, inspection certificate, packing list, etc.
The Commercial invoice contains various information like description of

goods, price, packing specification, bill of lading number etc. Bill of lading
is the document to the title of goods duly signed and issued by shipping
company acknowledging the goods mentioned in the document have been
shipped or received for shipment and undertaking to deliver at the agreed
destination. By practice and custom bill of lading is transferable by
endorsement. Bill of lading should be presented to negotiating bank or the
collecting bank soon after it is issued by the shipping company so that it is
made available to overseas consignee before the vessel carrying the goods
arrives at destination, to avoid the demurrage and the other
inconveniences. Airway bill is an acknowledgement issued by the Airline
Company or their authorised agents stating that they have received the
goods as detailed therein for despatch by air to the named consignee at
the address stated therein. Unlike bill of lading, AWB is not negotiable
document to the title of goods because it is merely acknowledgement of
goods and it is not negotiable document. Multimodal transport document is
issued when the movement of goods involves more than one mode of
transport.
Marine insurance policy and certificate is issued in international trade to

insure the goods against the loss or damage. For the financing bank a
marine insurance policy is very important document accompanying the
shipping document as it provides the additional cover for the advance it
has made to the importer. A bill of exchange is an unconditional order in
writing, addressed by the drawer to the drawee requiring the drawee to
pay on demand stated sum of money to the bearer/ specified person or
organisation. Bill of exchange is negotiable instrument and is payable to
the bearer or to the person in whose favour it is endorsed. A consular
invoice is special type of invoice required by some countries for their
imports. This invoice facilitates in that country clearance of goods at the
! !163
port of entry by avoiding delay arising from the customs formalities.

Certain countries need customs invoice for allowing entry of merchandise
at preferential tariff rate. The forms are supplied by the consular office of
the respective importers country and are to be duly filled in and signed by
the shipper. In many countries permission to import is refused unless the
buyer produces the certificate of origin. The essential feature is certification
of country of origin of the goods. Inspection certificate by an established
inspecting authority is also needed under some contract or by some
countries. This certificate is issued by one of the authorised inspection
agencies in the exporter’s country by the agency nominated by the
importer. Exporter also prepares a packing list showing the description of
goods, number and marks on the packages quantity per package etc.
6.8 Questions
A. Answer the following question
1. The documents which are commonly used in trade finance are broadly
grouped into how many groups? Name the documents in each group.
2. Describe the characteristic features of commercial invoice?
3. What are the various features of bill of lading? Describe the different
types of bills of ladings.
4. What are different types of financial documents used in domestic trade?

(I) Marine insurance risk
(II) Charter party bill of lading
(III) Trust receipt
(IV) Mates receipt
! !164
B. Multiple Choice questions
1. Main Purpose of Commercial Invoice is:

a. To know goods have been shipped
b. To know price of goods and types of goods shipped
c. To check whether appropriate goods have been shipped and also unit
price, total value, marking on package etc.
d. To check the sales terms of contract
2. Black-listed certificate is required for __________.

a. Countries which have strained political relationship
b. Countries which are placed in the black list by exporting country
c. Countries black-listed for not making the payment of export
d. All countries in OFAC list
3. Open Marine insurance policy is issued to __________.

a. Cover single despatch
b. Number of despatches
c. Number of despatches until sum insured is exhausted
d. All above
4. Can post parcel documents considered as Transport document? –Yes /

No.
a. Yes
b. No.
5. Bill of lading is ……………….

a. Document given by shipping agency for the goods shipped
b. Document given by exporter
c. Documents issued by any agency confirming goods have been
shipped
d. Document to indicate goods are received for shipment
Answers : 1. (c), 2. (a), 3. (c), 4. (a), 5. (a)
! !165
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !166
IMPORT TRADE: GUIDELINES
Chapter 7
Import Trade: Guidelines
Objectives

various aspects of import trade in to India considering impart guidelines,
issued by various regulatory authorities. You will also understand about
documentation, payment for import, interest part procedure for
replacement of goods imported etc.
Structure:
On completion of this chapter, you will understand the following
7.1 Introduction
7.2 Import Trade Control
7.3 FEMA and Regulatory Guidelines for Imports
7.4 Advance Remittance
7.5 Interest on Import Bills
7.6 Remittances against Replacement Imports
7.7 Guarantee for Replacement Import
7.8 Import of Equipment by Business Process Outsourcing (BPO)

Companies for their Overseas Sites
7.9 Receipt of Import Bills/Documents
7.10 Summary
7.11 Questions
! !167
7.1 Introduction
Import/Export trade is regulated by the Directorate General of Foreign

Trade (DGFT) under the Ministry of Commerce and Industry, Department of
Commerce, Government of India in conformity with the Foreign Trade
Policy in force and Foreign Exchange Management (Current Account
Transactions) Rules, 2000 framed by the Government of India. Banks are
following normal banking procedures and adhere to the provisions of
Uniform Customs and Practices for Documentary Credits (UCPDC), etc.,
while handling letters of credit for import into India on behalf of their
constituents. Taxation-related matters are looked after by Central Board of
Direct Taxes through Customs.
Customs duty not only raises money for the Central Government but also
helps the government to prevent the illegal imports and exports of goods
from India. The Central government has emergency powers to increase
import or export duties whenever necessary after a notification in the
session of Parliament.
For enforcing the provision of Foreign Exchange Management Act, 1999

and dealing with prosecutions and adjudications for evasion or
contravention of regulations there is separate machinery, The Directorate
of Enforcement, in the central government, with headquarters in New Delhi
and branch offices in important places in the country.
7.2 Import trade Control
Import in India is governed by the certain rules and regulation, which are
issued by the import-export governing bodies. Import-Export, government
authorities decide which items will be imported and which item will be
prohibited. The quantity of goods to be imported and tax imposed on the
imported goods is also under the control of import governing body. Import-
Export governing bodies also play an important role in settling the Foreign
Trade Agreement in matters related to import of goods.
! !168
1. Ministry of Commerce and Industry
The Ministry of Commerce and Industry is the nodal authority for

formulating and implementing the foreign trade policy in matter related to
Import. The Department of Commerce play a key role in matters related to
multilateral and bilateral commercial relations, state trading, export
promotion measures and development and regulation of certain import
oriented industries and commodities.
There are two departments under the Ministry of Commerce and Industry.
The first one is the Department of Commerce and the second is
Department of Industrial Policy and Promotion. The department of Ministry
of Commerce which is sometimes also termed as Department of Industrial
Policy and Promotion was established in the year 1995, and in the year
2000 Department of Industrial Development was merged with it.
2. Directorate General of Foreign Trade (DGFT)
DGFT or Directorate General of Foreign Trade is a government organisation

in India responsible for the formulation of guidelines and principles for
importers as well as exporters of country. Preparation, formulation and
implication of Foreign Trade Policies are one of the main functions of DGFT.
Apart from Foreign Trade Policy, DGFT is also responsible for issuing IEC or
Import Export Code. IEC codes are mandatory for carrying out import
export trade operations and enable companies to acquire benefits on their
imports/exports, customs, exports promotion council etc in India. DGFT
also play an important role in controlling DEPB rates and setting standard
input-output norms. Any changes or formulation or addition of new codes
in ITC-HS Codes are also carried out by DGFT (Directorate General of
Foreign Trade). DGFT has its offices in all the major cities. Its Delhi office is
located at IP Bhawan, New Delhi.
3. Central Board of Excises Customs (CBEC)
The Central Board of Excises Customs (CBEC) under Ministry of Finance is

the controlling authority to handle custom duty related matters. CBEC
regularly publishes the “Indian Customs Tariff Guide that provides all types
of information on custom duty rules and regulation in India.
! !169
Customs duty not only raises money for the Central Government but also
helps the government to prevent the illegal imports and exports of goods
from India. The Central government has emergency powers to increase
import or export duties whenever necessary after a notification in the
session of Parliament.
Objectives of Customs Duties
• Regulating the amount of import in India in order to protect the domestic

market.
• Protecting Indian Industry from undue competition
• Prohibiting certain imports of goods for achieving the policy objectives of
the Government
• Regulating imports
• Coordinating legal provisions with other laws dealing with foreign
exchange such as Foreign Trade Act, Foreign Exchange Regulation Act,
Conservation of Foreign Exchange and Prevention of Smuggling Act, etc.
7.3 FEMA and Regulatory Guidelines for Imports
7.3.1 General Guidelines

Rules and regulations to be followed by the AD Category-I banks from the
foreign exchange angle while undertaking import payment transactions on
behalf of their clients are set out in the following paragraphs. Where
specific regulations do not exist, AD Category-I banks may be governed by
normal trade practices. AD Category-I banks may particularly note to
adhere to "Know Your Customer" (KYC) guidelines issued by Reserve Bank
(Department of Banking Regulation) in all their dealings.
7.3.2 Remittances for Import Payments

AD Category-I Banks may allow remittance for making payments for
imports into India, after ensuring that all the requisite details are made
available by the importer and the remittance is for bonafide trade
transactions as per applicable laws in force.
7.3.3 Import Licences

Except for goods included in the negative list which require licence under
the Foreign Trade Policy in force, AD Category-I banks may freely open
letters of credit and allow remittances for import. While opening letters of
credit, the ‘For Exchange Control purposes’ copy of the licence should be
! !170
called for and adherence to special conditions, if any, attached to such

licences should be ensured. After effecting remittances under the licence,
AD Category-I banks may preserve the copies of utilised licence/s till they
are verified by the internal auditors or inspectors. Details are also
explained separately in this chapter.
7.3.4 Obligation of Purchaser of Foreign Exchange
(i) In terms of Section 10(6) of the Foreign Exchange Management Act,

1999 (FEMA), any person acquiring foreign exchange is permitted to use
it either for the purpose mentioned in the declaration made by him to an
Authorised Dealer Category-I bank under Section 10(5) of the Act or for
any other purpose for which acquisition of foreign exchange is
permissible under the said Act or Rules or Regulations framed
thereunder.
(ii)Where foreign exchange acquired has been utilised for import of goods
into India, the AD Category-I bank should ensure that the importer
furnishes evidence of import, viz., as in IDPMS as explained separately
also, Postal Appraisal Form or Customs Assessment Certificate, etc., and
satisfy himself that goods equivalent to the value of remittance have
been imported. AD bank should ensure that all import remittances
outstanding on the notified date of IDPMS are uploaded in IDPMS.
(iii)Notwithstanding anything contained in the Manner of Payment in

foreign Exchange (FEMA 14R/2016-RB dated May 02, 2016), a person
resident in India may make payment for import of goods in foreign
exchange through an international card held by him/in rupees from
international credit card/ debit card through the credit/debit card
servicing bank in India against the charge slip signed by the importer or
as prescribed by Reserve Bank from time to time, provided that the
transaction is in conformity with the extant provisions and the import is
in conformity with the Foreign Trade Policy in force.
! !171
(iv)Any person resident in India may also make payment as under:
(a)In rupees towards meeting expenses on account of boarding, lodging

and services related thereto or travel to and from and within India of a
person resident outside India who is on a visit to India;
(b)By means of a crossed cheque or a draft as consideration for purchase

of gold or silver in any form imported by such person in accordance with
the terms and conditions imposed under any order issued by the Central
Government under the Foreign Trade (Development and Regulations)
Act, 1992 or under any other law, rules or regulations for the time being
in force;
(c)A company or resident in India may make payment in rupees to its non-
whole-time director who is resident outside India and is on a visit to
India for the company’s work and is entitled to payment of sitting fees
or commission or remuneration, and travel expenses to and from and
within India, in accordance with the provisions contained in the
company’s Memorandum of Association or Articles of Association or in
any agreement entered into it or in any resolution passed by the
company in general meeting or by its Board of Directors, provided the
requirement of any law, rules, regulations, directions applicable for
making such payments are duly complied with.
7.3.5 Time Limit for Settlement of Import Payments
• Time limit for Normal Imports
(i) In terms of the extant regulations, remittances against imports should

be completed not later than six months from the date of shipment,
except in cases where amounts are withheld towards guarantee of
performance, etc.
(ii)AD Category-I banks may permit settlement of import dues delayed due
to disputes, financial difficulties, etc. However, interest if any, on such
delayed payments, usance bills or overdue interest is payable only for a
period of up to three years from the date of shipment.
! !172
• Time Limit for Deferred Payment Arrangements
Deferred payment arrangements (including suppliers’ and buyers’ credit)

upto five years, are treated as trade credits for which the procedural
guidelines as laid down in the Master Circular for External Commercial
Borrowings and Trade Credits may be followed.
• Time Limit for Import of Books
Remittances against import of books may be allowed without restriction as

to the time limit, provided, interest payment, if any, is as per the
instructions under FEMA.
• Extension of Time
(i) AD Category-I banks can consider granting extension of time for

settlement of import dues up to a period of six months at a time
(maximum up to the period of three years) irrespective of the invoice
value for delays on account of disputes about quantity or quality or non-
fulfilment of terms of contract; financial difficulties and cases where
importer has filed suit against the seller. In cases where sector specific
guidelines have been issued by Reserve Bank of India for extension of
time (i.e., rough, cut and polished diamonds), the same will be
applicable.
(ii)While granting extension of time, AD Category-I banks must ensure

that:
a. The import transactions covered by the invoices are not under

investigation by Directorate of Enforcement/Central Bureau of
Investigation or other investigating agencies;
b. While considering extension beyond one year from the date of

remittance, the total outstanding of the importer does not exceed
USD one million or 10 per cent of the average import remittances
during the preceding two financial years, whichever is lower; and
c. Where extension of time has been granted by the AD Category-I

banks, the date up to which extension has been granted may be
indicated in the ‘Remarks’ column.
! !173
(iii)Cases not covered by the above instructions/beyond the above limits,

may be referred to the concerned Regional Office of Reserve Bank of
India.
(iv)The above shall be reported in IDPMS as per message “Bill of Entry

Extension” and the date up to which extension is granted will be
indicated in “Extension Date” column.
7.3.6 Import of Foreign Exchange/Indian Rupees
i. Except as otherwise provided in the Regulations, no person shall,

without the general or special permission of the Reserve Bank, import or
bring into India, any foreign currency. Import of foreign currency,
including cheques, is governed by clause (g) of subsection (3) of section
6 of the Foreign Exchange Management Act, 1999, and the Foreign
Exchange Management (Export and Import of Currency) Regulations
2000, issued by Reserve Bank vide Notification No. FEMA 6(R)/2015-RB
dated December 29, 2015, as amended from time to time.
ii. Reserve Bank may allow a person to bring into India currency notes of
Government of India and/or of Reserve Bank subject to such terms and
conditions as the Reserve Bank may stipulate.
• Import of Foreign Exchange into India
A person may –
(i) Send into India, without limit, foreign exchange in any form other than
currency notes, bank notes and travellers cheques;
(ii)Bring into India from any place outside India, without limit, foreign
exchange (other than unissued notes), subject to the condition that
such person makes, on arrival in India, a declaration to the Custom
Authorities at the Airport in the Currency Declaration Form (CDF)
annexed to these Regulations; provided further that it shall not be
necessary to make such declaration where the aggregate value of the
foreign exchange in the form of currency notes, bank notes or travellers
cheques brought in by such person at any one time does not exceed
USD 10,000 (US Dollars ten thousand) or its equivalent and/or the
aggregate value of foreign currency notes (cash portion) alone brought
! !174
in by such person at any one time does not exceed USD 5,000 (US
Dollars five thousand) or its equivalent.
• Import of Indian Currency and Currency Notes
(i) Any person resident in India who had gone out of India on a temporary
visit, may bring into India at the time of his return from any place
outside India (other than from Nepal and Bhutan), currency notes of
Government of India and Reserve Bank of India notes up to an amount
not exceeding Rs. 25,000 (Rupees twenty five thousand only).
(ii)A person may bring into India from Nepal or Bhutan, currency notes of
Government of India and Reserve Bank of India for any amount in
denominations up to Rs. 100/-.
7.3.7. Third Party Payment for Import Transactions
AD category-I banks are allowed to make payments to a third party for

import of goods, subject to conditions as under:
a. Firm irrevocable purchase order/tripartite agreement should be in place.

However this requirement may not be insisted upon in case where
documentary evidence for circumstances leading to third party
payments/name of the third party being mentioned in the irrevocable
order/invoice has been produced.
b. AD bank should be satisfied with the bonafides of the transactions and

should consider the Financial Action Task Force (FATF) Statement before
handling the transactions;
c. The Invoice should contain a narration that the related payment has to
be made to the (named) third party;
d. Bill of Entry should mention the name of the shipper as also the
narration that the related payment has to be made to the (named) third
party;
e. Importer should comply with the related extant instructions relating to

imports including those on advance payment being made for import of
goods.
! !175
7.3.8. Issue of Guarantees by an Authorised Dealer
• An authorised dealer may give a guarantee in respect of any debt,

obligation or other liability incurred by a person resident in India and
owned to a person resident outside India, as an importer, in respect of
import on deferred payment terms in accordance with the approval by
the Reserve Bank of India for import on such terms.
• An authorised dealer may give guarantee in respect of any debt,

obligation or other liability incurred by a person resident in India and
owned to a person resident outside India (being an overseas supplier of
goods, bank or a financial institution), for import of goods, as permitted
under the Foreign Trade Policy announced by Government of India from
time to time and subject to such terms and conditions as may be
specified by Reserve Bank of India from time to time.
• An authorised dealer may, in the ordinary course of his business, give a

guarantee in favour of a non-resident service provider, on behalf of a
resident customer who is a service importer, subject to such terms and
conditions as stipulated by Reserve Bank of India from time to time:
Provided that no guarantee for an amount exceeding USD 500,000 or its

equivalent shall be issued on behalf of a service importer other than a
Public Sector Company or a Department/Undertaking of the Government of
India/State Government;
Provided further that where the service importer is a Public Sector

Company or a Department/Undertaking of the Government of India/State
Government, no guarantee for an amount exceeding USD 100,000 or its
equivalent shall be issued without the prior approval of the Ministry of
Finance, Government of India.
An authorised dealer may, subject to the directions issued by the Reserve

Bank of India in this behalf, permit a person resident in India to issue
corporate guarantee in favour of an overseas lessor for financing import
through operating lease effected in conformity with the Foreign Trade Policy
in force and under the provisions of the Foreign Exchange Management
(Current Account Transactions) Rules, 2000 framed by the Government of
India vide Notification No. G. S. R. 381 (E) dated May 3, 2000 and the
! !176
Directions issued by Reserve Bank of India under Foreign Exchange

Management Act, 1999 from time to time.
7.4 Advance Remittance
7.4.1. Advance Remittance for Import of Goods
(i) AD Category-I bank may allow advance remittance for import of goods
without any ceiling subject to the following conditions:
a. If the amount of advance remittance exceeds USD 200,000 or its

equivalent, an unconditional, irrevocable Standby Letter of Credit or a
guarantee from an international bank of repute situated outside India or
a guarantee of an AD Category-I bank in India, if such a guarantee is
issued against the counter-guarantee of an international bank of repute
situated outside India, is obtained.
b. In cases where the importer (other than a Public Sector Company or a

Department/Undertaking of the Government of India/State
Government/s) is unable to obtain bank guarantee from overseas
suppliers and the AD Category-I bank is satisfied about the track record
and bona fides of the importer, the requirement of the bank guarantee/
standby Letter of Credit may not be insisted upon for advance
remittances up to USD 5,000,000 (US Dollar five million). AD Category-I
banks may frame their own internal guidelines to deal with such cases
as per a suitable policy framed by the bank's Board of Directors.
c. A Public-Sector Company or a Department/Undertaking of the

Government of India/State Governments which is not in a position to
obtain a guarantee from an international bank of repute against an
advance payment, is required to obtain a specific waiver for the bank
guarantee from the Ministry of Finance, Government of India before
making advance remittance exceeding USD 100,000.
(ii) All payments towards advance remittance for imports shall be subject
to the specified conditions and AD banks are required to create Outward
Remittance Message (ORM) for all such outward remittances in IDPMS and
follow other extant IDPMS guidelines.
! !177
7.4.2. Advance Remittance for Import of Rough Diamonds
a. AD category-I banks are permitted to take decision on overseas mining

companies to whom an importer (other than Public Sector Company or
Department/Undertaking of Government of India/State Government)
can make advance payments, without any limit/bank guarantee/ stand-
by Letter of credit. Banks must ensure the following:
i. The overseas mining company should have the recommendation of

GJEPC.
ii. The importer should be a recognised processor of rough diamonds

and should have a good track record.
iii. AD Category-I banks should, undertake the transaction based on

their commercial judgment and after being satisfied about the
bonafides of the transaction.
iv. Advance payments should be made strictly as per the terms of the
sale contract and should be made directly to the account of the
company concerned, that is, to the ultimate beneficiary and not
through numbered accounts or otherwise and AD banks should
ensure that they have created the Outward Remittance Message
(ORM) for all such outward remittances in IDPMS.
v. Further, due caution may be exercised to ensure that remittance is

not permitted for import of conflict diamonds (Kimberly Certification).
vi. KYC and due diligence exercise should be done by the AD Category-I
banks as per the existing guidelines.
vii.AD Category-I banks should follow-up submission of the Bill of Entry/

documents evidencing import of rough diamonds into the country by
the importer, in terms of the Act/Rules/Regulations/Directions issued
in this regard.
! !178
b. In case of an importer entity in the Public Sector or a Department/

Undertaking of the Government of India/State Government/s, AD
Category-I banks may permit the advance remittance subject to the
above conditions and a specific waiver of bank guarantee from the
Ministry of Finance, Government of India, where the advance payments
is equivalent to or exceeds USD 100,000/- (USD one hundred thousand
only).
i. Based on the AD code declared by the importer, the banks shall

download the Bill of Entry (BoE) issued by EDI ports from “BoE
Master” in IDPMS. For non-EDI ports, AD banks of the importer shall
upload the BoE data in IDPMS as per message format “Manual BoE
reporting” on daily basis on receipt of BoE from the customer/
Customs Office.
ii. AD banks will enter BoE details and mark off ORMs as per the
message format “BoE Settlement”
iii. In case of payment after receipt of BoE, the AD bank shall generate
ORM for import payments made by the importer customer as per the
message format “BoE Settlement”
iv. Multiple ORMs can be settled against single BoE and also multiple
BoEs can be settled against one ORM.
7.4.3 Advance Remittance for Import of Aircrafts/Helicopters and

other Aviation-related Purchases
1. As a sector specific measure, entities which have been permitted under

the extant Foreign Trade Policy to import aircrafts and helicopters
(including used/second hand aircraft and helicopters) or any other
person who has been granted permission by the Directorate General of
Civil Aviation (DGCA) to operate Scheduled or Non-scheduled Air
Transport Service (including Air Taxi Services), can make advance
remittance without bank guarantee or an unconditional, irrevocable
Standby Letter of Credit, up to USD 50 million. Accordingly, AD
Category-I banks may allow advance remittance, without obtaining a
bank guarantee or an unconditional, irrevocable Standby Letter of
Credit, up to USD 50 million, for direct import of each aircraft, helicopter
and other aviation related purchases.
! !179
2. Importers of Aircrafts/Helicopters and other Aviation Related Purchases,

not eligible under clause (1) above can make advance remittance
without bank guarantee.
3. The remittances for the transactions at 1 and 2 above shall be subject

to the following conditions:
i. The AD Category-I banks should undertake the transactions based on

their commercial judgment and after being satisfied about the bonafide
of the transactions. KYC and due diligence exercise should be done by
the AD Category-I banks for the Indian importer entity and the overseas
manufacturer company as well.
ii. Advance payments should be made strictly as per the terms of the sale
contract and directly to the account of the manufacturer (supplier)
concerned.
iii. AD Category-I banks may frame their own internal guidelines to deal
with such cases, with the approval of their Board of Directors.
iv. In the case of a Public-Sector Company or a Department/Undertaking of

Central /State Governments, the AD Category-I bank shall ensure that
the requirement of bank guarantee has been specifically waived by the
Ministry of Finance, Government of India for advance remittances
exceeding USD 100,000.
v. Physical import of goods into India is made within six months (three
years in case of capital goods) from the date of remittance and the
importer gives an undertaking to furnish documentary evidence of
import within fifteen days from the close of the relevant period. It is
clarified that where advance is paid as milestone payments, the date of
last remittance made in terms of the contract will be reckoned for the
purpose of submission of documentary evidence of import.
vi. Prior to making the remittance, the AD Category-I bank may ensure
that the requisite in principle approval of the Ministry of Civil Aviation in
case of Scheduled Air Service Operators and in other cases approval of
the Director General of Civil Aviation/Other agencies in terms of the
extant Foreign Trade Policy has been obtained by the company, for
import.
! !180
vii. In the event of non-import of aircraft and aviation sector related

products, AD Category-I bank should ensure that the amount of
advance remittance is immediately repatriated to India.
Prior approval of the concerned Regional Office of the Reserve Bank

will be required in case of any deviation from the above stipulations.
viii.Concerned AD Category-I banks to ensure generation of ORMs, BoE

entries and BoE settlement with the respective ORMs etc. as per extant
IDPMS guidelines
7.4.4 Advance Remittance for the Import of Services
AD Category-I bank may allow advance remittance for import of services

without any ceiling subject to the following conditions:
a. Where the amount of advance exceeds USD 500,000 or its equivalent, a

guarantee from a bank of international repute situated outside India, or
a guarantee from an AD Category-I bank in India, if such a guarantee is
issued against the counter-guarantee of a bank of international repute
situated outside India, should be obtained from the overseas
beneficiary.
b. In the case of a Public-Sector Company or a Department/Undertaking of

the Government of India/State Governments, approval from the Ministry
of Finance, Government of India for advance remittance for import of
services without bank guarantee for an amount exceeding USD 100,000
(USD One hundred thousand) or its equivalent would be required.
c. AD Category-I banks should also follow-up to ensure that the

beneficiary of the advance remittance fulfils his obligation under the
contract or agreement with the remitter in India, failing which, the
amount should be repatriated to India.
13(d) AD Category-I banks should ensure generation of ORMs and marking

off in the IDPMS etc., as per extant IDPMS guidelines.
! !181
7.5 Interest on Import Bills
a. AD Category-I bank may allow payment of interest on usance bills or

overdue interest on delayed payments for a period of less than three
years from the date of shipment at the rate prescribed for trade credit
from time to time.
b. In case of prepayment of usance import bills, remittances may be made

only after reducing the proportionate interest for the unexpired portion
of usance at the rate at which interest has been claimed or LIBOR of the
currency in which the goods have been invoiced, whichever is
applicable. Where interest is not separately claimed or expressly
indicated, remittances may be allowed after deducting the proportionate
interest for the unexpired portion of usance at the prevailing LIBOR of
the currency of invoice.
c. In case of change in value due to (i) or (ii) above, the respective AD

bank should ensure proper remark/indicator is entered for ORM mark off
in IDPMS, etc. as per extant IDPMS guidelines.
7.6 Remittances against Replacement Imports
Where goods are short-supplied, damaged, short-landed or lost in transit

and the Exchange Control Copy of the import licence has already been
utilised to cover the opening of a letter of credit against the original goods
which have been lost, the original endorsement to the extent of the value
of the lost goods may be cancelled by the AD Category-I bank and fresh
remittance for replacement imports may be permitted without reference to
Reserve Bank, provided, the insurance claim relating to the lost goods has
been settled in favour of the importer. It may be ensured that the
consignment being replaced is shipped within the validity period of the
license. AD bank should ensure that proper remark/indicator is entered for
ORM mark off/closure of Bills in IDPMS, etc., as per extant IDPMS
guidelines.
! !182
7.7 Guarantee for Replacement Import
In case replacement goods for defective import are being sent by the
overseas supplier before the defective goods imported earlier are reshipped
out of India, AD Category-I banks may issue guarantees at the request of
importer client for dispatch/return of the defective goods, according to
their commercial judgment.
7.8 Import of Equipment by Business Process Outsourcing

(BPO) Companies for their Overseas Sites
AD Category-I bank may allow BPO companies in India to make

remittances towards the cost of equipment to be imported and installed at
their overseas sites in connection with the setting up of their International
Call Centres (ICCs) subject to the following conditions:
a. The BPO company should have obtained necessary approval from the
Ministry of Communications and Information Technology, Government of
India and other authorities concerned for setting up of the ICC.
b. The remittance should be allowed based on the AD Category-I banks’

commercial judgment, the bonafides of the transactions and strictly in
terms of the contract.
c. The remittance is made directly to the account of the overseas supplier.
d. The AD Category-I banks should also obtain a certificate as evidence of

import from the Chief Executive Officer (CEO) or auditor of the importer
company that the goods for which remittance was made have actually
been imported and installed at overseas sites.
e. The AD Category-I bank should ensure compliance with IDPMS

guidelines as applicable.
! !183
7.9 Receipt of Import Bills/Documents
Concerned AD Category banks to ensure generation of ORMs, BoE entries

and BoE settlement with the respective ORMs in compliance with IDPMS
guidelines as applicable.
7.9.1 Receipt of import documents by the importer directly from

overseas suppliers
Import bills and documents should be received from the banker of the
supplier by the banker of the importer in India. AD Category-I bank should
not, therefore, make remittances where import bills have been received
directly by the importers from the overseas supplier, except in the following
cases:
a. Where the value of import bill does not exceed USD 300,000.
b. Import bills received by wholly-owned Indian subsidiaries of foreign

companies from their principals.
c. Import bills received by Status Holder Exporters as defined in the

Foreign Trade Policy, 100% Export-oriented Units/Units in Special
Economic Zones, Public Sector Undertakings and Limited Companies.
d. Import bills received by all limited companies, viz., public limited,

deemed public limited and private limited companies.
7.9.2. Receipt of import documents by the importer directly from

overseas suppliers in case of specified sectors
As a sector specific measure, AD Category-I banks are permitted to allow

remittance for imports by non-status holder importers up to USD 300,000
where the importer of rough diamonds, rough precious and semi-precious
stones has received the import bills/documents directly from the overseas
supplier and the documentary evidence for import is submitted by the
importer at the time of remittance. Status holder importers as defined in
the Foreign Trade Policy dealing in the import of rough diamonds, rough
precious and semi-precious stones can receive import bills directly from the
suppliers without any ceiling. AD Category-I banks may undertake such
transactions subject to the following conditions:
! !184
a. The import would be subject to the prevailing Foreign Trade Policy.
b. The transactions are based on their commercial judgment and they are
satisfied about the bona fides of the transactions.
c. AD Category-I banks should do the KYC and due diligence exercise and
should be fully satisfied about the financial standing/status and track
record of the importer customer. Before extending the facility, they
should also obtain a report on each individual overseas supplier from
the overseas banker or reputed overseas credit rating agency.
7.9.3. Receipt of import documents by the AD Category-I bank

directly from overseas suppliers
a. At the request of importer clients, AD Category-I bank may receive bills

directly from the overseas supplier as above, provided the AD Category-
I bank is fully satisfied about the financial standing/status and track
record of the importer customer.
b. Before extending the facility, the AD Category-I bank should obtain a

report on each individual overseas supplier from the overseas banker or
a reputed overseas credit agency. However, such credit report on the
overseas supplier need not be obtained
In cases where the invoice value does not exceed USD 300,000
provided the AD Category-I bank is satisfied about the bonafides of the
transaction and track record of the importer constituent.
! !185
7.10 Summary
Import in India is governed by the certain rules and regulation, which are
issued by the import-export governing bodies. Import Export government
authorities decide which items will be imported and which item will be
prohibited. The quantity of goods to be imported and tax imposed on the
imported goods is also under the control of import governing body. Import-
Export governing bodies also play an important role in settling the Foreign
Trade Agreement in matters related to import of goods
There are two departments under the Ministry of Commerce and Industry.
The first one is the Department of Commerce and the second is
Department of Industrial Policy and Promotion. DGFT or Directorate
General of Foreign Trade is a government organisation in India responsible
for the formulation of guidelines and principles for importers as well as
exporters of country. Preparation, formulation and implication of Foreign
Trade Policies are one of the main functions of DGFT. The Central Board of
Excises Customs (CBEC) under Ministry of Finance is the controlling
authority to handle custom duty related matters. CBEC regularly publishes
the "Indian Customs Tariff Guide that provides all types of information on
custom duty rules and regulation in India.
AD Category-I Banks may allow remittance for making payments for

imports into India, after ensuring that all the requisite details are made
available by the importer and the remittance is for bonafide trade
transactions as per applicable laws in force. Except for goods included in
the negative list which require licence under the Foreign Trade Policy in
force, AD Category - I banks may freely open letters of credit and allow
remittances for import. While opening letters of credit, the ‘For Exchange
Control purposes’ copy of the licence should be called for and adherence to
special conditions, if any, attached to such licences should be ensured
In terms of the extant regulations, remittances against imports should be

completed not later than six months from the date of shipment, except in
cases where amounts are withheld towards guarantee of performance, etc.
Deferred payment arrangements (including suppliers’ and buyers’ credit)
upto five years, are treated as trade credits for which the procedural
guidelines as laid down in the Master Circular for External Commercial
Borrowings and Trade Credits may be followed
! !186
AD Category-I banks can consider granting extension of time for

settlement of import dues up to a period of six months at a time
(maximum up to the period of three years) irrespective of the invoice value
for delays on account of disputes about quantity or quality or non-
fulfilment of terms of contract; financial difficulties and cases where
importer has filed suit against the seller. In cases where sector specific
guidelines have been issued by Reserve Bank of India for extension of time
(i.e., rough, cut and polished diamonds), the same will be applicable. An
authorised dealer may, in the ordinary course of his business, give a
guarantee in favour of a non-resident service provider, on behalf of a
resident customer who is a service importer, subject to such terms and
conditions as stipulated by Reserve Bank of India from time to time.
AD Category-I bank may allow advance remittance for import of services

without any ceiling subject to certain conditions: Where the amount of
advance exceeds USD 500,000 or its equivalent, a guarantee from a bank
of international repute situated outside India, or a guarantee from an AD
Category-I bank in India, if such a guarantee is issued against the counter-
guarantee of a bank of international repute situated outside India, should
be obtained from the overseas beneficiary.
In case of prepayment of usance import bills, remittances may be made

only after reducing the proportionate interest for the unexpired portion of
usance at the rate at which interest has been claimed or LIBOR of the
currency in which the goods have been invoiced, whichever is applicable.
Where interest is not separately claimed or expressly indicated,
remittances may be allowed after deducting the proportionate interest for
the unexpired portion of usance at the prevailing LIBOR of the currency of
invoice.
their commercial judgment
Import bills and documents should be received from the banker of the
supplier by the banker of the importer in India. AD Category-I bank should
not, therefore, make remittances where import bills have been received
! !187
directly by the importers from the overseas supplier, except in the following
cases:
a. Where the value of import bill does not exceed USD 300,000.
b. Import bills received by wholly-owned Indian subsidiaries of foreign

companies from their principals.
c. Import bills received by Status Holder Exporters as defined in the

Foreign Trade Policy, 100% Export Oriented Units/Units in Special
Economic Zones, Public Sector Undertakings and Limited Companies.
d. Import bills received by all limited companies, viz. public limited,

deemed public limited and private limited companies.
AD Category-I banks are permitted to allow remittance for imports by non-

status holder importers up to USD 300,000 where the importer of rough
diamonds, rough precious and semi-precious stones has received the
import bills/documents directly from the overseas supplier and the
documentary evidence for import is submitted by the importer at the time
of remittance.
Before extending the facility, the AD Category-I bank should obtain a

report on each individual overseas supplier from the overseas banker or a
reputed overseas credit agency. However, such credit report on the
overseas supplier need not be obtained in cases where the invoice value
does not exceed USD 300,000.
! !188
7.11 Questions
1. Explain the agencies involved in control of Imports in to India?
2. What is Import licence? Who is authority to issue the import licence?
3. Describe the different types of import licences
4. What are the types of evidences that need to submit to AD Category-I

bank for import of goods? Explain
5. What is deferred payment Letter of Credit? Describe
1. Import trade is regulated by the __________ under the Ministry of

Commerce and Industry, Department of Commerce, Government of
India
(a) Reserve Bank of India

(b) Directorate General of Foreign Trade (DGFT)
(c) Directorate of Revenue Intelligence
(d) Enforcement Directorate
2. Who is responsible for issuing IEC or Import Export Code?
(a) AD Bank
(b) RBI
(c) DGFT
(d) IBA
! !189
3. The usance period of Letters of Credit opened for import of gold in any
form including jewellery made of gold/precious metals or/and studded
with diamonds/semi-precious/precious stones should not exceed
__________ days from the date of shipment and only on 100 per cent
cash margin basis
(a) 90 days
(b) 120 days
(c) 180 days
(d) 270 days
4. What is the maximum amount up to which AD banks can approve trade

credit?
(a) USD 10 million

(b) USD 20 million
(c) USD 5 million
(d) No limit.
5. Banks are permitted to allow remittance for imports up to USD

__________ where the importer of rough diamonds, rough precious and
semi-precious stones has received the import bills/documents directly
from the overseas supplier and the documentary evidence for import is
submitted by the importer at the time of remittance
(a) 200,000
(b) 300,000
(c) 500,000
(d) 1000,000
Answer: 1. (b), 2. (c), 3. (a), 4. (b), 5. (b).
! !190
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !191
IMPORT TRADE: REGULATIONS
Chapter 8
Objectives

various Import regulations in this chapter which consist of details on
Import Licences, recently, introduced new IDPMS system for followup of
Import Bills and Payments, receipt of documents merchanting trade, third
party payment by importer and many more information.
Structure
8.1 Introduction
8.2 Import Licence
8.3 Types of Import Licenses
8.4 Imports without Licence
8.5 Detailed Operational Procedures for IDPMS
8.6 Import of Gold, Silver, Platinum, Jewellery, Foreign Exchange, Indian
Currency
8.7 Other Imports
8.8 Import under Foreign Currency Loan/Credit
8.9 Merchanting Trade
8.10 Processing of Import-related Payments through Online Payment
Gateway Service Providers (OPGSPs)
8.11 Settlement of Import Transactions in Currencies not having a Direct
Exchange Rate
8.12 Third Party Payment for Import Transactions
8.13 Summary
8.14 Questions
! !192
8.1 Introduction
Import trade is regulated by the Directorate General of Foreign Trade

(DGFT) under the Ministry of Commerce & Industry, Department of
Commerce, Government of India. Authorised Dealer Category-I (AD
Category-I) banks should ensure that the imports into India are in
conformity with the Foreign Trade Policy in force and Foreign Exchange
Management (Current Account Transactions) Rules, 2000 framed by the
Government of India vide Notification No. G.S.R.381 (E) dated May 3, 2000
and the Directions issued by Reserve Bank under Foreign Exchange
Management Act, 1999 from time to time. AD Category-I banks should
follow normal banking procedures and adhere to the provisions of Uniform
Customs and Practices for Documentary Credits (UCPDC), etc., while
opening letters of credit for import into India on behalf of their
constituents.
Compliance with the provisions of Research and Development Cess Act,

1986 may be ensured for import of drawings and designs.
AD Category-I banks may also advise importers to ensure compliance with

the provisions of Income Tax Act, wherever applicable.
Any reference to the Reserve Bank should first be made to the Regional
Office of the Foreign Exchange Department situated in the jurisdiction
where the applicant person resides, or the firm/company functions, unless
otherwise indicated. If, for any particular reason, they desire to deal with a
different office of the Foreign Exchange Department, they may approach
the Regional Office of its jurisdiction for necessary approval.
8.2 Import Licence
Except for goods included in the negative list which require license under
the Foreign Trade Policy in force, AD Category-I banks are free to open
credit, the ‘For Exchange Control purposes’ copy of the licence should be
called for and special conditions, if any, attached to such licences should be
adhered to. After effecting remittances under the licence, AD Category-I
banks may preserve the copies of utilised licence/s till they are verified by
the internal auditors or inspectors.
! !193
While majority of the goods are freely importable, the current Foreign
Trade Policy of India prohibits import of certain categories of products as
well as conditional import of certain items. In such a situation, it becomes
important for the importer to have an import license issued by the issuing
authorities of the Government of India.
Import License Issuing Authority
In India, Import License is issued by the Director General of Foreign Trade.

DGFT Delhi office is situated in Udyog Bhawan, New Delhi 110011.
Validity of Import License

Import Licenses are valid for 36 months for capital goods and 24 months
for raw material components, consumables and spares, with the license
term renewable. A typical sample of import license consists of two copies
1. Foreign Exchange Control Copy: To be utilised for effecting

remittance to foreign seller or for opening letter of credit
2. Customs Copy: To be utilised for presenting to Customs authority

enabling them to clear the goods. In the absence of custom copy,
import will be declared as an unauthorised import, liable for confiscation
and or penalty.
Categories of Import
All types of imported goods come under the following four

categories:
• Freely importable items: Most capital goods fall into this category. Any
product declared as Freely Importable Item does not require import
licenses.
• Licensed Imports: There are number of goods, which can only be

imported under an import license. This category includes several broad
product groups that are classified as consumer goods; precious and
semi-precious stones; products related to safety and security; seeds,
plants and animals; some insecticides, pharmaceuticals and chemicals;
some electronically items; several items reserved for production by the
small-scale sector; and 17 miscellaneous or special-category items.
! !194
• Canalised Items: There are certain canalised items that can only be
imported in India through specified channels or government agencies.
These include petroleum products (to be imported only by the Indian Oil
Corporation); nitrogenous phosphatic, complex chemical fertilisers (by
the Minerals and Metals Trading Corporation) vitamin-A drugs (by the
State Trading Corporation); oils and seeds (by the State Trading
Corporation and Hindustan Vegetable Oils); and cereals (by the Food
Corporation of India).
• Prohibited items: Only four items tallow fats, animal rennet, wild
animals and unprocessed ivory — are completely banned from
importation.
Category of Importer
Based on product to be imported and its target buyer, importers categories

are divided into three groups for the purpose of obtaining import licensing:
1. Actual Users: An actual user applies for and receives a license to

import of any item for personal use rather than for business or trade
purpose.
2. Registered Exporters: Defined as those who have a valid registration

certificate issued by an export promotion council, commodity board or
other registered authority designated by the Government for purposes
of export-promotion.
3. Others.
The two types of actual user licenses are:
1. General Licenses: This license can be used for the imports of goods
from all countries, except those countries from which imports are
prohibited;
2. Specific Licenses: This license can only be used for imports from a
specific country.
! !195
Custom Inspection
Any violation in the import license is usually scanned by the custom

officials of the custom department. Customer inspector and other custom
officials have authority to inspect and evaluate the goods to be imported.
It’s a part of their job to determine whether imports conform to the
description in the import license or not. Custom official even has right to
charge fines and penalties if any violation in the import license is found to
be done by the importer.
8.3 Types of Import Licenses
Import Licence may be issued on cash basis or on deferred payment basis.

A Cash Licence, i.e., a licence on cash basis is one of which the exchange
control copy does not contain any indication of deferred payment basis.
Accordingly, a remittance against the import has to be effected within six
months from the date of shipment.
Import licence issued for import of capital goods and heavy electrical plants
are valid for 36 months and for others 24 months only. The commodities
subject to export control are as per foreign trade policy (FTP).
1. Open General Licensed Items

While normal items and traded goods like textiles, consumer durables,
Handicrafts, electronics items, Food articles, Drugs, etc., are generally
allowed to be imported and exported by all countries freely without
restrictions.
2. Imports against Specific Import Licenses

Many items like second-hand capital equipment, plant and machinery,
engines, etc., are traded, transferred and imported normally by developing
and underdeveloped economies. Such second-hand machinery and goods
are allowed to be imported into the receiving countries only through
specific license obtained for the said purpose. Such license would set forth
conditions required to be met by the importer to prove the residual life of
the machinery, etc.
Import of Fire Arms and Ammunitions are always covered under specific
licenses in most of the countries.
! !196
3. Import — Quantity Restrictions or Quota

Some countries like USA do allocate quantity restrictions for import of
items like textile on certain countries and exporters would have to adhere
to the quota norms, which are periodically reviewed and amended as
required.
4. Export Licenses
While the domestic industries are engaged in export of some important
natural resources and raw materials like iron and steel, certain kinds of
herbs, etc., Governments control and restrict the export through issuing
Export Licenses.
5. Negative List
Most countries maintain a negative list of items which prohibit import and
export of certain items like animal hides and other wildlife, precious wild
life, livestock, narcotics and many more sensitive items.
When people import or export items into the country without applicable
licenses, do not bring in consignments avoiding customs clearance and
thus, avoid paying duties as well as those items that are prohibited are
brought into the country illegally, such trade is labeled as smuggling.
8.4 Imports without Licence
Free Importability or Open General License (OGL)
As per ITC (HS) classification, there is no terminology called Open General

License (OGL). However, in India, during the EXIM policies of 70s and 80s
the freely imported/exported items were still used to be monitored based
on the licence issued under OGL. Today OGL is no more required.
All these items and the sensitive import items are monitored by Directorate
General of Commercial Intelligence and Statistics (DGCI&S) without the
need of a separate licence. As on date, importability or the exportability of
items in India is classified into three categories namely,
(a) Prohibited items, (b) Restricted items including items reserved for STEs
or requiring permission etc., and (c) Freely importable.
! !197
Some of the categories where Import Licence is not required are:
1. Under Free Importability (Erstwhile OGL) Declaration

2. Private Import
3. Postal Import
4. Import into Bonds
5. Import Through Couriers
1. Under Free Importability (Erstwhile OGL) Declaration

For importing any good in India, a buyer must check the item in the ITC-
HS code to know whether the item is free to import, restricted or
prohibited. Import Export Code Number or IEC number is required for
import under free importability.
2. Private/Personal Import
In general, a personal import is a direct purchase of foreign goods from
overseas mail order companies, retailers, manufacturers or by an individual
for personal use.
There are two types of personal import:
1. Direct Personal Import: An importer himself/herself places orders to

foreign mail order companies, retailers or manufactures and imports
directly from them.
2. Indirect Personal Import: An importer places orders to an import

agent and imports goods via the agent.
In any case, since personal import is direct trade with foreign countries, a
buyer must understand the various rules and regulations while importing
such goods.
Import Export Code Number or IEC number is not required for import of
items for personal use.
! !198
8.4.1 Postal Import
The Rules prescribed for landing and clearing at notified Ports/Airports/

Land Customs Stations of parcels and packets forwarded by the foreign
mails or passenger vessels or airliners are as follows:-
a. The boxes or bags containing the parcels labelled as “Postal Parcel”,

“Parcel Post”, “Parcel Mail”, “Letter Mail” will be allowed to pass at the
Foreign Parcel Department of the Foreign Post Offices and Sub Foreign
Post Offices.
b. On receipt of the parcel mail, the Postmaster hands over to the Customs
the following documents:
i. a memo showing the total number of parcels received from each

country of origin;
ii. parcel bills in sheet form (in triplicate) and the senders’ declarations
(if available) and any other relevant documents that may be required
for the examination, assessment, etc., by the Customs Department;
iii. the relative Customs Declarations and dispatch notes (if any); and
iv. any other information required in connection with the preparation of

the parcel bills which the Post Office is able to furnish.
c. On receipt of the documents, the Customs Appraiser shall scrutinise the

details given in the parcel bill and shall identify the parcels required to
be detained for examination either for want of necessary particulars or
defective description or suspected misdeclaration or undervaluation of
contents. The remaining parcels are to be assessed by showing the
rates of duty on the declarations or parcel bill. For this purpose, the
Appraisers are generally guided by the particulars given in the parcel bill
or Customs declarations and dispatch notes (if any). When any invoice,
document or information is required whereby the real value, quantity or
description of the contents of a parcel can be ascertained, the addressee
may be called upon by way of a notice to produce or furnish such
invoice, document and information.
! !199
d. Whenever necessary, the values from the declarations are entered in the
parcel bill and after conversion into Indian Currency at the ruling rates
of exchange; the amount of duty is calculated and entered. The relevant
copies of parcel bills with the declarations so completed are then
returned to the Postmaster immediately. In case of postal imports, duty
is calculated at the rate and valuation in force on the date that the
postal authorities present a list of such goods to the Customs. In case,
the list is presented before the arrival of the vessel carrying the goods,
the list is deemed to have been presented on the date of the arrival of
the vessel.
e. All parcels marked for detention in the manner indicated above are to
be detained by the Postmaster. Rest of the parcels will go forward for
delivery to the addressee on payment of the duty marked on each
parcel.
f. As soon as the detained parcels are ready for examination, they are
submitted together with the parcel bill to the Customs. After examining
them and filling in details of contents of value in the parcel bills,
Customs note the rate and amount of duty against each item. The
remarks “Examined” is then to be entered against the entry in the
parcel bill relating to each parcel examined by the Customs Appraiser
and the Postmaster’s copies will be returned by the Customs.
g. In the case of receipt of letter mail bags, the Postmaster gets the bags
opened and scrutinised under the supervision of the Customs with a
view to identify all packets containing dutiable articles. Such packets are
to be detained and are presented in due course to the Customs
Appraiser with letter mail bill and assessment memos for assessment.
h. As soon as packets so detained are ready for examination and

assessment, they shall be submitted together with the relative letter
mail bill and assessment memos to the Customs. After examining them
and filling the details of contents of value in the bill, the Customs
Appraiser will note the rate and amount of duty against each item. He
will likewise fill in these details on the assessment memos to be
forwarded along with each packet.
i. All parcels or packets required to be opened for Customs examination

are opened, and after examination, re-closed by the Post Office officials
! !200
and are then sealed by them with a distinctive seal. The parcels or
packets remain throughout in the custody of the Post Office officials.
j. If on examination, the contents of any parcel or packet are found to be

mis declared or the value understated or to consist of prohibited goods,
such parcels or packets must be detained and reported to the Customs
and the Postmaster does not allow such parcels or packets to go forward
without the Customs’ orders.
k. The duties as assessed by the Customs Appraiser and noted in the

parcel bill or letter mail bill shall be recovered by the Post Office from
the addressees at the time of delivery to them. The credit for the total
amount of duty certified by the Customs Appraiser at the end of each
bill is given by the Post Office to the Customs Department in accordance
with the procedure settled between the two Departments.
l. The parcel bills or letter mail bills and other documents on which
assessment is made remain in the custody of the Post Office, but the
duplicates, where these are prepared, are kept in the Customs
Department for dealing with claims for refunds, etc.
Remittance in payment of bills covering such imports may be freely made

by an authorised dealer, provided that the postal receipt is produced or an
undertaking is furnished by importer that he will produce the postal
appraisal or customs assessment certificate within three months from the
date of remittance (Article 25 of UCP 600).
A post receipt or certificate of posting, however named, evidencing receipt

of goods for transport, must appear to be stamped or signed and dated at
the place from which the credit states the goods are to be shipped. This
date will be deemed to be the date of shipment.
8.4.2 Import into Bonds
Goods desired to be exported are sometimes imported from abroad and

instead of being taken delivery of are kept in bonded warehouse till the
export is arranged. For such import into bonds no import licence is needed.
Where bonding facility is desired on importation, the importer or his
representative is required to present to the Customs a Bill of Entry for
warehousing (also known as Into-Bond Bill of Entry) in the prescribed form
! !201
along with relevant documents required. The duties liable are assessed but
not required to be paid. A suitable bond must be executed with the Bond
Section before Customs allow bonding. Once the warehousing bond has
been executed by the importer, the Customs may order the deposit of the
goods in the warehouse. The goods are normally escorted to Bonded
Warehouse if the warehouse is at the same port/airport station where
goods landed. Otherwise these are allowed to be moved under a transit
bond — without escort.
The whole of the bonded goods is to be fully accounted for — by way of

home consumption/export etc. Once all the goods brought under any bond
have been accounted for to the satisfaction of the Customs officer, after
payment of all duties etc., the Customs officer cancels and returns the
bond executed as discharged in full.
Any goods deposited in a warehouse may be stored upto a period of one

year in the Bonded Warehouse. In the case of capital goods intended for
use in any 100% EOU, such goods can however be stored up to a period of
5 years. The warehousing period can be extended by the Commissioner of
Customs for a period of 6 months and by the Chief Commissioner of
Customs for such further period as is deemed fit by him. The importers
should file their applications for extensions well before the expiry of the
initial/extended period of warehousing.
Extensions in warehousing period are not meant to be granted routinely

but only in such cases where the goods must be kept in the warehouse
under circumstances beyond the control of the importer. Lack of finance to
pay the duty is not considered as valid and good ground of seeking
extensions which are otherwise given for short period. In case the
warehoused goods are likely to deteriorate, the Commissioner of Customs
may reduce the one year’s period of warehousing to such shorter period as
he may deem fit.
! !202
8.4.3 Import through Couriers
Import of goods (other than certain specified items) through a registered

courier services is permitted by the present Foreign Trade Policy (FTP)
subject to condition that the value of the consignment does not exceed US
Dollar 100,000. AD Banks may, therefore, allow remittances up to a ceiling
permitted by the government of India from time to time, subject to
production of the courier wrapper and bill of entry by the importer as
evidence of import.
As per article 25 of UCP 600, courier receipt however, named, evidencing

receipt of goods for transport must appear to:
• Indicate the name of the courier service, and stamped or signed by the
named courier service at the place from which the credit states the goods
are to be shipped and
• Indicate the date of pick-up or of receipt or wording to this effect. This

date will be deemed to be the date of shipment
A requirement that courier charges are to be paid or pre-paid may be

satisfied by a transport documents issued by courier service evidencing
that courier charges are for the account of party other than the consignee.
8.4.4 Evidence of Import
• Physical Imports
I n c a s e o f a l l i m p o r t s , i r r e s p e c t i ve o f t h e va l u e o f f o r e i g n
exchange remitted/paid for import into India, it is obligatory on the part of
the AD Category-I bank through which the relative remittance was made,
to ensure that the importer submits:-
a. The importer shall submit BoE number, port code and date for marking
evidence of import under IDPMS.
b. Customs Assessment Certificate or Postal Appraisal Form, as declared

by the importer to the Customs Authorities, where import has been
made by post, or Courier Bill of Entry as declared by the courier
companies to the Customs Authorities in cases where goods have been
! !203
imported through couriers, as evidence that the goods for which the
payment was made have actually been imported into India, or
c. For goods imported and stored in Free Trade Warehousing Zone (FTWZ)
or SEZ Unit warehouses or Customs bonded warehouses, etc., the
Exchange Control Copy of the Ex-Bond Bill of Entry or Bill of Entry
issued by Customs Authorities by any other similar nomenclature the
importer shall submit applicable BoE number, port code and date for
marking evidence of import under IDPMS.
i. In respect of imports on delivery against acceptance basis, AD

Category-I bank shall verify the evidence of import from IDPMS at
the time of effecting remittance of import bill. However, if importers
fail to produce documentary evidence due to genuine reasons such as
nonarrival of consignment, delay in delivery/customs clearance of
consignment, etc., AD bank may, if satisfied with the genuineness of
request, allow reasonable time, not exceeding three months from the
date of remittance, to the importer to submit the evidence of import.
ii. AD banks are required to create Outward Remittance Message (ORM)

for all such outward remittances irrespective of value and shall
perform the subsequent activity viz., document submission, outward
remittance data, matching with ORM, closing of transactions, etc., as
per IDPMS guidelines.
8.5 Detailed Operational Procedures for IDPMS
The operational guidelines are summarised as below:
a. AD banks are required to create Outward Remittance Message (ORM)

for all outward remittance/s for import payments on behalf of their
importer customer for which the prescribed documents for evidence of
import have not been submitted.
b. Creation of ORM for all outstanding outward remittance/s for import

payments need to be completed by banks on or before October 31,
2016, which most of the banks are trying to complete.
! !204
8.5.1 Settlement of ORM with BoE
i. Based on the AD code declared by the importer, the banks shall

download the Bill of Entry (BoE) issued by EDI ports from “BoE Master”
in IDPMS. For non-EDI ports, AD bank of the importer shall upload the
BoE data in IDPMS as per message format “Manual BoE reporting” on
daily basis on receipt of BoE from the customer/Customs office. In order
to enhance the ease of doing business and reduce transaction costs,
submission of hardcopy of evidence of import documents, i.e., BoE
Exchange Control copy has been discontinued with effect from
December 1, 2016 as the same is available in IDPMS. The revised
procedure is as under:
ii. AD banks shall enter BoE details (BoE number, port code and date) for
ORM associated with the advance payments for import transactions as
per the message format “BOE settlement”.
iii. In case of payment after receipt of BoE, the AD bank shall generate
ORM for import payments made by its importer customer as per the
message format “BoE settlement”.
iv. Multiple ORMs can be settled against single BoE and multiple BoE can be
settled against one ORM.
8.5.2 Issue of acknowledgement by AD bank
On settlement of ORM with evidence of import AD Category-I bank shall in

all cases issue an acknowledgement slip to the importer containing the
following particulars:
a. importer’s full name and address with code number;

b. number and date of BoE and the amount of import; and
c. a recap advice on number and amount of BoE and ORM not settled for
the importer.
The importer needs to preserve the printed ‘Importer copy’ of BoE as

evidence of import and acknowledgement slip for future use.
! !205
8.5.3 Extension and Write-off
• AD Category-I banks shall give extension for submission of BoE beyond

the prescribed period in terms of the extant guidelines on the matter, and
the same will be reported in IDPMS as per the message “Bill of Entry
Extension” and the date up to which extension is granted will be
indicated in “Extension Date” column.
• AD Category-I banks can consider closure of BoE/ORM in IDPMS that

involves write off to the extent of 5% of invoice value in cases where the
amount declared in BoE varies from the actual remittance due to
operational reasons and AD bank is satisfied with the reason/s submitted
by the importer.
• AD Category-I banks may close the BoE for such import transactions
where write off is because of quality issues; short shipment or
destruction of goods by the port/Customs/health authorities in terms of
extant guidelines on the matter subject to submission of satisfactory
documentation by the importer irrespective of the amount involved. AD
Bank shall settle and close ORM/BoE with appropriate “Adjustment
Indicator” in IDPMS.
• The above operational guidelines for extension and write off are meant to
facilitate closure of bills in IDPMS and will be subject to extant guidelines
on the matter and not absolve the importer from remitting/receiving the
amount in case of change in circumstances.
• While allowing write-off, AD Category-I banks must ensure that:
a. The case is not the subject matter of any pending civil or criminal
suit;
b. The importer has not come to the adverse notice of the Enforcement
Directorate or the Central Bureau of Investigation or any such other
law enforcement agency; and
c. There is a system in place under which internal inspectors or auditors

of the AD category-I banks (including external auditors appointed by
authorised dealers) should carry out random sample check/
percentage check of write-off of import bills;
! !206
• Extension and write-off cases not covered by the extant guidelines may
be referred to the concerned Regional Office of Reserve Bank of India for
necessary approval.
• The extant instructions and guidelines for Evidence of Import in Lieu of

Bill of Entry will apply mutatis mutandis. The evidence of import in lieu of
BoE in permitted/approved conditions will be created and uploaded by AD
Category-I bank of the importer in the form of BoE data as per message
format “Manual BoE reporting” in IDPMS
8.5.4 Evidence of Import in Lieu of Bill of Entry
i. AD Category-I bank may accept, in lieu of Exchange Control Copy of Bill

of Entry for home consumption, a certificate from the Chief Executive
Officer (CEO) or auditor of the company that the goods for which
remittance was made have actually been imported into India provided:
a. The amount of foreign exchange remitted is less than USD 1,000,000

or its equivalent and
b. The importer is a company listed on a stock exchange in India and

whose net worth is not less than Rs. 100 crore as on the date of its
last audited balance sheet, or, the importer is a public sector
company or an undertaking of the Government of India or its
departments.
ii. The above facility may also be extended to autonomous bodies,

including scientific bodies/academic institutions, such as Indian Institute
of Science/Indian Institute of Technology, etc. whose accounts are
audited by the Comptroller and Auditor General of India (CAG). AD
Category-I bank may insist on a declaration from the auditor/CEO of
such institutions that their accounts are audited by CAG.
iii. Outward Remittance Message has to be created and BoE has to be

downloaded from “BoE Master “in IDPMS (in case of EDI ports). In case
of Non-EDI ports duplicate copy/customs certified copy have to be
submitted or BoE waiver obtained from RBI.
! !207
8.5.5 Non-physical Imports
i. Where imports are made in non-physical form, i.e., software or data

through Internet/Datacom channels and drawings and designs through
e-mail/fax, a certificate from a Chartered Accountant that the software/
data/drawing/ design has been received by the importer, may be
obtained.
ii. AD Category-I bank should advise importers to keep Customs

Authorities informed of the imports made by them under this clause.
8.5.6 Follow-up for Evidence of Import
AD Category-I banks shall continue to follow-up for outward remittance

made for import (i.e. unsettled ORM) in terms of extant guidelines and
instructions on the subject. In cases, where relevant evidence of import
data is not available in IDPMS on due dates against the ORM, AD Category-
I bank shall follow up with the importer for submission of documentary
evidence of import. Similarly, if BoE data is not settled against ORM within
the prescribed period, AD Category-I banks shall follow up with the
importer in terms of extant instructions.
8.5.7 Verification and Preservation
i. Internal inspectors and IS auditors (including external auditors

appointed by AD Category-I bank) should carry out verification and IS
audit and assurance of the “BOE Settlement” process in IDPMS. Data
and process followed by AD Category-I bank for “BOE Settlement”
should be preserved in terms of the guidelines under Cyber Security
Framework in the bank.
ii. Internal inspectors or auditors (including external auditors appointed by

AD Category-I bank) should carry out verification of the documents
evidencing import other than which are available in IDPMS, e.g.,
Exchange Control copies of Postal Appraisal Forms, or Customs
Assessment Certificates, etc.
iii. Documents evidencing import into India should be preserved by AD

Category-I bank for a period of one year from the date of their
verification. However, in respect of cases which are under investigation
! !208
by investigating agencies, documents, and/or data, process may be

destroyed only after obtaining clearance from the investigating agency
concerned.
8.5.8 Follow-up for Import Evidence
i. In case an importer does not furnish any documentary evidence of

import, as required within three months from the date of remittance
involving foreign exchange irrespective of value, the AD Category-I bank
should rigorously follow-up for the next three months, including issuing
registered letters to the importer.
ii. On operationalisation of IDPMS, all outstanding import remittances,

irrespective of the amount involved, will be reported into the system by
banks and submission of a separate BEF statement would be
discontinued from a date, to be notified separately.
8.6 Import of Gold, silver, Platinum, Jewellery, Foreign

Exchange, Indian Currency
8.6.1 Import of Gold
a. The 20:80 scheme of import of gold was withdrawn on November 28,

2014. However, the obligation to export under the 20:80 scheme would
apply to the unutilised gold imported before November 28, 2014.
b. Nominated banks and nominated agencies, as notified by DGFT, are

permitted to import gold on consignment basis. All sale of gold
domestically will, however, be against upfront payment. Nominated
banks are free to grant gold metal loans.
c. Star and Premier Trading Houses (STH/PTH) can import gold on

Document against Payment (DP) basis as per entitlement without any
end use restrictions.
d. The import of gold coins and medallions is permitted. However,

prohibition on sale of gold coins and medallions by banks continues
pending further review.
! !209
Head Offices/International Banking Divisions of AD Category-I banks shall

henceforth submit the following statements under XBRL system from
October 2014 onwards.
(a) Statement on half yearly basis (end March/end September), showing

the quantity and value of gold imported by the nominated banks/ agencies/
EOUs/SEZs in Gems and Jewellery sector, mode of payment-wise.
(b) Statement on monthly basis showing the quantity and value of gold
imports by the nominated agencies (other than the nominated banks)/
EOUs/SEZs in Gems and Jewellery sector during the month under report as
well as the cumulative position as at the end of the said month beginning
from the 1st month of the Financial Year. Both the statements shall be
submitted, even if there is 'Nil' position, by the 10th of the following
month/half year, to which it relates.
8.6.2 Import of Gold Jewellery Including Jewellery Made of

Precious Metals or/and Studded with Diamonds/Precious Stones /
Semi-precious
Suppliers’ and Buyers’ credit (trade credit) including the usance period of
Letters of Credit opened for import of gold in any form, including jewellery
made of gold/precious metals or/and studded with diamonds/semi-
precious/precious stones, should not exceed 90 days from the date of
shipment.
8.6.3 Import of Other Precious Metals
Import of Platinum/Palladium/Rhodium/Silver/Rough, Cut and Polished

Diamonds/Precious and Semi-Precious Stones.
(a)Suppliers’ and Buyers’ Credit, including the usance period of Letters of

Credit opened for import of Platinum, Palladium, Rhodium and Silver
and rough, cut and polished Diamonds, Precious and semi-precious
stones; should not exceed 90 days from the date of shipment.
However, for Clean Credit, i.e., credit given by a foreign supplier to its
Indian customer/buyer, without any Letter of Credit (Suppliers’ Credit)/
Letter of Undertaking (Buyers’ Credit)/Fixed Deposits from any Indian
financial institution for import of rough, cut and polished diamonds,
! !210
precious and semi-precious stones, may be permitted for a period not

exceeding 180 days from the date of shipment.
Further, AD banks may allow extension of time in respect of such clean

credit for import of rough, cut and polished diamonds, for a period
exceeding 180 days from the date of shipment to a maximum period of
180 days beyond the prescribed period/due date beyond which they
may refer the cases to the respective Regional Office of the Reserve
Bank. Such extension by AD banks may be subject to the conditions
such as: (i) AD banks being satisfied of the genuineness of the reason
and bonafides of the transaction and also that no interest payment is
involved for the additional period; (ii) reasons for such extension are
due to financial difficulties and/or quality disputes; (iii) importer is not
under investigation and is not a frequent offender. AD banks may
submit a half yearly report of such extensions allowed customer-wise,
to the respective Regional Office of the Reserve Bank.
b. AD Category-I banks should ensure that due diligence is undertaken and

Know Your Customer (KYC) norms and Anti-money Laundering (AML)
guidelines, issued by the Reserve Bank are adhered to while
undertaking import of the precious metals and rough, cut and polished
diamonds. Further, any large or abnormal increase in the volume of
business should be closely examined to ensure that the transactions are
bonafide and are not intended for interest/currency arbitrage.
8.6.4 Import of Gold/Platinum/Silver by Nominated Banks/

Nominated Agencies
Nominated banks/agencies are permitted to import gold on loan basis,

Suppliers Credit/Buyers Credit basis, consignment basis as also on unfixed
price basis. However, all imports of gold will necessarily have to be on
Documents against Payment (DP) basis. Accordingly, gold imports on
Documents against Acceptance (DA) basis will not be permitted. These
restrictions will however not apply to import of gold to meet the needs of
exporters of gold jewellery. Letters of Credit (LC) to be opened by
Nominated Banks/Agencies for import of gold under all categories will be
only on 100 per cent cash margin basis. It is clarified that, consequent
upon the issue of above instructions, import of gold against suppliers/
buyers credit, as also import of gold on unfixed price basis has to
necessarily observe the discipline stipulated relating to cash margins and
! !211
Documents against Payment (DP) basis. In other words, AD Category-I

Banks are required to ensure that credit in any form or name is not
enabled for import of any form of gold.
8.6.5 Import of Gold/Platinum/Silver on consignment Basis
a. Nominated agencies/premier/star trading houses that have been

permitted by Government of India to import gold and nominated banks
may now import gold on consignment basis only to meet the needs of
exporters of gold jewellery.
b. Platinum and silver may be imported by the nominated agencies/banks

on consignment basis where the ownership will remain with the supplier
and the importer (consignee) will be acting as an agent of the supplier
(consignor). Remittances towards the cost of import shall be made as
and when sales take place and in terms of the provisions of agreement
entered into between the overseas supplier and nominated agency/
bank.
8.6.6 Import of Gold/Platinum/Silver on Unfixed Price Basis
The nominated agency/bank may import gold on outright purchase basis

subject to the condition that although ownership of the gold shall be
passed on to the importer at the time of import itself, the price of gold
shall be fixed later, as and when the importer sells the gold to the users.
These instructions would also apply to import of platinum and silver.
8.6.7. Direct Import of Gold
AD Category-I bank can open Letters of Credit and allow remittances on

behalf of EOUs, units in SEZs in the Gem and Jewellery sector and the
nominated agencies/banks, for direct import of gold, subject to the
following:
i. The import of gold should be strictly in accordance with the Foreign

Trade Policy.
ii. The usance period of LCs opened for direct import of gold, should not
exceed 90 days and on 100 per cent cash margin basis.
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iii. Banker’s prudence should be strictly exercised for all transactions

pertaining to import of gold. AD Category-I bank should ensure that due
diligence is undertaken and all Know Your Customer (KYC) norms and
the Anti-money-Laundering guidelines, issued by Reserve Bank from
time to time are adhered to while undertaking such transactions. AD
Category-I bank should closely monitor such transactions. Any large or
abnormal increase in the volume of business of the importer should be
closely examined to ensure that the transactions are bona fide trade
transactions.
iv. In addition to carrying out the normal due diligence exercise, the
credentials of the supplier should also be ascertained before opening the
LCs. The financial standing, line of business and the net worth of the
importer customer should be commensurate with the volume of
business turnover. Apart from the above, in case of such transactions
banks should also make discreet enquiries from other banks to assess
the actual position. Further, in order to establish audit trail of import/
export transactions, all documents pertaining to such transactions must
be preserved for at least five years.
v. AD Category-I bank should follow-up submission of the Bill of Entry by

the importers as stipulated.
vi. Head Offices/International Banking Divisions of AD Category-I banks

shall submit the following statements to Reserve Bank of India:
a. Statement on half yearly basis (end March/end September) showing

the quantity and value of gold imported by the nominated banks/
agencies/EOUs/SEZs in Gems and Jewellery sector, mode of
payment-wise
b. Statement on monthly basis showing the quantity and value of gold

imports by the nominated agencies (other than the nominated
banks)/EOUs/SEZs in Gems and Jewellery sector during the month
under report as well as the cumulative position as at the end of the
said month beginning from the 1st month of the Financial Year,
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8.6.8 Import of Gold on Loan basis
i. Nominated agencies/authorised banks can import gold on loan basis for

on lending to exporters of jewellery under this scheme.
ii. EOUs and units in SEZ who are in the Gems and Jewellery sector can
import gold on loan basis for manufacturing and export of jewellery on
their own account only.
iii. The maximum tenor of gold loan would be as per the Foreign Trade
Policy 2015-2020, or as notified by the Government of India from time
to time in this regard.
iv. AD bank may open Standby Letters of Credit (SBLC), for import of gold
on loan basis, wherever required, as per FEDAI guidelines. The tenor of
the SBLC should be in line with the tenor of the gold loan.
v. SBLC can be opened only on behalf of entities permitted to import gold

on loan basis, viz. nominated agencies and 100% EOUs/units in SEZ,
which are in the Gems and Jewellery sector.
vi. SBLC should be in favour of internationally renowned bullion banks only.

AD Category-I bank can obtain a detailed list of internationally
renowned bullion banks from the Gems and Jewellery Export Promotion
Council.
vii.All other existing instructions on import of gold and opening of Letters

of Credit, with usance period not exceeding 90 days, will continue to be
applicable.
viii.AD Category-I banks must maintain adequate documentation with them

to uniquely link all imports with the SBLC issued for the import of gold
on loan basis.
ix. The maximum period of gold loan shall be as per the Foreign Trade
Policy 2015-2020 or as notified by the Government of India from time to
time.
! !214
x. Accordingly, the maximum tenor of gold loan becomes 270 days at

present (i.e., 90 days for manufacture and export +180 days for fixing
the price and repayment).
8.6.9 Import of Platinum/Silver on Unfixed Price Basis
The nominated agency/bank may allow import of platinum and silver, on

outright purchase basis subject to the condition that although ownership of
the same shall be passed on to the importers at the time of import itself,
the price shall be fixed later as and when the importer sells to the user.
8.7 Other Imports
8.7.1 Import Factoring
a. AD Category-I bank may enter into arrangements with international

factoring companies of repute, preferably members of Factors Chain
International, without the approval of Reserve Bank.
b. They will have to ensure compliance with the extant foreign exchange
directions relating to imports, Foreign Trade Policy in force and any
other guidelines/directives issued by Reserve Bank in this regard.
8.7.2 Import of Foreign Exchange
A. Import of Foreign Exchange into India
A person,
a. may send into India without limit foreign exchange in any form other
than currency notes, bank notes and travellers cheques;
b. may bring into India from any place outside India without limit foreign
exchange (other than unissued notes) subject to the condition that such
person makes, on arrival in India, a declaration to the Customs
authorities in Currency Declaration Form (CDF). It shall not be
necessary to make such declaration where the aggregate value of the
foreign exchange in the form of currency notes, bank notes or travelers
cheques brought in by such person at any one time does not exceed
US$10,000 (US Dollars ten thousand) or its equivalent and/or the
! !215
aggregate value of foreign currency notes brought in by such person at

any one time does not exceed US$ 5,000 (US Dollars five thousand) or
its equivalent.
B. Import of Indian currency and currency notes
Any person resident outside India, not being a citizen of Pakistan or

Bangladesh, and visiting India,
a. may take outside India currency notes of Government of India and

Reserve Bank of India notes up to an amount not exceeding Rs. 25,000
(Rupees Twenty Five Thousand only) per person
b. may bring into India currency notes of Government of India and Reserve
Bank of India notes up to an amount not exceeding Rs. 25,000 (Rupees
Twenty Five Thousand only) per person
An NRI coming into India from abroad can bring with him foreign exchange
without any limit provided if foreign currency notes, travellers cheques,
Forex plus Card exceed US$ 10,000/ - or its equivalent and/or the value of
foreign currency exceeds US$ 5,000/- or its equivalent, it should be
declared to the Customs Authorities at the Airport in the Currency
Declaration Form (CDF), on arrival in India.
8.7.3 Import of Securities
There are no restrictions on the import in to India of any securities whether

Indian or Foreign. It is however obligatory on the part of a person resident
in India (other than foreign national not permanently residents in India or
persons who have been resident outside India for continuous period of not
less than one year) to obtain the Reserve Bank’s permission to acquire or
hold foreign securities.
! !216
8.8 Import under Foreign Currency Loan/Credit
8.8.1 Trade Credit
Trade Credits refer to the credits extended by the overseas supplier, bank
and financial institution for maturity up to five years for imports into India.
Depending on the source of finance, such trade credits include suppliers’
credit or buyers’ credit. Suppliers’ credit relates to the credit for imports
into India extended by the overseas supplier, while buyers’ credit refers to
loans for payment of imports into India arranged by the importer from
overseas bank or financial institution. Imports should be as permissible
under the extant Foreign Trade Policy of the Director General of Foreign
Trade (DGFT).
8.8.2 Routes and Amount of Trade Credit
The available routes of raising Trade Credit are mentioned below:
• Automatic Route: ADs are permitted to approve trade credit for import
of non-capital and capital goods up to USD 20 million or equivalent per
import transaction.
• Approval Route: The proposals involving trade credit for import of non-
capital and capital goods beyond USD 20 million or equivalent per import
transaction are considered by the RBI.
8.8.3 Maturity prescription
Maturity prescriptions for trade credit are same under the automatic and
approval routes. While for the non-capital goods, the maturity period is up
to one year from the date of shipment or the operating cycle whichever is
less, for capital goods, the maturity period is up to five year from the date
of shipment. For trade credit up to five years, the ab initio contract period
should be 6 (six) months. No roll-over/extension will be permitted beyond
the permissible period.
! !217
8.8.4 Cost of raising Trade Credit

The all-in-cost ceiling for raising Trade Credit is 350 basis points over six
months LIBOR (for the respective currency of credit or applicable
benchmark). The all-in-cost include arranger fee, upfront fee, management
fee, handling/ processing charges, out of pocket and legal expenses, if any.
8.8.5 Guarantee for Trade Credit

AD Category-I banks are permitted to issue guarantee in favour of
overseas supplier, bank or financial institution up to USD 20 million per
import transaction for a maximum period up to one year in case of import
of non-capital goods (except gold, palladium, platinum, rhodium, silver,
etc.). For import of capital goods, the period of guarantee/Letters of Credit/
Letters of Undertaking by AD can be for a maximum period up to three
years. The period is reckoned from the date of shipment and the guarantee
period should be co-terminus with the period of credit. Further, issuance of
guarantees will be subject to prudential guidelines issued by the RBI from
time to time.
8.9 Merchanting Trade
For a trade to be classified as Merchanting Trade following conditions

should be satisfied:
a. Goods acquired should not enter the Domestic Tariff Area, and
b. The state of the goods should not undergo any transformation.
AD Category-I bank may handle bona fide Merchanting Trade Transactions

and ensure that:
a. Goods involved in the transactions are permitted for export/import

under the prevailing Foreign Trade Policy (FTP) of India as on the date of
shipment and all the rules, regulations and directions applicable to
export (except Export Declaration Form) and import (except Bill of
Entry) are complied with for the export leg and import leg, respectively,
b. Both the legs of a Merchanting Trade Transaction are routed through the
same AD bank. The bank should verify the documents like invoice,
packing list, transport documents and insurance documents (if originals
are not available, non-negotiable copies duly authenticated by the bank
! !218
handling documents may be taken) and satisfy itself about the

genuineness of the trade.
c. The entire Merchanting Trade Transactions should be completed within

an overall period of nine months and there should not be any outlay of
foreign exchange beyond four months.
d. The commencement of Merchanting Trade would be the date of

shipment/export leg receipt or import leg payment, whichever is first.
The completion date would be the date of shipment/export leg receipt or
import leg payment, whichever is the last;
e. Short-term credit either by way of suppliers' credit or buyers' credit will

be available for Merchanting Trade Transactions, to the extent not
backed by advance remittance for the export leg, including the
discounting of export leg LC by an AD bank, as in the case of import
transactions;
f. In case advance against the export leg is received by the Merchanting

Trader, AD bank should ensure that the same is earmarked for making
payment for the respective import leg. However, AD bank may allow
short-term deployment of such funds for the intervening period in an
interest-bearing account;
g. Merchanting Traders may be allowed to make advance payment for the

import leg on demand made by the overseas seller. In case where
inward remittance from the overseas buyer is not received before the
outward remittance to the overseas supplier, AD bank may handle such
transactions by providing facility based on commercial judgement. It
may, however, be ensured that any such advance payment for the
import leg beyond USD 200,000/- per transaction, should be made
against Bank Guarantee/LC from an international bank of repute, except
in cases and to the extent where payment for export leg has been
received in advance;
h. Letter of Credit to the supplier is permitted against confirmed export

order keeping in view the outlay and completion of the transaction
within nine months;
! !219
i. Payment for import leg may also be allowed to be made out of the
balances in Exchange Earners Foreign Currency Account (EEFC) of the
Merchant Trader.
j. AD bank should ensure one-to-one matching in case of each

Merchanting Trade transaction and report defaults in any leg by the
traders to the concerned Regional Office of RBI, on half yearly basis
within 15 days from the close of each half year, i.e. June and December.
k. Defaulting Merchanting Traders, whose outstanding reach 5% of their

annual export earnings, would be caution-listed.
l. The KYC and AML guidelines should be observed by the AD bank while
handling such transactions.
Merchanting Traders must be genuine traders of goods and not mere

financial intermediaries. Confirmed orders must be received by them from
the overseas buyers. AD banks should satisfy themselves about the
capabilities of the Merchanting Trader to perform the obligations under the
order. The overall Merchanting Trade should result in reasonable profits to
the Merchanting Trader.
8.9.1 Merchanting trade to Nepal and Bhutan
As Nepal and Bhutan are landlocked countries, there is a facility of transit

trade whereby goods are imported from third countries by Nepal and
Bhutan through India under the cover of Customs Transit Declarations in
terms of the Government of India Treaty of Transit with these two
countries. In consultation with Government of India, it is clarified herein
that goods consigned to the importers of Nepal and Bhutan from third
countries under merchanting trade from India would qualify as traffic-in-
transit, if the goods are otherwise compliant with the provisions of the
India-Nepal Treaty of Transit and Indo-Bhutan Treaty of Transit
respectively.
! !220
8.10 Processing of import-related payments through

Online Payment Gateway Service Providers (OPGSPs)
AD Category-l banks have been permitted to offer facility of payment for

imports of goods and software of value not exceeding USD 2,000 by
entering into standing arrangements with the OPGSPs subject to the
following:
a. The balances held in the Import Collection account shall be remitted to

the respective overseas exporter's account immediately on receipt of
funds from the importer and, in no case, later than two days from the
date of credit to the collection account.
b. The AD Category-I bank will obtain a copy of invoice and airway bill
from the OPGSP containing the name and address of the beneficiary as
evidence of import and report the transaction in R-Return under the
foreign currency payment head.
c. The permitted credits in the OPGSP Import Collection account will be
• collection from Indian importers for online purchases from overseas

exporters electronically through credit card, debit card and net banking
and
• charge back from the overseas exporters.
d. The permitted debits in the OPGSP Import Collection account will be
• payment to overseas exporters in permitted foreign currency;

• payment to Indian importers for returns and refunds;
• payment of commission at rates/frequencies as defined under the
contract to the current account of the OPGSP; and
• bank charges
! !221
8.11 Settlement of Import transactions in currencies not

having a direct exchange rate
To further liberalise the procedure and facilitate settlement of import

transactions where the invoicing is in a freely convertible currency and the
settlement takes place in the currency of the beneficiary, which though
convertible, does not have a direct exchange rate, it has been decided that
AD Category-I banks may permit settlement of such import transactions
(excluding those put through the ACU mechanism), subject to conditions as
under:
a. Importer shall be a customer of the AD Bank,

b. Signed contract/invoice is in a freely convertible currency,
c. The beneficiary is willing to receive the payment in the currency of
beneficiary instead of the original (freely convertible) currency of the
invoice/contract, Letter of Credit as full and final settlement,
d. AD bank is satisfied with the bonafides of the transactions, and
e. The counterparty to the importer of the AD bank is not from a country
or jurisdiction in the updated FATF Public Statement on High Risk and
Non-co-operative Jurisdictions on which FATF has called for counter
measures.
8.12 Third Party Payment for Import Transactions
AD category-I banks are allowed to make payments to a third party for

import of goods, subject to conditions as under:
a. Firm irrevocable purchase order/tripartite agreement should be in place.

However, this requirement may not be insisted upon in case where
documentary evidence for circumstances leading to third party
payments/name of the third party being mentioned in the irrevocable
order/invoice has been produced.
b. AD bank should be satisfied with the bonafides of the transactions and

should consider the Financial Action Task Force (FATF) Statement before
handling the transactions;
c. The Invoice should contain a narration that the related payment has to
be made to the (named) third party;
! !222
d. Bill of Entry should mention the name of the shipper as also the
narration that the related payment has to be made to the (named) third
party;
e. Importer should comply with the related extant instructions relating to

goods.
8.13 Summary
Import trade is regulated by the Directorate General of Foreign Trade

(DGFT) under the Ministry of Commerce and Industry, Department of
Commerce, Government of India in conformity with the Foreign Trade
Policy in force and Foreign Exchange Management (Current Account
Transactions) Rules, 2000 framed by the Government of India. Banks are
following normal banking procedures and adhere to the provisions of
Uniform Customs and Practices for Documentary Credits (UCPDC), etc.
while handling letters of credit for import into India on behalf of their
constituents. Taxation related matters are looked after by Central Board of
Direct Taxes though Customs.
The Ministry of Commerce and Industry is the nodal authority for

formulating and implementing the foreign trade policy in matter related to
Import. DGFT or Directorate General of Foreign Trade is a government
organisation in India responsible for the formulation of guidelines and
principles for importers as well as exporters of country. Preparation,
formulation and implication of Foreign Trade Policies are one of the main
functions of DGFT. Apart from Foreign Trade Policy, DGFT is also
responsible for issuing IEC or Import Export Code. The Central Board of
Excises Customs (CBEC) under Ministry of Finance is the controlling
authority to handle custom duty related matters.
Except for goods included in the negative list which require license under
the Foreign Trade Policy in force, AD Category-I banks are free to open
credit, the ‘For Exchange Control purposes’ copy of the license should be
called for and special conditions, if any, attached to such licences should be
adhered to. In India, Import License is issued by the Director General of
Foreign Trade (DGFT). Import Licenses are valid for 36 months for capital
goods and 24 months for raw materials components, consumable and
! !223
spares. Depending up on category of importers, import licences are issued.

Import License may be issued on cash basis or on deferred payment basis.
A Cash License, i.e., a license on cash basis is one of which the Exchange
control copy does not contain any indication of deferred payment basis.
There are mainly five types of imports according to which import license is
issued. The types of import are Free Importability, Imports against Specific
Import Licenses, Import – Quantity Restrictions or Quota, Export Licenses
and under Negative List. In general a personal import is a direct purchase
of foreign goods from overseas mail order companies, retailers,
manufacturers or by an individual for the purpose of personal use. Import
Export Code Number or IEC number is not required for import of items for
personal use. Postal Import, import into bond and import through couriers
are permitted with specified limit for specified category.
AD Category-I banks shall continue to follow-up for outward remittance

made for import (i.e. unsettled ORM) in terms of extant guidelines and
instructions on the subject. In cases where relevant evidence of import
data is not available in IDPMS on due dates against the ORM, AD Category-
I bank shall follow-up with the importer for submission of documentary
evidence of import. Similarly, if BoE data is not settled against ORM within
the prescribed period, AD Category-I banks shall follow up with the
importer in terms of extent instructions.
In respect of Import of Gold, Silver, Platinum, Jewellery, Foreign Exchange,

Indian Currency there are certain restrictions on import and should be
followed strictly.
In case of normal import of goods Import bills and documents should be

received from the banker of the supplier by the banker of the importer in
India. Bank should not make remittances where import bills have been
received directly by the importers from the overseas supplier, except where
the value of import bill does not exceed USD 300,000. As a sector specific
measure, banks are permitted to allow remittance for imports up to USD
300,000 where the importer of rough diamonds, rough precious and semi-
precious stones has received the import bills/documents directly from the
overseas supplier and the documentary evidence for import is submitted by
the importer at the time of remittance. Bank may receive bills directly from
the overseas supplier as above, provided the bank is fully satisfied about
the financial standing/status and track record of the importer customer.
! !224
Trade Credits’ (TC) refer to credits extended for imports directly by the
overseas supplier, bank and financial institution for maturity of less than
three years.
In respect of Acquisition of Foreign Currency/Exchange Authorised Persons

may release foreign exchange for travel purposes on the basis of a
declaration given by the traveler regarding the amount of foreign exchange
availed of during the financial year. Out of the overall foreign exchange
being sold to a traveler, exchange in the form of foreign currency is
permitted up to USD 3000 or equivalent. The maximum period to
surrender received/realised/unspent/unused foreign exchange to an
Authorised Person is within 180 days from the date of receipt/ realisation/
purchase/acquisition/date of return of the traveler. The returning traveler
can retain with unspent foreign currency with him up to equivalent of USD
2000 and foreign coins without any ceiling beyond 180 days.
While opening the letters of credit banks are expected to observe the rules
and regulations framed under FEMA, Guidelines issued by RBI, respective
banks internal policy and practices followed in international trade. A
deferred payment letter of credit differs from a sight draft or time draft in
that no drafts are involved but the payment is guaranteed on the stated
date. However, there being no draft, the beneficiary party's ability to
discount or sell his or her right to payment is restricted, also called usance
letter of credit.
AD Category-l banks have been permitted to offer facility of payment for

imports of goods and software of value not exceeding USD 2,000 by
entering into standing arrangements with the OPGSPs.
AD Category-I banks are allowed to make payments to a third party for

import of goods, subject to certain conditions.
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8.14 Questions
1. Name the authorities involved in the import trade control.

2. Describe the different types of import licences.
3. What is open general licensed Items?
4. Write short notes on Private/personal imports.
5. What are the types of evidences that need to submit to AD Category -1
bank for import of goods? Explain
6. What is deferred payment letter of credit? Describe.
1. As per ITC (HS) classification, is there any terminology called Open

General License (OGL) exists now? (Yes/No)
(a) Yes
(b) No
2. Import Licenses is valid for __________ months for capital goods and
24 months for raw materials components, consumable and spares. (fill
in the blanks)
(a) 18 months
(b) 24 months
(c) 36 months
(d) 12 months
3. Any goods deposited in a warehouse may be stored upto a period of

__________ year in the Bonded Warehouse.
(a) 2 years
(b) 1 year
(c) 3 years
4. In the import of gold on unfixed price basis ownership of the gold is

passed on to
(a) Seller/supplier
(b) Importer
(c) Nominated agency
(d) Banks nominated by RBI
! !226
5. An unspent foreign exchange brought back to India by a resident

individual should be surrendered to an Authorised Person within
__________ days from the date of return of the traveller
(a) 90
(b) 120
(c) 180
(d) 360
Answers: 1. (b), 2. (c), 3. (b), 4. (a), 5. (c).
! !227
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !228
DOCUMENTARY CREDIT: METHOD OF FINANCING IMPORT
Chapter 9
Documentary Credit:
Method Of Financing Import
Objectives

detailed information of documentary credit (Letter of Credit). This also
includes Policy Provisions, Parties involved in documentary credit and
different types of documentary credits used by importers worldwide.
Structure
9.1 Introduction
9.2 Barriers to International Trade
9.3 Important Policy Provisions
9.4 Various Methods for Financing of Imports by an Importer
9.5 Import Letter of Credit
9.6 Parties to Import Letter of Credit
9.7 Types of Letters of Credit
9.8 Summary
9.9 Questions
! !229
9.1 Introduction
The need of developing countries for imports cannot be overemphasised,

as they require the essential goods and basic infrastructure to meet the
basic aspiration of their people and build up their economies. The
developed countries look upon developing countries as a source of cheap
raw materials, labour and a vast market for their products. The
globalisation and liberalisation have opened new vistas for international
trade. Ideally speaking, there should be no barriers to international trade.
However, due to difficulties in balance of payment and paucity of foreign
reserves and as a measure of protection to domestic industry, various
types of quantitative and tariff barriers are imposed to curb imports by
countries. The advent of World Trade Organisation (WTO) has made various
provisions for removal/reduction of such barriers in a phased manner, with
a view to open up the economies and free flow of goods and services.
• Import trade in India is regulated by the Directorate General of Foreign

Trade (DGFT) under the Ministry of Commerce and Industry, Department
of Commerce, Government of India.
• Authorised Dealer Category-I (AD Category-I) banks are directed to

ensure that the imports into India are in conformity with the Foreign
Trade Policy in force and Foreign Exchange Management (Current
Account Transactions) Rules, 2000 framed by the Government of India
and the Directions issued by Reserve Bank under FEMA from time to
time.
• Banks are directed to follow normal banking procedures and adhere to

the provisions of Uniform Customs and Practices for Documentary Credits
(UCPDC), etc., while opening letters of credit for import into India on
behalf of their constituents.
• Compliance with the provisions of Research and Development Cess Act,

1986 may be ensured for import of drawings and designs
• Advise importers to ensure compliance with the provisions of Income Tax

Act, wherever applicable
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For the Country it is necessary to restructure the level of imports to the

level of available foreign Exchange and bring the economy of the country in
the line with global economy as under:
1. Accelerate countries transition to globally-oriented vibrant economy by

deriving maximum benefit from expanding global markets opportunities
2. To stimulate sustained economic growth by providing access to essential

raw material , components, consumables, etc.
3. To enhance the technological strength and efficiency of Indian

agriculture industry and services thereby increasing competitive
strength while generating new employment opportunities
4. To provide consumers with good quality products
9.2 Barriers to International Trade
Trade barriers are government-induced restrictions on international

trade. The barriers can take many forms, including the following:
Tariffs: A tariff is a taxed placed on imports (goods coming into the

country). It must be paid before goods can be taken of a ship. (Makes
foreign products more expensive.) So if the government wants to protect
domestic (us) businesses, what should it do to this tariff? The answer is
they should increase it because this makes it less profitable buying from
overseas producers. Very Dangerous! This action by the government is also
known as a protectionist trade policy
• Non-tariff barriers to trade
Import quotas:
Quota: (or maximum amount) A quota has the same effect on imports.
Instead of imposing a tax on imports the government sets a LOW quota on
imports/exports. So, only a limited amount of imports can come into/out of
the country. So if the government wants to protect domestic businesses,
what should it do to this quota? They should decrease it because this
makes a limited amount of imports in the country, which will increase the
! !231
price of those imports. Very dangerous! This action by the government is

also known as a protectionist trade policy
Embargo: An embargo shuts down all imports from a country. Instead of

imposing a tax on imports the government sets a quota (or maximum
amount) on imports. So, only a limited amount of imports can come into
the country. So if the government wants to protect domestic businesses,
should it enact an embargo? Answer: no. because this will cause less
competition since there are fewer imports, thus possibly increasing the
price of domestic items. Americans will reduce spending and domestic
businesses may suffer. This action by the government is also known as a
protectionist trade policy
Most trade barriers work on the same principle: the imposition of some sort
of cost on trade that raises the price of the traded products. If two or more
nations repeatedly use trade barriers against each other, then a trade
war results.
Economists generally agree that trade barriers are detrimental and

decrease overall economic efficiency, this can be explained by the theory of
comparative advantage. In theory, free trade involves the removal of all
such barriers, except perhaps those considered necessary for health or
national security.
9.3 Important Policy Provisions
IEC Number: Every Importer-Exporter has to obtain all Importer Exporter

Code Number (IEC) from the DGFT. Custom authorities will not allow any
person to import or export goods into or from India unless he holds a valid
IEC.
Categories of Importers: For the purpose of licensing, importers are

divided into following broad categories:
Actual Users — Industrial or Non-industrial
Exporters holding registration-cum-membership certificate (RCMC).
Country of Import: Unless otherwise specifically provided import/export

will be valid from/to any country. Thus, the imports can be made from any
! !232
country in the world excepting those countries against which trade ban is
imposed by trade control authorities.
Valid Import: Import is defined as bringing into India of any item by sea,
land or air. Import is considered as valid if it fulfils among other things, the
following conditions:
The item is not included in the prohibited list or is covered by an import

licence/customs clearance permit, wherever required.
• The description, value and the quantity of the imported goods are in
accordance with the licence/custom clearance permit, wherever
applicable.
• The shipment/despatch of goods from the supplying country take place

within the validity period of the licence/custom clearance permit.
• The terms and conditions contained in the licence/customs clearance

permit and the foreign trade policy and procedures in regard to the items
and other connected matters are fulfilled.
Import Licence: Import licence means a licence granted specifically for

import of goods which are subject to import control. Import licences are
issued by Central Government or any other officer authorised under the Act
or under the policy. Import of goods under a licence granted would be
subject to conditions listed in the licence and also to the provisions of
Foreign Trade Policy.
The imports can mainly be categorised as under:
• Free Importability: (Erstwhile Open General Licence (OGL): Under this

import of goods is permitted without any licence.
• Restricted List: Certain consumer goods, security and related items,

seeds, plants and animals, chemicals/drugs etc., allowed to be imported
or exported on a restricted basis are included in the restricted list.
• Negative List: Items listed in this category are not allowed to be

imported or exported.
! !233
• Advance Licence: An advance licence is granted to a merchant or

manufacturer exporter for the manufacture of export goods without
paying the basic customs duty. Advance licences are issued to regular
exporters on the basis of production programme and specific export
orders in accordance with the procedures laid down in the policy.
(Foreign Trade Policy 2015-2020.)
• Duty free replenishment certificate: Duty free replenishment

certificate is issued to a merchant exporter or manufacturer exporter for
the import of inputs used in the manufacture of goods without payment
of basic customs duty, surcharge, etc.
9.4 Various Methods for Financing of Imports by an

Importer
For financing import, banks generally allow Import Letter of Credit facility
to their customers. While allowing import finance it is necessary for banks
to ensure that the imports which are proposed to be financed are made as
per the prevailing policies/exchange control and trade regulations
conditions of respective licence.
• Import Letter of Credit

• Buyers Credit/Suppliers Credit
• Forfeiting
• Counter Trade
• International Leasing
Details regarding buyers credit, suppliers credit, forfeiting center trade and
international leasing are separately discussed in chapter 11 under ‘Other
Methods of Import Financing’ as this chapter specifically deals with
documenting credit.
! !234
9.5 Import Letter of Credit
A Letter of credit is an instrument of settling trade payment which ensures

making payment for the goods against documents for title to goods or
otherwise. It is an agreement whereby a bank (issuing bank), acting at the
request of a customer, undertakes to pay a third party by a given date
according to the agreed stipulations and against presentation of
documents, the counter value of the goods or services dispatched/
supplied/rendered or otherwise.
Import letter of credit forms an integral part of International Trade. A

contract between an importer and an exporter may call for payment under
a letter of credit, often abbreviated as LC, put it simply it is a:
• Written assurance of a bank (the issuing bank);

• Given to the seller (the beneficiary);
• On instructions from the buyer;
• To effect payment (i.e., by making a payment, or by accepting or
negotiating bills of exchange);
• Up to a stated sum of money;
Provided the seller presents specified documents.
The Import Letter of Credit provides comfort to both the buyer and the
seller who are in different countries. The import letter of credit also
provides comfort to the financing institutions:
• When resident in India wants to import goods into India.
• When resident merchant trader (known as intermediary) is purchasing

goods from one country for sale to another country, for the purpose of
merchant trade.
• When an Indian exporter who is executing a contract abroad requires

importing goods from a third country to the country where he is
executing the contact.
! !235
9.5.1 Import letter of credit as a method of Import Finance
• How does a letter of credit works?
Import finance by way of import LC facility involves various stages as

under:
I. Sanction of Limits
As per exchange control guidelines, banks are expected to open import

letters of credit for their own clients who are regularly dealing with them
and who are known to be participating in the trade. Hence, selection of a
client must be discrete. Banks can obtain the following information to
establish the bonafides of the importer: The importer-exporter code
number allocated by DGFT is required to establish LC which ensures
importer is registered importer.
Details of their industrial licence, DGTD Registration, SSI Registration,

Registration Certificate issued by trade bodies, R&D Recognition Certificate,
Food and Drug Administration Department Licence, Registration Certificate
under Shops and Establishment etc., as applicable. This would not only
establish their bonafides but also help determine their eligibility for import,
particularly of imports subject to ‘Actual user’ conditions.
After client selection, the facilities required should be assessed taking the
same precautions as would be taken for fund based facilities keeping in
view the credit guidelines of RBI. Normally, import letter of credit facilities
will be assessed considering factors like production trading capacity of the
unit, its import requirements, time taken by suppliers for shipment, time
involved in movement of goods, credit period offered by suppliers etc.
Extra care should be taken while sanctioning facilities on DA basis or for

import of capital goods. Wherever required, adequate margins (particularly
in case of DA facilities, and facilities to traders) should also stipulated. As
per exchange control regulations, banks stipulates margin monies from
third parties at their discretion, ensuring that the applicant will be in a
position to retire/pay the bills and be able to clear the goods by payment of
dues.
! !236
II. Documentations
After the limits are sanctioned, banks normally obtain main security
documents like guarantee from borrower/sureties, execution of pledge/
hypothecation agreements, obtaining of collateral securities etc., as per the
sanctioned terms. This documentation is in addition to the individual credit
application-cum-agreement taken at the time of opening the letter of
credit.
III. Application by Importer
Once the exporter and importer have concluded a transaction that calls for
payment under some form of letter of credit, the importer makes
application for the credit to the bank mentioning:
• The full particulars of the beneficiary (exporter);
• Brief description of goods involved including the quantity, quality and the
unit price;
• The method, place and form of shipment, location or the final destination
and other shipping issues;
• The full correct description of the documents required including period of

time in which they must be presented;
• Details of letter of credit itself including the amount, expiry date etc.
• Other relevant particulars, if any.
IV. Letter of Credit Application
At the time of opening letter of credit the applicant needs to give an

application-cum-agreement. FEDAI has evolved a standard credit
application format for adoption by banks based on ICC standard credit
application with suitable modifications to suit Indian situations. It has the
main application and an agreement part. The application, being a request-
cum-agreement to open a letter of credit, has to be affixed with necessary
stamp duty. Some of the banks supply printed and stamped formats to
applicants, they only need to ensure that applicants fill in all details
! !237
properly and sign them. Along with the application, the importer needs to
give:
• The underlying sales contract which forms the basis for opening the letter
of credit.
• Exchange control copy of import licence(s) or a declaration stating that

the goods are not covered under negative lists etc.
• Insurance Policy/Cover Note if insurance are being covered locally.
V. Scrutiny of Letter of Credit Application by Bank:
The application must be filled in all respects without inconsistencies and

ambiguities. The documents and conditions requested for should be in
accordance with the underlying sales contract and the provisions of Trade
and Exchange Control Regulations. The application being also an
agreement must be verified with reference to specimen signatures lodged
with the bank.
Opening of import LCs involve compliance of instructions/

guidelines as under:
1. Import Trade Control

2. Exchange Control
3. Credit Norms of RBI
4. FEDAI and UCP Provisions
5. Banking Internal Procedure and Practices.
1. Import Trade Control

Trade Control lays down the policy and regulations relating to physical
movements of goods into India. Since letter of credit envisages payment
for goods being brought into the country, the first step a banker needs to
ensure is whether the goods concerned can be physically brought into India
or not as per the current Foreign Trade Policy. He can proceed with the
opening of an import letter of credit when the answer to this crucial aspect
is in the affirmative. A person who wishes to open an import letter of credit
must have the basic authorisation for import of goods.
! !238
2. Exchange Control
The scope of exchange control is to oversee the payments and receipts by
residents to non-residents and vice versa. Import Letter of Credit to be
opened by a bank is to effect settlement of payment due by the Indian
importer (resident) to the overseas supplier (non-resident). Hence, the
opening of letter of credit automatically falls under the purview of
exchange control and payment authorised or committed under the letter of
credit must be within the scope of exchange control guidelines. The scope
of these regulations is in addition to the guidelines of trade control and
covers basically the methods of payment, time limit etc.
3. Credit Norms of RBI

Opening of a letter of credit is undertaking a payment commitment on
behalf of the applicant. Hence, it amounts to extension of credit to the
applicant, which should naturally be within the credit norms prescribed by
RBI, if any. Though, a letter or credit facility is a non-funded credit facility,
it has the potential to turn to funded facility, if the applicant does not
reimburse the bank at the appropriate time (on presentation of documents
or on due date). Further, as per credit norms extending usance (DA) letter
of credit facilities tantamount to substitution of funded facilities (in other
words, extending the funded facility). In the light of these, RBI has advised
all banks to assess the facilities of import letter of credit requirements like
any other normal credit assessment. Other aspects to be kept in view by
banks while sanctioning import letters of credit facility are:
a. If the facility is to cover import of commodities covered by selective

credit control, the guidelines of selective credit control (mainly relating
to margin requirements and quantum of facilities sanctioned) must be
complied with.
b. When the import letter of credit facility is to cover import of capital

goods, banks must ensure availability of adequate long-term funds for
value of import and customs duties thereon. Banks must asses and
extend the facility with all the precautions that are taken for granting of
a term loan or Deferred Payment Guarantee (DPG).
c. When import letter of credit facility is granted on DA basis the usance

period allowed (after taking into account the time taken for movement
and clearance of goods etc.) should be within the period of inventory
! !239
norms suggested by RBI (wherever applicable) or the reasonable period

required by the unit concerned.
d. Though import letter of credit facilities are non-funded facilities, banks

are advised to assess the requirements like funded facilities and to
ensure that borrowers are/will be in a position to honour their
commitments as and when they fall due.
4. FEDAI and UCPDC Provisions

Foreign Exchange Dealers Association of India, which is an apex forum of
banks authorised to deal in foreign exchange, issues guidelines at the
instance or with the concurrence of RBI for safe and smooth conduct of
various foreign exchange operations. Import letters of credit being one of
the important areas of FX operations, fall within the scope of their
guidelines. In 1984, on the eve of introduction of 1983 Revision of UCPDC,
FEDAI issued detailed guidelines for the opening of Import Letters of Credit
by banks in India. Standard formats of credit application and letter of
credit to be opened by banks was also circulated for the information and
adoption by banks. With a few modifications/additions are still in vogue
and are to be followed by Authorised Dealers (A.D.).
5. Bank’s Internal Procedures & Practices:

All banks will normally have their own internal procedures for carrying out
foreign exchange operations, particularly a facility like import letter of
credit which involves a credit decision. RBI has also advised banks to issue
internal guidelines, covering various FX areas of operation to their staff at
various levels. These guidelines cover certain decision making discretionary
powers at appropriate levels in areas like determining the value limit
beyond which credit reports on beneficiaries are to be obtained, waiver of
standard conditions of letters of credit to suit specific requirements of
customers etc. All staff members dealing with import letters of credit must
follow such internal guidelines of the bank concerned in the interest of, not
only the bank, but also the overall interests of exchange control.
6. Establishment and Operation of LC

Upon approval of the credit application by the issuing bank, the letter of
credit is advised to the exporter, usually through another bank known as
advising bank. Once the importer and exporter are satisfied that the credit
is operable, the exporter ships against the original item contract, and
presents the required documents and a draft (the instrument by which the
! !240
exporter directs the importer to make payment) to the confirming,

correspondent or issuing bank, as the case may be. Upon checking the
documents for accuracy, the bank(s) passes the documents onto the
importer and makes payment against the draft to the exporter.
In case of delay in payment of the amount of documents by the importer,

the banks pay the amount by allowing import advance in the name of the
importer in the form of Advance Bills (AB) and/or Import Loans.
Sometimes, banks may also allow advance to importers for payment of
custom duty for clearance of goods from customs and/or for clearance and
trans-shipment of goods in the form of import loan. Usual precautions as
are applicable for domestic advances are taken for monitoring follow up for
such import loans.
9.6 Parties to Import Letter of Credit
Let us now understand various parties to an import LC and some important

kinds of LCs generally used in international trade.
1. Applicant, i.e., the importer (the buyer of goods), who has to make
payment to the beneficiary.
2. Beneficiary, i.e., the seller of goods, the party in whose favour the
letter of credit is opened.
3. Issuing Bank, i.e., the banker of the importers/buyers, which

established the ILC.
4. The Advising Bank, i.e., the bank situated in beneficiary country,

which advises the LC to the beneficiary (Art.9).
5. The Negotiating Bank, i.e., the bank authorised by the opening bank
to pay, to incur a deferred payment undertaking to accept draft(s) or to
negotiate (Art.2).
6. The Reimbursing Bank, i.e., the bank which is authorised to honour

the reimbursement claim in settlement of the negotiation/payment/
acceptance lodged by the negotiating bank. This is the bank with which
the issuing bank maintains its account (Art.13).
! !241
7. Confirming Bank, i.e., the bank that adds its guarantee to LC opened
by another bank, and thereby undertaking responsibility to pay/
negotiate/accept the documents under the credit, in addition to the
prime responsibility of the issuing bank (Art.8).
However, parties associated with Letters of credit can be broadly grouped/

classified into the following groups:
• Commercial Parties: Applicant, beneficiary or second beneficiary.
• Banks: Issuing bank, advising bank, confirming bank, nominated bank

or reimbursing bank.
The issuing bank is located in the buyer’s country and acts on behalf of the
buyer. Other banks are located in the seller’s country and perform different
functions to facilitate smooth payment to beneficiary. A reimbursing bank
may be located in a third country.
1. Related Parties: The insurer and carrier.
Now we will see different parties in terms of their functions and

responsibilities in details .
• Commercial Parties:
Applicant and beneficiary are the two commercial parties to the

documentary credit. Applicant (Buyer) opens LC in a bank naming the
seller as beneficiary. Buyers bank where LC is opened is known as the
issuing bank while seller’s bank is called the advising bank.
a. Applicant: The applicant is normally the buyer of the goods, i.e.

Importer who requests to his bank to issue a letter of credit in favour of
named beneficiary against tendering certain specified documents or
such other modalities as may be specified in a letter of request. While
making the request for issuing the documentary credit the applicant is
guided by the terms of contract entered in to between him and the
beneficiary and gives instructions to bank to ensure that the payment is
made only when documents presented by the beneficiary are in
compliance. So far UCP was silent as to define the applicant. UCP 600,
for the first time provides the definition. As per UCP 600 “Applicant”
! !242
means the party on whose request the credit is issued. The applicants
role is to:
• Supply the bank with complete instructions; he must fill out the
standard application form.
• Issue instructions for amendments if any.
• Decide on the discrepancies reported by the issuing bank to him.
• Arrange for the funds at the time of payment.
b. Beneficiary: The beneficiary is normally the seller of the goods who

receives the payment under the documentary credit if he has complied
with the terms and conditions of the documentary credit. A credit is
issued in favour of the beneficiary to enable him or his agent to obtain
payment once he has performed his part of the contract and submitted
the stipulated documents showing compliance with the terms and
conditions of the letter of credit. Beneficiary has been defined by UCO
600 as “the party in whose favour a credit is issued. In the case of of
transferable letter of credit the credit is transferred to another party, the
original beneficiary is referred as to the first beneficiary and the person
to whom the credit is transferred is known as second beneficiary. The
beneficiaries role is:
• Establish the terms of payment when sale contract is being negotiated.
• Assess the risk of non payment even when the compliant documents are
presented in case of unconfirmed LC.
• Provide draft wordings to the buyer regarding the LC terms.
• Scrutinise the LC on receipt from the advising bank to check whether it is

in consonance with the sales contract whether it is otherwise workable
and acceptable to him.
• Request for LC amendment from buyer.
• Provide copy of the credit to despatch department and cargo agent to

ensure correct documentation.
! !243
Bankers: Parties to the documentary credit may be issuing bank, an

advising bank , confirming bank, nominated bank, reimbursing bank
Issuing bank: The issuing bank or the opening bank is one which issues
the credit i.e. undertakes independent of undertaking of the applicant to
make the payment provided the terms and conditions of the credit have
been complied with. The payment may be at sight if the credit provides for
sight payment or at maturity dates if the credit provides for deferred
payment. The banker may agree to accept the draft drawn by the
beneficiary if he credit provides for acceptance and to pay without recourse
to the drawer and/or bona fide holders if the credit provides for
negotiations. As per UCP 600the issuing bank means” the bank that issues
a credit at the request of the applicant or on its own behalf.
Advising Bank: The advising bank advises the credit to the beneficiary
thereby authenticating genuineness of the credit. In addition it often takes
on the role of confirming the credit and thus guarantees the payment. The
advising bank is normally situated in the country/place of the beneficiary.
The advising bank is defined as per UCP 600 as “the bank that advises the
credit at the request of issuing bank.”
If the bank is simply advising the credit without any obligation on its part it
will so mention while forwarding the credit to the seller. It is under no
commitment to make the payment, incur the deferred payment liability,
accept/s the draft negotiated even though it may be nominated as the
bank authorised to accept or negotiate in terms of article 10 of UCP 600.
Confirming Bank: A confirming bank is one which adds its guarantee to

credit. It undertakes the responsibility of payment/negotiation/acceptance
under the credit in addition to that of issuing bank. In other words a
confirming bank has much the same status as the issuing bank. A
confirming bank enters the picture only at the request of the issuing bank.
Normally the advising bank is also confirming bank. If the bank is
requested to confirm a letter of credit and it does not wish to do so, then
the confirming bank must advise the issuing bank immediately about its
intention not to confirm the letter of credit. Once confirmation is added to
the credit, the bank enters into separate contract with beneficiary forcing it
to pay. Keeping this role of confirming bank in view the UCP 600 says that
“confirming bank means the bank that adds its confirmation to the credit
up on the issuing bank’s request or authorisation.
! !244
Without Recourse to Beneficiary: A confirming bank also becomes a

nominated bank when it is authorised by issuing bank to negotiate the
credit and also make the payment.
Nominated Bank: A nominated bank is a bank nominated or authorised

by issuing bank to pay, incur a deferred payment liability, to accept the
draft or to negotiate the credit. Any bank incurring any of the above
liability will be deemed to be nominated bank. Based on the precise
mandate, the nominated bank may be paying or negotiating bank.
Nominated bank is not liable to pay unless it is also a confirming bank, in
view of this, nominated bank is “Bank authorised in the credit to honour, or
negotiates or in the case of freely available credit, any bank”.
Reimbursing Bank: A reimbursing bank is a bank authorised to honour

the reimbursement claims in settlement of negotiation/acceptance/lodged
with it by the paying/negotiating or accepting bank. It is normally the bank
with which the issuing bank has an account and from which payment is to
be made.
Broadly the banking parties fall into the two categories, issuing bank which
acts for and on behalf of buyer and is located in the buyers country and the
advising bank which has been chosen to advise the documentary credit to
the beneficiary and usually located in the sellers country. The second bank
can also be confirming bank if it confirms the credit in addition to the
transmission of the credit. If credit is advised to the beneficiary through
another bank without engagement on the part of the advising bank, and if
elects to advise the credit, the bank shall take reasonable care to check the
apparent authenticity of the credit advised. This is mandatory under Article
9 (b) of UCP 600.
Related Parties
Insurer: The insurer has the prime responsibility for insuring the goods as
provided for the credit. The insurance document may be required for
presentation under the credit. It may be noted that in case of loss or
damage of the goods, payment is to the holder of the insurance document.
! !245
Carrier: The carrier, i.e., shipping company or airline or transport agency

is responsible for safe arrival of the goods at the destination. The carrier
must supply a document of receipt of goods and terms of carriage. The
document form id specified in the credit articles 19-25 and 26 of UCP 600.
9.7 Types of Letters of Credit
Letters of credit are classified into various categories depending upon the
nature and the function of the Credit. Some of these types are discussed in
the following paragraphs:
(i) Revocable Letter of Credit

It is a credit which can be revoked, i.e., cancelled or amended by the bank
issuing the credit, without notice to the beneficiary. Letters of credit is a
financial contract and in normal course any amendment to or cancellation
of credit should be done, only with the consent of the parties to Letter of
Credit, i.e., Issuing Bank, Applicant and Beneficiary (also a Confirming
Bank, if it is confirmed Letter of Credit). But in case of Recoverable Letter
of Credit, the bank issuing the Letter of Credit can amend or cancel the
same without the consent/without notice to other parties. Recoverable
Letters of Credit are very rarely used. From all exporters’ point of view this
type of Letter of Credit is not a satisfactory one. But, it is advantageous to
the importer and the Issuing Bank. From Bank’s point of view this type of
Letter of Credit is nothing but a mere advice to the beneficiary and is not a
definite undertaking. Under a recoverable credit, the Issuing bank has the
responsibility of reimbursing the bank, or branch with which it has made
the credit available for payment, acceptance or negotiation or deferred
payment if such bank has undertaken any payment, acceptance or
negotiation or deferred payment against documents which are as per terms
of the credit and provided they were undertaken before receipt of notice of
revocation from the Issuing Bank. There is no provision for confirming
revocable credits as per terms of UPCDC; hence, they cannot be confirmed.
It may be noted that, it should be indicated on the credit that it is
revocable; if there is no such indication the credit will be deemed as
irrevocable in terms of provisions of UCPDC 600 (Art. 3).
In this type of credit, buyer and the bank which has established the LC, are
able to manipulate the letter of credits or make any kinds of corrections
without informing the seller and getting permissions from him. According
to UCP 600, all LCs are irrevocable, hence this type of LC is used no more.
! !246
(ii) Irrevocable LC
In this type of LC, Any changes (amendment) or cancellation of the LC
(except if it has expired) is done by the Applicant through the Issuing
Bank. It must be authenticated by the Beneficiary of the LC. Whether to
accept or reject the changes depends on the beneficiary. In this case it is
not possible to revoke or amended a credit without the agreement of the
issuing bank, the confirming bank, and the beneficiary. From an exporter’s
point of view it is believed to be more beneficial. 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.
(i) Confirmed LC
An LC is said to be confirmed when another bank adds its additional
confirmation (or guarantee) to honour a complying presentation at the
request or authorisation of the issuing bank. Confirmed Letter of Credit is a
special type of L/C in which another bank apart from the issuing bank has
added its guarantee. Although, the cost of confirming by two banks makes
it costlier, this type of L/C is more beneficial for the beneficiary as it
doubles the guarantee.
In the event of a confirmed letter of credit, the confirming bank (in

addition to the issuing bank) assumes an obligation to pay the seller for
the goods upon the fulfilment of the conditions of the documentary credit.
A confirmed letter of credit gives the seller a two-fold guarantee (opening
bank and confirming bank) that the payment will be made. A confirmed
letter of credit is mostly used when the seller has reservations about the
buyer's bank or the country of origin of the buyer's bank.
(ii) Unconfirmed LC
This type of letter of credit, does not acquire the other bank's confirmation.
(iii) Transferable Letter of Credit (Article 38 of UCP 600)

Transferable letter of credit gives the intermediary (the first beneficiary of
the letter of credit) an opportunity to apply to the bank for a transfer of the
documentary credit for the benefit of the supplier (seller, second
beneficiary of the letter of credit). Thus, the intermediary buys the goods
from the supplier with the same documentary credit that the intermediary
sells the goods with to the buyer. The intermediary transfers its right to the
! !247
documentary credit amount paid against documents that are in accordance

with the conditions of the documentary credit to the supplier.
The conditions of documentary credit, specified by the buyer, i.e., the party
opening the letter of credit, have to be fulfilled and the documents
submitted by the supplier. The intermediary exchanges only the supplier's
invoice and the bill of exchange upon receipt of the documentation to the
transferring bank (provided that the bill of exchange is required under the
letter of credit). Therefore, the main task of the intermediary is to agree
upon similar terms and conditions with both its buyer and the seller (with
the exception of price), as the second beneficiary of the letter of credit or
the seller must meet the terms stated by the buyer in the letter of credit.
The letter of credit is transferred in its original form. The first beneficiary of
the letter of credit (the intermediary) has the right to change only the
following terms upon the transfer of the documentary credit:
• documentary credit amount;

• price charged for goods (unit price);
• expiry date of the letter of credit;
• last date for the delivery of goods;
• date for presentation of documents.
All the aforementioned amounts can be decreased and the deadlines

shortened. Also, the intermediary may increase the insurance amount so
as to assure the compliance of the insurance with the provisions stated in
the original documentary credit.
Benefits of transferable documentary credit for the intermediary:
• Transferable documentary credit is an opportunity to intermediate large

trade transactions without having to use one's own funds (no need for
credit decision);
• If the terms stated in the documentary credit allow partial shipments, the
intermediary may transfer the documentary credit to a number of other
beneficiaries of the documentary credit).
! !248
A Transferable Credit is the one under which the exporter has the right to
make the credit available to one or more subsequent beneficiaries. Credits
are made transferable when the original beneficiary is a middleman and
does not supply the merchandise himself but procures goods from the
suppliers and arrange them to be sent to the buyer and does not want the
buyer and supplier knows each other. The middleman is entitled to
substitute his own invoice for the one of the supplier and acquire the
difference as his profit in transferable letter of credit mechanism.
(iv) Untransferable LC
It is said to the credit that seller cannot give a part or completely right of
assigned credit to somebody or to the persons he wants. In international
commerce, it is required that the credit will be untransferable.
(v) Deferred/Usance LC
It is kind of credit that won't be paid and assigned immediately after
checking the valid documents but paying and assigning it requires an
indicated duration which is accepted by both of the buyer and seller. In
reality, seller will give an opportunity to the buyer to pay the required
money after taking the related goods and selling them.
(vi) At Sight LC
It is a kind of credit that the announcer bank after observing the carriage
documents from the seller and checking all the documents immediately
pays the required money.
(vii) Anticipatory Credit

Ordinarily, a credit provides for payment to beneficiary at post shipment
stage, i.e., against shipping documents. But in case of anticipatory credit,
as the name suggests, payment is made to beneficiary at preshipment
stage in anticipation of his actual shipment and submission of bills at future
date. The payment which is provided through an anticipatory credit is
generally a part or full amount of credit to be adjusted at the time of
submission of final documents. A credit containing the special clause
authorising bank to make advance to the beneficiary which is recovered
from the beneficiary out of the proceeds of the bills to be presented under
letter of credit. But if no presentation is made the recovery will be made
from the opening bank. Generally, the advances under these credits are
made against simple receipt and undertaking of the beneficiary either to
! !249
submit the documents or to repay the advances with interest. There are
two types of anticipatory credits, namely —
1. Red Clause LC
In this kind of credit assignment, the seller before sending the products
can take the pre-paid or part of the money from the bank. The first part of
the credit is to attract the attention of the acceptor bank. The reasoning
behind this is the first time this credit is established by the assigner bank,
it is to gain the attention of the offered bank. The terms and conditions
were written by red ink, going forward it became famous with that name.
2. Green Clause LC
It is extended version of red clause credit, in the sense that it not only
provides for advance towards purchase, processing and packing but also
warehousing and insurance charges at port when the goods are stored
pending availability of ship/shipping space. Generally, money under this
credit is advanced after the goods are put in bonded warehouses etc., up to
the period ship or shipping space is available. In such cases warehouse
warrants are given security.
(viii) Back to Back LC

This type of LC consists of two separated and different types of LC. First
one is established in the benefit of the seller that is not able to provide the
corresponding goods for any reasons. Because of that reason according to
the credit which is opened for him, neither credit will be opened for another
seller to provide the desired goods and sends it.
Back to back L/C is a type of L/C issued in case of intermediary trade.

Intermediate companies such as trading houses are sometimes required to
open L/Cs by supplier and receive Export L/Cs from buyer. Bank will issue a
L/C for the intermediary company which is secured by the Export L/C
(Master L/C). This L/C is called "Back to back L/C”.
Back to Back Letter of Credit is also termed as Countervailing Credit. A

credit is known as back to back credit when a L/C is opened with security
of another L/C.
A back to back credit which can also be referred as credit and counter
credit is actually a method of financing both sides of a transaction in which
a middleman buys goods from one customer and sells them to another.
! !250
The parties to a Back to Back Letter of Credit are
a. the buyer and his bank as the issuer of the original Letter of Credit.
b. The seller/manufacturer and his bank,
c. The manufacturer's subcontractor and his bank
The practical use of this credit is seen when L/C is opened by the ultimate
buyer in favour of a particular beneficiary, who may not be the actual
supplier/manufacturer offering the main credit with near identical terms in
favour as security and will be able to obtain reimbursement by presenting
the documents received under back to back credit under the main L/C.
The need for such credits arises mainly when:
a. The ultimate buyer not ready for a transferable credit
b. The beneficiary do not want to disclose the source of supply to the

openers.
c. The manufacturer demands on payment against documents for goods

but the beneficiary of credit is short of funds
From Bankers point of view a back to back credit is not as safe as

transferable credit (though they serve the same practical purpose as
transferable credit) because payment has to be made against the
documents received under the back to back credit but the opener of back
to back credit may not be able to submit the same documents under
original credit to obtain the reimbursement. Hence bankers should exercise
extra care while opening a back to back credit. It should be opened only in
favour of sound supplier and on behalf of a reliable and established client.
(ix) Revolving Letter of Credit

The revolving Letter of Credit is one where, under the terms and conditions
of the credit, the amount is revived or reinstated without requiring specific
amendment to the credit. The amount under the credit can revolve in
relation to time and value. The basic principle of revolving credit is that
“after a drawing is made, credit reverts to its original amount for re-use by
beneficiary” there are two types of revolving credits.
! !251
• In the first type of revolving credit, credit gets reinstated immediately

after drawing is made.
• In the second type of revolving credit, the credit reverts to the original
amount only after it is confirmed by the issuing bank.
Bankers should remember that revolving credit have some inherent

drawbacks for the reasons that they would not know how much they are
committing themselves under such credit and may loose control over
opener and may be lending name and money for an indefinite amount and
period. However, they may be issued only where necessary, with explicit
stipulations on the ceiling for aggregate drawings, total period for which
the credit will be available, etc.
(x) Standby Letter of Credit

As trade and finance develop it is seen that there are some other areas
exist where using the core principles of commercial letters of credit can be
beneficial with a different intention. In a way 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. Also irrevocable payment
undertaken is given by an independent reliable institution. 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.
The standby letter of credit serves as a secondary payment mechanism,

which means as long as the applicant keeps its obligations, standby letter
of credit is not expected to be utilised by the beneficiary.
Standby letters of credit have their own rules since 1999. ISP 98 -
International Standby Practices, ICC Publication No. 590 is published by
International Chamber of Commerce to govern the standby letters of
! !252
credit. However, it is possible to issue standby letters of credit subject to

UCP 600.
Standby letters of credit have very similar characteristics with the demand
guarantees which are issued subject to the Uniform Rules for Demand
Guarantees, ICC publication No: 758.
Standby letter of credit (SBLC) can be used to secure a variety of
transactions where third party guarantees of payment may replace a cash
or bond deposit. Transactions that are typically secured by a Standby letter
of credit include: lease, mortgage, performance bond.
A Standby Letter of Credit (SBLC) is written obligations of an issuing bank

to pay a sum of money to a beneficiary on behalf of their customer in the
event that the customer does not pay the beneficiary. The standby
basically fulfills the same purpose as a bank guarantee as it is payable
upon first demand and without objections or defences on the basis of the
underlying transaction between the applicant and the beneficiary. It is up
to the beneficiary to decide whether he may accept a standby.
The parties to the standby letter of credit:
1. The Applicant: This is the customer of the bank who applies to the
bank for the standby letter of credit. He must provide collateral to the
bank or have sufficient credit to induce the bank to issue the
instrument. He also must pay the bank a fee for issuing the instrument.
2. The Issuing Bank: This is the applicant’s bank that issues the standby
letter of credit.
3. The Beneficiary: This is the party in whose favour the instrument is

issued.
4. Advising Bank: This is the bank that represents the beneficiary. It may
accept the letter of credit on behalf of the beneficiary and collect on it
on behalf of the beneficiary. In order for the transaction to be a bank-to-
bank transaction, the advising bank works for the beneficiary to keep
the instrument in the banking system. Sometimes, the Advising Bank
also is the Confirming Bank, but not always.
! !253
5. Confirming Bank: This is a bank (usually located near the beneficiary)

that agrees (confirms) to pay the beneficiary rather than have the
issuing bank pay the beneficiary. The beneficiary pays the Confirming
Bank a fee for this convenience. The Confirming Bank then collects from
the Issuing Bank the amount paid to the beneficiary.
Types of standby letters of credit
1. Performance Standby: This instrument supports an obligation to

perform other than to pay money including the purpose of covering
losses arising from a default of the applicant in completion of the
underlying transaction.
2. Commercial Standby: This is the most used standby and it supports

the obligations of an applicant to pay for goods or services in the event
of non-payment by a business debtor.
3. Bid Bond/Tender Standby: This standby supports an obligation of the

applicant to execute a contract if the applicant is awarded a bid.
4. Direct Pay Standby: This instrument serves to support payment when

due of an underlying payment obligation typically in connection with a
financial standby without regard to default. This standby is also used to
directly pay an obligation where the only conditions of payment are the
passage of the term and presentment of payment.
5. Insurance Standby: This instrument is an insurance or reinsurance

obligation of the applicant.
6. Advance Payment Standby: This instrument supports an obligation to

account for an advance payment made by the beneficiary to the
applicant.
7. Counter Standby: This instrument supports the issuance of a separate

standby or other undertaking by the beneficiary of the counter standby
! !254
9.8 Summary
The globalisation and liberalisation have opened new vistas for

international trade. Ideally speaking, there should be no barriers to
international trade. However, due to difficulties in balance of payment and
paucity of foreign reserves and as a measure of protection to domestic
industry, various types of quantitative and tariff barriers are imposed to
curb imports by countries. Trade barriers are government-induced
restrictions on international trade. The barriers can take many forms,
including the Tariff, Non-tariff barriers to trade such as Import quotas,
Embargo etc. In theory, free trade involves the removal of all such barriers,
except perhaps those considered necessary for health or national security.
For the import in to the country there are certain policy provisions such as
IEC Number, Categories of Importers, Country of Import, Valid Import,
Import Licences etc. The imports can mainly be categorised as Free
Importability of goods, import under Restricted List, Negative List, Advance
Licences. There are various methods for financing of imports by an
importer these methods are Import Letter of Credit, Buyers Credit/
Suppliers Credit, Forfeiting, Countertrade, International Leasing, etc. For
financing import, banks generally allow Import Letter of Credit facility to
their customers. While allowing import finance it is necessary for banks to
ensure that the imports which are proposed to be financed are made as per
the prevailing policies/exchange control and trade regulations conditions of
respective license
Import finance by way of import LC facility involves various stages. A

Letter of credit is an instrument of settling trade payment which ensures
making payment for the goods against documents for title to goods or
otherwise. Import letter of credit forms an integral part of International
Trade. A contract between an importer and an exporter may call for
payment under a letter of credit, often abbreviated as LC. Import finance
by way of import LC facility involves various stages such as Sanction of
Limits, Documentations, Application by Importer, Letter of Credit
Application, Scrutiny of Letter of Credit Application by Bank after satisfying
with all these requirement compliances in respect of these are required to
be fulfilled. Opening of import LCs involve compliance of instructions/
guidelines such as Import Trade control, Exchange Control, Credit Norms of
RBI, FEDAI and UCP Provisions and Banking Internal Procedure and
Practices.
! !255
There are various parties to an import LC these are applicant, beneficiary,

issuing bank, advising bank, negotiating bank, confirming bank,
reimbursing bank, etc. Depending on the requirement of importer, types of
LC can be opened. Generally, LCs to be issued is Revocable Letter of Credit.
There are also different kind of LCs these are Transferable letter of credit,
Deferred/Usance LC, Red Clause LC, Green Clause LC, Back to Back LC,
Revolving Letter of Credit, Standby Letter of Credit.
There are various methods of financing imports these are buyers credit,
supplier’s credit, forfeiting, countertrade, barter, switch trading, counter
purchase, buybacks, etc. The International leasing has become an
important source of international finance for acquiring the capital goods ,
particularly assets like ships/aircrafts etc. the main advantage of lease
finance is that it is usually for the full value of assets acquired unlike in
other forms of traditional loans.
As trade and finance develop, it is seen that there are some other areas
exist where using the core principles of commercial letters of credit can be
beneficial with different intentions. In a way 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. Also irrevocable payment
undertaken is given by an independent reliable institution. 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.
The standby letter of credit serves as a secondary payment mechanism,

which means as long as the applicant keeps its obligations standby letter of
credit is not expected to be utilised by the beneficiary.
! !256
9.9 Questions
1. What are the barriers to international trade? Explain
2. What are the various methods of financing import?
3. Describe the following with regards to letter of credit:

A. Applicant
B. Beneficiary
C. Issuing bank
D. Advising bank
E. Negotiating bank
4. Write short notes on transferable letter of credit, and explain how it

works.
5. Describe:
(I) Back to back letter of credit

(II) Remittances against rough diamonds
(III) Revolving letter of credit
1. To finance the Import bankers are generally allowing facility to

importers……………….
a. Buyers credit
b. Suppliers credit
c. Import letters of credit
d. Forfeiting
2. What is merchanting trade?

a. Resident merchant importing goods for trading
b. Resident merchant trader purchasing the good from one country and
sales to another country
c. Merchant importer buying goods for consumption purpose
d. Trade between to merchant importer.
! !257
3. Letter of credit application cum agreement is devised b………………………….

a. RBI
b. DGFT
c. FEDAI
d. ICC
4. Along with letter of credit importer must give ………………

a. underlying sales contract
b. import licence
c. insurance policy
d. all above
5. Confirming bank is ………………

a. Bank that adds its guarantee to LC opened by another bank
b. Undertaking responsibility to pay /negotiate/accept the documents
under LC
c. Guarantee to LC opening bank and pay the documents under LC
d. Acting independently.
Answers: 1. (a), 2. (b), 3. (c), 4. (a), 5. (c)
! !258
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !259
ESTABLISHMENT OF LC, IMPORT BILLS UNDER LC, COLLECTIONS AND OTHER IMPORT
REGULATIONS
Chapter 10
Establishment Of LC, Import Bills Under LC,
Collections And Other Import Regulations
Objectives

various regulations required to be complied with by various parties involved
while establishing letter of credit or handling import collection documents
or while making payment of import.
Structure:
10.1 Introduction
10.2 Establishing Letter of Credit
10.3 Margin, Commission, etc.
10.4 Accounting
10.5 Amendment
10.6 Insurance
10.7 Booking of Exchange
10.8 Import Bills
10.9 Other Import Regulations
10.10 Summary
10.11 Questions
! !260
REGULATIONS
10.1 Introduction
Establishing letter of credit is complex operational process. Once the credit

limits are sanctioned as discussed in previous chapter utilisation of this
limit can happen only after opening the letter of credit. There are various
steps involved in the process right from receipt of application. LC
application is always in standard format and it must be signed by the
importer applicant. Since the terms and conditions are normally getting
incorporated in LC text as stipulated in the application which are coinciding
with the underlying document submitted.
Once the LC is issued and accepted by the beneficiary, beneficiary after

export of goods draws the documents on importer and dispatches it to the
LC opening bank. LC opening bank then intimates to importer to fulfill its
obligation either by making the payment or accepting the documents.
All the stages are explained in this chapter.
10.2 Establishing Letter of Credit
a. Application: A documentary credit is opened against the application

usually on the banks printed format made by the importer. The
application should contain the importers request to the banker to open
the credit in favour of a named overseas exporter for supply of goods of
a given description and value, and authorise banker to make the
payment to the exporter on tender of specified documents such as
invoice, bill of lading, marine insurance policy, certificate of origin,
consular invoice, certificate of analysis, packing list, etc. Further the
application should also specify:
i. The type of credit to be opened – whether it is revocable/irrevocable

and if irrevocable, whether to be confirmed
ii. The terms of sale, i.e., CIF, FOB, C&F or FAS implying thereby which
of the parties, exporter or importer, will arrange for the insurance
iii. The risk to be covered under the policy and amount of insurance
iv. The mode of stowage of goods, i.e., on deck or under deck
! !261
REGULATIONS
v. The mode of shipment, i.e., whether the part shipment or
transshipment will be allowable and the date up to which the credit
will remain valid and the date within which the documents should be
presented for negotiation
b. Scrutiny: Before taking decision on the application, the banker should

check up the creditworthiness of the applicant. Where necessary, he
should also check up the financial position, performance capacity, etc.,
of the beneficiary Dun & Bradstreet or through foreign correspondent.
He should assure himself that the application provides all the necessary
particulars in regard to the proposed letter of credit and that the credit,
if opened, will not contravene any of the exchange control regulations
currently in force in respect of opening of letter of credit.
c. Specimen format of letter of credit:
------------------ Instance Type and Transmission ----------------------
Original received from SWIFT

Priority/Delivery : Normal
Message Output Reference : 1725 171012XXXXXXXXX5657939061
Correspondent Input Reference : 1725 171012XXXXXXXXX1178375172
——————————— Message Header ————————————————
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : RATNINBBXXX
RBL BANK LIMITED
(MUMBAI BRANCH)
Receiver : IRVTUS3NXXX
THE BANK OF NEW YORK MELON
(ALL US OFFICES)
NEW YORK
----------------------- Message Text ----------------------------------
27: Sequence of Total

1/1
40A: Form of Documentary Credit
! !262
REGULATIONS
IRREVOCABLE
20: Documentary Credit Number

2017AML201703366
31C: Date of Issue
171012
40E: Applicable Rules
UCP URR LATEST VERSION
31D: Date and Place of Expiry
180106-NEW YORK
50: Applicant
ABC COMPANY LIMITED
NARIMAN POINT
MUMBAI
59: Beneficiary — Name and Address
XYZ IMPORT COMPANY LTD, .
(FULL BENEFS. NAME AND ADDRESS UNDER FIELD 47A ITEM NO.6)
32B: Currency Code, Amount
Currency USD (US DOLLAR)
Amount #310.000,00#
39B: Maximum Credit Amount
NOT EXCEEDING
41A: Available With.. .By. .. - BIC
IRVTUS3NXXX
BY PAYMENT
43P: Partial Shipments
NOT ALLOWED
43T: Transshipment
ALLOWED
44E: Port of Loading/Airport of Departure
ANY US PORT
44F: Port of Discharge/Airport of Destination
JNPT PORT MUMBAI
44C: Latest Date of Shipment
121215
45A: Description of Goods and/or Services
CRUSHING PLANT. AS PER PRO FORMA INVOICE NO: P-111-7 R02 DATED
03/07/2012 CFR, BAHRAIN.
! !263
REGULATIONS
46A: Documents Required
1. SIGNED COMMERCIAL INVOICE IN 1 ORIGINAL + 2 COPIES

INDICATING DELIVERY TERMS.
2. FULL SET OF CLEAN ON BOARD BILL OF LADING ISSUED OR ENDORSED

TO THE ORDER OF ARAB BANK PLC, NOTIFY APPLICANT SHOWING
FREIGHT PREPAID AND SHOWING FULL NAME AND ADDRESS OF THE
SHIPPING COMPANY AGENT OR HIS REPRESENTATIVE IN BAHRAIN.
3. A CERTIFICATE ISSUED BY THE VESSEL OWNERS/CAPTAIN/ CARRIER

OR BY ONE OF THEIR AGENTS STATING THAT THE CARRYING VESSEL
IS SUBJECT TO THE INTERNATIONAL SAFETY MANAGEMENT CODE
(ISM) AND INTERNATIONAL SHIPPING AND PORT SECURITY SAFETY
CODE (ISPS).
4. CERTIFICATE OF ORIGIN STATING THAT GOODS ARE OF US ORIGIN

ISSUED BY A CHAMBER OF COMMERCE SHOWING NAME AND ADDRESS
OF MANUFACTURERS.
5. PACKING LIST IN 1 ORIGINAL + 2 COPIES.
47A: Additional Conditions
1. HONOUR/NEGOTIATION OF DOCUMENTS UNDER RESERVE OR AGAINST

INDEMNITY OR GUARANTEE IS PROHIBITED.
2. DISCREPANCY FEE FOR USD50 PLUS ALL RELATIVE SWIFT/TLX

CHARGES WILL BE DEDUCTED FROM DOCUMENTS VALUE FOR EACH
PRESENTATION OF DISCREPANT DOCUMENTS UNDER THIS CREDIT,
NOTWITHSTANDING ANY INSTRUCTIONS TO THE CONTRARY.
3. ALL REQUIRED DOCUMENTS INCLUDING TRANSPORT DOCUMENTS

MUST BE DATED BUT NOT DATED PRIOR TO THE ISSUANCE DATE OF
THIS CREDIT.
4. ALL REQUIRED DOCUMENTS INCLUDING DRAFTS - IF ANY – MUST

INDICATE OUR CREDIT NUMBER.
5. FULL BENEFICIARYS NAME AND ADDRESS: XXXXXXXXXXXXXXXXXXX,
! !264
REGULATIONS
6. ALL PARTIES TO THIS TRANSACTION ARE ADVISED THAT WHERE
THE U.S. EU, UN, AND OTHER GOVERNMENT AND/OR REGULATORY
AUTHORITIES IMPOSE SPECIFIC SANCTIONS AGAINST CERTAIN
COUNTRIES, ENTITIES AND INDIVIDUALS, BANKS MAY BE UNABLE TO
PROCESS A TRANSACTION THAT INVOLVES A BREACH OF SUCH
SANCTIONS, AND AUTHORITIES MAY REQUIRE DISCLOSURE OF
INFORMATION. RATNAKAR BANK IS NOT LIABLE IF IT, OR ANY OTHER
PERSON, FAILS OR DELAYS TO PERFORM THE TRANSACTION, OR
DISCLOSES INFORMATION AS A RESULT OF ACTUAL OR APPARENT
BREACH OF SUCH SANCTIONS.
KINDLY ACKNOWLEDGE RECEIPT AND ADVISE US BY SWIFT THE DATE OF

THIS CREDIT HAS BEEN ADVISED TO AND RECEIVED BY BENEFICIARY.
71B: Charges
ALL CHARGES AND COMMISSIONS OUTSIDE BAHRAIN INCLUDING

COURIER, CONFIRMATION AND REIMBURSEMENT CHARGES SHOULD BE
PAID BY BENEFICIARY.
48: Period for Presentation

PLS SEE FIELD 47A ITEM NO.15
49: Confirmation Instructions

CONFIRM
53A: Reimbursing Bank - BIC

CHASUS33XXX JPMORGAN CHASE BANK, N.A. NEW YORK,NY US
78: Instruction to Paying/Accepting/Negotiating Bank

YOU ARE KINDLY REQUESTED TO FORWARD ORIGINAL SET OF
DOCUMENTS AND DUPLICATES DIRECTLY TO US IN TWO CONSECUTIVE
SETS BY SPECIAL COURIER TO OUR ADDRESS: TRADE FINANCE UNIT,
NATIONAL OPEATING CENTRE, MUMBAI FOR THE VALUE OF DOCUMENTS
WHICH STRICTLY COMPLY WITH CREDIT TERMS, PLS REIMBURSE ON OUR
MUMBAI OFFICE, USD A/C 000001 WITH JPMORGAN CXXSE BANK N.A.,
NEW YORK UNDER ATHENTICATED SWIFT ADVICE TO US.
! !265
REGULATIONS
57D: Rs.Advise ThroughRs. Bank – Name and Address
IRVTUS3NXXX
----------------------- Message Trailer ------------------------------
{MAC: 00000000}
{CHK: XXXXXXXX}
(d) Advising the credit:
i. If the banker decides to open the credit, the letter of credit is made out
in quadruplicate, usually on the banks printed form. The letter is
addressed to the beneficiary and incorporates the terms of credit as
under;
• The type, amount and period of credit
• The names and particulars of documents to accompany the draft or

drafts drawn under credit
• The risk to be covered under marine insurance, the amount thereof and
the currency in which and the place at which claim, if any arises, will be
payable.
• A description including quality and value of the goods to be exported

under the credit
• Whether part shipment or transshipment will be allowable
• The last date of shipment and that for presentation of the documents
for negotiation
• The mode of dispatch by the negotiating bank of the document

received, i.e., by surface or mail etc.
• Further the letter carries instructions that the draft or drafts drawn
under the credit should bear its number and date as well as name of
! !266
REGULATIONS
the issuing bank, and that payment should be made only on
presentation of shipping documents.
The letter also usually states that the name of the overseas branch or
correspondent bank to which the documents should be tendered for
negotiation, and whether the credit is subject to UCP 600.
ii. The original letter of credit and the duplicate endorsed to the banker
overseas branch or correspondent are sent to the branch or
correspondent with instructions to advise the credit and add the
confirmation, as the case may be to the beneficiary. The triplicate is
sent to the credit opening customer and the fourth copy is retained by
the banker for record.
iii. In the case of reimbursement credit, the draft by which reimbursement

is provided to the overseas correspondent is enclosed with the endorsed
coy of the LC or in the alternative, the instruction as to the mode of
reimbursement is given therein.
iv. The credit may be advised by cable/telex followed by the letter. In such
cases it is customary for the correspondent to send the credit opening
bank a copy of the forwarding letter to the beneficiary for the latter’s
information. If however, the mail confirmation, i.e., the letter should be
operative credit instrument, (Article 8 of UCP 600).
10.3 Margin, Commission, etc.
a. Margin: Where necessary, the banker should hold the margin varying
the credit worthiness of the customer against the credit opened. The
entire amount as required under the exchange control regulations must
be kept in rupees.
b. Commission, etc: The banker realises from the customer his

commission for the opening of the credit as well as for amendment, if
any, made subsequently, at the rate fixed by individual banks. Postage,
SWIFT charges etc., are also recovered from him.
! !267
REGULATIONS
10.4 Accounting
For the purpose of keeping the track of the total contingent liability
incurred by the bank by reason of the credit opened, the banker should
pass, at the end of the day, contra entries for the total amount of the LC
opened during the day as under:
Debit: Customers liability account of acceptance
Credit: Acceptance on account of customers
There should be separate accounts for different currencies. The entries in

these contra accounts should be revered as and when, and to the extent,
draft drawn under LC received.
10.5 Amendment
When the credit opening customer desires to amend any of the terms of
credit, such extension of validity period, increase in amount, or change in
description, quantity, value, unit price of the goods, etc., the amendment
may be allowed only after verification of corresponding amendment on the
sales contract, and communicated to the overseas branch or correspondent
by latter, cable or telex as instructed by the customer, subject, off course,
to the exchange control regulations as detailed above, and subject to
further to the agreement of the advising bank and the beneficiary to the
amendment. The amendment should be recorded in the copy of the LC
retained by the banker.
However, the issuing bank continues to be bound to reimburse the

overseas correspondent, through whom the credit is transmitted, for any
payment, acceptance or negotiation made by him in strict compliance with
the terms and conditions of the credit prior to receipt by him of notice of
amendment (Article 10 of UCP 600).
! !268
REGULATIONS
10.6 Insurance
When under FOB or C&F contract the insurance is provided by the importer,
the banker in order to protect the interest of the bank should see to it that
the insurance cover is duly obtained by the customer and the particulars
thereof are furnished to him together with the policy or insurance
certificate.
10.7 Booking of Exchange
If on the opening of the credit, the importer, in order to avoid exchange

risks, desire to book the exchange in advance, forward sale contract may
be entered into with him for the appropriate period at an appropriate
exchange rate, subject to exchange control regulations. The forward sale
contract should be covered by a forward purchase of the exchange, and the
sale and purchase should be recorded in the position book.
10.8 Import Bills
Import bills under the FEDAI rule includes:
(1) Advance bills

(2) Bills drawn under as banks own LC and
(3) Plain collection items
A. Scrutiny of Documents:
In documentary credit operations all parties concerned deal in documents

and not in goods. Hence when draft (i.e., bill of exchange) drawn under LC
and negotiated by the bankers’ overseas correspondent by debit to the
banker’s Nostro account with him, is received together with the relative
shipping documents and the debit advice of the correspondent, the banker,
in order to make sure that they are prima facie in order, should check up
the documents as under:
! !269
REGULATIONS
B. Documents completeness scrutiny:
For discrepancies in the documents following principles are adopted:
• If discrepancies are such which violates any of exchange control or

import control regulations, the documents should straightaway be
rejected.
• If the discrepancies are of trivial nature not affecting the character of the
transactions the documents may be accepted on merits.
• If the documents are rejected, immediate notice to that effect should be

given to the bank to safeguard the importer's interests.
• The documents prescribed by the beneficiary are carefully scrutinised by

the issuing banker.
C. Documents Compliance Scrutiny:
The Bank/Importer should also scrutinise the documents to ensure that:
1. They were presented when the credit was in force and had not expired.
2. The amendments and special instructions have been taken care of.
3. The amount of bill does not exceed the value of L/C.
4. All documents required in the L/C have been made available.
5. Documents carry required endorsements.
6. The documents do not contain discrepancies which violate any exchange

control/import control regulations.
7. The invoice is duly signed, tallies with amount of draft, exact quantities
are shown and is drawn in appropriate currency of the origin of goods.
8. Bill of lading is presented in full set of negotiable copies and is on board

bill of lading and duly signed.
! !270
REGULATIONS
9. In case the goods are imported on cash against documents (CAD),
documents against payment (D/P) or documents against acceptance (D/
A) basis, the importer needs to take delivery of documents from the
banker before completion of the customs formalities.
10. This process, known as retirement of documents, needs the importer to

apply to authorised dealer/banker who is in possession of documents.
11.This can be done by tendering the funds equivalent to the value of

documents and the bank charges exchange control copy of import
license, where applicable, Form A-1 duly completed for remittance of
foreign exchange.
12.The documents are released to the importers against payment in case

of DP bills and against acceptance in case of DA bills.
13.The payment in either case is accepted only from the bank account of
importer. If the bank is out of funds, the interest is charged to the
importer's account.
14.For any overdue period, a penal interest will be charged.
D. Checklist for Document (received under L/C) Scrutiny:
• General check
• whether all documents in full sets as per L/C terms have been received
• Documents had been presented before the expiry date
• All the documents are dated subsequent to the date of issue of the L/C
• Cancellation/overwriting in all documents are authenticated
• Bills of Exchange-check whether drawn on the person indicated in the L/C
and duly signed up by the beneficiary of the credit
• Drawing is within L/C amount and in the same currency as per the L/C
• The amounts in words and figures are the same and identical with the
amount stated in the invoice
• Superscription, regarding drawing under L/C has been made and the bill
must have been issued stamped.
• Invoice checks whether invoice:
• Is made out in the name of the person who had opened the L/C
• Quantity, unit price and value are quoted as per L/C
• Whether unit price and value are quoted as per L/C
! !271
REGULATIONS
• The description of the merchandise corresponds to the description in the
L/C
The arithmetical calculations are correct
• Import license/OGL/Contract No./Order No./Indent No. mentioned as per

L/C
No charge other than stipulated in L/C in included

• Additional copy for Exchange Control purposes is submitted
The date and no. of the License/OGL indicated
• Bill of Lading/ AWB:

• Bill of lading is submitted within 21days from the date of shipment, if no
specific time is between the date of issue and expiry of L/C
• The date of shipment is between the date of issue and expiry of L/C
• Full quantity of goods is shipped, if part shipment is not allowed
• Full set is submitted
• Freight is shown as prepaid/payable at destination, as per L/C
• Bill of lading shows 'on board shipment'
• Parties are notified as per L/C terms
• Carrying vessel's name has been mentioned in Bill of Lading
• The beneficiary's name is shown as consignor, unless L/C terms permits
third party bill of lading
• The consignee's name is as per L/C
• The B/L is manually signed
• The description of goods is consistent with L/C
• The ports of loading/destination are mentioned as per L/C
• Marks, numbers, quantity and weight agree with the invoice
• The carrying vessel belongs to any particular line as per L/C
• Adequately stamped
• Properly endorsed
• If AWB, whether flight number and date of departure mentioned
• If freight has been added separately in invoice and no separate freight
certificate of shipping company is submitted. B/L shows freight amount.
! !272
REGULATIONS
• Scrutiny for Insurance documents - check whether:
• The policy is taken out in the name of the shipper
• Certificate/Policy is according to Letter of Credit terms
• Risk commences w.e.f. date of B/L
• Amount of insurance as per L/C terms
• Whether drawn in the same currency as the L/C
• Description of goods agree with B/L
• Risks as per L/C are covered
• The place where claims are payable is as per L/C terms
• Adequately stamped
• Details such as name of carrying vessel, ports of loading/destination,
marks, agree with the B/L
• Certificate of analysis, weighment, etc.

• The certificates are issued by the authority stipulated in L/C
• Name of the shipper is properly shown
• The samples drawn relate to the goods actually shipped
• Date of sample verification is within the date of shipment
• Certificate of origin
• It is issued by the authority stipulated in the L/C
• The description of goods agrees with that in the invoice
• Checking other documents

• All other documents stipulated in the L/C are verified
• They are issued by the authorities specified in the L/C
• They contain the details as required by the L/C
• For matter relating to Documentary Collections and Commercial terms,
the importers are likely to be conversant with the brochures issued by
the International Chamber of Commerce (ICC), Paris.
E. Recording:
• Date of receipt of Import documents in case of import bills under LC is
very important, so documents must be date sealed and time marked.
• Send an acknowledgement message to the bank from whom documents
are received
• Within five banking day’s acceptance or rejection is required to convey to
remitting bank
• On 10th day bill should be delinked
! !273
REGULATIONS
After receiving the document from the overseas supplier's bank, the
importer's bank will scrutinise them to verify the extent of correctness as
per the terms of the L/C.
F. Accounting:
Apart from reversing the entries in the contra account, by the amount of
bill received, the debit raised in the Nostro account of the bank by overseas
correspondent in negotiating the bill should be responded to by a credit to
the banker’s pro forma foreign bank account. The corresponding debit
should be passed through an import bill purchased or advance against
import bills or some such account. The conversion in to rupee of the
amount of the bill, if drawn in foreign currency, should be made at the rate
of exchange obtaining on the date of adjustment or at the rate if any fixed
under the forward contract.
G. Presentation of the documents to drawee:

The documents should then be presented to the drawee importer either
physically or by intimation in the banks printed form. The intimation should
give the bill amount in the foreign currency in which the bill is drawn as
well as its rupee equivalent at the prevailing rate of exchange or at the rate
if any fixed under the forward contract. Pending retirement of the bills, the
banker should follow up the steamer arrival notices as published in the
newspaper or issued by the steamship companies.
H. Discrepant/Irregular documents:
a. If scrutiny reveals any discrepancy in or deviation from the terms of LC,

in spite of which the documents have been negotiated by the overseas
correspondent (possibly under reserve again an indemnity furnished by
the exporter-beneficiary), the fact should be immediately be
communicated to the drawee-importer. If he agrees to honour the bill
notwithstanding the discrepancy or deviation, his confirmation should be
obtained in writing.
b. When customer refuses to honour the bill because of the discrepancies

or deviation and consequent refusal by drawee should at once be
informed to overseas correspondent who negotiated the documents. The
notice should add that the documents were being held under the
correspondent’s disposal, and also contain a request to the
! !274
REGULATIONS
correspondent to refund the reimbursement obtained by him against the
negotiation of bills, i.e., to reverse the debit made in the bank’s Nostro
account. Further action in the matter, such as free delivery of the
documents to the importer, delivery thereof against payment to the
party or re-shipment of goods, etc., should be taken in accordance with
the correspondent’s instructions. Pending disposal, no request from the
importer for survey or inspection of the goods should be entertained.
To safeguard the interest of the parties concerned, UCP 600, Article

16 on Discrepant Documents, Waiver and Notice, etc. which is
described as under:
a. When nominated bank acting on its nomination, a confirming bank, if

any, or the issuing bank determines that a presentation does not
comply, it may refuse to honour or negotiate.
b. When an issuing bank determines that a presentation does not comply,

it may in its sole judgment approach the applicant for a waiver of the
discrepancies. This does not, however, extend the period mentioned in
sub-article 14 (b).
c. When nominated bank acting on its nomination, a confirming bank, if

any, or the issuing bank decides to refuse to honour or negotiate, it
must give a single notice to that effect to the presenter.
The notice must state:
i. that the bank is refusing to honour or negotiate;
ii. each discrepancy in respect of which the bank refuses to honour or

negotiate; and
iii. a. that the bank is holding the documents pending further instructions
from the presenter; or
b. that the issuing bank is holding the documents until it receives a

waiver from the applicant and agrees to accept it, or receives further
instructions from the presenter prior to agreeing to accept a waiver;
or
! !275
REGULATIONS
c. That the bank is returning the documents; or
d. That the bank is acting in accordance with instructions previously

received from the presenter.
e. The notice required in sub-article 16 (c) must be given by

telecommunication or, if that is not possible, by other expeditious
means no later than the close of the fifth banking day following the
day of presentation.
f. A nominated bank acting on its nomination, a confirming bank, if any,

or the issuing bank may, after providing notice required by sub-article
16 (c) (iii) (a) or (b), return the documents to the presenter at any
time.
g. If an issuing bank or a confirming bank fails to act in accordance with

the provisions of this article, it shall be precluded from claiming that
the documents do not constitute a complying presentation.
h. When an issuing bank refuses to honour or a confirming bank refuses

to honour or negotiate and has given notice to that effect in
accordance with this article, it shall then be entitled to claim a
refund, with interest, of any reimbursement made.
I. Payment of Import Bills:
a. Basic Principle: The payment for import should be made under the
exchange control regulations in force only in a permitted method. In
other words, the payment to the overseas supplier should be made in a
currency or through an account appropriate to the country of origin of
the goods irrespective of the country from which they may be shipped.
Exception: This basic rule does not apply to the import of rough
diamonds. From whichever country rough diamonds are imported;
payment is to be made in a currency or through an account
appropriate to the country of shipment. However, a certificate from a
supplier, stating that the supply is made from stock in his ownership,
is required to be produced along with other customary documents.
! !276
REGULATIONS
b. Mode of payment: As prescribed under the exchange control
regulations, the payment of the bill should be recovered in rupees by
debit of drawee’s account with the banker, or by crossed cheque drawn
on any other bank. The conversion of the foreign currency in to rupees
should be made at that exchange rate ruling on the date of payment or
at the rate, if any, fixed under a forward contract. The receipt of
payment for import in cash is not permissible.
The Reserve Bank has permitted credit of rupees to non-resident account

as one of the method of payment to person resident outside India for
imports where the imports are as declared by the importer in his
application for foreign exchange for the purpose.
These provisions are applicable also to payments made through the

Asian Clearing Union (ACU).
J. Permitted Methods of Import Payment
RBI Circular on Import of Goods and Services talks about permitted

methods of payment of import, which is further defined in Notification
No.FEMA14/2000-RB dated 3rd May 2000.
Authorised dealers should make remittances from India or provide

reimbursement to their overseas branches and correspondents in foreign
countries (other than Nepal and Bhutan): against payments due for
imports into India and other payments in a manner conforming to the
methods of payment indicated below:
! !277
REGULATIONS
Group Permitted methods

(i) All countries other than (a)Payment in rupees to the account of a
those listed under (ii) below resident of any country in this Group
(b) Payment in any permitted currency*

(ii) Member countries in the
Asian Clearing Union (expect (a)Payment for all eligible current
Nepal) transactions by debit to the ACU (Asian
Clearing Union) dollar account in India of
a bank of the participating country in
which is resident or by credit to the ACU
dollar account of the authorised dealer
maintained with the correspondent bank
in the other participating country.
(b)Payment in any permitted currency in

other cases
* The expression ‘permitted currency’ is used to indicate a foreign currency

which is freely convertible, i.e., a currency which is permitted by the rules
and regulations of the country concerned to be converted into major
reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly
active market exists for dealings against the major currencies.
• In respect of imports, payment must be made in a currency

appropriate to the country of shipment of the goods. In cases, however,
where goods are shipped from an ACU member country (other than
Nepal) but the supplier is a resident of a country other than a member
country of ACU, payment can be made in the manner specified for
countries in Group (i)
• Government of India has concluded and may conclude from time to

time Special Trade and Payments Agreements with some countries
providing for settlement of certain payments to the countries in a
specified manner. Wherever authorised dealers have been advised
about such arrangements, the method of payment specified therein will
have to be followed in such cases.
! !278
REGULATIONS
• Government of India had entered into bilateral trade and payment
agreements with certain east European countries under which
transactions were hitherto settled in non-convertible Indian rupees. In
terms of fresh agreements entered into with these countries,
payments/receipts for trade etc., transactions are to be settled in
convertible currency and liquidation of outstanding rupee balances in
favour of banks in these countries is permitted by export of goods/
services from India. Besides, repayment of rupee-denominated
commercial credits granted by organisations in the erstwhile USSR
under the protocols of deliveries of machinery and equipment from the
erstwhile USSR on deferred payment terms signed on 30th April 1981
and 23rd December 1985 and repayment of State Credits granted by
the erstwhile USSR are permitted by export of goods and services and
the Indian exporter is permitted to receive proceeds of his exports in
such cases in Indian rupees. Authorised dealers should be guided by
the instructions issued to them separately in this regard from time to
time.
c. Permissible Excess Payment: For the imports under import licence,

the CIF value specified on licence in rupees is the limiting factor for
remittance, i.e., the value of import bill payment. However, import bills
for amount exceeding the CIF value of imports as mention on licence
will be acceptable where the excess is due to:
• War risk insurance charges, increased freight charges, bunker

surcharge or congestion surcharge paid at the foreign port, provided
that the customs authorities have condoned the excess and
documentary evidence thereof is produced
• Adverse fluctuation in the exchange rate taking place after the letter of
credit was opened or after shipment has been made if no letter of
credit was opened and
• Where the documents have been received on collection basis the rate
at which exchange was sold being higher than the rate prevailing on
the date of shipment of goods
In either of the last two cases, suitable remark should be made, under
his stamp and signature, by authorised dealer on the licence,
! !279
REGULATIONS
explaining the basis of condonation of the excess before the licence is
surrendered to AD bank/RBI.
d. Further Excess Payment: If in spite of the forgoing rules, any

remittance is required to be made against the licence when there has
already been shortfall under it, the authorised dealer may make such
remittances provided that:
1. Further excess does not exceed 5% of the value of the licence value
or Rs. 5,000 whichever is lower.
2. The imported goods have already allowed clearance by customs

authorities and
3. The relative exchange control copy of the customs bill of entry or

post parcel wrapper as the case may be is produced before the
authorised dealer.
Any import bill for an amount exceeding the value of the licence for any
reason other than the above should not be accepted except with the prior
approval of RBI.
e. Interest: Interest at the agreed rate from the date of negotiation of the
bills and other bank charges including those made by the overseas
correspondent, should be recovered by debit to customers account.
10.9 Other Import Regulations
A. Time limit for settlement of import payment
1. Time limit for normal imports
a. In terms of the extant regulations, remittances against imports should

be completed not later than six months from the date of shipment,
except in cases where amounts are withheld towards guarantee of
performance, etc.
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REGULATIONS
b. AD Category-I banks may permit settlement of import dues delayed due
to disputes, financial difficulties, etc. Interest in respect of delayed
payments, usance bills or overdue interest for a period of less than
three years from the date of shipment may be permitted as under:
• AD Category-I bank may allow payment of interest on usance bills or

overdue interest for a period of less than three years from the date of
shipment at the rate prescribed for trade credit from time to time.
• In case of prepayment of usance import bills, remittances may be

made only after reducing the proportionate interest for the unexpired
portion of usance at the rate at which interest has been claimed or
LIBOR of the currency in which the goods have been invoiced,
whichever is applicable. Where interest is not separately claimed or
expressly indicated, remittances may be allowed after deducting the
proportionate interest for the unexpired portion of usance at the
prevailing LIBOR of the currency of invoice.
2. Time limit for deferred payment arrangements

Deferred payment arrangements, including suppliers and buyers credit,
providing for payments beyond a period of six months from date of
shipment up to a period of less than three years, are treated as trade
credits for which the procedural guidelines laid down for External
Commercial Borrowings and Trade Credits should be followed.
3. Time limit for import of books

Remittances against import of books may be allowed without restriction as
to the time limit, provided, interest payment, if any, is as explained above.
B. Delivery of shipping documents

While delivering the shipping documents on receipt of payments for the
relative bill, the banker should ensure that the delivery is made to importer
who holds the import licence and to none else. When the import is under
free importability, the exchange control copy of the customs bill of entry
should be obtained from the importer and kept along with documents for
verification by banks internal auditors as well as RBI Inspectors
! !281
REGULATIONS
C. Endorsement on LC
On receipt of the bills drawn under LC together with the relative shipping
documents the amount thereof, both in foreign currency and its rupee
equivalent, should be endorsed on the reverse of the copy of the LC
retained by the banker, indicating on it the balance if any, yet due under it.
D. Exchange control copy of licence
(a) Endorsement: On opening the letter of credit, the number, date and
rupee equivalent of the amount thereof should, as required under the
exchange control regulations, be endorsed on reverse of the exchange
control copy of import licence and copy retained by the banker. Similarly,
when bill drawn under LC is paid, the payment should be endorsed in a
separate column on the reverse of the copy, indicating the balance, if any,
yet available under the licence.
(b) Surrender to RBI/Keeping with AD Bank: When the licence is fully

utilised, or when the balance not yet utilised is so significant that the
licence cannot be further utilised, the exchange control copy, duly
endorsed, should be surrendered to the Reserve Bank of India/Authorised
dealer bank, together with formal application (form A1) for remittance
made against it.
(c) Returning to the Importer: Pending full utilisation, the exchange

control copy may be returned to importer only if:
• The licence has been partially availed or further utilisation is to be

made through another bank, and/or
• the licence is to be re-submitted to the office of the Director General of

Foreign Trade for extension or revalidation
Before returning the copy, the banker should see to it that the particulars
of the credits opened and remittances made had been clearly endorsed on
it.
(d) Cancellation of Endorsement: An endorsement already made on

exchange control copy of a current licence may be cancelled by banker
without reference to Reserve Bank, provided that the sale of foreign
exchange itself is cancelled. An endorsement may also be cancelled to the
! !282
REGULATIONS
extent of goods imported under the licence are short supplied, damaged,
short landed or lost in transit, provided that the full insured value of the
lost goods has been recovered by the importer and repatriated to India in
an appropriate manner.
E. Form A1
To liberalise and simplify the procedure, it has been decided by RBI to

dispense with the requirement of submitting request in Form A-1 to the AD
Category-I Banks for making payments towards imports into India. AD
Category-I may however, need to obtain all the requisite details from the
importers and satisfy itself about the bona fides of the transactions before
effecting the remittance. (A. P. (DIR Series) Circular No.76 dated February
12, 2015)
F. Import packing credit
The drawee of an import bill drawn under LC may, on occasion, fail to

honour the bill against the payment, and in view of urgency of his need of
the relative goods, for the manufacture of products destined for export,
any request by banker to deliver the shipping documents to him against
the trust receipt. Such proposal may be entertained only when the banker,
on verification of documentary evidence, is satisfied that —
1. Import are raw materials for end products for export.
2. The importer (drawee) is in possession of the firm, valid export order

and given the facility may reasonably be expected to be able to execute
the order and repay the banks due; and
3. He is sufficiently creditworthy for the purpose.
The accommodation will be in the form of packing credit for rupee

equivalent of the value of the bill with or without margin.
! !283
REGULATIONS
Risk involved: The risk inherent in such a transaction are:
1. Breach of trust on the part of importer
2. Failure on his part to complete the manufacture and consequently to

execute the export order
3. If the goods imported are specifically intended for particular

manufacture these will be of limited use and if not used for
manufacture, will not be readily saleable, involving lock up of the bank’s
funds
4. Destruction of the goods, while in the process of manufacture, by fire

etc.
Accounting: On granting the packing credit the debit in the import bills
purchased account should be reversed by debit entry in a packing credit
account (to be opened) in the name of importer. This debit should be
reversed, and the interest accrued thereon, and the other bank charges
should be recovered out of the proceeds of the relative export bills when
tendered by the importer and negotiated by the banker.
G. Trust receipt:
• Options and Terms for the Importer
When the documents arrive, whether under documentary credit or D/P

payment terms, the importer is obliged to effect payment against the
release of the documents from the bank. If the importer does not wish to
effect payment, he can use the import financing provided by the bank
under the Trust Receipt arrangement.
Once the importer's application for Trust Receipt facilities has been
approved by the bank, a Trust Receipt Agreement and/or Letter of
Hypothecation will be signed. The Bank will set a credit limit which is
determined by the importer's three Cs of Creditworthiness (Character,
Capacity and Capital) and/or their goodwill.
! !284
REGULATIONS
The bank then becomes the new creditor, effecting payment on behalf of
the importer to the exporter overseas, under the Trust Receipt facilities,
reducing the credit limit as the facility is used.
There are two types of Trust Receipts.
• Method A is where the importer is given the transport documents to

arrange the discharge, customs clearance, transportation and insurance
of the goods at their own risk and expense. For warehouses there are
two options: Safe keeping the goods in the importer's own warehouse,
clearly separate from other goods, and made accessible to the bank or its
agent for inspection from time to time; or: warehousing in the
importer's name, in a warehouse approved by the bank with a
warehouse warrant endorsed to the bank, and held by the bank as
collateral. The collateral goods can then be sold to the purchasers.
• Method B is where the importer is again given the transport documents

to arrange at their own risk and expense, the discharge, customs
clearance, transportation, procurement of insurance and warehousing of
the goods, but in godown approved by the bank and with a godown
warrant made out to the order of the bank, and the original copy of the
godown warrant given to the bank as collateral. All delivery orders for the
delivery of the collateral goods to the purchaser need to be signed or
countersigned by the bank.
There are several terms and conditions common to both these methods.
The importer is the agent, trustee and/or bailee of the bank. Before full
payment is made to the bank by the importer, the title of the goods and all
documents relating to the title and the insurance, are held by the bank as
collateral. The importer must procure full value insurance coverage, against
all risks, covering fire, flood, burglary and other risks common in the trade.
The insurance policy has to be held to the order of the bank, made out with
the bank as the beneficiary and is retained by the bank as collateral.
The importer must not have indebted to any other party in respect of the
goods. In other words, the importer cannot negotiate further loans,
services and/or performance against the collateral goods from a third
party.
! !285
REGULATIONS
If something goes wrong, the goods must be surrendered to the bank
when demanded. Also, the bank can change from Method A to Method B at
any time they think necessary.
The above terms may also change for raw materials. As it would be difficult
for the bank to recover the raw materials if they have already been
consumed during the manufacture of a finished product, and cannot be
separated or recovered from the finished products the bank insists that it
be notified of the sales details and prior approval must be obtained before
the sale is made. This also applies to credit sales to the purchasers.
When accounting for goods sold under a Trust Receipt, all deposits,
advance payments, bills of exchange, promissory notes, and other
payments received from the sale of goods must be given to the bank as a
special option. Normally, payment is made when the Trust Receipt expires
which is either 30, 60 or 90 days from the signing depending on what has
been specified. Accounts for the sale of the goods should be treated
separately and not to be mixed with the sales of other goods or the capital
of the importer.
Wherever possible the bank should be given priority in claiming the assets
of the company after its bankruptcy.
To redeem the Trust Receipt, full payment is made to the bank including
interest, once the goods have been sold. The bank will then release the
insurance policy and/or warehouse warrant held as collateral. If necessary,
it is possible to obtain approval from the bank for an extension on the
expiry date of the Trust Receipt, if the importer is unable to sell the goods
before expiry.
The accountants as well as the auditing firms adopt the "Concept of Going
Concern" when dealing with collateral goods under a Trust Receipt. That is,
the collateral goods will be treated like other equipment, where the real
ownership is not yet transferred to the user (e.g. photocopiers and trucks
under hire purchase instalment payments) and will treat them as if they
were owned by the users. The remarks "True and Correct" or "True and
Fair" appear on their audit reports.
! !286
REGULATIONS
The bankers may know how the accountants and the auditors treat the
collateral goods in their books as the "Concept of Going Concern," instead
of keeping separate accounts. This could lead to disputes in litigations and
it would be difficult to judge which party is right. Importers of course would
argue that they should not be held responsible for “unreasonable” terms
which are against accounting and audit practices. The banks might argue
that the importers sign these trust receipts without querying these terms.
It seems that the banks may enjoy false comfort by adding odd terms
which they do not believe would actually be implemented. However,
importers have to be aware of what they have really agreed to in the Trust
Receipt Agreement. Most importers, when hearing that other companies
have also signed the same agreement in printed format, feel content to put
their signatures on these documents, having the comfortable feeling that if
they have made a mistake, they are not alone. This kind of attitude
encourages banks, shipping companies and other parties to add more odd
terms to their contracts and in doing so will upset the trade equilibrium
between the banks, shippers and traders against the interests of the
traders.
H. Cash credit against imports:
a. Occasion: If an importer fails to honour the bill drawn on him under

the LC against payment on presentation, consignment may, at his
request or under advice to him, be cleared and stored by the banker so
as to avoid the wharfage for delayed clearance. If the duty, if any,
payable on consignment is not paid at the time of clearance the goods
are stored in bonded warehouse under the control of the customs
authorities, in other cases the storage is made in bankers own godown
or in a godown of the central or state warehousing corporation.
b. Insurance: Pending delivery against payment, the goods should be

fully insured against the usual risk of fire, burglary etc. If the goods are
stored in the godown of the central of state warehousing corporation,
the insurance is automatically provided by the corporation, and the
insurance premium is included in the rent charged for storage.
! !287
REGULATIONS
c. Accounting: The debit in import bills purchased account, may on such
clearance and storage of the goods, be reversed by debit to new cash
credit account in the name of the importer, or the import bill purchased
account may be allowed to continue pending adjustment by payment
received against the deliveries made.
d. Partial delivery: Under the FEDAI rule partial deliveries of the

imported goods so cleared and stored allowable, provided that the
transactions are routed through a rupee loan account.
! !288
REGULATIONS
10.10 Summary
A documentary credit is opened against the application usually on the

banks printed format made by the importer. The application should contain
the importers request to the banker to open the credit in favour of a
named overseas exporter for supply of goods of a given description and
value, and authorise banker to make the payment to the exporter on
tender of specified documents such as invoice, bill of lading, marine
insurance policy, certificate of origin, consular invoice, certificate of
analysis, packing list, etc.
Before taking decision on the application, the banker should check up the
creditworthiness of the applicant. Where necessary, he should also check
up the financial position, performance capacity etc. of the beneficiary in
Syed’s commercial list of the parties in UK or Dun & Bradstreet for parties
on the USA or through his foreign correspondent in the other cases. He
should assure himself that the application provides all the necessary
particulars in regard to the proposed letter of credit and that the credit, if
opened, will not contravene any of the exchange control regulations
currently in force in respect of opening of letter of credit
Import bills under the FEDAI rule includes:
(1) Advance bills

(2) Bills drawn under as banks own LC and
(3) Plain collection items
In documentary credit operations all parties concerned deal in documents

and not in goods. Hence when draft (i.e., bill of exchange) drawn under LC
and negotiated by the bankers’ overseas correspondent by debit to the
banker’s Nostro account with him, is received together with the relative
shipping documents and the debit advice of the correspondent, the banker,
in order to make sure that they are prima facie in order, should check up
the documents as under
After receiving the document from the overseas supplier's bank, the
importer's bank will scrutinise them to verify the extent of correctness as
per the terms of the L/C.
! !289
REGULATIONS
In terms of the extant regulations, remittances against imports should be
completed not later than six months from the date of shipment, except in
cases where amounts are withheld towards guarantee of performance, etc.
AD Category-I banks may permit settlement of import dues delayed due to
disputes, financial difficulties, etc. Interest in respect of delayed payments,
usance bills or overdue interest for a period of less than three years from
the date of shipment may be permitted.
On opening the letter of credit, the number, date and rupee equivalent of
the amount thereof should, as required under the exchange control
regulations, be endorsed on reverse of the exchange control copy of import
licence and copy retained by the banker. Similarly, when bill drawn under
LC is paid, the payment should be endorsed in a separate column on the
reverse of the copy, indicating the balance, if any, yet available under the
licence
While delivering the shipping documents on receipt of payments for the

relative bill, the banker should ensure that the delivery is made to importer
who holds the import licence and to none else. When the import is under
free importability, the exchange control copy of the customs bill of entry
should be obtained from the importer and kept along with documents for
verification by banks internal auditors as well as RBI Inspectors
The drawee of an import bill drawn under LC may, on occasion, fail to

honour the bill against the payment, and in view of urgency of his need of
the relative goods, for the manufacture of products destined for export,
any request by banker to deliver the shipping documents to him against
the trust receipt. Such proposal may be entertained only when the banker,
on verification of documentary evidence,
When the documents arrive, whether under documentary credit or D/P

payment terms, the importer is obliged to effect payment against the
release of the documents from the bank. If the importer does not wish to
effect payment, he can use the import financing provided by the bank
under the Trust Receipt arrangement.
! !290
REGULATIONS
10.11 Questions
1. What is the content of the application for opening the letter of credit?
2. Explain the process of scrutiny of the documents drawn under LC.
3. What is trust receipt? When is it required to be obtained?
4. Write short note on import packing credit.
5. Explain cash credit against the import.
1. “Import bills under the FEDAI rule includes Advance bills, Bills drawn
under as banks own LC and Plain collection items”. ____________ True
or False
(a) True
(b) False
2. Bank may allow payment of interest on usance bills or overdue interest

for a period of less than _________ years from the date of shipment at
the rate prescribed for trade credit from time to time
(a) 1
(b) 3
(c) 5
(d) 7
3. When the drawee of an import bill drawn under LC fails to honor the bill
against the payment , and in view of urgency of his need of the relative
goods, for the manufacture of products destined for export , any
request by banker to deliver the shipping documents to him against
_________.
(a) Bill of Exchange
(b) Promissory note
(c) Trust Receipt
(d) Declaration
! !291
REGULATIONS
4. In case of pre-payment of usance import bills, remittances may be
made only after reducing the proportionate interest for the _________
at the rate at which interest has been claimed or LIBOR of the currency
in which the goods have been invoiced, whichever is applicable
(a) unexpired portion of usance
(b) Agreed period
(c) As quoted by overseas supplier
(d) As decided by bank
5. If the importer does not wish to effect payment, he can use the import
financing provided by the bank under the arrangement grant to finance
against ……………….
(a) Documents received
(b) Trust Receipt arrangement
(c) Other securities offered by importer
(d) Clean credit facility granted
Answers:1. (a), 2. (b), 3. (c), 4. (a), 5. (b).
! !292
REGULATIONS
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !293
OTHER MEHODS OF IMPORT FINANCING
Chapter 11
Other Methods Of Import Financing
Objectives

other methods of financing import. You have already learned financing of
import to way of Letter of Credit. There are other instruments against
which finance can be availed by importers as discussed in this chapter.
Structure
11.1 Introduction
11.2 Methods for Financing Imports
11.3 Forfeiting
11.4 Countertrade
11.5 International Leasing
11.6 Some Other Instruments in Financing Imports
11.7 Summary
11.8 Questions
! !294
11.1 Introduction
There are various Methods for Financing of Imports by an Importer which

includes:

• Buyers Credit/Suppliers Credit
• Forfeiting
• Countertrade
Financing import by means of import letter of credit is already discussed in

earlier chapter. Now, we will discuss other methods of financing import by
importers.
In the case of intermediary banker, the documents to the title of goods

exported, the credit of issuing banker, his promise, express or implied, to
reimburse him, and the credit balance maintained by the issuing banker
with him – these constitute the security for his payment to the beneficiary
against the bills drawn under letter of credit. He is entitled to retain, as
pledge, the documents tendered until reimbursement of payment is made
otherwise than by debit to the credit opening bankers account with him. So
far as the issuing banker is concerned, the security is credit worthiness of
the importer customer, the documents to the title of goods and the margin,
if any held. If he pays the intermediary banker, as he always does, through
a debit to his Nostro account with the latter, and holds the documents
pending the retirement thereof by the buyer, he holds them as pledge and
has the right to sell them in the event of default on the part of the buyer.
! !295
11.2 Methods for financing Imports
11.2.1 Buyers Credit
Buyer’s Credit refers to loans for payment of imports into India arranged
on behalf of the importer through an overseas bank. Based on letter of
undertaking of Importer’s bank, overseas bank credits the Nostro of the
importer’s bank. Importer’s bank uses the funds and makes the payment
to the Suppliers bank against the import bill on due date.
Benefits of Buyer’s Credit:
The benefits of buyer’s credit for the importer are as follows:
• The exporter gets paid on due date; whereas importer gets extended
date for making an import payment as per the cash flows
• The importer can deal with exporter on sight basis, negotiate a better
discount and use the buyer’s credit route to avail financing.
• The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.)
depending on the choice of the customer.
• The importer can use this financing for any form of trade, viz., open
account, collections, or LCs.
• The currency of imports can be different from the funding currency,

which enables importers to take a favourable view of a particular
currency.
! !296
Buyer’s Credit Process flow
1. Indian customer imports the goods either under DC/LC, DA/DP or Direct
Documents.
2. Indian customer requests the Buyer’s Credit Consultant before the due
date of the bill to avail buyer’s credit finance.
3. Consultant approaches overseas bank for indicative pricing, which is

further quoted to Importer.
4. If pricing is acceptable to importer, overseas bank issue’s offer letter in

the name of the Importer.
5. Importer approaches his existing bank to get Guarantor/SBLC issued in

favour of overseas bank via swift.
6. Guarantor/SBLC Overseas Bank as per instruction provided in

guarantor/SBLC will either funds existing bank’s Nostro account or pays
the supplier’s bank directly.
7. Existing bank to make import bill payment by utilising the amount

credited (If the borrowing currency is different from the currency of
Imports then a cross currency contract is utilised to effect the import
payment).
8. On due date existing bank to recover the principal and interest amount
from the importer and remit the same to overseas bank on due date.
! !297
Cost Involved
The cost involved in buyer’s credit is as follows:
• Interest cost: This is charged by overseas bank as a financing cost.

Normally it is quoted as say “3M L + 350 bps”, where 3M is 3 Month, L is
LIBOR, and bps is Basis Points (A unit that is equal to 1/100th of 1%). To
put is simply: 3M L + 3.50%. One should also check on what tenure
LIBOR is used, as depending on tenure LIBOR will change. For example,
as on day, 3-month LIBOR is 0.33561% and 6 Month LIBOR is 0.50161%
• Letter of comfort/undertaking: Your existing bank would charge this

cost for issuing letter of comfort/Undertaking. (However, this instrument
is no more in use as per RBI guidelines)
• Forward/Hedging cost
• Arrangement fee: Charged by Buyer’s Credit Agents/Brokers for

arranging buyer’s credit.
• Other charges: A2 payment on maturity, for 15CA and 15CB on

maturity, Intermediary bank charges etc.
• Withholding tax (WHT): The customer has to pay WHT on the interest
amount remitted overseas to the Indian tax authorities. The WHT is not
applicable where Indian banks arrange for buyer’s credit through their
offshore offices.
Documents at the Time of Taking Fresh/Rollover of Buyer’s Credit

• A1 Form (Principal amount)
• ECB Form
• Offer letter from overseas bank and SWIFT
• Import documents and bill of entry (In case of direct documents)
• Request letter and along with it authority to debit charges
• Documents at the time of repayment of buyer’s credit
• A2 Form (for interest payment)
• Form 15CA and Form 15CB (In case of foreign bank)
! !298
Regulatory Framework:
RBI has issued directions under Sec. 10(4) and Sec. 11(1) of the Foreign
Exchange Management Act, 1999, stating that authorised dealers may
approve proposals received (in Form ECB) for short-term credit for
financing — by way of either suppliers’ credit or buyers’ credit — of import
of goods into India, based on uniform criteria.
Over the years there have been changes in norms. Current norm as per
RBI Master Directions on External Commercial Borrowing (ECB) and Trade
Credit issued in January 01, 2016 and updated from time to time till
October 09, 2017. Accordingly, some of the measure regulatory guidelines
are as under:
A. Amount and Maturity
• Maximum amount per transaction: $20 Million
• Maximum maturity in case of import of non-capital goods: upto 1

year from the date of shipment
• Maximum maturity in case of import of capital goods: upto 5 years

from the date of shipment (Beyond 3 years banks are not allowed to
provide Letter of Undertaking/comfort)
B. All-in-cost ceilings as on October 09, 2017
• Upto 1 year : 6 Month LIBOR + 350 bps

• Upto 5 years: 6 Month LIBOR + 350 bps
All applications for short-term credit exceeding $20 million for any import
transaction are to be forwarded to the Chief General Manager, Exchange
Control Department, Reserve Bank of India, Central Office, External
Commercial Borrowing (ECB) Division, Mumbai.
! !299
11.2.2 Supplier’s Credit
Supplier’s Credit relates to credit for imports into India extended by the
overseas suppliers or financial institutions outside India. Usance Bills under
Letter of Credit (LC) issued by Indian bank branches on behalf of their
importers are discounted by Indian bank overseas branches or foreign
bank. It means paying suppliers at sight against usance bills under letter of
credits.
Why Required?
• Suppliers would ask for sight payment whereas you want credit on the
transaction.
• At times, in capital goods, banks would insist on using term loan instead
of buyer’s credit. By this way you can avail cheap LIBOR rate funds and
your supplier would also not mind as he is getting funds at sight.
Benefits/Advantages
For Importer
• Availability of cheaper funds for import of raw materials and capital

goods
• Ease short-term fund pressure as able to get credit
• Ability to negotiate better price with suppliers
• Able to meet the suppliers requirement of payment at sight
For Supplier
• Realise at sight payment

• Avoid the risk of importer’s credit by making settlement with LC
! !300
Process Flow of Transaction
a. With transaction details importer approaches arranger to get supplier’s

credit for the transaction
b. Arranger gets an offer from overseas bank on the transaction
c. Importer confirms on pricing to overseas bank and gets LC issued from

his bank, restricted to overseas bank counters with other required
clauses
d. Supplier ships the goods and submits documents at his bank counter
e. Supplier’s bank sends the documents to supplier’s credit bank.
f. Supplier’s credit bank post checking documents for discrepancies sends

the document to importers bank for acceptance
g. Importer accepts documents. Importer’s bank provides acceptance to

supplier’s credit bank LC guaranteeing payment on due date.
h. Supplier’s credit bank based on acceptance, discounts the bill and

makes payment to the supplier.
i. On maturity, importer makes the payment to his bank and importer’s

bank makes payment to supplier’s credit bank
Cost Involved (May vary Bank to Bank)
• Foreign bank interest cost

• Foreign bank LC confirmation cost (Case to case basis)
• LC advising and or amendment cost
• Negotiation cost (normally in range of 0.10%)
• Postage and SWIFT charges
• Reimbursement charges
• Cost for the usance (credit) tenure. (Indian bank cost)
! !301
Requirement
• Import transaction under LC

• Incoterms: FOB/CIF/C&F
• Arrangement has to be done before LC gets opened. In case of LC
already opened, relevant amendment has to be done.
• LC to be restricted to supplier’s credit providing bank under 41D clause of
LC
• Under payment term: 90 days usance payable at sight (Mention tenure
according to tenure and offer received).
Other Factors
At times foreign bank may insist on adding confirmation which would result
in additional cost.
RBI Regulations
Suppliers’ credit is governed by RBI Circular “Master Directions on External

Commercial Borrowings and Trade Credits” Dated January 01, 2016 and
updated till October 09, 2017.
(A)Amount and Maturity
• Maximum amount per transaction: $20 Million
• Maximum maturity in case of import of non-capital goods: Upto one year

from the date of shipment
• Maximum maturity in case of import of capital goods: up to five years

from the date of shipment (Beyond three years banks are not allowed to
provide guarantee/SBLC.
(B) All-in-cost Ceilings
• Up to 1 year: 6 Month Libor + 350 bps

• Up to 5 years: 6 Month Libor + 350 bps
• All applications for short-term credit exceeding $20 million for any import
transaction are to be forwarded to the Chief General Manager, Exchange
! !302
Control Department, Reserve Bank of India, Central Office, External

Commercial Borrowing (ECB) Division, Mumbai.
(C) Guarantee
• AD banks are permitted to issue guarantees in favour of overseas

supplier, bank and financial institution, up to USD 20 million per
transaction for a period up to one year for import of all non-capital goods
permissible under Foreign Trade Policy (except gold, palladium, platinum,
rhodium, silver, etc.) and up to three years for import of capital goods,
subject to prudential guidelines issued by Reserve Bank from time to
time. The period of such guarantees has to be co-terminus with the
period of credit, reckoned from the date of shipment.
11.3 Forfeiting
The term “forfeiting” is derived from French word “Forfait” meaning to

surrender or relinquish the right to something. In return for cash payment
from forfeiters, an exporter agrees to surrender or relinquish the right to
claim for payment on goods or services delivered to the buyer. Some of the
salient features of forfeiting are as under:
• Forfeiting facilitates the purchase of future payable debt instrument by

forfeiters from the suppliers of goods or services
• This purchase is without recourse to the supplier in the event of such
debt instrument not being honoured on maturity
• Credit period generally ranges from medium to long term
• Forfeiting is usually trade-related, however properly documented
financial papers can also be considered
• It is generally without recourse to the exporter
• It does not cover the quality and quantity-related risks
• Normally it is fixed rate financial arrangement, however in the prospects
of declining interest rates, floating rate is also available.
• It provides finance in all major currencies
• Affords immediate payment to exporters
• Forfeiting covers 3 types of risks-
• Sovereign Risk
• Commercial Banks
• Prime Corporate
! !303
Most forfeiting transactions involve the forfeit purchasing at a discount, bill

of exchange or promissory note accepted or guaranteed by the bank. The
guarantee can take the separate form of document, but it is more usual for
the buyer to obtain AVAL for the bill or notes. An AVAL is specific
endorsement on bill or notes by a bank, which guarantees the payment
should the drawee (buyer) default on payment. Through this mechanism,
the forfeiter provides non-recourse finance to exporter - once the bill or
note have been sold, the exporter has no further involvement in collection
of debt.
Forfeiting is popular with companies undertaking major export contracts

where repayment is made via a series of bills over an extended term and
for contracts involving goods or services with significant foreign content
which may prevent the exporter from obtaining credit insurance. When
tendering for new business, forfeiting can be used to fix the financing cost
in advance and build them in to the contract price.
The cost of forfeiting transactions consists of elements of interest/discount,

commitment fee in those cases where commitment is required much before
the transactions or bill for forfeiting and documentation fee.
Benefits of Forfeiting
Forfeiting offers many benefits to exporter. Some of these include:
• Converts a deferred payment export in to cash transactions, improving

liquidity.
• Frees the exporter from cross border political or commercial risks

associated in the export receivables.
• Finance up to 100% of export value.
• Provides fixed rate finance, hedge against interest and exchange risks
arising from deferred export credit.
• Exporter is free from credit administration and collection problems.
• It is transaction specific. Consequently, a long-term banking relationship

with forfeiter is not necessary to arrange a forfeiting transaction.
! !304
• Exporter saves on insurance costs as forfeiting obviates the need for

export credit insurance.
• Simplicity of documentation enables rapid conclusion of the forfeiting

arrangement.
11.4 Countertrade

whole or part, with other goods or services, rather than with money.
A monetary valuation can however be used in counter trade for accounting

used. OR "Any transaction involving exchange of goods or service for
something of equal value”
There are six main variants of countertrade and they are as under:
1. Barter: Exchange of goods or services directly for other goods or

services without the use of money as means of purchase or payment.
Barter is the direct exchange of goods between two parties in a

transaction. The principal exports are paid for with goods or services
supplied from the importing market. A single contract covers both flows, in
its simplest form involves no cash. In practice, supply of the principal
exports is often held up until sufficient revenues have been earned from
the sale of bartered goods.
One of the largest barter deals to date involved Occidental Petroleum

Corporation's agreement to ship sulphuric acid to the former Soviet Union
for ammonia urea and potash under a two-year deal which was worth 18
billion Euros.
Furthermore, during negotiation stage of a barter deal, the seller must

know the market price for items offered in trade. Bartered goods can range
from hams to iron pellets, mineral water, furniture or olive-oil all somewhat
more difficult to price and market when potential customers must be
sought.
! !305
2. Switch trading: Practice in which one company sells to another its

obligation to make a purchase in a given country.
3. Counter purchase: Sale of goods and services to one company in

other country by a company that promises to make a future purchase of
a specific product from the same company in that country.
4. Buyback: Occurs when a firm builds a plant in a country – or supplies

technology, equipment, training, or other services to the country and
agrees to take a certain percentage of the plant's output as partial
payment for the contract.
5. Offset: Agreement that a company will offset a hard currency purchase

of an unspecified product from that nation in the future. Agreement by
one nation to buy a product from another, subject to the purchase of
some or all of the components and raw materials from the buyer of the
finished product, or the assembly of such product in the buyer nation.
6. Compensation trade: Compensation trade is a form of barter in which

one of the flows is partly in goods and partly in hard currency.
Due to balance of payment difficulties many countries encourage counter

trade as means of financing imports. Under this import are paid in the form
of goods and not in terms of convertible currency, e.g., India was engaged
in countertrade with erstwhile Soviet Union and some east European
countries. Import by India form these countries were paid for by way of
purchase of goods/services by those countries.
Countertrade proposals involving adjustment of value of goods imported

into India against value of goods exported from India in terms of an
arrangement voluntarily entered into between the Indian party and the
overseas party through an Escrow Account opened in India in US Dollar will
be considered by the Reserve Bank subject to following conditions:
a. All imports and exports under the arrangement should be at

international prices in conformity with the Foreign Trade Policy and
Foreign Exchange Management Act, 1999 and the Rules and Regulations
made thereunder.
! !306
b. No interest will be payable on balances standing to the credit of the

Escrow Account but the funds temporarily rendered surplus may be held
in a short-term deposit up to a total period of three months in a year
(i.e., in a block of 12 months) and the banks may pay interest at the
applicable rate.
c. No fund based or non-fund based facilities would be permitted against

the balances in the Escrow Account.
d. Application for permission for opening an Escrow Account may be made

by the overseas exporter/organisation through his/their AD Category-I
bank to the Regional Office concerned of the Reserve Bank.
11.5 International leasing
International leasing has become an important source of international

finance for acquiring the capital goods, particularly assets like ships/
aircrafts etc. the main advantage of lease finance is that it is usually for the
full value of assets acquired unlike in other forms of traditional loans.
Prior approval of the Reserve Bank is required for export of machinery,

equipment, etc., on lease, hire basis under agreement with the overseas
lessee against collection of lease rentals/hire charges and ultimate re-
import. Exporters should apply for necessary permission, through an AD
Category-I banks, to the Regional Office concerned of the Reserve Bank,
giving full particulars of the goods to be exported..
! !307
11.6 Some Other instruments in financing Imports
The business of importing goods from another country for commercial

resale can be a profitable venture if you can find inexpensive products to
import and maintain your cash flow to cover the import costs. Your
purchase orders, inventory and accounts receivables are assets against
which you can obtain financing to help you manage your costs and service
the orders of your import business.
• Purchase Order Financing

A purchase order is issued to a buyer of the goods you are importing
outlining the agreement of terms. Once an importer has secured an order
for a buyer, he is faced with inventory and import costs. A lender provides
financing against a purchase order knowing that the buyer is creditworthy
and agreeable to the buyer's terms of payment. Purchase order financing
provides short-term funding to cover the costs and maintain the cash flow
of the import business.
• Accounts Receivables Financing

An importer may have a creditworthy buyer who will not pay immediately
but will pay within a certain time frame. Once the goods are received, the
purchase order for the goods becomes an account receivable. While the
importer may have to sell the receivables at a discount, retains immediate
cash, which may help to service the next order. The process of selling the
receivable is known as factoring. Factoring an account receivable is
common for an importer with large shipments of goods.
• Inventory Financing
If an importer has strong inventory, he may obtain financing by allowing
the lender to hold his inventory as collateral and get up to 50 per cent of
the inventory value. Inventory financing is used for commodity imports to
cover inventory and associated costs. The importer must agree to allow the
lender to ship the commodity to the purchaser directly and allow the
purchaser to pay the lender directly. The lender deducts the cost of the
inventory and financing costs and bills the importer for the balance.
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• Small Business Loan for Import Businesses

Importers can apply for financing through the Export Working Capital
Program (EWCP). The EWCP is a joint program of the Export-Import Bank
of the United States and the United States Small Business Administration.
The program backs the import company in case of default, repaying the
lender up to 90 per cent of her funding. Financial backing can be especially
helpful for an importer who is having a difficult time obtaining financing.
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11.7 Summary
There are various methods available for financing imports by importers, for
financing imports, Banks generally allow Import LC Facility to their
customers. While allowing import finance it is necessary for banks to
ensure that the imports which are proposed to be financed are made as per
the prevailing policies/exchange control and trade regulations/ conditions
of respective licence.
There are various Methods for Financing of Imports by an Importer which

includes:

• Buyer’s Credit/Supplier’s Credit
• Forfeiting
• Countertrade
Buyer’s credit refers to loans for payment of imports into India arranged on
behalf of the importer through an overseas bank. Based on letter of
undertaking of Importer’s bank, overseas bank credits the Nostro of the
importer’s bank. Importer’s bank uses the funds and makes the payment
to the suppliers bank against the import bill on due date.
Supplier’s credit relates to credit for imports into India extended by the
overseas suppliers or financial institutions outside India. Usance Bills under
Letter of Credit (LC) issued by Indian bank branches on behalf of their
importers are discounted by Indian bank overseas branches or foreign
bank. It means paying suppliers at sight against usance bills under letter of
credits.
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The term “forfeiting” is derived from French word “Forfait” meaning to

surrender or relinquish the right to something. In return for cash payment
from forfeiters, an exporter agrees to surrender or relinquish the right to
claim for payment on goods or services delivered to buyer. Some of the
salient features of forfeiting are as under:
• Forfeiting facilitates the purchase of future payable debt instrument by

forfeiters form the suppliers of goods or services
• This purchase is without recourse to the supplier in the event of such

debt instrument not being honoured on maturity

whole or part, with other goods or services, rather than with money. A
monetary valuation can however be used in counter trade for accounting
used, or “any transaction involving exchange of goods or service for
something of equal value.”
International leasing has become an important source of international

finance for acquiring the capital goods, particularly assets like ships/
aircrafts, etc. The main advantage of lease finance is that it is usually for
the full value of assets acquired unlike in other forms of traditional loans.
The business of importing goods from another country for commercial

resale can be a profitable venture if you can find inexpensive products to
import and maintain your cash flow to cover the import costs. Your
purchase orders, inventory and accounts receivables are assets against
which you can obtain financing to help you manage your costs and service
the orders of your import business.
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11.8 Questions
1. What is buyer’s credit? Explain

2. Explain supplier’s Credit.
3. Write short note on forfeiting.
4. What is countertrade? Describe
5. What are the other methods of financing Import?
1. On receipt of __________ Overseas Bank as per instruction provided,

will either funds existing bank’s Nostro account or pays the supplier’s
bank directly
(a) Request Letter
(b) Copy of LC
(c) LOU/LOC
(d) Authenticated SWIFT message to credit
2. Supplier’s Credit relates to credit for imports into India extended by the
__________ outside India.
(a) overseas suppliers
(b) financial institutions
(c) overseas suppliers or financial institutions
(d) banks of Indian Banks overseas.
3. In return for cash payment from forfeiters an exporter agrees to

surrender or relinquish the right to claim for payment on goods or
services delivered to __________
(a) Buyer
(b) Seller
(c) Buyer’s Bank
(d) Seller’s Bank
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4. Exchanging goods or services which are paid for, in whole or part, with
other goods or services, rather than with money is called as
__________
(a) Goods Trade
(b) Countertrade
(c) Barter Trade
(d) Compensation Trade
5. Inventory financing is used for __________ imports to cover inventory

and associated costs.
(a) Raw Material
(b) Capital Goods
(c) Commodity
(d) Perishable goods
Answers: 1.(c), 2. (c), 3. (a), 4. (b), 5. (a).
! !313
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !314
EXPORT: GUIDELINES AND REGULATIONS
Chapter 12
Export: Guidelines And Regulations
Objectives
After going through the chapter, students should be able to understand the
various guidelines for undertaking and handling export from India. You will
also understand regulations by regulators required to be complied in
parties involved in export trade.
Structure
12.1 Introduction
12.2 Objective
12.3 General Guidelines
12.4 Export Regulations
12.5 Summary
12.6 Questions
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12.1 Introduction
Export trade is regulated by the Directorate General of Foreign Trade

(DGFT) and its regional offices, functioning under the Ministry of
Commerce and Industry, Department of Commerce, Government of India.
Policies and procedures required to be followed for exports from India are
announced by the DGFT, from time to time.
AD Category-I banks may conduct export transactions in conformity with

the Foreign Trade Policy in vogue and the Rules framed by the Government
of India and the Directions issued by Reserve Bank from time to time. In
exercise of the powers conferred by clause (a) of subsection (1) and
subsection (3) of section 7 and subsection (2) of section 47 of the Foreign
Exchange Management Act, 1999 (42 of 1999), the Reserve Bank has
notified the Foreign Exchange Management (Export of Goods and Services)
Regulations, 2015 relating to export of goods and services from India,
hereinafter referred to as the ‘Export Regulations’. These Regulations have
been notified vide Notification No. FEMA 23(R)/2015-RB dated January 12,
2016.
The Directions contained in this Chapter should be read with the Rules
notified by the Government of India, Ministry of Finance, vide Notification
No. G.S.R.381 (E) dated May 3, 2000, as also Regulations notified by
Reserve Bank vide its Notification No. FEMA 23(R)/2015-RB dated January
12, 2016.In terms of Regulation 4 of the Foreign Exchange Management
(Guarantees) Regulations, 2000, notified vide Notification No. FEMA
8/2000-RB dated May 3, 2000 as amended from time to time, AD
Category-I banks have been permitted to issue guarantees on behalf of
exporter clients on account of exports out of India subject to specified
conditions.
There is no restriction on invoicing of export contracts in Indian Rupees in

terms of the Rules, Regulations, Notifications and Directions framed under
the Foreign Exchange Management Act, 1999. Further, in terms of Para
2.52 of the Foreign Trade Policy (2015-2020), “All export contracts and
invoices shall be denominated either in freely convertible currency or
Indian rupees but export proceeds shall be realised in freely convertible
currency. However, export proceeds against specific exports may also be
realised in rupees, provided it is through a freely convertible Vostro
account of a non-resident bank situated in any country other than a
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member country of Asian Clearing Union (ACU) or Nepal or Bhutan.” Indian

Rupee is not a freely convertible currency yet.
Any reference to the Reserve Bank should first be made to the Regional
Office of the Foreign Exchange Department situated in the jurisdiction
where the applicant person resides, or the firm/company functions, unless
otherwise indicated. If, for any particular reason, they desire to deal with a
different office of the Foreign Exchange Department, they may approach
the Regional Office of their jurisdiction for necessary approval.
“Financial Year” (April to March) is reckoned as the time base for all
transactions pertaining to trade-related issues.
12.2 Objective
The objective of keeping the control on exports is
• to prevent the export of goods which are essential for the development/
maintenance of country’s economy.
• to ensure that full value of the exported goods is received in India within
the prescribed time limit and permitted method of payment.
Realisation and repatriation of proceeds of export of goods/

software/services
It is obligatory on the part of the exporter to realise and repatriate the full
value of goods/software/services to India within a stipulated period from
the date of export, as under:
a. The period of realisation and repatriation of export proceeds shall be

nine months from the date of export for all exporters including Units in
Special Economic Zones (SEZs), Status Holder Exporters, Export
Oriented Units (EOUs), Units in Electronic Hardware Technology Parks
(EHTPs), Software Technology Parks (STPs) and Bio-Technology Parks
(BTPs) until further notice.
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b. For goods exported to a warehouse established outside India, the

proceeds shall be realised within fifteen months from the date of
shipment of goods.
12.3.1 Manner of Receipt and Payment
i. The amount representing the full export value of the goods exported
shall be received through an AD Bank in the manner specified in the
Foreign Exchange Management (Manner of Receipt and Payment)
Regulations, 2016 notified vide Notification No. FEMA.14 (R)/2016-RB
dated May 02, 2016
ii. When payment for goods sold to overseas buyers during their visits is
received in this manner, EDF (duplicate) should be released by the AD
Category-I banks only on receipt of funds in their Nostro account or if
the AD Category-I bank concerned is not the credit card servicing bank,
on production of a certificate by the exporter from the credit card
servicing bank in India to the effect that it has received the equivalent
amount in foreign exchange, AD Category-I banks may also receive
payment for exports made out of India by debit to the credit card of an
importer where the reimbursement from the card issuing bank/
organisation will be received in foreign exchange.
iii. Processing of export related receipts through Online Payment

Gateway Service Providers (OPGSPs) Authorised Dealer Category-I
(AD Category-I) banks have been allowed to offer the facility of
repatriation of export-related remittances by entering into standing
arrangements with Online Payment Gateway Service Providers
(OPGSPs) subject to the following conditions –
a. The AD Category-I banks offering this facility shall carry out the due
diligence of the OPGSP.
b. This facility shall only be available for export of goods and services of
value not exceeding USD 10,000 (US Dollar ten thousand).
c. AD Category-I banks providing such facilities shall open a NOSTRO

collection account for receipt of the export related payments
facilitated through such arrangements. Where the exporters availing
of this facility are required to open notional accounts with the OPGSP,
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it shall be ensured that no funds are allowed to be retained in such

accounts and all receipts should be automatically swept and pooled
into the NOSTRO collection account opened by the AD Category-I
bank.
d. A separate NOSTRO collection account may be maintained for each

OPGSP or the bank should be able to delineate the transactions in the
NOSTRO account of each OPGSP.
e. Under this arrangement, the permissible debits to the NOSTRO

collection account are for repatriation of funds representing export
proceeds to India for credit to the exporters’ account, payment of
fee/commission to the OPGSP as per the predetermined rates/
frequency/arrangement; and charge back to the importer where the
exporter has failed in discharging his obligations under the sale
contract.
f. The balances held in the NOSTRO collection account shall be

repatriated and credited to the respective exporter's account with a
bank in India immediately on receipt of the confirmation from the
importer and, in no case, later than seven days from the date of
credit to the NOSTRO collection account.
g. AD Category-I banks shall satisfy themselves as to the bona-fides of

the transactions and ensure that the purpose codes reported to the
Reserve Bank in the online payment gateways are appropriate.
h. AD Category-I banks shall submit all the relevant information relating

to any transaction under this arrangement to the Reserve Bank, as
and when advised to do so.
i. Each NOSTRO collection account should be subject to reconciliation

and audit on a quarterly basis.
j. Resolution of all payment related complaints of exporters in India

shall remain the responsibility of the OPGSP concerned.
k. AD Category-I banks desirous of entering into such an arrangement/s

should report the details of each such arrangement as and when
! !319
entered into to the Foreign Exchange Department, Central Office,

Reserve Bank of India, Mumbai.
l. A start-up can realise the receivables of its overseas subsidiary and

repatriate them through Online Payment Gateway Service Providers
(OPGSPs).
(iv) Settlement system under ACU Mechanism

In order to facilitate transactions/settlements, effective January 01, 2009,
participants in the Asian Clearing Union will have the option to settle their
transactions either in ACU Dollar or in ACU Euro. Accordingly, the Asian
Monetary Unit (AMU) shall be denominated as ‘ACU Dollar’ and ‘ACU Euro’
which shall be equivalent in value to one US Dollar and one Euro,
respectively.
Further, AD Category-I banks are allowed to open and maintain ACU Dollar
and ACU Euro accounts with their correspondent banks in other
participating countries. All eligible payments are required to be settled by
the concerned banks through these accounts.
Relaxation from ACU Mechanism – Indo-Myanmar Trade — Trade

transactions with Myanmar can be settled in any freely convertible currency
in addition to the ACU mechanism.
In view of the difficulties being experienced by importers/exporters in

payments to/receipts from Iran, it has been decided that with effect from
December 27, 2010, all eligible current account transactions including
trade transactions with Iran should be settled in any permitted currency
outside the ACU mechanism, until further notice.
In view of the understanding reached among the members of the ACU

during the 44th Meeting of the ACU Board in June, 2015, it has been
decided to permit the use of the Nostro accounts of the commercial banks
of the ACU member countries, i.e., the ACU Dollar and ACU Euro accounts,
for settling the payments of both exports and imports of goods and
services among the ACU countries.
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(v) Third party payments for export/import transactions
Taking into account the evolving international trade practices, third party
payments for export/import transactions is permitted which is subject to
certain conditions as under:
• Firm irrevocable order backed by a tripartite agreement should be in

place. However, it may not be insisted upon in cases where documentary
evidence for circumstances leading to third party payments/name of the
third party being mentioned in the irrevocable order/invoice has been
produced subject to:
• AD bank should be satisfied with the bona fides of the transaction and
export documents, such as invoice/FIRC.
• AD bank should consider the FATF statements while handling such

transaction;
• Third party payment should be routed through the banking channel only;
• The exporter should declare the third-party remittance in the Export

Declaration Form and it would be responsibility of the Exporter to realise
and repatriate the export proceeds from such third party named in the
EDF;
• It would be responsibility of the Exporter to realise and repatriate the

export proceeds from such third party named in the EDF;
• Reporting of outstanding, if any, in the XOS would continue to be shown

against the name of the exporter. However, instead of the name of the
overseas buyer from where the proceeds have to be realised, the name
of the declared third party should appear in the XOS;
• In case of shipments being made to a country in Group II of Restricted

Cover Countries, (e.g., Sudan, Somalia, etc.), payments for the same
may be received from an Open Cover Country; and
• In case of imports, the Invoice should contain a narration that the related
payment has to be made to the (named) third party, the Bill of Entry
should mention the name of the shipper as also the narration that the
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related payment has to be made to the (named) third party and the
importer should comply with the related extant instructions relating to
goods.
(vi) Settlement of export transactions in currencies not having a

direct exchange rate
To further liberalise the procedure and facilitate settlement of export

transactions where the invoicing is in a freely convertible currency and the
settlement takes place in the currency of the beneficiary, which though
convertible, does not have a direct exchange rate, AD Category-I banks
may permit settlement of such export transactions (excluding those put
through the ACU mechanism), subject to certain conditions as under:
• Exporter shall be a customer of the AD Bank,
• Signed contract/invoice is in a freely convertible currency,
• The beneficiary is willing to receive the payment in the currency of

beneficiary instead of the original (freely convertible) currency of the
invoice/contract, Letter of Credit as full and final settlement,
• AD bank is satisfied with the bona fides of the transactions, and
• The counterparts to the exporter/importer of the AD bank is not from a

country or jurisdiction in the updated FATF Public Statement on High Risk
and Non Co-operative Jurisdictions on which FATF has called for counter
measures.
12.3.2 Foreign Currency Account
Participants in international exhibition/trade fair have been granted

general permission vide Regulation 5(E)(5) of Foreign Exchange
Management (Foreign Currency Accounts by a person Resident in India)
Regulations dated January 21, 2016 for opening a temporary foreign
currency account abroad. Exporters may deposit the foreign exchange
obtained by sale of goods at the international exhibition/trade fair and
operate the account during their stay outside India provided that the
balance in the account is repatriated to India through normal banking
! !322
channels within a period of one month from the date of closure of the
exhibition/trade fair and full details are submitted to the AD Category-I
banks concerned.
Reserve Bank may consider applications in Form EFC from exporters having
good track record for opening a foreign currency account with AD banks in
India and outside India subject to certain terms and conditions.
Applications for opening the account with a branch of an AD Category-I
bank in India may be submitted through the branch at which the account is
to be maintained. If the account is to be maintained abroad the application
should be made by the exporter giving details of the bank with which the
account will be maintained.
An Indian entity can also open, hold and maintain a foreign currency
account with a bank outside India, in the name of its overseas office/
branch, by making remittance for the purpose of normal business
operations of the said office/branch or representative subject to conditions
stipulated in Regulation 5 (B) of Foreign Exchange Management (Foreign
Currency Accounts by a person Resident in India) Regulations dated
January 21, 2016.
A unit located in a Special Economic Zone (SEZ) may open, hold and
maintain a Foreign Currency Account with an AD Category-I bank in India
subject to conditions stipulated in Regulation 4 (D) of Foreign Exchange
Regulations dated January 21, 2016.
A person resident in India being a project/service exporter may open, hold

and maintain foreign currency account with a bank outside or in India,
subject to the standard terms and conditions in the Memorandum PEM.
12.3.2.1 Diamond Dollar Account (DDA)
Under the scheme of Government of India, firms and companies dealing in

purchase/sale of rough or cut and polished diamonds/precious metal
jewellery plain, minakari and/or studded with/without diamond and/or
other stones, with a track record of at least two years in import/export of
diamonds/colored gemstones/diamond and colored gemstones studded
jewellery/plain gold jewellery and having an average annual turnover of Rs.
3 crores or above during the preceding three licensing years (licensing year
! !323
is from April to March) are permitted to transact their business through

Diamond Dollar Accounts.
They may be allowed to open not more than five Diamond Dollar Accounts
with their banks.
Eligible firms and companies may apply for permission to their AD

Category-I banks in the format prescribed.
12.3.2.2 Exchange Earners’ Foreign Currency Account (EEFC

Account)
A person resident in India may open with, an AD Category-I bank in India,

an account in foreign currency called the Exchange Earners’ Foreign
Currency (EEFC) Account, in terms of Regulation 4 (D) of Foreign Exchange
Regulations, 2015 dated January 21, 2016.
Resident individuals are permitted to include resident close relative(s) as

defined in the Companies Act 2013 as a joint holder(s) in their EEFC bank
accounts on former or survivor basis.
This account shall be maintained only in the form of non-interest bearing

current account. No credit facilities, either fund-based or non-fund based,
shall be permitted against the security of balances held in EEFC accounts
by the AD Category-I banks.
All categories of foreign exchange earners are allowed to credit 100% of

their foreign exchange earnings to their EEFC Accounts subject to the
condition that —
• The sum total of the accruals in the account during a calendar month
should be converted into Rupees on or before the last day of the
succeeding calendar month after adjusting for utilisation of the balances
for approved purposes or forward commitments.
• The facility of EEFC scheme is intended to enable exchange earners to

save on conversion/transaction costs while undertaking forex
transactions. This facility is not intended to enable exchange earners to
! !324
maintain assets in foreign currency, as India is still not fully convertible

on Capital Account.
The eligible credits represent –
• Inward remittance received through normal banking channel, other than

the remittance received pursuant to any undertaking given to the
Reserve Bank or which represents foreign currency loan raised or
investment received from outside India or those received for meeting
specific obligations by the account holder.
• Payments received in foreign exchange by a 100 per cent Export

Oriented Unit or a unit in Export Processing Zone, Software Technology
Park or Electronic Hardware Technology Park for supply of goods to
similar such unit or to a unit in Domestic Tariff Area and also payments
received in foreign exchange by a unit in Domestic Tariff Area for supply
of goods to a unit in Special Economic Zone (SEZ);
AD Category-I banks may permit their exporter constituents to extend

trade related loans/ advances to overseas importers out of their EEFC
balances without any ceiling subject to compliance of provisions of
Notification No. FEMA 3/2000-RB dated May 3, 2000 as amended from
time to time.
• AD Category-I banks may permit exporters to repay packing credit

advances whether availed in Rupee or in foreign currency from balances
in their EEFC account and/or Rupee resources to the extent exports have
actually taken place.
• Where a part of the export proceeds are credited to an EEFC account, the
export declaration (duplicate) form may be certified as: “Proceeds
amounting to …… representing …...… per cent of the export realisation
credited to the EEFC account maintained by the exporter with ……”
! !325
12.3.4 Counter-trade Arrangement
The Countertrade proposals involving adjustment of value of goods

imported into India against value of goods exported from India in terms of
an arrangement voluntarily entered into between the Indian party and the
be considered by the Reserve Bank subject to following conditions:
• All imports and exports under the arrangement should be at international

prices in conformity with the Foreign Trade Policy and Foreign Exchange
Management Act, 1999 and the Rules and Regulations made thereunder.
• No interest will be payable on balances standing to the credit of the

Escrow Account but the funds temporarily rendered surplus may be held
in a short-term deposit up to a total period of three months in a year
(i.e., in a block of 12 months) and the banks may pay interest at the
applicable rate.
• No fund-based/or non-fund-based facilities would be permitted against

the balances in the Escrow Account.
• Application for permission for opening an Escrow Account may be made

by the overseas exporter/organisation through his/their AD Category-I
bank to the Regional Office concerned of the Reserve Bank.
12.3.5 Exports to neighbouring countries by road, rail or river
The following procedure should be adopted by exporters for filing original

copies of EDF where exports are made to neighbouring countries by road,
rail or river transport:
In case of exports by barges/country craft/road transport, the form should

be presented by exporter or his agent at the Customs station at the border
through which the vessel or vehicle has to pass before crossing over to the
foreign territory. For this purpose, exporter may arrange either to give the
form to the person in charge of the vessel or vehicle or forward it to his
agent at the border for submission to Customs.
! !326
As regards exports by rail, Customs staff has been posted at certain

designated railway stations for attending to Customs formalities. They will
collect the EDF for goods loaded at these stations so that the goods may
move straight on to the foreign country without further formalities at the
border. The list of designated railway stations can be obtained from the
Railways. For goods loaded at stations other than the designated stations,
exporters must arrange to present EDF to the Customs Officer at the
Border Land Customs Station where Customs formalities are completed.
12.3.6 Border trade with Myanmar

The barter system of trade at the Indo-Myanmar border has been
discontinued and replaced with normal trade with effect from December 1,
2015. Accordingly, all trade transactions with Myanmar, including those at
the Indo-Myanmar border with effect from December 1, 2015 is settled in
any permitted currency in addition to the Asian Clearing Union mechanism.
12.3.7 Countertrade arrangements with Romania

The Reserve Bank on application to them will consider countertrade
proposals from Indian exporters with Romania involving adjustment of
value of exports from India against value of imports made into India in
terms of a voluntarily entered arrangement between the concerned parties,
subject to the condition, among others that the Indian exporter should
utilise the funds for import of goods from Romania into India within six
months from the date of credit to Escrow Accounts allowed to be opened.
12.3.8 Repayment of State credits

Export of goods and services against repayment of State credits granted by
erstwhile USSR will continue to be governed by the extant directions issued
by the Reserve Bank, as amended from time to time.
12.3.9 Forfaiting
EXIM Bank and AD Category-I banks have been permitted to undertake
forfaiting, for financing of export receivables. Remittance of commitment
fee/service charges, etc., payable by the exporter as approved by the EXIM
Bank/AD Category-I banks concerned may be done through an AD bank.
Such remittances may be made in advance in one lump sum or at monthly
intervals as approved by the authority concerned.
! !327
12.3.10 Export factoring on non-recourse basis

AD banks have been permitted to factor the export receivables on a non-
recourse basis, so as to enable the exporters to improve their cash flow
and meet their working capital requirements subject to conditions as
under:
a. AD banks may take their own business decision to enter into export
factoring arrangement on non-recourse basis. They should ensure that
their client is not over financed. Accordingly, they may determine the
working capital requirement of their clients taking into account the value
of the invoices purchased for factoring. The invoices purchased should
represent genuine trade invoices.
b. In case the export financing has not been done by the Export Factor, the
Export Factor may pass on the net value to the financing bank/
Institution after realising the export proceeds.
c. AD bank, being the Export Factor, should have an arrangement with the
Import Factor for credit evaluation and collection of payment.
d. Notation should be made on the invoice that importer has to make

payment to the Import Factor.
e. After factoring, the Export Factor may close the export bills and report
the same in the Export Data Processing and Monitoring System (EDPMS)
of the Reserve Bank of India.
f. In case of single factor, not involving Import Factor overseas, the Export
Factor may obtain credit evaluation details from the correspondent bank
abroad.
g. KYC and due diligence on the exporter shall be ensured by the Export
Factor.
12.3.11 Export of goods on lease, hire, etc.

import. Exporters should apply for necessary permission, through an AD
! !328
Category-I banks, to the Regional Office concerned of the Reserve Bank,

giving full particulars of the goods to be exported.
12.3.12 Export on elongated credit terms

Exporters intending to export goods on elongated credit terms may submit
their proposals giving full particulars through their banks for consideration
to the Regional Office concerned of the Reserve Bank.
12.3.13 Export of Currency

In terms of Foreign Exchange Management (Export and Import of
Currency) Regulations, 2000 notified vide Notification No. FEMA 6 (R)/
2015-RB dated December 29, 2015, as amended from time to time,
permission of Reserve Bank is required for any export of Indian currency
except to the extent permitted under any general permission granted
under the Regulations as under:
• Any person resident in India may take outside India (other than to Nepal
and Bhutan) currency notes of Government of India and Reserve Bank of
India up to an amount not exceeding Rs. 25,000 (Rupees twenty five
thousand only); and
• Any person resident outside India, not being a citizen of Pakistan and
Bangladesh and also not a traveler coming from and going to Pakistan or
Bangladesh, and visiting India may take outside India currency notes of
Government of India and Reserve Bank of India notes up to an amount
not exceeding Rs. 25,000 (Rupees twenty five thousand only) while
exiting only through an airport.
12.3.14 Project Exports and Service Exports

Export of engineering goods on deferred payment terms and execution of
turnkey projects and civil construction contracts abroad are collectively
referred to as ‘Project Exports’. Indian exporters are required to obtain the
approval of the AD Category-I Banks/Exim Bank at post-award stage
before undertaking execution of such contracts. Regulations relating to
‘Project Exports’ and ‘Service Exports’ are laid down in the revised
Memorandum of Instructions on Project and Service Exports (PEM-July
2014).
! !329
Accordingly, AD Banks/Exim Bank may consider awarding post-award

approvals without any monetary limit and permit subsequent changes in
the terms of post award approval within the relevant FEMA guidelines/
regulations. Project and service exporters may approach AD Banks/Exim
Bank based on their commercial judgment. The respective AD bank/Exim
Bank should monitor the projects for which post-award approval has been
granted by them.
In order to provide greater flexibility to project and service exporters in

conducting their overseas transactions, facilities have been provided as
under:
• Inter-project transfer of machinery — The stipulation regarding

recovery of market value (not less than book value) of the machinery,
etc., from the transferee project has been withdrawn. Further, exporters
may use the machinery/equipment for performing any other contract
secured by them in any country subject to the satisfaction of the
sponsoring AD Category-I Bank(s)/Exim Bank and also subject to the
reporting requirement and would be monitored by the AD Category-I
Bank(s)/Exim Bank.
• Inter-project transfer of funds — AD Category-I Bank(s)/Exim Bank

may permit exporters to open, maintain and operate one or more foreign
currency account/s in a currency/currency of their choice with inter-
project transferability of funds in any currency or country. The Inter-
project transfer of funds will be monitored by the AD Category-I bank(s)/
Exim Bank.
• Deployment of temporary cash surpluses — Subject to monitoring

by the AD Category-I Bank(s)/Exim Bank, Project/Service exporters may
deploy their temporary cash surpluses, generated outside India
investments in short-term paper abroad including treasury bills and other
monetary instruments with a maturity or remaining maturity of one year
or less and the rating of which should be at least A-1/AAA by Standard &
Poor or P-1/-AAA by Moody’s or F1/AAA by Fitch IBCA etc., and as
deposits with branches/subsidiaries outside India of AD Category-I banks
in India.
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• Repatriation of funds in case of on-site software contracts —The

requirement of repatriation of 30 per cent of contract value in respect of
on-site contracts by software exporter company/firm has been dispensed
with. They should, however, repatriate the profits of on-site contracts
after completion of the contracts.
12.4 Export Regulations
EDF/SOFTEX Procedure
12.4.1 Export of goods through customs ports
• Customs shall certify the value declared and give running serial number
on the two copies of Export Declaration Form (EDF), submitted by
exporter at Non-electronic Data Interchange (EDI) port.
• Customs shall retain the original EDF for transmission to the Reserve
Bank and return the duplicate copy to the exporter.
• At the time of shipment of goods, exporters shall submit the duplicate

copy of the EDF to Customs. After examining the goods, Customs shall
certify the quantity in the form and return it to the exporter for
submission to AD for negotiation or collection of export bills.
• Within 21 days from the date of export, exporter shall lodge the duplicate
copy together with relative shipping documents and an extra copy of the
invoice to the AD named in the EDF.
• After the documents have been negotiated/sent for collection, the AD

shall report the transaction through Export Data Processing and
Monitoring System (EDPMS) to the Reserve Bank and retain the
documents at their end.
• In case of exports made under deferred credit arrangement or to joint

ventures abroad against equity participation or under rupee credit
agreement, the number and date of the Reserve Bank approval and/or
number and date of the relative RBI circular shall be recorded at the
appropriate place on the EDF.
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• Where duplicate copy of EDF is misplaced or lost, AD may accept copy of

duplicate EDF duly certified by Customs.
12.4.2 Export of goods/software done through EDI ports
• The shipping bill shall be submitted in duplicate to the Commissioner of

Customs concerned.
• After verifying and authenticating, the Commissioner of Customs shall

hand over to the exporter, one copy of the shipping bill marked
‘Exchange Control (EC) Copy’ for being submitted to the AD within 21
days from the date of export for collection/negotiation of shipping
documents.
• The manner of disposal of EC copy of Shipping Bill shall be the same as

that for EDF. The duplicate copy of the form together with a copy of
invoice etc. shall be retained by ADs and may not be submitted to the
Reserve Bank.
Note: In cases where ECGC/private insurance companies regulated by

Insurance Regulatory and Development Authority (IRDA) initially settles
the claims of exporters and the export proceeds are subsequently received
from the buyer/buyer’s country, the share of exporters in the amount so
received is disbursed through the AD which had handled the shipping
documents post receipt of certificate issued by ECGC/ private insurance
companies. The certificate will indicate the number of declaration form,
name of the exporter, name of the AD, date of negotiation, bill number,
invoice value and the amount actually received by ECGC/private insurance
company.
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12.4.3 Export of goods through Post
Postal Authorities shall allow export of goods by post only if the original
copy of the EDF has been countersigned by an AD. Therefore, EDF which
involve sending goods by post should be first presented by the exporter to
an AD for countersignature. The procedure is as under:
• AD shall countersign EDF after ensuring that the parcel has been
addressed to their branch or correspondent bank in the country of import
and return the original copy to the exporter, who shall then submit the
EDF to the post office with the parcel.
• The duplicate copy of EDF shall be retained by the AD to whom the

exporter shall submit relevant documents together with an extra copy of
invoice for negotiation/collection, within the prescribed period of 21 days.
• The concerned overseas branch or correspondent shall be instructed to

deliver the parcel to consignee against payment or acceptance of relative
bill.
• AD may, however, countersign EDF covering parcels addressed direct to

the consignees, provided:
• An irrevocable letter of credit for the full value of export has been opened
in favor of the exporter and has been advised through the AD concerned.
Or
• The full value of the shipment has been received in advance by the
exporter through an AD.
Or
• The AD is satisfied, on the basis of the standing and track record of the
exporter and the arrangements made for realisation of the export
proceeds.
In such cases, particulars of advance payment/letter of credit/AD’s

certification of standing, etc., of the exporter should be furnished on the
form under proper authentication.
! !333
Any alteration in the name and address of consignee on the EDF form
should also be authenticated by AD under its stamp and signature.
12.4.4 Mid-sea transshipment of catch by deep sea fishing vessels
Since deep sea fishing involves continuous sailing outside the territorial
limit, transshipment of catches takes place in the high sea leading to
procedural constraints in regulatory reporting requirement viz. the
Declaration of Export in terms of Notification No..FEMA.23(R)/2015-RB
dated January 12, 2016.
For mid-sea transshipment of catches by Indian owned vessels, as per the

norms prescribed by the Ministry of agriculture, Government of India, the
EDF declaration procedure in this regard has been rationalised in
consultation with the Government of India as outlined below should be
followed by the exporter in conformity with Regulation 3 of Notification
No.FEMA.23 (R)/2015-RB dated January 12, 2016.
• The exporters may submit the EDF, duly signed by the Master of the
vessel in lieu of Customs certification, indicating the composition of the
catch, quantity, export value, date of shipment (date of transfer of
catch), etc. duly supported by a certificate from an international cargo
surveyor.
• Bill of Lading/Receipt of transshipment issued by the carrier vessel

should include the EDF Number.
• The prescribed period of realisation and repatriation should be reckoned

with reference to the date of transfer of catch as certified by the Master
of the vessel or the date of the invoice, whichever is earlier.
• The EDF, both original and duplicate, should indicate the number and
date of Letter of Permit issued by Ministry of Agriculture for operation of
the vessel.
• The exporter will complete the EDF in duplicate and both the copies may
be submitted to the Customs at the registered port of the vessel or any
other port as approved by Ministry of Agriculture. EDF (Original) will be
retained by the Customs for capturing of data in Customs’ Electronic
Data Interchange.
! !334
• Customs will give their running serial number on both the copies of EDF
and will return the duplicate copy to the exporter as the value
certification of the export has already been done as mentioned above.
Rules, Regulations and Directions issued in respect of the procedure for

submission of the EDF by exporter to the AD Category-I banks, and the
disposal of these forms by these banks will be same as applicable to the
other exporters.
12.4.5 SOFTEX Forms
All software exporters are permitted to file single as well as bulk SOFTEX
form in the form of a statement in excel format to the competent authority
for certification. Since the SOFTEX data from STPI/SEZ are being
transmitted in electronic format to RBI, the exporters must submit the
SOFTEX form in duplicate as per the revised procedure. STPI/SEZ will
retain one copy and handover duplicate copy to exporters after due
certification. As hitherto, the exporters have to provide information about
all the invoices including the ones lesser than US$25000, in the bulk
statement in excel format.
• A common “SOFTEX Form” has been devised to declare single as well as

bulk software exports.
• Reserve Bank of India has extended the facility for online generation of
the EDF Form Number and the SOFTEX Form Number (Single as well as
bulk for use in off-site software exports). The facility of manual allotment
of single as well bulk SOFTEX Form number by Regional Offices of RBI
has been dispensed with accordingly.
(1) Invoicing of software exports
(a) For long duration contracts involving series of transmissions, the

exporters should bill their overseas clients periodically, i.e., at least once a
month or on reaching the ‘milestone’ as provided in the contract entered
into with the overseas client and the last invoice/bill should be raised not
later than 15 days from the date of completion of the contract. It would be
in order for the exporters to submit a combined SOFTEX Form for all the
invoices raised on a particular overseas client, including advance
remittances received in a month.
! !335
(b) Contracts involving only ‘one-shot operation’, the invoice/bill should be

raised within 15 days from the date of transmission.
(c) The exporter should submit declaration in Form SOFTEX in

quadruplicate in respect of export of computer software and audio/video/
television software to the designated official concerned of the Government
of India at STPI/EPZ /FTZ /SEZ for valuation/certification not later than 30
days from the date of invoice/the date of last invoice raised in a month, as
indicated above. The designated officials may also certify the SOFTEX
Forms of EOUs, which are registered with them.
(d) The invoices raised on overseas clients as at (a) to (c) above will be
subject to valuation of export declared on SOFTEX Form by the designated
official concerned of the Government of India and consequent amendment
made in the invoice value, if necessary.
(2) Citing of specific identification numbers

In all applications/correspondence with the Reserve Bank, the specific
identification number as available on the EDF and SOFTEX Forms should
invariably be cited.
12.4.6 Export of Services

It is clarified by RBI that, in respect of export of services to which none of
the Forms specified in these Regulations apply, the exporter may export
such services without furnishing any declaration, but shall be liable to
realise the amount of foreign exchange which becomes due or accrues on
account of such export, and to repatriate the same to India in accordance
with the provisions of the Act, and these Regulations, as also other rules
and regulations made under the Act.
12.4.6 Third party export proceeds

Realisation of export proceeds in respect of export of goods/software from
third party should be duly declared by the exporter in the appropriate
declaration form.
12.4.7 Random verification

In all the above procedures, AD Category-I bank should ensure, by random
check of the relevant duplicate forms by their internal/concurrent auditors,
that non-realisation or short realisation allowed, if any, is within the powers
! !336
delegated to them or has been duly approved by the Reserve Bank,

wherever necessary.
12.4.8 Short Shipments and Shut out Shipments

When part of a shipment covered by an EDF already filed with Customs is
short-shipped, the exporter must give notice of short-shipment to the
Customs in the form and manner prescribed. In case of delay in obtaining
certified short-shipment notice from the Customs, the exporter should give
an undertaking to the AD banks to the effect that he has filed the short-
shipment notice with the Customs and that he will furnish it as soon as it is
obtained.
Where a shipment has been entirely shut out and there is delay in making
arrangements to re-ship, the exporter will give notice in duplicate to the
Customs in the form and manner prescribed, attaching thereto the unused
duplicate copy of EDF and the shipping bill. The Customs will verify that the
shipment was actually shut out, certify the copy of the notice as correct
and forward it to the Reserve Bank together with unused duplicate copy of
the EDF. In this case, the original EDF received earlier from Customs will be
cancelled. If the shipment is made subsequently, a fresh set of EDF should
be completed.
12.4.9 Consolidation of air cargo/sea cargo
(i) Consolidation of air cargo
Where air cargo is shipped under consolidation, the airline company’s

Master Airway Bill will be issued to the Consolidating Cargo Agent. The
Cargo agent in turn will issue his own House Airway Bills (HAWBs) to
individual shippers.
AD Category-I banks may negotiate HAWBs only if the relative letter of

credit specifically provides for negotiation of these documents in lieu of
Airway Bills issued by the airline company.
(ii) Consolidation of sea cargo
AD Category-I banks may accept Forwarder’s Cargo Receipts (FCR) issued

by IATA approved agents, in lieu of bills of lading, for negotiation/collection
of shipping documents, in respect of export transactions backed by letters
! !337
of credit, if the relative letter of credit specifically provides for negotiation

of this document, in lieu of bill of lading even if the relative sale contract
with the overseas buyer does not provide for acceptance of FCR as a
shipping document, in lieu of bill of lading
Further, Authorised Dealers may, at their discretion, also accept FCR issued
by Shipping companies of repute/IATA approved agents (in lieu of bill of
lading), for purchase/discount/collection of shipping documents even in
cases, where export transactions are not backed by letters of credit,
provided their 'relative sale contract' with overseas buyer provides for
acceptance of FCR as a shipping document in lieu of bill of lading. However,
the acceptance of such FCR for purchase/discount would purely be the
credit decision of the bank concerned who, among others, should satisfy
itself about the bonafides of the transaction and the track record of the
overseas buyer and the Indian supplier since FCRs are not negotiable
documents. It would be advisable for the exporters to ensure due diligence
on the overseas buyer, in such cases.
12.4.10 Exemption from Declaration
The requirement of declaration of export of goods and software in the

prescribed form will not apply to the cases indicated in Regulation 4 of
Foreign Exchange Management (Export of Goods and Services) Regulations
dated January 12, 2016. The exporters shall, however, be liable to realise
and repatriate export proceeds as per FEMA Regulations.
12.5 Summary
Export trade is regulated by the Directorate General of Foreign Trade

(DGFT) and its regional offices, functioning under the Ministry of
Commerce and Industry, Department of Commerce, Government of India.
Policies and procedures required to be followed for exports from India are
announced by the DGFT, from time to time.
There is no restriction on invoicing of export contracts in Indian Rupees in

terms of the Rules, Regulations, Notifications and Directions framed under
the Foreign Exchange Management Act 1999. Further, in terms of Para 2.52
of the Foreign Trade Policy (2015-2020), “All export contracts and invoices
shall be denominated either in freely convertible currency or Indian rupees
but export proceeds shall be realised in freely convertible currency
! !338
It is obligatory on the part of the exporter to realise and repatriate the full
value of goods/software/services to India within a stipulated period from
the date of export.
The amount representing the full export value of the goods exported shall
be received through an AD Bank in the manner specified in the Foreign
Exchange Management (Manner of Receipt & Payment) Regulations, 2016
notified vide Notification No. FEMA.14 (R)/2016-RB dated May 02, 2016
Taking into account the evolving international trade practices, third party
payments for export/import transactions is permitted which is subject to
certain conditions. To further liberalise the procedure and facilitate
settlement of export transactions where the invoicing is in a freely
convertible currency and the settlement takes place in the currency of the
beneficiary, which though convertible, does not have a direct exchange
rate, AD Category-I banks may permit settlement of such export
transactions (excluding those put through the ACU mechanism), subject to
certain conditions.
Reserve Bank may consider applications in Form EFC from exporters having
good track record for opening a foreign currency account with AD banks in
India and outside India subject to certain terms and conditions. Under the
scheme of Government of India, firms and companies dealing in purchase/
sale of rough or cut and polished diamonds/precious metal jewellery plain,
minakari and/or studded with/without diamond and/or other stones, with a
track record of at least two years in import/export of diamonds/colored
gemstones/diamond and colored gemstones studded jewellery/plain gold
jewellery and having an average annual turnover of Rs. 3 crores or above
during the preceding three licensing years (licensing year is from April to
March) are permitted to transact their business through Diamond Dollar
Accounts. A person resident in India may open with, an AD Category-I
bank in India, an account in foreign currency called the Exchange Earners’
Foreign Currency (EEFC) Account, in terms of Regulation 4(D) of Foreign
Exchange Management (Foreign Currency Accounts by a person Resident in
India) Regulations, 2015 dated January 21, 2016.
The Countertrade proposals involving adjustment of value of goods

imported into India against value of goods exported from India in terms of
an arrangement voluntarily entered into between the Indian party and the
! !339

be considered by the Reserve Bank subject to certain conditions.
AD banks have been permitted to factor the export receivables on a non-

recourse basis, so as to enable the exporters to improve their cash flow
and meet their working capital requirements subject to conditions.

import.

referred to as ‘Project Exports’. Indian exporters are required to obtain the
approval of the AD Category-I Banks/Exim Bank at post-award stage
before undertaking execution of such contracts.
Customs shall certify the value declared and give running serial number on
the two copies of Export Declaration Form (EDF), submitted by exporter at
Non-Electronic Data Interchange (EDI) port.
Postal Authorities shall allow export of goods by post only if the original
copy of the EDF has been countersigned by an AD. Therefore, EDF which
involve sending goods by post should be first presented by the exporter to
an AD for countersignature.
For mid-sea transshipment of catches by Indian owned vessels, as per the
norms prescribed by the Ministry of agriculture, Government of India, the
EDF declaration procedure in this regard has been rationalised in
consultation with the Government of India as outlined below should be
followed by the exporter in conformity with Regulation 3 of Notification
No.FEMA.23 (R)/2015-RB dated January 12, 2016.
All software exporters are permitted to file single as well as bulk SOFTEX
Form in the form of a statement in excel format to the competent authority
for certification. Since the SOFTEX data from STPI/SEZ are being
transmitted in electronic format to RBI, the exporters must submit the
SOFTEX Form in duplicate as per the revised procedure.
! !340
It is clarified by RBI that, in respect of export of services to which none of

the Forms specified in these Regulations apply, the exporter may export
such services without furnishing any declaration, but shall be liable to
realise the amount of foreign exchange which becomes due or accrues on
account of such export, and to repatriate the same to India in accordance
with the provisions of the Act, and these Regulations, as also other rules
and regulations made under the Act.
12.6 Questions
1. Explain the manner of receipt of payment in respect of export of goods

and services.
2. What are the guidelines for third party payments for export
transactions?
3. What precaution will you take while exporting the goods through post?
4. Write short notes on third party receipt of export realisation.
5. What is short shipment and shut out shipment?
1. Online payment gateway system facility shall only be available for

export of goods and services of value not exceeding __________.
(a) USD 2,000
(b) USD 5,000
(c) USD 10,000
(d) USD 25,000
! !341
2. Exporters may deposit the foreign exchange obtained by sale of goods

at the international exhibition/ trade fair and operate the account during
their stay outside India provided that the balance in the account is
repatriated to India through normal banking channels within a period of
__________ from the date of closure of the exhibition/trade fair
(a) one month
(b) three months
(c) six months
(d) Nine months
3. What is maximum number of Diamond Dollar Accounts permitted to

open by eligible exporters with their banks?
(a) One
(b) Three
(c) Five
(d) Seven
4. Any person resident in India may take outside India (other than to
Nepal and Bhutan) currency notes of Government of India and Reserve
Bank of India up to an amount not exceeding __________.
(a) USD 25,000
(b) Rs. 25,000
(c) Rs. 10,000
(d) USD 10,000
5. Contracts involving only ‘one-shot operation’, the invoice/bill should be

raised within __________.from the date of transmission.
(a) 90 Days
(b) 60 days
(c) 30 days
(d) 15 days
Answers: 1. (c), 2. (a), 3. (c), 4. (b), 5. (d)
! !342
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !343
EXPORT: OBLIGATIONS AND ROLE OF AD BANKS
Chapter 13
Export: Obligations And Role Of Ad Banks
Objectives

responsibilities and obligation of parties involved in export trade. You will
also understand rate of Banks handling the export documents and receives
the export realisation.
Structure
13.1 Introduction
13.2 EDF
13.3 Facilities to Exporters
13.4 Write-off of Unrealised Export Bills
13.5 Exporters’ Caution List
13.6 Issue of Guarantees by an Authorised Dealer
13.7 Issuance of Electronic Bank Realisation Certificate (e-BRC)
13.8 Remittances Connected with Export
13.9 Summary
13.10 Questions
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13.1 Introduction
To boost the exports from the country Government of India has taken
several measures and to make exports hassle-free, under Foreign
Exchange Management Acts delegated various powers to Authorised Dealer
Banks. To execute the power delegated at each stage and as per the
requirement of the exporter for various stages of export, certain guidelines
have been issued. We will consider in this chapter obligations under the
provision of regulations and role expected to be played by AD Banks.
13.2 EDF
13.2.1 Grant of EDF waiver
AD Category-I banks may consider requests for grant of EDF waiver from
exporters for export of goods free of cost, for export promotion up to 2 per
cent of the average annual exports of the applicant during the preceding
three financial years subject to a ceiling of Rs. 5 lakhs. For Status Holder
exporters, this limit as per the present Foreign Trade Policy is Rs. 10 lakhs
or 2 per cent of the average annual export realisation during the preceding
three licensing years (April-March), whichever is lower.
Exports of goods not involving any foreign exchange transaction directly or

indirectly requires the waiver of EDF procedure from the Reserve Bank.
13.2.2 Receipt of advance against exports
In terms of Regulation 15 of Notification No. FEMA 23 (R)/2015-RB dated

January 12, 2016, where an exporter receives advance payment (with or
without interest), from a buyer outside India, the exporter shall be under
an obligation to ensure that the shipment of goods is made within one year
from the date of receipt of advance payment; the rate of interest, if any,
payable on the advance payment does not exceed London Interbank
Offered Rate (LIBOR) + 100 basis points; and the documents covering the
shipment are routed through the AD Category-I bank through whom the
advance payment is received. Provided that in the event of the exporter’s
inability to make the shipment, partly or fully, within one year from the
date of receipt of advance payment, no remittance towards refund of
unutilised portion of advance payment or towards payment of interest,
! !345
shall be made after the expiry of the said period of one year, without the
prior approval of the Reserve Bank.
EDPMS will capture the details of advance remittances received for exports.
AD Category-I banks will have to report all the inward remittances
including advance as well as old outstanding inward remittances received
for export of goods/software to EDPMS. Further, AD Category-I banks need
to report the electronic FIRC to EDPMS wherever such FIRCs are issued
against inward remittances.
The quarterly return being submitted for delay in utilisation of advances

received for export stands discontinued.
AD Category-I banks can also allow exporters having a minimum of three

years’ satisfactory track record to receive long-term export advance up to a
maximum tenor of 10 years to be utilised for execution of long term supply
contracts for export of goods subject to the conditions as under:
• Firm irrevocable supply orders and contracts should be in place. The

contract with the overseas party/buyer should be vetted and the same
shall clearly specify the nature, amount and delivery timelines of the
products over the years and penalty in case of non-performance or
contract cancellation. Product pricing should be in consonance with
prevailing international prices.
• Company should have capacity, systems and processes in place to ensure

that the orders over the duration of the said tenure can actually be
executed.
• The facility is to be provided only to those entities, which have not come
under the adverse notice of Enforcement Directorate or any such
regulatory agency or have not been caution listed.
• Such advances should be adjusted through future exports.
• The rate of interest payable, if any, should not exceed LlBOR plus 200
basis points.
• The documents should be routed through an Authorised Dealer bank

only.
! !346
• Authorised Dealer bank should ensure compliance with AML/KYC

guidelines
• Such export advances shall not be permitted to be used to liquidate

Rupee loans classified as NPA.
• Double financing for working capital for execution of export orders should
be avoided.
• Receipt of such advance of USD 100 million or more should be

immediately reported to the Trade Division, Foreign Exchange
Department, Reserve Bank of India, Central Office, Mumbai.
• In case Authorised Dealer banks are required to issue bank guarantees

(BG)/Standby Letter of Credit (SBLC) for export performance, then the
issuance should be rigorously evaluated as any other credit proposal
keeping in view, among others, prudential requirements based on board
approved policy.
a. BG/SBLC may be issued for a term not exceeding two years at a time
and further rollover of not more than two years at a time may be
allowed subject to satisfaction with relative export performance as per
the contract.
b. BG/SBLC should cover only the advance on reducing balance basis.
c. BG/SBLC issued from India in favor of overseas buyer should not be

discounted by the overseas branch/subsidiary of bank in India.
Note: AD Category-I banks may also be guided by the Master Circular on

Guarantees and Co-acceptances issued by Department of Banking
Regulation.
• AD Category-I banks may allow the purchase of foreign exchange from

the market for refunding advance payment credited to EEFC account only
after utilising the entire balances held in the exporter’s EEFC accounts
maintained at different branches/banks.
• AD Category-I banks may allow exporters to receive advance payment

for export of goods which would take more than one year to manufacture
! !347
and ship and where the ‘export agreement’ provides for shipment of
goods extending beyond the period of one year from the date of receipt
of advance payment subject to the following conditions: -
i. The KYC and due diligence exercise has been done by the AD Category-I
bank for the overseas buyer;
ii. Compliance with the Anti-Money Laundering standards has been

ensured;
iii. The AD Category-I bank should ensure that export advance received by
the exporter should be utilised to execute export and not for any other
purpose, i.e., the transaction is a bona fide transaction;
iv. Progress payment, if any, should be received directly from the overseas
buyer strictly in terms of the contract;
v. The rate of interest, if any, payable on the advance payment shall not
exceed London Inter-Bank Offered Rate (LIBOR) + 100 basis points;
vi. There should be no instance of refund exceeding 10% of the advance

payment received in the last three years;
vii.The documents covering the shipment should be routed through the

same authorised dealer bank; and
viii.In the event of the exporter's inability to make the shipment, partly or
fully, no remittance towards refund of unutilised portion of advance
payment or towards payment of interest should be made without the
• Since there is substantial increase in the number and amount of

advances received for exports remaining outstanding beyond the
stipulated period on account of non-performance of such exports
(shipments in case of export of goods), AD Category-I banks are advised
to efficiently follow up with the concerned exporters in order to ensure
that export performance (shipments in case of export of goods) are
completed within the stipulated time period.
! !348
• AD category-I banks should exercise proper due diligence and ensure

compliance with KYC and AML guidelines, so that only bona fide export
advances flow into India. Doubtful cases as also instances of chronic
defaulters may be referred to Directorate of Enforcement (DoE) for
further investigation. A quarterly statement indicating details of such
cases may be forwarded to the concerned Regional Offices of RBI within
21 days from the end of each quarter.
13.2.3 EDF Approval
A. For trade fair/exhibitions abroad
Firms/Companies and other organisations participating in trade fair/

exhibition abroad can take/export goods for exhibition and sale outside
India without the prior approval of the Reserve Bank. Unsold exhibit items
may be sold outside the exhibition/trade fair in the same country or in a
third country. Such sales at discounted value are also permissible. It would
also be permissible to 'gift’ unsold goods up to the value of USD 5000 per
exporter, per exhibition/trade fair. AD Category-I banks may approve EDF
of export items for display or display-cum-sale in trade fairs/exhibitions
outside India subject to the following:
i. The exporter shall produce relative Bill of Entry within one month of re-
import into India of the unsold items.
ii. The exporter shall report to the AD Category-I banks the method of
disposal of all items exported, as well as the repatriation of proceeds to
India.
iii. Such transactions approved by the AD Category-I banks will be subject

to 100 per cent audit by their internal inspectors/auditors.
B. EDF approval for export of goods for re-imports
AD Category-I banks may consider request from exporters for granting EDF
approval in cases where goods are being exported for re-import after
repairs/maintenance/testing/calibration, etc., subject to the condition that
the exporter shall produce relative Bill of Entry within one month of re-
import of the exported item from India.
! !349
Where the goods being exported for testing are destroyed during testing,
AD Category-I banks may obtain a certificate issued by the testing agency
that the goods have been destroyed during testing, in lieu of Bill of Entry
for import.
C. Re-export of unsold rough diamonds from special notified zone

of customs without export declaration Form (EDF) formality
In order to facilitate re-export of unsold rough diamonds imported on free

of cost basis at SNZ, it is clarified that the unsold rough diamonds, when
re-exported from the SNZ (being an area within the Customs) without
entering the Domestic Tariff Area (DTA), do not require any EDF formality.
Entry of consignment containing different lots of rough diamonds into the

SNZ should be accompanied by a declaration of notional value by way of an
invoice and a packing list indicating the free cost nature of the
consignment. Under no circumstance, entry of such rough diamonds is
permitted into DTA.
For the lot/lots cleared at the Precious Cargo Customs Clearance Centre,
Mumbai, Bill of Entry shall be filed by the buyer. AD bank may permit such
import payments after being satisfied with the bona fides of the
transaction. Further, AD bank shall also maintain a record of such
transactions.
13.3 Facilities to exporters
13.3.1 Setting up of offices abroad and acquisition of immovable

property for overseas offices
At the time of setting up of the office, AD Category-I banks may allow

remittances towards initial expenses up to fifteen per cent of the average
annual sales/income or turnover during the last two financial years or up to
twenty-five per cent of the net worth, whichever is higher.
For recurring expenses, remittances up to ten per cent of the average

annual sales/income or turnover during the last two financial years may be
sent for the purpose of normal business operations of the office (trading/
non-trading)/branch or representative office outside India subject to the
following terms and conditions:
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a. The overseas branch/office has been set up or representative is posted

overseas for conducting normal business activities of the Indian entity;
b. The overseas branch/office/representative shall not enter into any

contract or agreement in contravention of the Act, Rules or Regulations
made thereunder;
c. The overseas office (trading/non-trading)/branch/representative should

not create any financial liabilities, contingent or otherwise, for the head
office in India and also not invest surplus funds abroad without prior
approval of the Reserve Bank. Any funds rendered surplus should be
repatriated to India.
d. The details of bank accounts opened in the overseas country should be

promptly reported to the AD Bank.
e. AD Category-I banks may also allow remittances by a company

incorporated in India having overseas offices, within the above limits for
initial and recurring expenses, to acquire immovable property outside
India for its business and for residential purpose of its staff.
f. The overseas office/branch of software exporter company/firm may

repatriate to India 100 per cent of the contract value of each ‘off-site’
contract.
g. In case of companies taking up ‘on-site’ contracts, they should

repatriate the profits of such ‘on site’ contracts after the completion of
the said contracts.
h. An audited yearly statement showing receipts under ‘off-site’ and ‘on-

site’ contracts undertaken by the overseas office, expenses and
repatriation thereon may be sent to the AD Category – I banks.
13.3.2 Delay in submission of shipping documents by exporters

In cases where exporters’ present documents pertaining to exports after
the prescribed period of 21 days from date of export, AD Category-I banks
may handle them without prior approval of the Reserve Bank, provided
they are satisfied with the reasons for the delay.
! !351
13.3.3 Return of documents to exporters

The duplicate copies of EDF and shipping documents, once submitted to
the AD Category – I banks for negotiation, collection, etc., should not
ordinarily be returned to exporters, except for rectification of errors and
resubmission.
13.3.4 Landlocked countries

AD Category-I banks may deliver one negotiable copy of the Bill of Lading
to the Master of the carrying vessel or trade representative for exports to
certain landlocked countries if the shipment is covered by an irrevocable
letter of credit and the documents conform strictly to the terms of the
Letter of Credit which, inter alia, provides for such delivery.
13.3.5 Direct dispatch of documents by the exporter

AD Category-I banks should normally dispatch shipping documents to their
overseas branches/correspondents expeditiously. However, they may
dispatch shipping documents direct to the consignees or their agents
resident in the country of final destination of goods in cases where:
a. Advance payment or an irrevocable letter of credit has been received for

the full value of the export shipment and the underlying sale contract/
letter of credit provides for dispatch of documents direct to the
consignee or his agent resident in the country of final destination of
goods.
b. The AD Category-I banks may also accede to the request of the

exporter provided the exporter is a regular customer and the AD
Category-I bank is satisfied, on the basis of standing and track record of
the exporter and arrangements have been made for realisation of export
proceeds.
AD Category-I banks may also permit ‘Status Holder Exporters’ (as defined
in the Foreign Trade Policy), and units in Special Economic Zones (SEZ) to
dispatch the export documents to the consignees outside India subject to
the terms and conditions that:
! !352
a. The export proceeds are repatriated through the AD banks named in the
EDF.
b. The duplicate copy of the EDF is submitted to the AD banks for

monitoring purposes, by the exporters within 21 days from the date of
shipment of export.
AD Category-I banks may regularize cases of dispatch of shipping

documents by the exporter direct to the consignee or his agent resident in
the country of the final destination of goods, up to USD 1 million or its
equivalent, per export shipment, subject to the following conditions:
a. The export proceeds have been realized in full.
b. The exporter is a regular customer of AD Category-I bank for a period of

at least six months.
c. The exporter’s account with the AD Category-I bank is fully compliant

with the Reserve Bank’s extant KYC/AML guidelines.
d. The AD Category-I bank is satisfied about the bona fides of the

transaction.
e. In case of doubt, the AD Category-I bank may consider filing Suspicious

Transaction Report (STR) with FIU_IND (Financial Intelligence Unit in
India).
13.3.6 Part drawings/undrawn balances
In certain lines of export trade, it is the practice to leave a small part of the
invoice value undrawn for payment after adjustment due to differences in
weight, quality, etc., to be ascertained after arrival and inspection,
weighment or analysis of the goods. In such cases, AD Category-I banks
may negotiate the bills, provided:
a. The amount of undrawn balance is considered normal in the particular

line of export trade, subject to a maximum of 10 per cent of the full
export value.
! !353
b. An undertaking is obtained from the exporter on the duplicate of EDF

forms that he will surrender/account for the balance proceeds of the
shipment within the period prescribed for realisation.
In cases where the exporter has not been able to arrange for repatriation
of the undrawn balance in spite of best efforts, AD Category-I banks, on
being satisfied with the bona fides of the case, should ensure that the
exporter has realised at least the value for which the bill was initially drawn
(excluding undrawn balances) or 90 per cent of the value declared on EDF
form, whichever is more and a period of one year has elapsed from the
date of shipment.
13.3.7 Consignment Exports

When goods have been exported on consignment basis, the AD Category-I
bank, while forwarding shipping documents to his overseas branch/
correspondent, should instruct the latter to deliver them only against trust
receipt/undertaking to deliver sale proceeds by a specified date within the
period prescribed for realisation of proceeds of the export. This procedure
should be followed even if, according to the practice in certain trades, a bill
for part of the estimated value is drawn in advance against the exports.
• The agents/consignees may deduct from sale proceeds of the goods

expenses normally incurred towards receipt, storage and sale of the
goods, such as landing charges, warehouse rent, handling charges, etc.,
and remit the net proceeds to the exporter.
• The account sales received from the Agent/Consignee should be verified

by the AD Category-I banks. Deductions in Account Sales should be
supported by bills/receipts in original except in case of petty items like
postage/cable charges, stamp duty, etc.
• In case the goods are exported on consignment basis, freight and marine
insurance must be arranged in India.
• AD Category-I banks may allow the exporters to abandon the books,

which remain unsold at the expiry of the period of the sale contract.
Accordingly, the exporters may show the value of the unsold books as
deduction from the export proceeds in the Account Sales.
! !354
13.3.8 Opening/Hiring of Warehouses abroad
AD Category-I banks may consider the applications received from

exporters and grant permission for opening/hiring warehouses abroad
subject to the following conditions:
a. Applicant’s export outstanding does not exceed 5 per cent of exports

made during the previous financial year.
b. Applicant has a minimum export turnover of USD 100,000/- during the

last financial year.
c. Period of realisation should be as applicable.
d. All transactions should be routed through the designated branch of the

AD Banks.
e. The above permission may be granted to the exporters initially for a

period of one year and renewal may be considered subject to the
applicant satisfying the requirement above.
f. AD Category-I banks granting such permission/approvals should

maintain a proper record of the approvals granted.
13.3.9 Export bills register
AD Category-I banks should maintain Export Bills Register, in physical or

electronic form aligned with Export Data Processing and Monitoring System
(EDPMS). The bill number should be given to all type of export transactions
on a financial year basis (i.e., April to March) and same should be reported
in EDPMS.
13.3.10 Follow-up of overdue bills
• AD Category-I banks should closely watch realisation of bills and in cases

where bills remain outstanding, beyond the due date for payment from
the date of export, the matter should be promptly taken up with the
concerned exporter. If the exporter fails to arrange for delivery of the
proceeds within the stipulated period or seek extension of time beyond
the stipulated period, the matter should be reported to the Regional
! !355
Office concerned of the Reserve Bank stating, where possible, the reason
for the delay in realising the proceeds.
• The duplicate copies of EDF/SOFTEX Forms should, continue to be held

by AD Category-I banks until the full proceeds are realised, except in
case of undrawn balances.
• AD Category-I banks should follow up export outstanding with exporters

systematically and vigorously so that action against defaulting exporters
does not get delayed. Any laxity in the follow-up of realisation of export
proceeds by AD Category-I banks will be viewed seriously by the Reserve
Bank, leading to the invocation of the penal provision under FEMA, 1999.
• With operationalisation of EDPMS on March 01, 2014, realisation of all

export transaction for shipping documents after February 28, 2014
should be reported in EDPMS.
13.3.11 Reduction in invoice value on account of prepayment of

usance bills
Occasionally, exporters may approach AD Category-I banks for reduction in

invoice value on account of cash discount to overseas buyers for
prepayment of the usance bills. AD Category-I banks may allow cash
discount to the extent of amount of proportionate interest on the unexpired
period of usance, calculated at the rate of interest stipulated in the export
contract or at the prime rate/LIBOR of the currency of invoice where rate of
interest is not stipulated in the contract.
13.3.12 Reduction in invoice value in other cases
If, after a bill has been negotiated or sent for collection, its amount is to be
reduced for any reason, AD Category-I banks may approve such reduction,
if satisfied about genuineness of the request, provided:
a. The reduction does not exceed 25 per cent of invoice value,
b. It does not relate to export of commodities subject to floor price

stipulations,
c. The exporter is not on the exporters’ caution list of the Reserve Bank,
! !356
d. The exporter is advised to surrender proportionate export incentives

availed of, if any.
In the case of exporters who have been in the export business for more
than three years, reduction in invoice value may be allowed, without any
percentage ceiling, subject to the above conditions as also subject to their
track record being satisfactory, i.e., the export outstanding do not exceed 5
per cent of the average annual export realisation during the preceding
three financial years.
For the purpose of reckoning the percentage of export bills outstanding to

the average export realisations during the preceding three financial years,
outstanding of exports made to countries facing externalisation problems
may be ignored provided the payments have been made by the buyers in
the local currency.
13.3.13 Change of buyer/consignee
Prior approval of the Reserve Bank is not required if, after goods have been
shipped, they are to be transferred to a buyer other than the original buyer
in the event of default by the latter, provided the reduction in value, if any,
involved does not exceed 25 per cent of the invoice value and the
realisation of export proceeds is not delayed beyond the period of 9
months from the date of export. Where the reduction in value exceeds
25%, all other relevant conditions stipulated should also be satisfied.
13.3.14 Export of goods by special economic zones (SEZs)
Units in SEZs are permitted to undertake job work abroad and export
goods from that country itself subject to the conditions that:
a. Processing/Manufacturing charges are suitably loaded in the export

price and are borne by the ultimate buyer.
b. The exporter has made satisfactory arrangements for realisation of full

export proceeds subject to the usual EDF procedure.
AD Category-I banks may permit units in DTAs to purchase foreign

exchange for making payment for goods supplied to them by units in SEZs.
Authorised Dealer Banks are permitted to sell foreign exchange to a unit in
! !357
the DTA for making payment in foreign exchange to a unit in the SEZ for
the services rendered by it (i.e., a unit in SEZ) to a DTA unit. It must be
ensured that in the Letter of Approval (LoA) issued to the SEZ unit by the
Development Commissioner(DC) of the SEZ, the provisions pertaining to
the goods/services supplied by the SEZ unit to the DTA unit and for
payment in foreign exchange for the same should be mentioned.
13.3.15 Extension of time
The Reserve Bank of India has permitted the AD Category-I banks to

extend the period of realisation of export proceeds beyond stipulated
period of realisation from the date of export, up to a period of six months,
at a time, irrespective of the invoice value of the export subject to the
a. The export transactions covered by the invoices are not under

investigation by Directorate of Enforcement/Central Bureau of
Investigation or other investigating agencies,
b. The AD Category-I bank is satisfied that the exporter has not been able
to realise export proceeds for reasons beyond his control,
c. The exporter submits a declaration that the export proceeds will be

realised during the extended period,
d. While considering extension beyond one year from the date of export,
the total outstanding of the exporter does not exceed USD one million
or 10 per cent of the average export realisations during the preceding
three financial years, whichever is higher.
e. In cases where the exporter has filed suits abroad against the buyer,
extension may be granted irrespective of the amount involved/
outstanding.
In cases which are not covered by the above instructions would require
prior approval from the concerned Regional Office of the Reserve Bank.
Reporting should be done in EDPMS.
! !358
13.3.16 Shipments lost in transit
When shipments from India for which payment has not been received
either by negotiation of bills under letters of credit or otherwise are lost in
transit, the AD Category-I banks must ensure that insurance claim is made
as soon as the loss is known.
In cases where the claim is payable abroad, the AD Category - banks must
arrange to collect the full amount of claim due on the lost shipment,
through the medium of their overseas branch/correspondent and release
the duplicate copy of EDF only after the amount has been collected.
A certificate for the amount of claim received should be furnished on the

reverse of the duplicate copy.
AD Category-I banks should ensure that amounts of claims on shipments

lost in transit which are partially settled directly by shipping companies/
airlines under carrier’s liability abroad are also repatriated to India by
exporters.
13.3.17 Export claims
AD Category-I banks may remit export claims on application, provided the

relative export proceeds have already been realised and repatriated to
India and the exporter is not on the caution list of the Reserve Bank.
In all such cases of remittances, the exporter should be advised to

surrender proportionate export incentives, if any, received by him.
13.4 Write-off of unrealized export bills
An exporter who has not been able to realise the outstanding export dues
despite best efforts, may either self write-off or approach the AD Category-
I banks, who had handled the relevant shipping documents, with
appropriate supporting documentary evidence. The limits prescribed for
write-offs of unrealised export bills are as under:
! !359
5%*
Self “write-off” by an exporter
(Other than Status Holder Exporter)
Self “write-off” by Status Holder Exporters 10%*
Write-off” by Authorised Dealer Bank- 10%*
*of the total export proceeds realised during the previous calendar
year.
The above limits will be related to total export proceeds realised during the
previous calendar year and will be cumulatively available in a year.
The above write-off will be subject to conditions that the relevant amount
has remained outstanding for more than one year, satisfactory
documentary evidence is furnished in support of the exporter having made
all efforts to realise the dues, and the case falls under any of the
undernoted categories:
i. The overseas buyer has been declared insolvent and a certificate from
the official liquidator indicating that there is no possibility of recovery of
export proceeds has been produced.
ii. The overseas buyer is not traceable over a reasonably long period of
time.
iii. The goods exported have been auctioned or destroyed by the Port/
Customs/Health authorities in the importing country.
iv. The unrealised amount represents the balance due in a case settled
through the intervention of the Indian Embassy, Foreign Chamber of
Commerce or similar Organisation;
v. The unrealised amount represents the undrawn balance of an export bill

(not exceeding 10% of the invoice value) remaining outstanding and
turned out to be unrealisable despite all efforts made by the exporter;
vi. The cost of resorting to legal action would be disproportionate to the

unrealised amount of the export bill or where the exporter even after
! !360
winning the Court case against the overseas buyer could not execute
the Court decree due to reasons beyond his control;
vii.Bills were drawn for the difference between the letter of credit value and
actual export value or between the provisional and the actual freight
charges but the amounts have remained unrealised consequent on
dishonour of the bills by the overseas buyer and there are no prospects
of realisation.
viii.The exporter has surrendered proportionate export incentives if any,

availed of in respect of the relative shipments. The AD Category-I banks
should obtain documents evidencing surrender of export incentives
availed of before permitting the relevant bills to be written off.
ix. In case of self write-off, the exporter should submit to the concerned AD
bank, a Chartered Accountant’s certificate, indicating the export
realisation in the preceding calendar year and also the amount of write-
off already availed of during the year, if any, the relevant EDF to be
written off, Bill No., invoice value, commodity exported, country of
export. The CA certificate may also indicate that the export benefits, if
any, availed of by the exporter have been surrendered.
x. However, the following would not qualify for the write-off facility:
a. Exports made to countries with externalisation problem, i.e., where

the overseas buyer has deposited the value of export in local
currency but the amount has not been allowed to be repatriated by
the central banking authorities of the country.
b. EDF which are under investigation by agencies like, Enforcement

Directorate, Directorate of Revenue Intelligence, Central Bureau of
Investigation, etc., as also the outstanding bills which are subject
matter of civil/criminal suit.
xi. AD banks should report write-off of export bills through EDPMS to the
Reserve Bank.
xii.AD banks are advised to put in place a system under which their
internal inspectors or auditors (including external auditors appointed by
! !361
authorised dealers) should carry out random sample check/percentage

check of write-off outstanding export bills.
xiii.Cases not covered by the above instructions/beyond the above limits,

may be referred to the concerned Regional Office of Reserve Bank of
India.
13.4.1 Write-off in cases of payment of claims by ECGC and private

insurance companies regulated by insurance regulatory and
development authority (IRDA)
AD Category-I banks shall, on an application received from the exporter

supported by documentary evidence from the ECGC and private insurance
companies regulated by IRDA confirming that the claim in respect of the
outstanding bills has been settled by them, write off the relative export
bills in EDPMS.
• Such write-off will not be restricted to the limit of 10 per cent indicated
above.
• Surrender of incentives, if any, in such cases will be as provided in the

Foreign Trade Policy.
• The claims settled in rupees by ECGC and private insurance companies

regulated by IRDA should not be construed as export realisation in
foreign exchange.
13.4.2 Write-off relaxation
As announced in the Foreign Trade Policy (FTP), 2015-20, realisation of

export proceeds shall not be insisted upon under any of the Export
Promotion Schemes under the said FTP, subject to the following conditions:
a. The write off on the basis of merits is allowed by the Reserve Bank or by
AD Category-I bank on behalf of the Reserve Bank, as per extant
guidelines;
b. The exporter produces a certificate from the Foreign Mission of India

concerned, about the fact of non-recovery of export proceeds from the
buyer;
! !362
c. This would not be applicable in self write-off cases.
13.4.3 Set-off of export receivables against import payables
AD category-I banks may deal with the cases of set-off of export

receivables against import payables, subject to following terms and
conditions:
i. The import is as per the Foreign Trade Policy in force.
ii. Invoices/Bills of Lading/Airway Bills and Exchange Control copies of Bills

of Entry for home consumption have been submitted by the importer to
the Authorised Dealer bank.
iii. Payment for the import is still outstanding in the books of the importer
iv. Both the transactions of sale and purchase may be reported separately
in R-Returns and FETERS.
v. The relative EDF will be released by the AD bank only after the entire
export proceeds are adjusted/received.
vi. The set-off of export receivables against import payments should be in

respect of the same overseas buyer and supplier and that consent for
set-off has been obtained from him.
vii.The export/import transactions with ACU countries should be kept

outside the arrangement.
viii.All the relevant documents are submitted to the concerned AD bank

who should comply with all the regulatory requirements relating to the
transactions.
! !363
13.4.4 Netting-off of export receivables against import payments –

Units in Special Economic Zones (SEZs)
AD Category-I banks may allow requests received from exporters for

‘netting off’ of export receivables against import payments for units located
in Special Economic Zones subject to the following:
i. The netting-off of export receivables against import payments is in

respect of the same Indian entity and the overseas buyer/supplier
(bilateral netting) and the netting may be done as on the date of
balance sheet of the unit in SEZ.
ii. The details of export of goods are documented in EDF (O) forms/DTR as
the case may be while details of import of goods/services are recorded
through A1/A2 form as the case may be. The relative EDF will be
treated as complete by the designated AD Category-I banks only after
the entire proceeds are adjusted/received.
iii. Both the transactions of sale and purchase in R-Returns under FETERS
are reported separately.
iv. The export/import transactions with ACU countries are kept outside the
arrangement.
v. All the relevant documents are submitted to the concerned AD

Category-I banks who should comply with all the regulatory
requirements relating to the transactions.
13.5 Exporters’ Caution List
The process of Caution Listing/De-caution Listing of exporters is automated

in EDPMS. The updated list of caution listed exporters can be accessed
through EDPMS on a daily basis. Criteria laid down for cautioning/ de-
cautioning of exporters in EDPMS are as under:
a. The exporters would be caution listed if any shipping bill against them
remains open for more than two years in EDPMS provided no extension
is granted by AD Category-I bank/RBI. Date of shipment will be
considered for reckoning the realisation period.
! !364
b. Once related bills are realised and closed or extension for realisation is
granted, the exporter will automatically be de-caution listed.
c. The exporters can also be caution listed even before the expiry of two
years period based on the recommendation of AD banks. The
recommendation may be based on cases where exporter has come to
adverse notice of the Enforcement Directorate (ED)/Central Bureau of
Investigation (CBI)/ Directorate of Revenue Intelligence (DRI)/any such
other law enforcement agency or the case where exporter is not
traceable or not making any serious efforts for realisation of export
proceeds. In such cases, AD may forward its findings to the concerned
regional office of RBI recommending inclusion of the name of the
exporter in the caution list.
d. Reserve Bank will caution/de-caution the exporters in such cases based

on the recommendation of AD Category-I banks.
AD Category-I banks should follow the procedure mentioned below while

handling shipping documents in respect of caution listed exporters:
a. They will intimate the exporters about their caution listing, giving the
details of outstanding shipping bills. When caution listed exporters
submit shipping documents for negotiation/purchase/ discount/
collection, etc., the AD Category-I bank may accept the documents
subject to following conditions:-
• The exporters concerned should produce evidence of having received

advance payment or an irrevocable letter of credit in their favour
covering the full value of the proposed exports;
• In case of usance bills, the relative letter of credit should cover full
export value and also permit such drawings. Besides, the usance bills
should also mature within prescribed realisation period reckoned from
date of shipment.
• Except under the above-mentioned conditions given in 2 (a) (i) and (ii),
AD banks should not handle the shipping documents of caution listed
exporters.
! !365
AD Category-I banks should obtain prior approval of the Reserve Bank for
issuing guarantees for caution-listed exporters.
13.6 Issue of Guarantees by an Authorised Dealer
An authorised dealer may give guarantee in respect of any debt, obligation

or other liability incurred by a person resident in India and owned to a
person resident outside India, where the debt, obligation or other liability is
incurred by the person resident in India as an exporter, on account of
exports from India.
An authorised dealer may give a guarantee in respect of any debt,

obligation or other liability incurred by a person resident outside India, in
the following cases, namely:
a. where such debt, obligation or liability is owned to a person resident in

India in connection with a bona fide trade transaction: Provided that the
guarantee given under this clause is covered by a counter-guarantee of
a bank of international repute resident broad;
b. as a counter-guarantee to cover guarantee issued by his branch or

correspondent outside India, on behalf of Indian exporter in cases
where guarantees of only resident banks are acceptable to overseas
buyers.
13.7 Issuance of Electronic Bank Realisation Certificate (e-

BRC)
AD Category-I banks are required to update the EDPMS with data of export
proceeds on “as and when realised basis” and, with effect from October 16,
2017, they are required to generate Electronic Bank Realisation Certificate
(eBRC) only from the data available in EDPMS, to ensure consistency of
data in EDPMS and consolidated eBRC.
! !366
13.8 Remittances connected with Export
13.8.1 Agency commission on exports
AD Category-I banks may allow payment of commission, either by

remittance or by deduction from invoice value, on application submitted by
the exporter. The remittance on agency commission may be allowed
subject to conditions as under:
a. Amount of commission has been declared on EDF/SOFTEX form and

accepted by the Customs authorities or Ministry of Information
Technology, Government of India/EPZ authorities as the case may be. In
cases where the commission has not been declared on EDF/SOFTEX
form, remittance may be allowed after satisfying the reasons adduced
by the exporter for not declaring commission on Export Declaration
Form, provided a valid agreement/written understanding between the
exporters and/or beneficiary for payment of commission exists.
b. The relative shipment has already been made.
AD Category-I banks may allow payment of commission by Indian

exporters, in respect of their exports covered under countertrade
arrangement through Escrow Accounts designated in US Dollar, subject to
the following conditions:
a. The payment of commission satisfies the conditions as at (a) and (b)

stipulated in paragraph (i) above.
b. The commission is not payable to Escrow Account holders themselves.
c. The commission should not be allowed by deduction from the invoice

value.
Payment of commission is prohibited on exports made by Indian partners

towards equity participation in an overseas joint venture/wholly owned
subsidiary as also exports under Rupee Credit Route, except commission
up to 10 per cent of invoice value of exports of tea and tobacco.
! !367
13.8.2 Refund of export proceeds
AD Category-I banks, through whom the export proceeds were originally

realised may consider requests for refund of export proceeds of goods
exported from India and being re-imported into India on account of poor
quality. While permitting such transactions, AD Category-I banks are
required to:
a. Exercise due diligence regarding the track record of the exporter
b. Verify the bona fides of the transactions
c. Obtain from the exporter a certificate issued by DGFT/Custom

authorities that no incentives have been availed by the exporter against
the relevant export or the proportionate incentives availed, if any, for
the relevant export have been surrendered
d. Obtain an undertaking from the exporter that the goods will be re-
imported within three months from the date of remittance and
e. Ensure that all procedures as applicable to normal imports are adhered
to.
! !368
13.9 Summary
To execute the power delegated at each stage and as per the requirement
of the exporter for various stages of export certain guidelines have been
issued. We will consider in this chapter obligations under the provision of
regulations and role expected to be played by AD Banks. AD Category-I
banks may consider requests for grant of EDF waiver from exporters for
export of goods free of cost, for export promotion up to 2 per cent of the
average annual exports of the applicant during the preceding three
financial years subject to a ceiling of Rs. 5 lakhs.
Firms/Companies and other organisations participating in Trade Fair/

Exhibition abroad can take/export goods for exhibition and sale outside
India without the prior approval of the Reserve Bank. Unsold exhibit items
may be sold outside the exhibition/trade fair in the same country or in a
third country. Such sales at discounted value are also permissible. It would
also be permissible to 'gift’ unsold goods up to the value of USD 5000 per
exporter, per exhibition/trade fair.
Banks may consider request from exporters for granting EDF approval in
cases where goods are being exported for re-import after repairs/
maintenance/testing/calibration, etc., subject to the condition that the
exporter shall produce relative Bill of Entry within one month of re-import
of the exported item from India. In order to facilitate re-export of unsold
rough diamonds imported on free of cost basis at SNZ, it is clarified that
the unsold rough diamonds, when re-exported from the SNZ (being an
area within the Customs) without entering the Domestic Tariff Area (DTA),
do not require any EDF formality.
AD Category-I banks should normally dispatch shipping documents to their

overseas branches/correspondents expeditiously. However, they may
dispatch shipping documents direct to the consignees or their agents
resident in the country of final destination of goods in cases where:
! !369
a. Advance payment or an irrevocable letter of credit has been received for

the full value of the export shipment and the underlying sale contract/
letter of credit provides for dispatch of documents direct to the
consignee or his agent resident in the country of final destination of
goods.
b. The AD Category-I banks may also accede to the request of the

exporter provided the exporter is a regular customer and the AD
Category-I bank is satisfied, on the basis of standing and track record of
the exporter and arrangements have been made for realisation of export
proceeds.
When goods have been exported on consignment basis, the AD Category-I

bank, while forwarding shipping documents to his overseas branch/
correspondent, should instruct the latter to deliver them only against trust
receipt/undertaking to deliver sale proceeds by a specified date within the
period prescribed for realisation of proceeds of the export.
AD Category-I banks should closely watch realisation of bills and in cases

where bills remain outstanding, beyond the due date for payment from the
date of export, the matter should be promptly taken up with the concerned
exporter.
Reduction in invoice value on account of prepayment of usance bills,

Change of buyer/consignee, Extension of time, Export claims, etc., are
some of the permitted activities to exporters with compliance of certain
terms and conditions.
An exporter who has not been able to realise the outstanding export dues
despite best efforts, may either self write-off or approach the AD Category-
I banks, who had handled the relevant shipping documents, with
appropriate supporting documentary evidence. The limits are prescribed for
write-offs of unrealised export bills. AD category-I banks may deal with the
cases of set-off of export receivables against import payables, subject to
certain terms and conditions.
The process of Caution Listing/De-caution Listing of exporters is automated

in EDPMS. The updated list of caution listed exporters can be accessed
through EDPMS on a daily basis. Criteria laid down for cautioning/ de-
cautioning of exporters in EDPMS.
! !370
An authorised dealer may give guarantee in respect of any debt, obligation

or other liability incurred by a person resident in India and owned to a
person resident outside India, where the debt, obligation or other liability is
incurred by the person resident in India as an exporter, on account of
exports from India.
AD Category-I banks are required to update the EDPMS with data of export
proceeds on “as and when realised basis” and, with effect from October 16,
2017, they are required to generate Electronic Bank Realisation Certificate
(eBRC) only from the data available in EDPMS, to ensure consistency of
data in EDPMS and consolidated eBRC.
AD Category-I banks may allow payment of commission, either by

remittance or by deduction from invoice value, on application submitted by
the exporter. The remittance on agency commission may be allowed
subject to certain conditions.
AD Category-I banks, through whom the export proceeds were originally

realised may consider requests for refund of export proceeds of goods
exported from India and being re-imported into India on account of poor
quality.
13.10 Questions
1. What do you know of granting of EDF waiver?

2. What is consignment export? Explain.
3. Write short note on: netting off and set-off
4. What is exporters caution list?
5. Explain: agency commission on export.
! !371
1. AD Category-I banks will have to report all the inward remittances

including advance as well as old outstanding inward remittances
received for export of goods/software to __________.
(a) EDPMS
(b) IDPMS
(c) CUSTOMS
(d) RBI
2. For opening and hiring the warehouse abroad, Applicant has a minimum
export turnover of __________ during the last financial year.
(a) USD 1 million
(b) USD 100,000
(c) USD 10,000
(d) USD 500,000
3. The exporters would be caution listed if any shipping bill against them
remains open for more than __________ in EDPMS provided no
extension is granted by AD Category-I bank/RBI.
(a) One Year
(b) 2 years
(c) 3 years
(d) 5 years
4. Electronic Bank Realisation Certificate (e-BRC) only from the data

available in __________, to ensure consistency of data in EDPMS and
consolidated e-BRC.
(a) IDPMS
(b) FETERS
(c) EDPMS
(d) Caution list
! !372
5. Payment of commission is prohibited on exports made by Indian

partners towards ………………..
(a)equity participation in an overseas joint venture/wholly owned
subsidiary
(b)exports under Rupee Credit Route, except commission up to 10
per cent of invoice value of exports of tea & tobacco
(c)Both a & b
(d)Purchase of second-hand machinery
Answers: 1. (a), 2. (b), 3. (b), 4. (c), 5. (c).
! !373
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !374
EXPORT FINANCE — PRE-SHIPMENT CREDIT IN RUPEES
Chapter 14
Export Finance — Pre-Shipment Credit In
Rupees
Objectives

export finance in Indian Rupees at Preshipment Stage, granted by Banks
and financial institutions This includes various stages of preshipment
finance, interest and regulations pertains to specific sectors.
Structure
14.1 Introduction
14.2 Export Finance
14.3 Pre-shipment Finance
14.4 Pre-shipment Credit/Packing Credit (Domestic currency, e.g., Indian

Rupee for exports from India)
14.5 Liquidation of Packing Credit
14.6 Interest on Packing Credit
14.7 Rupee Pre-shipment Credit to Specific Sectors/Segments
14.8 Summary
14.9 Questions
! !375
14.1 Introduction
The nature has not distributed all its resources evenly on the globe. What
is available easily and in plenty in one place is scarce, not available or
difficult to obtain in another place. This has resulted in global environment
of interdependency, giving rise to international trade which may extend to
cover commodities, services, and other resources including movement/
mobilisation of funds (cross border capital movements). The growth of
international trade in commodities, services and resources necessitates a
mechanism for payment/transmission of value of commodities, services,
other resources from one country to the other and also for conversion of
currency of one country into that of another which can be best effected
through the banking channels spread across countries. Such function of
banks which extends to transactions taking place in other countries has
come to be known as Cross Border Banking Functions.
Cross Border Banking includes financing of movement of goods/services

across the borders, i.e., Cross Border Trade Finance involving exports and
imports of goods/services, External Funds mobilisation, i.e., Cross Border
Capital Movement and also the Management of Risk associated with such
transactions involving international banking. In the subsequent paragraphs
of this chapter we shall discuss about various facets of Cross Border
Banking.
The cross border trade finance refers to financing the movement of goods
and services across the borders or financing of foreign trade and includes
Export finance and Import finance. The international trade is based on the
principle of comparative advantage arising out of differences in resources,
costs, demand and supply, and technology between countries. The
comparative advantage refers to the relative and not absolute efficiency of
producing goods and services. Countries engage in foreign trade, i.e.,
export and import of goods and services due to the differences in relative
efficiencies of production.
! !376
14.2 Export Finance
Exports play a very crucial role and are given utmost priority in the foreign
trade policy of any country particularly in developing countries. Indian
economy being one such, is attaching great importance to promote
exports. Finance is the backbone of any trade, whether domestic or
international and export being a part of international trade is, no exception.
Export finance, therefore, plays a very important role in development of
international trade and serves the process of economic development, which
is a national objective. Banks, being the main source of finance, are
encouraged in several ways to extend export finance, to achieve the
objectives of foreign trade policy.
An exporter may need financial assistance for execution of an export order

from the date of receipt of an export order till the date of realisation of
export proceeds at any stage. Export finance is short-term working capital
finance allowed to an exporter. Export Finance can be broadly classified
into two categories, depending upon at what stage of export activity the
finance is extended, viz., Pre-shipment finance and Post-shipment finance.
14.3 Pre-shipment Finance
Financial assistance extended to the exporters, prior to shipment of export

goods, i.e., from the date of receipt of export order till the date of
shipment, falls within the scope of pre-shipment finance. Pre-shipment
credit is a working capital facility extended to a registered exporter in
anticipation of his exporting the goods to an importer in a foreign country.
Pre-shipment finance is extended to an exporter for the purpose of
procuring raw material, processing, packing, transporting and warehousing
of goods meant for export.
Pre-shipment finance can be classified as under:
• Packing Credit (Domestic currency, e.g., Indian Rupees for

exports from India)
• Advances against cheques/demand drafts received as advance

payment
• Pre-shipment Credit in Foreign Currency (PCFC).
! !377
14.4 Pre-shipment Credit/Packing Credit (Domestic

currency, e.g., Indian Rupee for exports from India)
Packing credit advance is essentially a short-term, need-based working

capital loans granted by the banks to eligible exporter/manufacturer for
financing exports at pre-shipment stage. The purpose of advance is to
enable the exporter to purchase raw material, its manufacturing,
processing, packing, transporting, warehousing, etc., or for purchase of
ready goods for export.
‘Pre-shipment credit/Packing credit’ means any loan or advance granted or

any other credit provided by a bank to an exporter for financing the
purchase, processing, manufacturing or packing of goods prior to
shipment, on the basis of letter of credit opened in his favour or in favour
of some other person, by an overseas buyer or a confirmed and irrevocable
order for the export of goods from abroad or any other evidence of an
order for export from abroad having been placed on the exporter or some
other person unless lodgement of export orders or letter of credit with the
bank has been waived.
A. Eligibility
An exporter to be eligible for packing credit finance must have an

Importer-Exporter code number (IEC) allotted by Director General of
Foreign Trade (DGFT) and should not be in the caution list of the concerned
export credit guarantee organisation (e.g., ECGC in India). Generally,
packing credit facility can be granted to an exporter on the basis of letter
of credit opened in his favour or confirmed and irrevocable order for export
of goods. Packing credit loan can be allowed to exporter himself if he
himself would manufacture and ship the goods. Packing Credit Loan can
also be allowed to the supporting manufacturer supplier of the goods who
do not have export orders or LCs in their name but would be supplying the
goods to merchant exporters/export houses for export. In such cases, an
undertaking from the manufacturer/supplier to the effect that he would not
be raising any loan from any bank on the portion of export order for which
order has been placed on him, must be obtained. In cases where
manufacture/supplier of goods and exporter of goods are two different
parties, the packing credit loan can be shared between them within the
overall time limit and amount sanctioned.
! !378
B. Criteria for Allowing Packing Credit
Packing credit being a purpose-oriented advance is allowed to the exporter

against the lodgement of letter of credit opened in his favour by an
overseas importer or a confirmed and irrevocable order for export of goods
from India or any other evidence of export order having been placed by an
importer. At times where there is continuing relationship, exporters may
conclude the deal over phone or telex/fax and actual export orders may
follow. In such cases PCL can be disbursed by accepting the messages
exchanged over telex/fax provided such communications include the
following details:
• Name of the overseas buyer

• Particulars of goods to be exported
• Quantity and unit price of goods to be exported
• Date of shipment and terms of sales and payments.
In such cases, an undertaking to the effect that original export order would
be produced as soon as it is received but within a maximum period of 30
days should be obtained and systematic follow-up for receipt of export
orders/LCs should be ensured. The bank should retain all the original,
export orders/LCs against which packing credit loans have been allowed
and they should be endorsed on the back side mentioning the details of the
PCL granted. The original LC/orders can be released against the
acknowledgement to the exporter in case they are required by him for any
specific genuine reason, like obtaining export quota/licence, etc. In case
PCL is allowed against the export orders backed by export LC all
undertakings from exporters should be obtained to submit the export LC,
within reasonable time.
C. Sanction of Export Credit Limit
The packing credit limit is assessed on the basis of estimated projected

export orders to be executed by the exporter. While considering the credit
facilities for export activities in addition to the normal routine appraisal
bank should specifically look into the aspects of product profile, country
profile and the commodity profile. The Bank should also look into the
status report of the prospective buyers with whom the exporter proposes
to deal, for which services of ECGC or some other international consultant
such as Dun & Bradstreet can be obtained
! !379
At the time of appraising all export credit proposals as prudent lending

norms will have the following special features:
1. Proposal should be viable
2. Flexible approach in debt equity ratio and lending norms
3. Collateral ordinarily not insisted upon as ECGC cover is available
4. Exporter should have proper infrastructure and capacity to execute the

orders. Experience in the field will be an added advantage
5. Banks will also examine the political/economic risk relating to the

country to which goods are exported
6. For longer gestation period exchange risk will be reckoned, exporter

would therefore need to hedge against exchange risk
7. Commodity to be exported – its present marketability abroad
8. The overseas buyer should not be banned or restricted list of ECGC.
9. Commodity to be exported is permissible under export trade control

regulations
10. Letters of credit against which packing credit is granted should be

genuine and against which the financing bank can also negotiate the
documents
11. Regulations of importing country will also be taken in to account in

credit disbursement
12. Demand for certain commodities in international trade is seasonal such

as wither garments, summer fruits, etc., therefore, the ability of the
exporter to adhere to the time schedule is crucial.
13. Price competitiveness for the export vis-à-vis other countries for e.g.,
Chinese and Korean exporters are known to outprice Indian counter
parties in the final stages of export.
! !380
14. Last, not certainly least, integrity of the exporter.
D. Type of Finance
Packing credit advance is basically allowed for procurement of goods for

export. The goods can be procured either by making cash payment or by
opening the letter of credit/guarantees. Thus, depending upon the
requirement of the client facing, packing credit can be either in the form of
funded advance (PCL Hypothecation) or non-funded facility (Inland/Import
LC or Guarantee), which later on gets converted to funded advance. Bank
should carefully study the requirement of the exporter and consider the
facility accordingly. In case the payment is required to be made in advance
against which goods will be supplied/received afterward, suitable clean PCL
facility may be considered clearly specifying the period for the same.
In whatever form, the finance is allowed, it must be ensured that there is

no double financing against the particular export order. This can be done
mainly by retaining the original export order/LC and also keeping close
watch on the local availment of export finance and the level of export of
the concerned exporter.
E. Period of Finance
The period for which a packing credit advance may be given by a bank will
depend upon the circumstances of the individual case, such as the time
required for procuring, manufacturing or processing (where necessary) and
shipping the relative goods/rendering of services. It is primarily for the
banks to decide the period for which a packing credit advance may be
given, having regard to the various relevant factors so that the period is
sufficient to enable the exporter to ship the goods/render the services.
If pre-shipment advances are not adjusted by submission of export

documents within 360 days from the date of advance, the advances will
cease to qualify for prescribed rate of interest for export credit to the
exporter ab initio.
! !381
F. Maintenance of accounts
Ordinarily, each packing credit sanctioned should be maintained as

separate account for the purpose of monitoring the period of sanction and
end-use of funds.
Banks may release the packing credit in one lump sum or in stages as per
the requirement for executing the orders/LC.
Banks may also maintain different accounts at various stages of

processing, manufacturing, etc., depending on the types of goods/services
to be exported e.g., hypothecation, pledge, etc., accounts and may ensure
that the outstanding balance in accounts are adjusted by transfer from one
account to the other and finally by proceeds of relative export documents
on purchase, discount, etc.
Banks should continue to keep a close watch on the end-use of the funds
and ensure that credit at lower rates of interest is used for genuine
requirements of exports. Banks should also monitor the progress made by
the exporters in timely fulfilment of export orders.
G. ‘Running Account’ Facility
As stated earlier, pre-shipment credit to exporters is normally provided on

lodgement of LCs or firm export orders. It is observed that the availability
of raw materials is seasonal in some cases. In some other cases, the time
taken for manufacture and shipment of goods is more than the delivery
schedule as per export contracts. In many cases, the exporters have to
procure raw material, manufacture the export product and keep the same
ready for shipment, in anticipation of receipt of letters of credit/firm export
orders from the overseas buyers. Having regard to difficulties being faced
by the exporters in availing of adequate pre-shipment credit in such cases,
banks have been authorised to extend Pre-shipment Credit ‘Running
Account’ facility in respect of any commodity, without insisting on prior
lodgement of letters of credit/firm export orders, depending on the bank’s
judgement regarding the need to extend such a facility and subject to the
! !382
Banks may extend the ‘Running Account’ facility only to those exporters
whose track record has been good as also to Export-oriented Units (EOUs)/
Units in Free Trade Zones/Export Processing Zones (EPZs) and Special
Economic Zones (SEZs)
In all cases where Pre-shipment Credit ‘Running Account’ facility has been
extended, letters of credit/firm orders should be produced within a
reasonable period of time to be decided by the banks.
Banks should mark off individual export bills, as and when they are
received for negotiation/collection, against the earliest outstanding pre-
shipment credit on 'First In First Out' (FIFO) basis. Needless to add that,
while marking off the pre-shipment credit in the manner indicated above,
banks should ensure that export credit available in respect of individual
pre-shipment credit does not go beyond the period of sanction or 360 days
from the date of advance, whichever is earlier.
Packing credit can also be marked off with proceeds of export documents
against which no packing credit has been drawn by the exporter.
If it is noticed that the exporter is found to be abusing the facility, the

facility should be withdrawn forthwith.
In cases where exporters have not complied with the terms and conditions,
the advance will not be treated as export credit ab initio.
Running account facility should not be granted to sub-suppliers.
H. Follow-up and Monitoring
Immediately, after disbursement of packing credit loan bank should note

down the due dates in due date register. They should periodically follow-up,
with the exporters to ascertain the status of the manufacturing of the
goods and probable date of shipment. In case it is observed that the
shipment will not take place within the prescribed period, the reasons
thereof, should be investigated and if delay is on account of unavoidable
reasons, such as labour problems, power shortage, non-availability of
shipping space, etc., the exporter should be advised to seek extension of
shipment date from the purchaser in LC/export order. The developments
should be notified to ECGC.
! !383
Bank should obtain monthly stock statement from exporters reporting the
stocks which are under the pledge/hypothecation lying with the
subcontractor/in transit/held with clearing agents/advance lying with sub
suppliers/unutilised funds held/cash on hand etc. to the bank for securing
the packing credit advance. Lower frequency of submission of stock
statement must be decided by the bank at the time of sanction of the
facility. Stocks pledged/hypothecated by exporter must be inspected by the
bank from time to time.
14.5 Liquidation of Packing Credit
The packing credit/pre-shipment credit granted to an exporter may be

liquidated out of proceeds of bills drawn for the exported commodities on
its purchase, discount etc., thereby converting pre-shipment credit into
post-shipment credit. Further, subject to mutual agreement between the
exporter and the banker it can also be repaid/prepaid out of balances in
Exchange Earners Foreign Currency A/c (EEFC A/c) as also from rupee
resources of the exporter to the extent exports have actually taken place.
• Packing credit in excess of export value
(a) Where by-product can be exported

Where the exporter is unable to tender export bills of equivalent value for
liquidating the packing credit due to the shortfall on account of wastage
involved in the processing of agro products like raw cashew nuts, etc.,
banks may allow exporters, inter alia, to extinguish the excess packing
credit by export bills drawn in respect of by-product like cashew shell oil,
etc.
(b) Where partial domestic sale is involved

However, in respect of export of agro-based products like tobacco, pepper,
cardamom, cashew nuts etc., the exporter has necessarily to purchase a
somewhat larger quantity of the raw agricultural produce and grade it into
exportable and non-exportable varieties and only the former is exported.
The non-exportable balance is necessarily sold domestically. For the
packing credit covering such non-exportable portion, banks are required to
charge the rate of interest applicable to the domestic advance from the
date of advance of packing credit.
! !384
(c) Export of deoiled/defatted cakes

Banks are permitted to grant packing credit advance to exporters of HPS
groundnut and deoiled/defatted cakes to the extent of the value of raw
materials required even though the value thereof exceeds the value of the
export order. The advance in excess of the export order is required to be
adjusted either in cash or by sale of residual by-product oil within a period
not exceeding 30 days from the date of advance.
Banks have, however, operational flexibility to extend the following

relaxations to their exporter clients who have a good track record:
a. Repayment/liquidation of packing credit with proceeds of export

documents will continue; however, this could be with export documents
relating to any other order covering the same or any other commodity
exported by the exporter. While allowing substitution of contract in this
way, banks should ensure that it is commercially necessary and
unavoidable. Banks should also satisfy themselves about the valid
reasons as to why packing credit extended for shipment of a particular
commodity cannot be liquidated in the normal method. As far as
possible, the substitution of contract should be allowed if the exporter
maintains account with the same bank or it has the approval of the
members of the consortium, if any.
b. The existing packing credit may also be marked off with proceeds of
export documents against which no packing credit has been drawn by
the exporter. However, it is possible that the exporter might avail of EPC
with one bank and submit the documents to another bank. In view of
this possibility, banks may extend such facility after ensuring that the
exporter has not availed of packing credit from another bank against the
documents submitted. If any packing credit has been availed of from
another bank, the bank to which the documents are submitted has to
ensure that the proceeds are used to liquidate the packing credit
obtained from the first bank.
c. These relaxations should not be extended to transactions of sister/

associate/group concerns.
! !385
14.6 Interest on Packing Credit
The Base Rate System is applicable from July 1, 2010 and accordingly
interest rates applicable for all tenors of rupee export credit advances
sanctioned on or after July 01, 2010 are at or above Base Rate. If pre-
shipment advances are not liquidated from proceeds of bills on purchase,
discount, etc., on submission of export documents within 360 days from
the date of advance, the advances will not be treated as export credit ab
initio.
If exports do not materialise at all, banks should charge on relative packing

credit domestic lending rate plus penal rate of interest, if any, to be
decided by the banks on the basis of a transparent policy approved by their
Board.
14.7 Rupee Pre-shipment Credit to specific sectors/

segments
a. Rupee Export Packing Credit to manufacturer suppliers for

exports routed through STC/MMTC/Other Export Houses,
Agencies etc.
i. Banks may grant export packing credit to manufacturer suppliers who

do not have export orders/letters of credit in their own name and
goods are exported through the State Trading Corporation/Minerals
and Metal Trading Corporation or other export houses, agencies etc.
b. Rupee Export Packing Credit to Sub-Suppliers
Packing credit can be shared between an Export Order Holder (EOH) and
sub-supplier of raw materials, components etc., of the exported goods as in
the case of EOH and manufacturer suppliers, subject to the following:
i. Running Account facility is not contemplated under the scheme. The

scheme will cover the LC or export order received in favour of Export
Houses/Trading Houses/Star Trading Houses etc. or manufacturer
exporters only. The scheme should be made available to the exporters
with good track record.
! !386
ii. Bankers to an EOH will open an inland LC specifying the goods to be

supplied by the sub-supplier to the EOH against the export order or LC
received by him as a part of the export transaction. On the basis of such
a LC, the sub-supplier's banker will grant EPC as working capital to
enable the sub-supplier to manufacture the components required for the
goods to be exported. On supplying the goods, the LC opening bank will
pay to the sub-supplier's banker against the inland documents received
on the basis of inland LC. Such payments will thereafter become the
EPC of the EOH.
iii. It is upto the EOH to open any number of LCs for the various
components required with the approval of his banker/leader of
consortium of banks within the overall value limit of the order or LC
received by him. Taking into account the operational convenience, it is
for the LC opening bank to fix the minimum amount for opening such
LCs. The total period of packing credit availed by the sub-supplier(s),
individually or severally and the EOH should be within normal cycle of
production required for the exported goods. Normally, the total period
will be computed from the date of first drawal of packing credit by any
one of the sub-suppliers to the date of submission of export documents
by EOH.
iv. The EOH will be responsible for exporting the goods as per export order
or overseas LC and any delay in the process will subject him to the
penal provisions issued from time to time. Once the sub-supplier makes
available the goods as per inland LC terms to the EOH, his obligation of
performance under the scheme will be treated as complied with and the
penal provisions will not be applicable to him for delay by EOH, if any.
v. The scheme is an additional window besides the existing system of

sharing of packing credit between EOH and manufacturer in respect of
exported goods.. The scheme will cover only the first stage of
production cycle. For example, a manufacturer exporter will be allowed
to open domestic LC in favour of his immediate suppliers of components
etc. that are required for manufacture of exportable goods. The scheme
will not be extended to cover suppliers of raw materials/components
etc., to such immediate suppliers. In case the EOH is merely a trading
house, the facility will be available commencing from the manufacturer
to whom the order has been passed on by the Trading House.
! !387
vi. EOUs/EPZ/SEZ units supplying goods to another EOU/EPZ/SEZ unit for

export purposes are also eligible for rupee pre-shipment export credit
under this scheme. However, the supplier EOU/EPZ/SEZ unit will not be
eligible for any post-shipment facility as the scheme does not cover sale
of goods on credit terms.
vii.The scheme does not envisage any change in the total quantum of
advance or period. Accordingly, the credit extended under the system
will be treated as export credit from the date of advance to the sub-
supplier to the date of liquidation by EOH under the inland export LC
system and upto the date of liquidation of packing credit by shipment of
goods by EOH. It has to be ensured that no double financing of the
same leg of the transaction is involved.
viii.Banks may approach the ECGC for availing suitable cover in respect of
such advances.
ix. The scheme does not envisage extending credit by a sub-supplier to the
EOH/manufacturer and thus, the payment to sub-suppliers has to be
made against submission of documents by LC opening bank treating the
payment as EPC of the EOH.
c. Rupee Pre-shipment Credit to Construction Contractors
i. The packing credit advances to the construction contractors to meet

their initial working capital requirements for execution of contracts
abroad may be made on the basis of a firm contract secured from
abroad, in a separate account, on an undertaking obtained from them
that the finance is required by them for incurring preliminary
expenses in connection with the execution of the contract, e.g., for
transporting the necessary technical staff and purchase of
consumable articles for the purpose of executing the contract abroad,
etc.
ii. The advances should be adjusted within 360 days from the date of
advance by negotiation of bills relating to the contract or by
remittances received from abroad in respect of the contract executed
abroad. To the extent the outstandings in the account are not
adjusted in the stipulated manner, banks may charge normal rate of
interest applicable for working capital finance.
! !388
iii. The exporters undertaking project export contracts including export

of services may comply with the guidelines/instructions issued by
Reserve Bank of India, Foreign Exchange Department, Central Office,
Mumbai from time to time.
d. Export of Services
Pre-shipment and post-shipment finance may be provided to exporters of

all the 161 tradable services covered under the General Agreement on
Trade in Services (GATS) where payment for such services is received in
free foreign exchange as stated at Chapter 3 of the Foreign Trade Policy
2015-20. All provisions of this circular shall apply mutatis mutandis to
export of services as they apply to export of goods unless otherwise
specified. A list of services is given in Appendix 10 of HBPv1. The financing
bank should ensure that there is no double financing and the export credit
is liquidated with remittances from abroad. Banks may take into account
the track record of the exporter/overseas counter party while sanctioning
the export credit. The statement of export receivables from such service
providers may be tallied with the statement of payables received from the
overseas party.
In view of the large number of categories of service exports with varied

nature of business as well as in the environment of progressive
deregulation where the matters with regard to micro management are left
to be decided by the individual financing banks, the banks may formulate
their own parameters to finance the service exporters.
Exporters of services qualify for working capital export credit (pre and post
shipment) for consumables, wages, supplies etc.
! !389
Banks may ensure that —
• The proposal is a genuine case of export of services.
• The item of service export is covered under Appendix 10 of HBPv1.
• The exporter is registered with the Electronic and software EPC or

Services EPC or with Federation of Indian Export Organisations, as
applicable.
• There is an Export Contract for the export of the service.
• There is a time lag between the outlay of working capital expense and
actual receipt of payment from the service consumer or his principal
abroad.
• There is a valid Working Capital gap, i.e., service is provided first while
the payment is received some time after an invoice is raised.
• Banks should ensure that there is no double financing/excess financing.
• The export credit granted does not exceed the foreign exchange earned
less the margins if any required, advance payment/credit received.
• Invoices are raised.
• Inward remittance is received in Foreign Exchange.
• Company will raise the invoice as per the contract. Where payment is
received from overseas party, the service exporter would utilise the funds
to repay the export credit availed of from the bank.
! !390
e. Pre-shipment Credit to Floriculture, Grapes and Other Agro-

based Products
i. In the case of floriculture, pre-shipment credit is allowed to be extended

by banks for purchase of cut-flowers etc. and all post-harvest expenses
incurred for making shipment.
ii. However, with a view to promoting export of floriculture, grapes and

other agro-based products, banks are allowed to extend credit for
working capital purposes in respect of export-related activities of all
agro-based products including purchase of fertilisers, pesticides and
other inputs for growing of flowers, grapes etc., provided banks are in a
position to clearly identify such activities as export-related and satisfy
themselves of the export potential thereof, and that the activities are
not covered by direct/indirect finance schemes of NABARD or any other
agency, subject to the normal terms and conditions relating to packing
credit such as period, quantum, liquidation etc.
iii. Export credit should not be extended for investments, such as, import of
foreign technology, equipment, land development etc., or any other item
which cannot be regarded as working capital.
f. Export Credit to Processors/Exporters — Agri-Export Zones
i. Government of India has set up Agri-Export Zones in the country to

promote Agri Exports. Agri-Export Oriented Units (processing) are set
up in Agri-Export zones as well as outside the zones and to promote
such units, production and processing are to be integrated. The
producer has to enter into contract farming with farmers and has to
ensure supply of quality seeds, pesticides, micro-nutrients and other
material to the group of farmers from whom the exporter would be
purchasing the products as raw material for production of the final
products for export. The Government, therefore, suggested that such
export processing units may be provided packing credit under the
extant guidelines for the purpose of procuring and supplying inputs to
the farmers so that quality inputs are available to them which in turn
will ensure that only good quality crops are raised. The exporters will be
able to purchase/import such inputs in bulk, which will have the
advantages of economies of scale.
! !391
ii. Banks may treat the inputs supplied to farmers by exporters as raw
material for export and consider sanctioning the lines of credit/export
credit to processors/exporters to cover the cost of such inputs required
by farmers to cultivate such crops to promote export of agri products.
The processor units would be able to effect bulk purchases of the inputs
and supply the same to the farmers as per a predetermined
arrangement.
iii. Banks have to ensure that the exporters have made the required
arrangements with the farmers and overseas buyers in respect of crops
to be purchased and products to be exported respectively. The financing
banks will also appraise the projects in agri export zones and ensure
that the tie-up arrangements are feasible, and projects would take off
within a reasonable period of time.
iv. They are also to monitor the end-use of funds, viz., distribution of the
inputs by the exporters to the farmers for raising the crops as per
arrangements made by the exporter/main processor units.
v. They have to further ensure that the final products are exported by the
processors/exporters as per the terms and conditions of the sanction in
order to liquidate the pre-shipment credit as per extant instructions.
! !392
14.8 Summary
Finance is the backbone of any trade, whether domestic or international

and export being a part of international trade is, no exception. Export
finance, therefore plays a very important role in development of
international trade and serves the process of economic development, which
is a national objective. Banks, being the main source of finance, are
encouraged in several ways to extend export finance, to achieve the
objectives of foreign trade policy.
Financial assistance extended to the exporters, prior to shipment of export

goods, i.e., from the date of receipt of export order till the date of
shipment, falls within the scope of pre-shipment finance. Pre-shipment
credit is a working capital facility extended to a registered exporter in
anticipation of his exporting the goods to an importer in a foreign country.
Pre-shipment finance is extended to an exporter for the purpose of
procuring raw material, processing, packing, transporting and warehousing
of goods meant for export.
Pre-shipment finance can be classified as under:
• Packing Credit (Domestic currency, e.g., Indian Rupees for exports from
India)
• Advances against cheques/demand drafts received as advance payment
• Pre-shipment Credit in Foreign Currency (PCFC).
Pre-shipment/Packing credit’ means any loan or advance granted or any

other credit provided by a bank to an exporter for financing the purchase,
processing, manufacturing or packing of goods prior to shipment, on the
basis of letter of credit opened in his favour or in favour of some other
person, by an overseas buyer or a confirmed and irrevocable order for the
export of goods from abroad or any other evidence of an order for export
from abroad having been placed on the exporter or some other person
unless lodgement of export orders or letter of credit with the bank has
been waived.
! !393
Packing credit being a purpose oriented advance is allowed to the exporter

against the lodgement of letter of credit opened in his favour by an
overseas importer or a confirmed and irrevocable order for export of goods
from India or any other evidence of export order having been placed by an
importer.
The pre-shipment credit to exporters is normally provided on lodgement of

LCs or firm export orders. It is observed that the availability of raw
materials is seasonal in some cases. In some other cases, the time taken
for manufacture and shipment of goods is more than the delivery schedule
as per export contracts. In many cases, the exporters have to procure raw
material, manufacture the export product and keep the same ready for
shipment, in anticipation of receipt of letters of credit/firm export orders
from the overseas buyers. Having regard to difficulties being faced by the
exporters in availing of adequate pre-shipment credit in such cases, banks
have been authorised to extend Pre-shipment Credit ‘Running Account’
facility in respect of any commodity, without insisting on prior lodgement of
letters of credit/firm export orders, depending on the bank’s judgement
regarding the need to extend such a facility and subject to certain
conditions.
If pre-shipment advances are not liquidated from proceeds of bills on

purchase, discount, etc. on submission of export documents within 360
days from the date of advance, the advances will not be treated as export
credit ab initio.
Packing credit can be shared between an Export Order Holder (EOH) and
sub-supplier of raw materials, components etc., of the exported goods as in
the case of EOH and manufacturer suppliers, subject to certain conditions.
Pre-shipment and post-shipment finance may be provided to exporters of
all the 161 tradable services covered under the General Agreement on
Trade in Services (GATS) where payment for such services is received in
free foreign exchange.
Agri-Export Oriented Units (processing) are set up in Agri-Export zones as

well as outside the zones and to promote such units, production and
processing are to be integrated. The producer has to enter into contract
farming with farmers and has to ensure supply of quality seeds, pesticides,
micro-nutrients and other material to the group of farmers from whom the
exporter would be purchasing the products as raw material for production
! !394
of the final products for export. The Government, therefore, suggested that
such export processing units may be provided packing credit under the
extant guidelines for the purpose of procuring and supplying inputs to the
farmers so that quality inputs are available to them which in turn will
ensure that only good quality crops are raised
14.9 Questions
1. What is running account facility? Explain.
2. What are the guidelines for packing credit in excess of export value?
3. Write a short note on pre-shipment credit to service exporters.
4. Explain Guidelines on: Rupee pre-shipment credit to construction

contractors
5. Write short notes on: Export credit to processors/exporters – agri-

export zones
1. Pre-shipment finance is extended to an exporter for the purpose of

__________.
(a) procuring raw material
(b) processing, packing, transporting
(c) warehousing of goods meant for export
(d) all above
2. Packing Credit Loan can also be allowed to the __________ of the

goods who do not have export orders or LCs in their name but would be
supplying the goods to merchant exporters/export houses for export.
(a) Supporting manufacturer supplier
(b) Merchant suppliers
(c) Manufacturer
(d) Trader of goods
! !395
3. If pre-shipment advances are not liquidated from proceeds of bills on

purchase, discount, etc. on submission of export documents within from
the date of advance, the advances will not be treated as export credit ab
initio.
(a) 180 days
(b) 90 days
(c) 360 days
(d) 30 days
4. Whether supplier EOU/EPZ/SEZ unit will be eligible for any post-

shipment facility, as the scheme does not cover sale of goods on credit
terms? ___________ Yes or No
(a) Yes
(b) No
5. Pre-shipment and post-shipment finance may be provided to exporters

of all the __________ tradable services covered under the General
Agreement on Trade in Services (GATS) where payment for such
services is received in free foreign exchange
(a) 116
(b) 161
(c) 611
(d) 661
Answers: 1.(d), 2. (a), 3. (c), 4. (b), 5. (b).
! !396
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !397
EXPORT FINANCE — PRE-SHIPMENT CREDIT IN FOREIGN CURRENCY
Chapter 15
Export Finance - Pre-Shipment Credit In
Foreign Currency
Objectives

export finance granted by Banks in Foreign currency to exporters. The
scheme devised by RBI, its characteristic features source of funds, period
of credit etc. Is explain in this chapter.
Structure
15.1 Introduction
15.2 Schemes
15.3 Source of Funds for Banks
15.4 Spread
15.5 Period of Credit
15.6 Export Credit in Foreign Currency to Protect Exporters from Rupee
Fluctuations
15.7 Liquidation of PCFC Account
15.8 Cancellation/Non-execution of Export Order
15.9 Running Account Facility for All Commodities
15.10 Forward Contracts
15.11 Sharing of EPC under PCFC
15.12 Supplies from one EOU/EPZ/SEZ Unit to another EOU/EPZ/SEZ Unit
15.13 Deemed Exports
15.14 Refinance
15.15 Other Aspects
15.16 Summary
15.17 Questions
! !398
15.1 Introduction
With a view to making credit available to exporters at internationally

competitive rates, authorised dealers have been permitted to extend pre-
shipment Credit in Foreign Currency (PCFC) to exporters for domestic and
imported inputs of exported goods at LIBOR/EURO LIBOR/EURIBOR related
rates of interest as detailed below:
15.2 Schemes
i. The scheme is an additional window for providing pre-shipment credit to

Indian exporters at internationally competitive rates of interest. It will
be applicable to only cash exports. The instructions with regard to rupee
export credit apply to export credit in foreign currency also mutatis
mutandis, unless otherwise specified.
ii. The exporter will have the following options to avail of export finance
• to avail of pre-shipment credit in rupees and then the post-shipment

credit either in rupees or discounting/ rediscounting of export bills
under EBR Scheme
• to avail of pre-shipment credit in foreign currency and discount/

rediscounting of the export bills in foreign currency under EBR Scheme.
• to avail of pre-shipment credit in rupees and then convert drawals into

PCFC at the discretion of the bank.
iii. Choice of currency
The facility may be extended in one of the convertible currencies viz., US

Dollars, Pound Sterling, Japanese Yen, Euro, etc.
To enable the exporters to have operational flexibility, it will be in order for

banks to extend PCFC in one convertible currency in respect of an export
order invoiced in another convertible currency. For example, an exporter
can avail of PCFC in US Dollar against an export order invoiced in Euro. The
risk and cost of cross currency transaction will be that of the exporter.
! !399
Banks are permitted to extend PCFC for exports to ACU countries.
The applicable benefit to the exporters will accrue only after the realisation
of the export bills or when the resultant export bills are rediscounted on
‘without recourse’ basis.
15.3 Source of funds for banks
i. The foreign currency balances available with the bank in Exchange

Earners Foreign Currency (EEFC) Accounts, Resident Foreign Currency
Accounts RFC(D) and Foreign Currency (Non-Resident) Accounts
(Banks) Scheme could be utilised for financing the pre-shipment credit
in foreign currency.
ii. Banks are also permitted to utilise the foreign currency balances
available under Escrow Accounts and Exporters Foreign Currency
Accounts for the purpose, subject to ensuring that the requirements of
funds by the account holders for permissible transactions are met and
the limit prescribed for maintaining maximum balance in the account
under broad based facility is not exceeded.
iii. Foreign currency borrowings
In addition, banks may arrange for borrowings from abroad. Banks may
negotiate lines of credit with overseas banks for the purpose of grant of
PCFC to exporters without the prior approval of the RBI.
Banks may avail of lines of credit from other banks in India if they are not
in a position to raise loans from abroad on their own, provided the bank
does not have a branch abroad. The spread between the borrowing and
lending bank is left to the discretion of the banks concerned.
Banks should draw on the line of credit arranged only to the extent of loans
granted by them to the exporters under the PCFC. However, where the
overseas bank making available the line of credit stipulates a minimum
amount for drawals which should not be very large, the small unutilised
portion may be managed by the bank within its foreign exchange position
and Aggregate Gap Limit (AGL). Similarly, any pre-payment by the
exporter may also be taken within the foreign exchange position and AGL
limits.
! !400
iv. In case the exporters have arranged for the suppliers’ credit for
procuring imported inputs, the PCFC facility may be extended by the
banks only for the purpose of financing domestic inputs for exports.
v. Banks are also permitted to use foreign currency funds borrowed in

terms of para 4.2(i) of Notification No. FEMA.3/2000 RB dated May 3,
2000 as also foreign currency funds generated through buy-sell swaps
in the domestic forex market for granting pre-shipment credit in Foreign
Currency (PCFC) subject to adherence to Aggregate Gap Limit (AGL)
prescribed by RBI (FED).
15.4 Spread
(i) The spread for pre-shipment credit in foreign currency will be related to
the international reference rate such as LIBOR/EURO LIBOR/EURIBOR
(6 months). The lending rate to the exporter should not exceed 350
basis points from November 15, 2011 to May 4, 2012 (200 basis points
upto November 14, 2011) above LIBOR/ EURO LIBOR/EURIBOR,
excluding withholding tax. Banks are free to determine the interest
rates on export credit in foreign currency with effect from May 5, 2012.
(ii)LIBOR/EURO LIBOR/EURIBOR rates are normally available for standard

period of 1, 2, 3, 6 and 12 months. Banks may quote rates on the basis
of standard period if PCFC is required for periods less than 6 months.
However, while quoting rates for non-standard period, banks should
ensure that the rate quoted is below the next upper standard period
rate.
(iii)Banks may collect interest on PCFC at monthly intervals against sale of

foreign currency or out of balances in EEFC accounts or out of
discounted value of the export bills if PCFC is liquidated.
! !401
15.5 Period of credit
i. The PCFC will be available for a maximum period of 360 days. Any
extension of the credit will be subject to the same terms and conditions
as applicable for extension of rupee packing credit.
ii. Further extension will be subject to the terms and conditions fixed by
the bank concerned and if no export takes place within 360 days, the
PCFC will be adjusted at T.T. selling rate for the currency concerned. In
such cases, banks can arrange to remit foreign exchange to repay the
loan or line of credit raised abroad and interest without prior permission
of RBI.
iii. For extension of PCFC within 180 days, banks are free to determine the
interest rates on export credit in foreign currency with effect from May
5, 2012.
1. Interest on PCFC
In respect of export credit to exporters at internationally competitive rates
under the schemes of 'Pre-shipment Credit in Foreign Currency' (PCFC) and
'Rediscounting of Export Bills Abroad' (EBR), banks are free to determine
the interest rates on export credit in foreign currency with effect from May
5, 2012.
2. Disbursement of PCFC
a. In case full amount of PCFC or part thereof is utilised to finance

domestic input, banks may apply appropriate spot rate for the
transaction.
b. As regards the minimum lots of transactions, it is left to the operational

convenience of banks to stipulate the minimum lots taking into account
the availability of their own resources. However, while fixing the
minimum lot, banks may take into account the needs of their small
customers also.
c. Banks should take steps to streamline their procedures so that no

separate sanction is needed for PCFC once the packing credit limit has
been authorised and the disbursement is not delayed at the branches.
! !402
15.6 Export Credit in Foreign Currency to Protect Exporters

from Rupee Fluctuations
1. Banks extend export credit in Indian Rupees as well as in foreign

currency, such as Pre-shipment Credit in Foreign Currency (PCFC) and
Post-shipment Credit in Foreign Currency (PSCFC), as per their own
internal lending policies within the overall regulatory framework
prescribed by the Reserve Bank.
2. The export credit limits are calculated in Indian Rupees and the limit is
apportioned between Rupee and foreign currency components
depending upon the borrowers' requirement. While the overall export
credit limits are fixed in Indian Rupees, the foreign currency component
of export credit fluctuates based on the prevailing exchange rates.
3. It is observed that whenever there is a depreciation of Indian Rupee.
a. the unveiled foreign currency component of export credit gets

reduced;
b. the foreign currency component of export credit already availed gets

revalued at a higher value in terms of Indian Rupees resulting in the
exporter being asked to reduce their exposure by part payment or
where the export credit limit is not fully disbursed, the available limit
for the borrower reduces, depriving exporter of funds.
4. In above connection, a reference is invited to the Report of the Technical

Committee on Services/Facilities for Exporters (Chairman: Shri G.
Padmanabhan) that the export finance limit is sanctioned by Indian
banks, who revalue the foreign currency borrowings like PCFC and
PSCFC on periodic (ranging from daily to monthly) basis, which results
in notional excess utilisation over and above the sanctioned limits in
case of weakening Rupee. The Committee was of the view that
denomination of facility in foreign currency would ensure that exporters
are insulated from Rupee fluctuations.
5. Banks are advised that they may compute the overall export credit
limits of the borrowers on an on-going basis say monthly, based on the
prevalent position of current assets, current liabilities and exchange
rates and re-allocate limit towards export credit in foreign currency, as
! !403
per the bank's own policy. This may result in increasing or decreasing
the Indian Rupee equivalent of foreign currency component of export
credit.
6. Alternatively, banks may denominate foreign currency (FC) component

of export credit in foreign currency only with a view to ensuring that the
exporters are insulated from Rupee fluctuations. The FC component of
export credit, sanctioned, disbursed and outstanding will be maintained
and monitored in FC. However, for translation of FC assets in the banks'
book, the on-going exchange/FEDAI rates may be used.
15.7 Liquidation of PCFC Account
PCFC can be liquidated out of proceeds of export documents on their

submission for discounting/rediscounting under the EBR Scheme or by
grant of foreign currency loans (DP Bills). Subject to mutual agreement
between the exporter and the banker, it can also be repaid/prepaid out of
balances in EEFC A/c as also from rupee resources of the exporter to the
extent exports have actually taken place.
(i) Packing credit in excess of F.O.B. value

In certain cases, (viz., agro-based products like HPS groundnut, de-fatted
and de-oiled cakes, tobacco, pepper, cardamom, cashew nuts, etc.) where
packing credit required is in excess of FOB value, PCFC would be available
only for exportable portion of the produce.
(ii) Substitution of order/commodity

Repayment/Liquidation of PCFC could be with export documents relating to
any other order covering the same or any other commodity exported by
the exporter or amount of balance in the EEFC Account. While allowing
substitution of contract in this way, banks should ensure that it is
commercially necessary and unavoidable. Banks should also satisfy about
the valid reasons as to why PCFC extended for shipment of a particular
commodity cannot be liquidated in the normal method. As far as possible,
the substitution of contract should be allowed if the exporter maintains
account with the same bank or it has the approval of the members of the
consortium, if any.
! !404
15.8 Cancellation/non-execution of export order
a. In case of cancellation of the export order for which the PCFC was
availed of by the exporter from the bank, or if the exporter is unable to
execute the export order for any reason, it will be in order for the
exporter to repay the loan together with accrued interest thereon, by
purchasing foreign exchange (principal + interest) from domestic
market through the bank. In such cases, interest will be payable on the
rupee equivalent of principal amount at the rate applicable to ECNOS at
pre-shipment stage plus a penal rate of interest from the date of
advance after adjustment of interest of PCFC already recovered.
b. It will also be in order for the banks to remit the amount to the overseas
bank, provided the PCFC was made available to exporter from the line of
credit obtained from that bank.
c. Banks may extend PCFC to such exporters subsequently, after ensuring

that the earlier cancellation of PCFC was due to genuine reasons.
15.9 Running Account Facility for all commodities
i. Banks are permitted to extend the ‘Running Account’ facility under the
PCFC Scheme to exporters for all commodities, on the lines of the
facility available under rupee credit, subject to the following conditions:
a. The facility may be extended provided the need for ‘Running Account’
facility has been established by the exporters to the satisfaction of
the bank.
b. Banks may extend the facility only to those exporters whose track
record has been good.
c. In all cases, where pre-shipment credit ‘Running Account’ facility has

been extended, the LCs or firm orders should be produced within a
reasonable period of time.
d. The PCFC will be marked-off on the ‘First-in-First-Out’ basis.
e. PCFC can also be marked-off with proceeds of export documents

against which no PCFC has been drawn by the exporter.
! !405
ii. Banks should closely monitor the production of firm order or LC

subsequently by exporters and also the end-use of funds. It has to be
ensured that no diversion of funds is made for domestic use. In case of
non-utilisation of PCFC drawal for export purposes, the penal provisions
stated above should be made applicable and the ‘Running Account’
facility should be withdrawn for the concerned exporter.
iii. Banks are required to take any prepayment by the exporter under PCFC
scheme within their foreign exchange position and Aggregate Gap Limit
(AGL) With the extension of ‘Running Account’ facility, mismatches are
likely to occur for a longer period involving cost to the banks. Banks
may charge the exporters the funding cost, if any, involved in absorbing
mismatches in respect of the prepayment beyond one month period.
15.10 Forward Contracts
i. PCFC can be extended in any of the convertible currencies in respect of

an export order invoiced in another convertible currency. Banks are also
permitted to allow an exporter to book forward contract on the basis of
confirmed export order prior to availing of PCFC and cancel the contract
(for portion of drawal used for imported inputs) at prevailing market
rates on availing of PCFC.
ii. Banks are permitted to allow customers to seek cover in any permitted
currency of their choice which is actively traded in the market, subject
to ensuring that the customer is exposed to exchange risk in a
permitted currency in the underlying transaction.
iii. While allowing forward contracts under the scheme, banks may ensure
compliance of the basic Foreign Exchange Management requirement
that the customer is exposed to an exchange risk in the underlying
transaction at different stages of the export finance.
! !406
15.11 Sharing of EPC under PCFC
i. The rupee export packing credit is allowed to be shared between an

export order holder and the manufacturer of the goods to be exported.
Similarly, banks may extend PCFC also to the manufacturer on the basis
of the disclaimer from the export order holder through his bank.
ii. PCFC granted to the manufacturer can be repaid by transfer of foreign

currency from the export order holder by availing of PCFC or by
discounting of bills. Banks should ensure that no double financing is
involved in the transaction and the total period of packing credit is
limited to the actual cycle of production of the exported goods.
iii. The facility may be extended where the banker or the leader of
consortium of banks is the same for both the export order holder and
the manufacturer or, the banks concerned agree to such an
arrangement where the bankers are different for export order holder
and manufacturer. The sharing of export benefits will be left to the
mutual agreement between the export order holder and the
manufacturer.
15.12 Supplies from One EOU/EPZ/SEZ Unit to another

EOU/EPZ/SEZ Unit
i. PCFC may be made available to both, the supplier EOU/EPZ/SEZ unit

and the receiver EOU/EPZ/ SEZ unit.
ii. The PCFC for supplier EOU/EPZ/SEZ unit will be for supply of raw
materials/components of goods which will be further processed and
finally exported by receiver EOU/ EPZ/SEZ unit.
iii. The PCFC extended to the supplier EOU/EPZ/SEZ unit will have to be
liquidated by receipt of foreign exchange from the receiver EOU/EPZ/
SEZ unit, for which purpose, the receiver EOU/EPZ/SEZ unit may avail
of PCFC.
iv. The stipulation regarding liquidation of PCFC by payment in foreign

exchange will be met in such cases not by negotiation of export
documents but by transfer of foreign exchange from the banker of the
! !407
receiver EOU/EPZ/SEZ unit to the banker of supplier EOU/EPZ/SEZ unit.

Thus, there will not normally be any post-shipment credit in the
transaction from the supplier EOU/EPZ/ SEZ unit’s point of view.
v. In all such cases, it has to be ensured by banks that there is no double

financing for the same transaction. Needless to add, the PCFC to
receiver EOU/EPZ/SEZ unit will be liquidated by discounting of export
bills.
15.13 Deemed Exports
PCFC may be allowed for ‘deemed exports’ only for supplies to projects
financed by multilateral/bilateral agencies/funds. PCFC released for
‘deemed exports’ should be liquidated by grant of foreign currency loan at
post-supply stage, for a maximum period of 30 days or upto the date of
payment by the project authorities, whichever is earlier. PCFC may also be
repaid/prepaid out of balances in EEFC A/c as also from rupee resources of
the exporter to the extent supplies have actually been made.
15.14 Refinance
Banks will not be eligible for any refinance from RBI against export credit
under the PCFC scheme and, as such, the quantum of PCFC should be
shown separately from the export credit figures reported for the purpose of
drawing export credit refinance.
! !408
15.15 Other aspects
i. The applicable benefits such as credit of eligible percentage of export

proceeds to EEFC Account, etc., to the exporters will accrue only after
realisation of the export bills and not at the stage of conversion of pre-
shipment credit to post-shipment credit (except when bills are
discounted/ rediscounted 'without recourse').
ii. Surplus of export proceeds available after adjusting relative export

finance and credit to EEFC account should not be allowed for setting off
of import bills.
iii. ECGC cover will be available in rupees only, whereas PCFC is in foreign
currency.
iv. For the purpose of reckoning banks' performance in extending export

credit, the rupee equivalent of the PCFC may be taken into account.
! !409
15.16 Summary
The scheme is an additional window for providing pre-shipment credit to

Indian exporters at internationally competitive rates of interest. It will be
applicable to only cash exports. The instructions with regard to rupee
export credit apply to export credit in foreign currency also.
The facility may be extended in one of the convertible currencies viz., US

Dollars, Pound Sterling, Japanese Yen, Euro, etc.
To enable the exporters to have operational flexibility, it will be in order for

banks to extend PCFC in one convertible currency in respect of an export
order invoiced in another convertible currency.
The foreign currency balances available with the bank in Exchange Earners
Foreign Currency (EEFC) Accounts, Resident Foreign Currency Accounts
RFC(D) and Foreign Currency (Non-Resident) Accounts (Banks) Scheme
could be utilised for financing the pre-shipment credit in foreign currency.
The spread for pre-shipment credit in foreign currency will be related to the
international reference rate such as LIBOR/EURO LIBOR/EURIBOR (6
months). Banks are free to determine the interest rates on export credit in
foreign currency.
The PCFC will be available for a maximum period of 360 days. Any
extension of the credit will be subject to the same terms and conditions as
applicable for extension of rupee packing credit
Banks extend export credit in Indian Rupees as well as in foreign currency,

such as Pre-shipment Credit in Foreign Currency (PCFC) and Post-shipment
Credit in Foreign Currency (PSCFC), as per their own internal lending
policies within the overall regulatory framework prescribed by the Reserve
Bank
PCFC can be liquidated out of proceeds of export documents on their

submission for discounting/rediscounting under the EBR Scheme or by
grant of foreign currency loans (DP Bills). Subject to mutual agreement
between the exporter and the banker, it can also be repaid/prepaid out of
balances in EEFC A/c as also from rupee resources of the exporter to the
extent exports have actually taken place.
! !410
In case of cancellation of the export order for which the PCFC was availed
of by the exporter from the bank, or if the exporter is unable to execute
the export order for any reason, it will be in order for the exporter to repay
the loan together with accrued interest thereon, by purchasing foreign
exchange (principal + interest) from domestic market through the bank.
Banks are permitted to extend the ‘Running Account’ facility under the
PCFC Scheme to exporters for all commodities, on the lines of the facility
available under rupee credit, subject to the following conditions
PCFC can be extended in any of the convertible currencies in respect of an

export order invoiced in another convertible currency. Banks are also
permitted to allow an exporter to book forward contract on the basis of
confirmed export order prior to availing of PCFC and cancel the contract
(for portion of drawl used for imported inputs) at prevailing market rates
on availing of PCFC
The rupee export packing credit is allowed to be shared between an export

order holder and the manufacturer of the goods to be exported. Similarly,
banks may extend PCFC also to the manufacturer on the basis of the
disclaimer from the export order holder through his bank.
PCFC may be allowed for ‘deemed exports’ only for supplies to projects
financed by multilateral/bilateral agencies/funds. PCFC released for
‘deemed exports’ should be liquidated by grant of foreign currency loan at
post-supply stage, for a maximum period of 30 days or upto the date of
payment by the project authorities, whichever is earlier.
Banks will not be eligible for any refinance from RBI against export credit
under the PCFC scheme and, as such, the quantum of PCFC should be
shown separately from the export credit figures reported for the purpose of
drawing export credit refinance.
! !411
15.17 Questions
1. What is the source of funds for PCFC?

2. Write short notes on: Liquidation of PCFC.
3. What are the guidelines on cancellation/non-execution of export order in
case of PCFC?
4. Write short note on: Running account facility for PCFC.
5. Please explain PCFC to deemed export.
1. What is the source of foreign currency fund for banks to grant PCFC?
(a) Various foreign currency deposits
(b) Balances in escrow accounts
(c) Foreign currency line of credit
(d) All above
2. The PCFC will be available for a maximum period of __________ Days

(a) 90 days
(b) 180 days
(c) 270 days
(d) 360 days
3. What is the lending rate to the exporter under PCFC?

(a) 350 BPS
(b) 250 BPS
(c) FREE to determine by banks
(d) As per RBI rate
4. Banks __________ be eligible for any refinance from RBI against export
credit under the PCFC scheme.
(a) Will
(b) will not
(c) as per banks policy
(d) as per client request
! !412
5. PCFC may be allowed for ‘deemed exports’ only for supplies to projects
financed by __________.
(a) banks in India
(b) financial companies in India
(c) multilateral/bilateral agencies/funds
(d) only by PSU banks
Answers: 1.(d), 2. (d), 3. (c), 4. (b), 5. (c)
! !413
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !414
EXPORT FINANCE -POST-SHIPMENT CREDIT IN RUPEE
Chapter 16
Export Finance -Post-Shipment Credit In
Rupee
Objectives

complete process of availing export finance in Indian rupees by exporter at
post shipment stage. You will also understand process of handling export
bills by banks and requirement to be fulfilled by exporters.
Structure
16.1 Introduction
16.2 Eligibility
16.3 Negotiation of Bills
16.4 Export Bills Purchased/Discounted
16.5 Advance against Export Bills Sent for Collection
16.6 Post-shipment Credit on Deferred Payment Terms
16.7 Export on Consignment Basis
16.8 Export of Goods for Exhibition and Sale
16.9 Advances against Undrawn Balances on Export Bills
16.10 Advances against Retention Money
16.11 Post-shipment Advances against Duty Drawback Entitlements
16.12 ECGC Whole Turnover Post Shipment Guarantee Scheme
16.13 Deemed Exports – Rupee Export Credit at Prescribed Rates
16.14 Interest Rate on Rupee Export Credit
16.15 Change of Tenor of Bill
16.16 Summary
16.17 Questions
! !415
16.1 Introduction
‘Post-shipment Finance' means any loan or advance granted or any other

credit provided by a bank to an exporter of goods/services from India from
the date of extending credit after shipment of goods/rendering of services
to the date of realisation of export proceeds as per the period of realisation
prescribed by FED, and includes any loan or advance granted to an
exporter, in consideration of, or on the security of any duty drawback
allowed by the Government from time to time.
Financial assistance extended after the shipment of export goods falls

within the scope of post-shipment finance. Credit facility extended to an
exporter from the date of shipment of goods till the realisation of export
proceeds is known as post-shipment credit.
Post-shipment finance can mainly be classified as under:
• Export bills purchased/discounted/negotiated.

• Advances against export bills sent on collection basis.
• Advances against exports on consignment basis.
• Advances against duty drawback receivables from Govt.
• Advances against approved deemed exports.
Post-shipment finance is also a working capital finance, which is provided

to the exporter against shipping documents. While pre-shipment finance is
an inventory-based finance, post-shipment finance is a receivable finance.
Post-shipment finance can be allowed as Purchase/Discount Negotiation of
export bills. It can also be allowed as Rupee finance against export bills
sent on collection/consignment basis. Post-shipment credit is to be
liquidated by the proceeds of export bills received from abroad in respect
of goods exported.
! !416
16.2 Eligibility
Post-shipment finance is extended to the person who has actually shipped

the goods, i.e. the exporter. It can also be provided to the exporter in
whose name the export documents are transferred. In case of deemed
exports, the finance is extended to the supplier of goods.
1. Modalities
Post-shipment finance is always extended against the shipping documents,
evidencing of shipment of goods. In all cases of post-shipment finance,
proof of dispatch of goods or documents of title to goods is essential. Post-
shipment finance, being a receivable finance, is allowed to the exporter as
bill finance against his export receivables. There is no restriction in
financing export bills up to 100%. But in order to keep some stake of the
exporter and also to recover overdue interest and other charges usually
some margin is kept.
2. Period of Finance
The period of post-shipment finance will depend on the terms of the
contract between exporter and overseas importer. As per exchange control
regulations, for cash exports it can be for a maximum period of 180 days
from the date of shipment. For project exports and deferred payment
exports the tenure may differ from contract to contact.
In the case of demand bills, the advance can be granted for the Normal
Transit Period (NTP) as specified by FEDAI. In case of usance bills, credit
can be granted for a maximum duration of 180 days from the date of
shipment inclusive of Normal Transit Period (NTP) and grace period if any.
Normal Transit Period means the average period normally involved from,
the date of negotiation/purchase/discount till the receipt of bill proceeds in
the Nostro account of the bank, as prescribed by Foreign Exchange Dealers
of India (FEDAI) from time to time. It is not to be confused with the time
taken for the arrival of the goods at overseas destination.
I. At present Normal Transit Period for purpose of all bills in foreign

currency is 25 days.
II. Export to Iraq: In respect of export to Iraq under United Nations

guidelines where payment under letter of credit is made on arrival of
! !417
goods up on issuance of certificate by UN Agency to the effect that the

exports conform to the guidelines laid down by United Nations the
applicable Normal Transit Period shall be for a maximum of 90 days, for
which concessional interest shall be recovered.
III.Normal Transit Period for the bills drawn in Rupees:
A In case of bills drawn under letter of credit where 3 days

reimbursement is provided at the centre of negotiation
(if reimbursement for negotiation of Rupee bills drawn
under letter of credit is obtained in the centre of
negotiation by debit to the non resident account of the
credit opening bank held, either with negotiating bank
itself or with any of its branches in the same centre,
interest for the transit period of 3 days as allowed shall
not be collected)
B In case of bills drawn under letter of credit where 7 days
reimbursement is provided at a centre in India other
than the centre of negotiation
C In case of bills drawn under letter of credit where 20 days
reimbursement is provided by banks situated outside
India
AND
Bills not under letter of credit
D Export to Russia against letter of credit providing for 20 days
reimbursement by Reserve Bank of India under State
credit arrangement
16.3 Negotiation of Bills
Negotiation of export bills usually refers to the documents presented under

freely negotiable letter of credit or LC providing for negotiation of the bill.
When export documents drawn under LC, are presented to bank for
negotiations they should be scrutinised carefully with the terms and
conditions of LC. The operation of the letter of credit is governed by UCP
600. Documents drawn should be strictly in conformity with the terms of
LC. It is to be noted that the LC issuing bank undertakes to honour its
commitment only if the beneficiary submits the stipulated documents
confirming the LC terms. Even the slightest deviation from those terms and
conditions specified in the LC can give an excuse to the issuing bank for
refusing the payment to the negotiating bank (Article 2 and &6).
! !418
Some of the discrepancies commonly observed are listed below:
1. LC expired before shipment or negotiation

2. Bill of exchange not drawn as per the terms of LC
3. Drawing in excess of LC amount
4. Invoice is incorrect or incomplete
5. Description of goods in all documents is not consistent
6. Bill of lading or Airway bill is not signed in terms of UCP 600or not
authenticated in case of alterations
7. Presentation of claused bill of lading, when LC calls for clean bill of
lading
8. Full set of documents not submitted as called for in LC
9. Partial shipment or transshipment effect, where as LC does not permit
10. Insurance documents incomplete
11. Certificate of origin not submitted or signed by the officials authorised
to do so.
12. A few documents/copies presented unsigned
13.GR form not properly filled up/inconsistent with invoice, etc., in terms of
value
14. Too many spelling mistakes in documents
The above discrepancies, which are commonly found, should be considered

as deviation from the terms and conditions of LC and opening/issuing bank
may refuse documents even if the discrepancies are not materially
significant.
After negotiation the proceeds should be utilised to liquidate the

outstanding packing credit loan, if any. Interest from the date of
negotiation to the due date is charged at concessive rates. If the bill is paid
before due date, proportionate interest is refunded, and if the bill is paid
beyond due date interest for the overdue period is recovered as per the
banks guidelines. If the documents presented are discrepant and if the
discrepancies cannot be rectified, the documents should not be negotiated.
In case packing credit has been given against the LC, the amount of
preshipment should be converted to post-shipment finance to comply with
the ECGC Guidelines.
! !419
16.4 Export bills purchased/discounted
This type of advance is originated out of the export order extended

between the buyers and exporters. The export bills representing genuine
trade, strictly drawn in terms of the sale contract/order may be purchased
if drawn on sight basis or discounted if it is drawn on usance basis. Proper
limit should be sanctioned to the exporter for purchase or discount of
export bills. Since the export is not covered under letter of credit, risk of
non-payment may arises, the risk is more pronounced in case of
documents under acceptance. In order to safeguard the interest of the
bank and also exporters, ECGC offers coverage of credit risk through their
guarantees to the bankers and policies to the exporters at the post-
shipment stage.
Documents
The principal documents necessary when purchasing discounting bills are

draft/invoice/bill of lading/airway bill /postal receipts/insurance policy (if
applicable)/packing list/certificate of origin or generalised system of
preference certificate. These documents should relate to goods identically
described and all must be consistent with one another. Transport
documents should not show as goods consigned to buyer. It should be
either order of shipper, endorsed on the reverse of the bill of lading or it
should be consigned to the order of foreign bank with prior arrangement.
Full set of transport documents should be surrendered by exporter.
16.5 Advance against Export bills sent for collection
Advance against an export collection bills is another type of post shipment

credit. Advance is generally granted at the time of sending the bills for
collection, and sometimes also after a few days or weeks after it is sent for
collection. The practice of granting post shipment financier several days
after the date of shipment/date of collection should be avoided, as once
the shipment takes place, packing credit/preshipment advance loses its
characteristic. The proceeds of advance should be utilised to liquidate
outstanding packing credit.
! !420
Interest at concessional rate is recovered from the date of advance to due

date. The exchange rate for the advance is notional rate. Up on realisation
of the bills the post shipment credit is liquidated by applying TT Buying rate
as on the date of conversion.
Interest on all post-shipment advance will cease on date of credit to Nostro

account of the bank, which has handled the bill.
16.6 Post-shipment Credit on Deferred Payment Terms
Banks may grant post-shipment credit on deferred payment terms for a

period exceeding one year, in respect of export of capital and producer
goods as specified by RBI (FED) from time to time. Interest on deferred
payment export is not charged concessional rate and banks are free to
charge interest as per their lending structure.
16.7 Export on Consignment Basis
Export on consignment basis lends scope for a lot of misuse in the matter
of repatriation of export proceeds. Therefore, export on consignment basis
should be at par with exports on outright sale basis on cash terms in
matters regarding the rate of interest to be charged by banks on post-
shipment credit. Thus, in the case of exports on consignment basis, even if
extension in the period beyond 365 days is granted by the Foreign
Exchange Department (FED) for repatriation of export proceeds, banks will
charge appropriate prescribed rate of interest only upto the notional due
date (depending upon the tenor of the bills), subject to a maximum of 365
days.
(i) Export of precious and semi-precious stones

Precious and semi-precious stones, etc. are exported mostly on
consignment basis and the exporters are not in a position to liquidate pre-
shipment credit account with remittances received from abroad within a
period of 365 days from the date of advance. Banks may, therefore, adjust
packing credit advances in the case of consignment exports, as soon as
export takes place, by transfer of the outstanding balance to a special
(post-shipment) account which in turn, should be adjusted as soon as the
relative proceeds are received from abroad but not later than 365 days
from the date of export or such extended period as may be permitted by
! !421
Foreign Exchange Department, Reserve Bank of India. Balance in the

special (post-shipment) account will not be eligible for refinance from RBI.
(ii) Extension of realisation of export proceeds for period upto

12/15 months
RBI (FED) has been allowing in deserving cases, on application by

individual exporters with satisfactory track record, a longer period upto 12
months from the date of shipment for realisation of proceeds of exports in
case of following categories of exporters:
a. Consignment Exports to CIS and East European Countries.
b. Consignment exports to Russian Federation against repayment of State

Credit in rupees.
c. Exporters who have been certified as 'Status Holder' in terms of Foreign

Trade Policy.
d. 100 per cent Export Oriented Units and units set up under Electronic
Hardware Technology Park, Software Technology Park and Bio-
Technology Park Schemes.
FED vide AP (DIR series) circular No.40 dated November 1, 2011 has
extended the period of realisation and repatriation of export proceeds from
6 months to 12 months from the date of export, for a further period upto
September 30, 2012.
Further in case of Exports through the Warehouse-cum-Display Centres

abroad, realisation of export proceeds has been fixed upto 15 months from
the date of shipment.
Banks may extend post-shipment credit to such exporters for a longer

period ab-initio. Accordingly, the interest rate upto 180 days from the date
of advance will be the rate applicable for usance bills for period upto 180
days. Beyond 180 days from the date of shipment, banks are free to decide
on the rate of interest. In case the sale proceeds are not realised within the
sanctioned period, the higher rate of interest as applicable for 'ECNOS'-
post-shipment will apply for the entire period beyond 180 days.
! !422
Refinance to banks against export credit would however, be available from

RBI, upto a period of 180 days at post-shipment stage as per guidelines
issued by RBI (MPD).
16.8 Export of Goods for Exhibition and Sale
Banks may provide finance to exporters against goods sent for exhibition
and sale abroad in the normal course in the first instance, and after the
sale is completed, allow the benefit of the prescribed rate of interest on
such advances, both at the pre-shipment stage and at the post-shipment
stage, upto the stipulated periods, by way of a rebate. Such advances
should be given in separate accounts.
16.9 Advances against Undrawn Balances on Export Bills
In respect of export of certain commodities where exporters are required

to draw the bills on the overseas buyer upto 90 to 98 per cent of the FOB
value of the contract, the residuary amount being ‘undrawn balance’ is
payable by the overseas buyer after satisfying himself about the quality/
quantity of goods.
Payment of undrawn balance is contingent in nature. Banks may consider

granting advances against undrawn balances at concessional rate of
interest based on their commercial judgement and the track record of the
buyer. Such advances are, however, eligible for concessional rate of
interest for a maximum period of 90 days only to the extent these are
repaid by actual remittances from abroad and provided such remittances
are received within 180 days after the expiry of NTP in the case of demand
bills and due date in the case of usance bills. For the period beyond 90
days, the rate of interest specified for the category Export Credit Not
Otherwise Specified (ECNOS) at post-shipment stage may be charged.
! !423
16.10 Advances against Retention Money
(i) In the case of turnkey projects/construction contracts, progressive

payments are made by the overseas employer in respect of services
segment of the contract, retaining a small percentage of the progressive
payments as retention money which is payable after expiry of the
stipulated period from the date of the completion of the contract,
subject to obtention of certificate(s) from the specified authority.
(ii)Retention money may also be sometimes stipulated against the supplies

portion in the case of turnkey projects. It may likewise arise in the case
of subcontracts. The payment of retention money is contingent in nature
as it is a deferred liability.
(iii)The following guidelines should be followed in regard to grant of

advances against retention money:
a. No advances may be granted against retention money relating to

services portion of the contract.
b. Exporters may be advised to arrange, as far as possible, provision of

suitable guarantees, instead of retention money.
c. Banks may consider, on a selective basis, granting of advances

against retention money relating to the supplies portion of the
contract taking into account, among others, the size of the retention
money accumulated, its impact on the liquid funds position of the
exporter and the past performance regarding the timely receipt of
retention money.
d. The payment of retention money may be secured by LC or Bank

Guarantee where possible.
e. Where the retention money is payable within a period of one year

from the date of shipment, according to the terms of the contract,
banks should charge prescribed rate of interest upto a maximum
period of 90 days. The rate of interest prescribed for the category
'ECNOS' at post-shipment stage may be charged for the period
beyond 90 days.
! !424
f. Where the retention money is payable after a period of one year from
the date of shipment, according to the terms of the contract and the
corresponding advance is extended for a period exceeding one year,
it will be treated as post-shipment credit given on deferred payment
terms exceeding one year, and the bank is free to decide the rate of
interest.
g. Advances against retention money will be eligible for concessional

rate of interest only to the extent the advances are actually repaid by
remittances received from abroad relating to the retention money
and provided such payments are received within 180 days from the
due date of payment of the retention money, according to the terms
of the contract
16.11 Post-shipment Advances against Duty Drawback

Entitlements
Banks may grant post-shipment advances to exporters against their duty

drawback entitlements and covered by ECGC guarantee as provisionally
certified by Customs Authorities pending final sanction and payment.
The advance against duty drawback receivables can also be made available
to exporters against export promotion copy of the shipping bill containing
the EGM Number issued by the Customs Department. Where necessary,
the financing bank may have its lien noted with the designated bank and
arrangements may be made with the designated bank to transfer funds to
the financing bank as and when duty drawback is credited by the Customs.
These advances granted against duty drawback entitlements would be

eligible for concessional rate of interest and refinance from RBI upto a
maximum period of 90 days from the date of advance.
! !425
16.12 ECGC Whole Turnover Post-Shipment Guarantee

Scheme
The Whole Turnover Post-shipment Guarantee Scheme of the Export Credit

Guarantee Corporation of India Ltd. (ECGC) provides protection to banks
against non-payment of post-shipment credit by exporters. Banks may, in
the interest of export promotion, consider opting for the Whole Turnover
Post-shipment Policy. The salient features of the scheme may be obtained
from ECGC.
As the post-shipment guarantee is mainly intended to benefit the banks,

the cost of premium in respect of the Whole Turnover Post-shipment
Guarantee taken out by banks may be absorbed by the banks and not
passed on to the exporters.
Where the risks are covered by the ECGC, banks should not slacken their
efforts towards realisation of their dues against long outstanding export
bills.
16.13 DEEMED EXPORTS - RUPEE EXPORT CREDIT AT

PRESCRIBED RATES
Banks are permitted to extend rupee pre-shipment and post-supply rupee

export credit at prescribed rate of interest to parties against orders for
supplies in respect of projects aided/financed by bilateral or multilateral
agencies/funds (including World Bank, IBRD, IDA), as notified from time to
time by Department of Economic Affairs, Ministry of Finance under the
Chapter “Deemed Exports” in Foreign Trade Policy, which are eligible for
grant of normal export benefits by Government of India.
Packing Credit provided should be adjusted from free foreign exchange

representing payment for the suppliers of goods to these agencies. It can
also be repaid/prepaid out of balances in Exchange Earners Foreign
Currency account (EEFC A/c), as also from the rupee resources of the
exporter to the extent supplies have actually been made.
! !426
Banks may also extend rupee post-supply credit (for a maximum period of
30 days or upto the actual date of payment by the receiver of goods,
whichever is earlier), for supply of goods specified as 'Deemed Exports'
under the same Chapter of Foreign Trade Policy from time to time.
The post-supply advances would be treated as overdue after the period of

30 days. In cases where such overdue credits are liquidated within a period
of 180 days from the notional due date (i.e., before 210 days from the date
of advance), the banks are required to charge, for such extended period,
interest prescribed for the category 'ECNOS' at post-shipment stage. If the
bills are not paid within the aforesaid period of 210 days, banks should
charge from the date of advance, the rate prescribed for ‘ECNOS'-post-
shipment.
Banks would be eligible for refinance from RBI for such rupee export
credits extended both at pre-shipment and post-supply stages.
16.14 Interest Rate on Rupee Export Credit
Interest Rate Structure
The Base Rate System is applicable with effect from July 1, 2010.
Accordingly, interest rates applicable for all tenors of rupee export credit
advances sanctioned on or after July 01, 2010 are at or above Base Rate.
Interest on Post-Shipment Credit
(a)Early payment of export bills
i. In the case of advances against demand bills, if the bills are realised
before the expiry of the normal transit period (NTP), interest at the
prescribed rate shall be charged from the date of advance till the
date of realisation of such bills. The date of realisation of demand
bills for this purpose would be the date on which the proceeds get
credited to the banks' Nostro accounts.
ii. In the case of advance/credit against usance export bills, interest at

prescribed rate may be charged only upto the notional/actual due
date or the date on which export proceeds get credited to the bank’s
Nostro account abroad, whichever is earlier, irrespective of the date
! !427
of credit to the borrower’s/exporter’s account in India. In cases

where the correct due date can be established before/immediately
after availment of credit due to acceptance by overseas buyer or
otherwise, prescribed interest can be applied only upto the actual due
date, irrespective of whatever may be the notional due date arrived
at, provided the actual due date falls before the notional due date.
iii. Where interest for the entire NTP in the case of demand bills or upto
notional/actual due date in the case of usance bills as stated at (b)
above, has been collected at the time of negotiation/purchase/
discount of bills, the excess interest collected for the period from the
date of realisation to the last date of NTP/notional due date/actual
due date should be refunded to the borrowers.
b. Overdue export bills under the BPLR system
i. In case of export bills, the rate of interest decided by the bank within
the ceiling rate stipulated by RBI will apply upto the due date of the
bill (upto NTP in case of demand bill and specified period in case of
usance bills).
ii. For the period beyond the due date viz., for the overdue period, the
prescribed interest rate as applicable to post-shipment rupee export
credit (not exceeding BPLR minus 2.5 percentage points) may be
applied upto 180 days from the date of advance, till further notice.
c. Interest on Post-Shipment Credit Adjusted from Rupee

Resources
Banks should adopt the following guidelines to ensure uniformity in

charging interest on post-shipment advances which are not adjusted in an
approved manner due to non-accrual of foreign exchange and advances
have to be adjusted out of the funds received from the Export Credit
Guarantee Corporation of India Ltd. (ECGC) in settlement of claims
preferred on them on account of the relevant export consignment:
i. In case of exports to certain countries, exporters are unable to

realise export proceeds due to non-expatriation of the foreign
exchange by the Governments/Central Banking Authorities of the
countries concerned as a result of their balance of payment problems
! !428
even though payments have been made locally by the buyers. In

these cases ECGC offer cover to exporters for transfer delays. Where
ECGC have admitted the claims and paid the amount for transfer
delay, banks may charge interest as applicable to ‘ECNOS’ - post-
shipment even if the post-shipment advance may be outstanding
beyond six months from the date of shipment. Such interest would be
applicable on the full amount of advance irrespective of the fact that
the ECGC admit the claims to the extent of 90 per cent/75 per cent
and the exporters have to bring the balance 10 per cent/25 per cent
from their own rupee resources.
ii. In a case where interest has been charged at commercial rate or

'ECNOS', if export proceeds are realised in an approved manner
subsequently, the bank may refund to the borrower the excess
amount representing difference between the quantum of interest
already charged and interest that is chargeable taking into account
the said realisation after ensuring the fact of such realisation with
satisfactory evidence. While making adjustments of accounts it would
be better if the possibility of refund of excess interest is brought to
the notice of the borrower.
16.15 Change of Tenor of Bill
a. Banks have been permitted by RBI (FED) on request from exporters, to

allow change of the tenor of the original buyer/consignee, provided inter
alia, the revised due date of payment does not fall beyond the
maximum period prescribed by FED for realisation of export proceeds.
b. In such cases as well as where change of tenor upto twelve months

from the date of shipment has been allowed, it would be in order for
banks to extend the prescribed rate of interest upto the revised notional
due date, subject to the interest rates directive issued by RBI.
! !429
16.16 Summary
Credit facility extended to an exporter from the date of shipment of goods

till the realisation of export proceeds is known as post-shipment credit.
Post-shipment finance can mainly be classified as under:
• Export bills purchased/discounted/negotiated.

• Advances against export bills sent on collection basis.
• Advances against exports on consignment basis.
• Advances against duty drawback receivables from Govt.
• Advances against approved deemed exports.
Post-shipment finance is extended to the person who has actually shipped

the goods, i.e., the exporter. It can also be provided to the exporter in
whose name the export documents are transferred. In case of deemed
exports, the finance is extended to the supplier of goods.
Negotiation of export bills usually refers to the documents presented under

freely negotiable letter of credit or LC providing for negotiation of the bill.
When export documents drawn under LC, are presented to bank for
negotiations they should be scrutinised carefully with the terms and
conditions of LC. The operation of the letter of credit is governed by UCP
600. Documents drawn should be strictly in conformity with the terms of
LC. It is to be noted that the LC issuing bank undertakes to honour its
commitment only if the beneficiary submits the stipulated documents
confirming the LC terms. Even the slightest deviation from those terms and
conditions specified in the LC can give an excuse to the issuing bank for
refusing the payment to the negotiating bank (Article 2 and 6).
The export bills representing genuine trade, strictly drawn in terms of the
sale contract/order may be purchased if drawn on sight basis or discounted
if it is drawn on Usance basis. Proper limit should be sanctioned to the
exporter for purchase or discount of export bills. Since the export is not
covered under letter of credit, risk of non payment may arises, the risk is
more pronounced in case of documents under acceptance.
! !430
Advance against an export collection bills is another type of post shipment

credit. Advance is generally granted at the time of sending the bills for
collection, and sometimes also after a few days or weeks after it is sent for
collection.
Export on consignment basis lends scope for a lot of misuse in the matter
of repatriation of export proceeds. Therefore, export on consignment basis
should be at par with exports on outright sale basis on cash terms in
matters regarding the rate of interest to be charged by banks on post-
shipment credit. Thus, in the case of exports on consignment basis, even if
extension in the period beyond 365 days is granted by the Foreign
Exchange Department (FED) for repatriation of export proceeds, banks will
charge appropriate prescribed rate of interest only upto the notional due
date (depending upon the tenor of the bills), subject to a maximum of 365
days.

value of the contract, the residuary amount being 'undrawn balance' is
quantity of goods.
In the case of turnkey projects/construction contracts, progressive

stipulated period from the date of the completion of the contract, subject
to obtention of certificate(s) from the specified authority
Banks may grant post-shipment advances to exporters against their duty

drawback entitlements and covered by ECGC guarantee as provisionally
certified by Customs Authorities pending final sanction and payment.
Banks are permitted to extend rupee pre-shipment and post-supply rupee

export credit at prescribed rate of interest to parties against orders for
supplies in respect of projects aided/financed by bilateral or multilateral
agencies/funds (including World Bank, IBRD, IDA), as notified from time to
time by Department of Economic Affairs, Ministry of Finance
! !431
16.17 Questions
1. What is eligibility criteria to avail the post-shipment export credit?

2. Write short notes on negotiation of bills.
3. What is consignment export? Please explain.
4. How advances against retention money is grated by banks?
5. Write short notes on deemed export.
1. As per exchange control regulations, for cash exports it can be for a

maximum period of __________ days from the date of shipment
(a.) 60
(b) 90
(c) 180
(d) 360
2. In the case of exports on consignment basis, if extension in the period

beyond 365 days is granted by the Foreign Exchange Department (FED)
for repatriation of export proceeds, banks will charge appropriate
prescribed rate of interest only upto the __________ (depending upon
the tenor of the bills), subject to a maximum of 365 days
(a) Declared due date
(b) Notional due date
(c) Actual date of realisation
(d) 180 days
3. Where the retention money is payable within a period of one year from
the date of shipment, according to the terms of the contract, banks
should charge prescribed rate of interest upto a maximum period of
__________.
(a) 90 days
(b) 120 days
(c) 180 days
(d) 360 days
! !432
4. These advances granted against duty drawback entitlements would be

maximum period of __________ days from the date of advance.
(a) 60
(b) 90
(c) 180
(d) 360
5. For the period beyond the due date viz. for the overdue period, the
prescribed interest rate as applicable to post-shipment rupee export
credit (not exceeding BPLR minus 2.5 percentage points) may be
applied upto __________ days from the date of advance, till further
notice.
(a) 360
(b) 270
(c) 180
(d) 90
Answers: 1. (c), 2. (b), 3. (a), 4. (b), 5. (c).
! !433
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !434
EXPORT FINANCE — POST-SHIPMENT CREDIT IN FOREIGN CURRENCY
Chapter 17
Export Finance -
Post-Shipment Credit In Foreign Currency
Objectives

process of granting the post-shipment export finance in Foreign currency
by Banks to exporters considering various aspects such as availability of
funds, facilities etc.
Structure
17.1 Introduction
17.2 Scheme
17.3 Availability of Funds
17.4 Eligibility Criteria
17.5 Source of Onshore Funds
17.6 Facility of Rediscounting ‘With Recourse’ and ‘Without Recourse’
17.7 Accounting Aspects
17.8 Restoration of Limits and Availability of Export Benefits such as EEFC
Account
17.9 ECGC Cover
17.10 Refinance
17.11 Export Credit Performance
17.12 Interest Rate Structure on Export Credit in Foreign Currency
17.13 Summary
17.14 Questions
! !435
17.1 Introduction
Like pre-shipment credit in foreign currency, it has been permitted to

exporters to avail the export credit in foreign currency for the export made
by them. The idea to make available cheaper funds to the exporters as
against the domestic currency. Direct discounting of export bills by
exporters with overseas bank and/or any other agency will be done only
through the branch of an authorised dealer designated by him for this
purpose. The limits granted to banks by overseas banks/discounting
agencies under BAF will not be reckoned for the purpose of borrowing
limits fixed by RBI (FED) for them
17.2 Scheme
i. It will be comparatively easier to have a facility against bills portfolio

(covering all eligible bills) than to have rediscounting facility abroad on
bill by bill basis. There will, however, be no bar if rediscounting facility
on bill to bill basis is arranged by a bank in case of any particular
exporter, especially for large value transactions.
ii. Banks may arrange a "Bankers’ Acceptance Facility" (BAF) for

rediscounting the export bills without any margin and duly covered by
collateralised documents.
iii. Each bank can have its own BAF limit(s) fixed with an overseas bank or
a rediscounting agency or an arrangement with any other agency such
as factoring agency (in case of factoring arrangement, it should be on
‘without recourse’ basis only).
iv. The exporters, on their own, can arrange for themselves a line of credit
with an overseas bank or any other agency (including a factoring
agency) for discounting their export bills direct subject to the following
conditions:
a. Direct discounting of export bills by exporters with overseas bank

and/or any other agency will be done only through the branch of an
authorised dealer designated by him for this purpose.
b. Discounting of export bills will be routed through designated bank/

authorised dealer from whom the packing credit facility has been
! !436
availed of. In case, these are routed through any other bank, the
latter will first arrange to adjust the amount outstanding under
packing credit with the concerned bank out of the proceeds of the
rediscounted bills.
v. The limits granted to banks by overseas banks/discounting agencies

under BAF will not be reckoned for the purpose of borrowing limits fixed
by RBI (FED) for them.
17.3 Availability of funds
Banks may utilise the foreign exchange resources available with them in
Exchange Earners Foreign Currency Accounts (EEFC), Resident Foreign
Currency Accounts (RFC), Foreign Currency (Non-Resident) Accounts
(Banks) Scheme, to discount usance bills and retain them in their portfolio
without resorting to rediscounting. Banks are also allowed to rediscount
export bills abroad at rates linked to international interest rates at post-
shipment stage.
17.4 Eligibility criteria
a. The scheme will cover mainly export bills with usance period upto 180
days from the date of shipment (inclusive of normal transit period and
grace period, if any). There is, however, no bar to include demand bills,
if overseas institution has no objection to it.
b. In case borrower is eligible to draw usance bills for periods exceeding

180 days as per the extant instructions of FED, post-shipment credit
under the EBR may be provided beyond 180 days.
c. The facility under the scheme of rediscounting may be offered in any

convertible currency.
d. Banks are permitted to extend the EBR facility for exports to ACU
countries.
e. For operational convenience, the BAF Scheme may be centralised at a

branch designated by the bank. There will, however, be no bar for other
branches of the bank to operate the scheme as per the bank's internal
guidelines/instructions.
! !437
17.5 Source of Onshore funds
a. In the case of demand bills, these may have to be routed through the
existing post-shipment credit facility or by way of foreign exchange
loans to the exporters out of the foreign currency balances available
with banks in the Schemes.
b. To facilitate the growth of local market for rediscounting export bills,

establishment and development of an active interbank market is
desirable. It is possible that banks hold bills in their own portfolio
without rediscounting. However, in case of need, the banks should also
have access to the local market, which will enable the country to save
foreign exchange to the extent of the cost of rediscounting. Further, as
different banks may be having BAF for varying amounts, it will be
possible for a bank which has balance available in its limit to offer
rediscounting facility to another bank which may have exhausted its
limit or could not arrange for such a facility.
c. Banks may avail of lines of credit from other banks in India if they are
not in a position to raise loans from abroad on their own or they do not
have branches abroad, subject to the condition that ultimate cost to the
exporter should not exceed 350 basis points from November 15, 2011
to May 4, 2012 (200 basis points upto November 14, 2011) above
LIBOR/EURO LIBOR/EURIBOR excluding withholding tax. The spread
between the borrowing and lending bank is left to the discretion of the
banks concerned.
Banks are free to determine the interest rates on export credit in foreign
currency with effect from May 5, 2012.
d. Banks are also permitted to use foreign currency funds borrowed in

terms of notification No. FEMA 3/2000 RB dated May 3, 2000 as also
foreign currency funds generated through buy- sell swaps in the
domestic Forex market for granting facility of rediscounting of Export
Bills Abroad (EBR) subject to adherence to Aggregate Gap Limit (AGL)
approved by RBI (FED).
! !438
17.6 Facility of Rediscounting ‘with recourse’ and ‘without

recourse’
It is recognised that it will be difficult to get ‘without recourse’ facility from

abroad under BAF or any other facility. Therefore, the bills may be
rediscounted ‘with recourse’. However, if an AD is in a position to arrange
‘without recourse’ facility on competitive terms, it is permitted to avail itself
of such a facility.
17.7 Accounting aspects
i. The rupee equivalent of the discounted value of the export bills will be
payable to the exporter and the same should be utilised to liquidate the
outstanding export packing credit.
ii. As the discounting of bills/extension of foreign exchange loans (DP bills)

will be in actual foreign exchange, banks may apply appropriate spot
rate for the transactions.
iii. The rupee equivalents of discounted amounts/foreign exchange loan

may be held in the bank’s books distinct from the existing post-
shipment credit accounts.
iv. In case of overdue bills, banks may charge 200 basis points above the
rate of rediscounting of foreign exchange loan from the due date to the
date of crystallisation.
v. Interest rate as per RBI interest rate directive for post-shipment credit
in rupees will be applicable from the date of crystallisation.
vi. In the event of export bill not being paid, it will be in order for the bank
to remit the amount equivalent to the value of the bill earlier
discounted, to the overseas bank/agency which had discounted the bill,
without the prior approval of the RBI.
! !439
17.8 Restoration of limits and availability of export

benefits such as EEFC Account
As stated earlier, ‘without recourse’ facility may not generally be available.

Thus, the restoration of exporter’s limits and the availability of export
benefits, such as credit to EEFC accounts, in case of ‘with recourse’ facility,
will be effected only on realisation of export proceeds and not on the date
of discounting/rediscounting of the bills. However, if the bills are
rediscounted ‘without recourse’, the restoration of exporter’s limits and
availability of export benefits may be given effect immediately on
rediscounting.
17.9 ECGC cover
In the case of export bills rediscounted ‘with recourse’, there will not be
any change in the existing system of coverage provided by Export Credit
Guarantee Corporation (ECGC) as the liability of the exporter continues till
the relative bill is retired/paid. In other cases, where the bills are
rediscounted ‘without recourse’, the liability of ECGC ceases as soon as the
relative bills are rediscounted.
17.10 Refinance
Banks will not be eligible for refinance from the RBI against export bills
discounted/rediscounted under the Scheme and as such, the bills
discounted/rediscounted in foreign currency should be shown separately
from the export credit figures reported for purposes of drawing export
credit refinance.
! !440
17.11 Export credit performance
i. Only the bills rediscounted abroad ‘with recourse’ basis and outstanding
will be taken into account for the purpose of export credit performance.
The bills rediscounted abroad ‘without recourse’ will not count for the
export credit performance.
ii. Bills rediscounted ‘with recourse’ in the domestic market could get
reflected only in the case of the first bank discounting the bills as that
bank alone will have recourse to the exporter and the bank
rediscounting will not reckon the amount as export credit.
17.12 Interest rate structure on Export Credit in Foreign

Currency
In respect of export credit to exporters at internationally competitive rates

under the schemes of 'Pre-shipment Credit in Foreign Currency' (PCFC) and
'Rediscounting of Export Bills Abroad' (EBR), banks are free to determine
the interest rates on export credit in foreign currency with effect from May
5, 2012.
17.13 Summary
It will be comparatively easier to have a facility against bills portfolio

(covering all eligible bills) than to have rediscounting facility abroad on bill
by bill basis. There will, however, be no bar if rediscounting facility on bill
to bill basis is arranged by a bank in case of any particular exporter,
especially for large value transactions.
Discounting of export bills will be routed through designated bank/

authorised dealer from whom the packing credit facility has been availed
of. In case, these are routed through any other bank, the latter will first
arrange to adjust the amount outstanding under packing credit with the
concerned bank out of the proceeds of the rediscounted bills.
Banks may utilise the foreign exchange resources available with them in
Exchange Earners Foreign Currency Accounts (EEFC), Resident Foreign
Currency Accounts (RFC), Foreign Currency (Non-Resident) Accounts
! !441
(Banks) Scheme, to discount usance bills and retain them in their portfolio
without resorting to rediscounting.
The scheme will cover mainly export bills with usance period upto 180 days
from the date of shipment (inclusive of normal transit period and grace
period, if any). There is, however, no bar to include demand bills, if
overseas institution has no objection to it.
To facilitate the growth of local market for rediscounting export bills,

establishment and development of an active interbank market is desirable.
It is possible that banks hold bills in their own portfolio without
rediscounting. However, in case of need, the banks should also have access
to the local market, which will enable the country to save foreign exchange
to the extent of the cost of rediscounting.
In the case of export bills rediscounted ‘with recourse’, there will not be
any change in the existing system of coverage provided by Export Credit
Guarantee Corporation (ECGC) as the liability of the exporter continues till
the relative bill is retired/paid.
Banks will not be eligible for refinance from the RBI against export bills
discounted/rediscounted under the scheme and as such, the bills
discounted/rediscounted in foreign currency should be shown separately
from the export credit figures reported for purposes of drawing export
credit refinance.
! !442
17.14 Questions
1. Explain the scheme of export credit in foreign currency at post-shipment

stage.
2. What is the eligibility criteria for post-shipment credit in foreign

currency?
3. Write short note on onshore funds.
4. What is facility of rediscounting ‘with recourse’ and ‘without recourse’?

Explain.
5. Write short note on: Accounting aspects of post-shipment credit in
foreign currency
1. Each bank can have its own BAF limit(s) fixed with an overseas bank or
a rediscounting agency or an arrangement with any other agency such
as factoring agency (in case of factoring arrangement, it should be on
__________ basis only).
(a) With recourse basis
(b) Without recourse basis
(c) Normal credit basis
(d) Financing bank’s policy norms
2. Banks may utilise the foreign exchange resources available with them in
__________ to discount usance bills and retain them in their portfolio
without resorting to rediscounting.
(a) Exchange Earners Foreign Currency Accounts (EEFC)
(b) Resident Foreign Currency Accounts (RFC)
(c) Foreign Currency (Non-Resident) Accounts (Banks) Scheme
(d) All above options
! !443
3. Banks may avail of lines of credit from other banks in India if they are
not in a position to raise loans from abroad on their own or they do not
have branches abroad, subject to the condition that ultimate cost to the
exporter should __________.
(a) not exceed 350 basis points
(b) as per the discretion of financing banks
(c) L + 250 BPS
(d) As per the cost of borrowing
4. The restoration of exporter’s limits and the availability of export

benefits, such as credit to EEFC accounts, in case of ‘with recourse’
facility, will be effected only on __________
(a) realisation of export proceeds
(b) prior to realisation
(c) bill sent on collection
(d) bills discounted
5. Whether banks will be eligible for refinance from the RBI against export
bills discounted/rediscounted under the scheme? __________ Yes or No
(a) Yes
(b) No
Answers: 1. (b), 2. (d), 3. (b), 4. (a), 5. (b).
! !444
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !445
PROJECT EXPORT AND EXPORT UNDER DEFERRED PAYMENT
Chapter 18
Project Export And Export Under Deferred
Payment
Objectives
After going through the chapter, students should be able to understand a

different type of export in long term usage. These are turnkey projects and
export made in the basis of deferred payment. You will also understand
long-term export of services and modalities to handle such kind of exports.
Structure
18.1 Introduction
18.2 PART A – General
18.3 PART B – Project Exports
18.4 PART C – Export of Services
18.5 PART D – Other Matters connected with Project Exports and Service
Exports
18.6 Summary
18.7 Questions
! !446
18.1 Introduction
You have learnt that all export proceeds must be surrendered to an

authorised dealer within 180 days from the date of shipment. Exporters are
required to obtain permission from the Reserve Bank through authorised
dealers in the event of non-realisation of export proceeds within the
prescribed period. However, realising the special needs of exports of
engineering goods and projects, Reserve Bank has formulated special
schemes permitting deferred credit arrangements. This will enable
realisation of export proceeds over a period exceeding six months. Hence,
contracts for export of goods and services against payment to be secured
partly or fully beyond 180 days are treated as deferred payment exports.
The Credit Word is termed as deferred payment term credit.
For financing under deferred credit system, a single point approval

mechanism within a three-tier system operates. This system includes:
Commercial banks who are authorised dealers in foreign exchange in India,

can provide in principle clearance for contracts valued upto Rs. 25 crores.
They can avail refinance from EXIM bank.
EXIM bank is empowered to give clearances for contracts of value of above

Rs. 25 crores and upto Rs. 100 crores.
(ii) A working group considers proposals of contracts of value beyond Rs.

100 crores. The working group consists of representatives of all the above
institutions to provide single window clearance.
Deferred credit facility is normally allowed only for export of engineering

goods, turnkey projects involving rendering of services like designing, civil
construction and erection and commissioning of plant or factory along with
supply of machinery, equipment and materials.
Project exports eligible for export finance are as follows:
! !447
Turnkey Projects: These projects involve supply of equipment along with

related services like design, detailed engineering, civil construction,
erection and commissioning of plants, etc.
Construction projects involve civil works, steel structural works as well as

associated supply of construction materials and equipment.
(iii) Technical and consultancy service contracts involve provision of

personnel, furnishing of know-how, skills, operation and maintenance
services and management contracts. These services include:
a. Engineering services contracts involve supply of services such as design,

erecting, commissioning or supervision of erector and commissioning.
b. Consultancy services contracts involve preparation of feasibility studies,

project reports, preparation of designs and advice to the project
authority on specifications for plants and equipment.

referred to as ‘Project Exports’. Project export contracts are generally of
high value and exporters undertaking them are required to offer
competitive credit terms to be able to secure orders from foreign buyers in
the face of stiff international competition. Indian exporters offering
deferred payment terms to overseas buyers in respect of export of goods
and those who have been awarded turnkey, civil construction contracts by
overseas parties have to secure prior approval at post award stage from
Authorised Dealer/Exim Bank for credit terms to be offered, third country
imports, etc.
Regulations relating to Project Exports and Service Exports are divided into
the following parts:
PART A – General
PART B – Project Exports
PART C – Export of Services
PART D – Other matters connected with Project Exports and Service
Exports
! !448
18.2 PART A — GENERAL
A.1.Exporters who have secured orders for undertaking supply contracts on

deferred payment terms, those who have secured turnkey/civil
construction contracts abroad or for export of services in the area of
management, technical consultancy, etc., where execution of the contracts
involves grant of fund-based and/or non-fund based facilities from the
Indian banking system or where deferred payment terms are to be offered
require approval from Authorised Dealer/Exim Bank.
Broad Criteria for Consideration of Proposals
A.2 (i) Authorised Dealer/Exim Bank will mainly examine, among others,
the following aspects while considering grant of package approval for
proposals for export of engineering goods on deferred payment terms or
for undertaking turnkey/construction contracts abroad:
a. Period of deferred credit offered vis-a-vis foreign competition,

moratorium, rate of interest, adequacy of advance and down
payment provided for as well as requirement of foreign exchange for
execution of contract (viz., imports from third countries, agency
commission, freight, etc.) and overall economics of the proposal.
b. Nature of security obtainable from the foreign buyers against

payments due and nature and extent of various bonds/guarantees
required to be offered by the exporter (including those for procuring
third country supplies).
c. Nature of escalation, force majeure and arbitration clauses provided

in the contract and penalty/damages payment provisions.
d. Extent of fund-based and non-fund-based facilities required in India

including pre-shipment and post-shipment credit and/or bridge
finance requirement.
e. In case of turnkey contracts, economic and technical viability thereof

as well as special features relating to erection, supervision and
commissioning of the contract.
! !449
(ii) As regards civil construction contracts, turnkey engineering contracts,

process and engineering consultancy services and project construction
items (excluding steel and cement), the Authorised Dealer/Exim Bank will
consider proposals only from contractors who are on the approved list of
Ministry of Commerce and Industry, Government of India in order to
ensure that only contractors having the necessary competence and
capability undertake overseas construction contracts. While considering
proposals, Authorised Dealer/Exim Bank will endeavour to promote,
wherever possible, the idea of high value construction contracts being
undertaken on a consortium basis. Apart from examination of special
features relevant to the proposal under consideration and the factors
enumerated in sub-paragraph (i) above, Authorised Dealer/Exim Bank will
also take into account the following aspects while considering grant of
package approval for construction contracts abroad:
a. Availability of infrastructural facilities in the importer country like

transport, water, construction material, skilled/unskilled labour, etc.
and nature of laws governing civil matters, labour usages, etc.
b. Estimated monthly/quarterly cash flows for the entire duration of the

contract and arrangements between prime contractor and associate/
subcontractors for timely execution of the contract in case of
consortium arrangement.
c. Whether the contract would need any bridge finance facility abroad to
meet temporary cash flow deficits in working capital, if so, the
manner of raising the bridge finance and its full repayment with
interest.
(iii) In regard to service contracts, Authorised Dealer/Exim Bank will, inter

alia, take into account relevant factors like size of the contract, nature of
services to be rendered, overall economic condition of the importer
country, extent of international competition and potential and prospects for
further export of services, goods or turnkey projects from India.
(iv) Authorised Dealer/Exim Bank may suitably relax the above criteria at
its discretion where warranted by merits of the proposal. While considering
proposals, Authorised Dealer/Exim Bank may also make such suggestions
or tender such advice as may be necessary to avoid inter se competition
! !450
and to promote, as far as possible, exports in such a way that the foreign
exchange benefit for the country is maximised.
18.2.1 Procedure for Clearance of Proposals
A.3 (i) Applications in the prescribed form are required to be submitted by

the exporters sufficiently in advance to the Authorised Dealer/Exim Bank to
enable to it to consider the proposal and grant a package clearance to it.
(ii) Exporters desiring to submit bids for execution of projects abroad

including service contracts will not be required to obtain clearance for
submission of bids from Authorised Dealer/Exim Bank.
18.2.2 Declaration of the Exports and Handling of EDF/SDF
A.4 (i) The regulations notified under Notification No.FEMA 23/2000-RB

dated 3rd May 2000 and the directions issued vide A.P. (DIR Series)
Circular No. 12 dated 9th September 2000 relating to declaration of export
of goods and other matters apply mutatis mutandis, to project exports. In
order to facilitate maintenance of proper record of exports made on
deferred payment terms, exporters should prominently superscribe both
copies of relative EDF/SDF with the name of export contract for which
supplies are being made and the number and date of the approval granted
by the approving authority (viz. Authorised Dealer, Exim Bank) noted on
the EDF/SDF in the space provided therefor. The duplicate copies of the
forms should be retained by authorised dealers duly certified after
realisation of the last instalment together with interest from overseas
buyers. Similar procedure should be followed by sub-suppliers also while
declaring their exports on EDF/SDF.
(ii) In connection with execution of projects, exporters may sometime be

required to export ‘consumables’ such as tools, tackles, machinery spares,
etc., for which separate payments will not be made by the overseas
buyers. Such consumables will have also to be declared on EDF/SDF in the
same manner as exports of machinery, materials, etc., which are
separately paid for. In such cases, authorised dealer may, on application,
permit exporters to raise invoices against their own site offices abroad,
send the shipping documents direct to those offices and realise the value
due thereon in convenient instalments out of the progress payments for
the contracts. The application to authorised dealer may be accompanied by
! !451
a declaration by the exporter that the consumables are being exported for
execution of the project export contract which has been approved by the
Authorised Dealer/Exim Bank. The number and the date of approval for the
project export contract granted by the approving authority may be
indicated on EDF/SDF.
18.3 PART B – PROJECT EXPORTS
18.3.1 Extension of Deferred Payment Terms
B.1 Contracts for export of goods against payment to be received partly or

fully beyond the period statutorily prescribed for realisation of export
proceeds are treated as deferred payment exports. Ordinarily, contracts
providing for deferred payment terms will be allowed only for export of
engineering goods (capital goods and consumer durables). Turnkey
projects involve rendering of services like designing, civil construction and
erection and commissioning of plant/factory along with supply of
machinery, equipment and materials. Execution of civil construction
contracts abroad involves mainly erection and civil construction work and
supply of construction materials and equipment going into the civil works.
Payment in respect of goods supplied under both turnkey and civil
construction contracts may be received on ‘cash’ basis but sometimes
exporters are required to offer deferred payment terms in respect of such
supplies depending on the nature and size of the project. The terms and
conditions governing extension of deferred credit terms are set out in the
following paragraphs.
18.3.2 Nature of Credit
B.2 Contracts for export of goods on deferred payment terms may be

financed either under supplier’s credit or buyer’s credit. Under supplier’s
credit the exporter extends credit directly to the overseas buyer. Buyer’s
credits are credits extended to the foreign buyers by authorised dealers or
financial institutions in India (including a consortium of authorised dealers
or financial institutions in India) and the exporters realise the export value
in Indian rupees from the institution/s concerned straightaway. As
repayments under deferred payment arrangements are spread over a long
period of time, exporters extending supplier’s credit as well as those
desiring to undertake exports to be financed under buyer’s credit may seek
the advice of Exim Bank or ECGC in regard to various risks inherent in
! !452
extension of such long-term credits and ways and means of protecting

themselves against these risks.
18.3.3 Eligible Goods
B.3 An illustrative List (in two parts, A and B) of engineering goods in

respect of which commercial export credit may be offered by exporters to
prospective buyers abroad is given in Annexure-I. The list is subject to
revision from time to time.
Inclusion of goods in the lists does not imply that their exports may be
made only on deferred payment terms. Exporters should always endeavour
to secure the best possible terms from their buyers so that foreign
exchange accrues to the country as early as possible.
18.3.4 Period of Deferred Credit
B.4 The periods for which credit may be offered for export of goods,
consumer durables, turnkey contracts and civil construction contracts will
depend on merits of individual case and may be determined by the
exporter and his banker in mutual consultation on the basis of commercial
judgement. However, consumer durables and miscellaneous engineering
goods (Part B of List) should ordinarily be exported on cash terms. Four
major factors, viz., anticipated life of the goods to be exported, extent of
foreign competition, nature of the foreign market and the contract value
constitute the criteria for determining the overall terms of credit.
18.3.5 Conditions necessary for Clearance of Proposals by

Authorised Dealers/Exim Bank
While it is not necessary for exporters to obtain prior approval for

submission of bids/offers for execution of contracts, authorised dealer/Exim
Bank should, while granting post-award clearance, ensure that the export
proposals satisfy, inter alia, the following conditions:
! !453
a. Moratorium or grace period applicable to repayment of principal (and

not to payment of interest) should not exceed one year in respect of
export of capital or producer goods. In the case of turnkey contracts,
the moratorium should not exceed two years. No moratorium should be
permitted in respect of export of consumer durables. Interest should be
payable even during the period of moratorium.
b. In case of supply contracts, deferred receivables should be received in

equal half-yearly instalments over the agreed period with relation to
mean date of shipment (i.e., the date by which 50 per cent supplies in
terms of value will be completed) or the date of respective shipment. In
case of turnkey projects, instalments should be related to either date of
contract or the mean date of shipment or commissioning as agreed
upon between the parties.
c. The rate of interest on deferred receivables should be such that taking

into account the cost of deferred credit in India the overall profitability is
ensured.
d. Ordinarily, down payment together with advance payment or

mobilisation advance should not be less than 15 per cent of the contract
value. In exceptional cases, this may be reduced to 5 per cent of the
contract value. In the case of civil construction contracts, it should not
ordinarily be less than 5 per cent.
e. Down payments and deferred instalments receivable should be secured

by a letter of credit/acceptable bank guarantee. In case the overseas
importer/project authority is a Government department or a public
sector undertaking, a guarantee from the foreign government and /or a
promissory note from the foreign government/public sector undertaking
will suffice.
f. As far as possible, turnkey projects and civil construction contracts

should be self-financing. However, bridge finance required for meeting
temporary shortfalls in working capital should not normally exceed 25
per cent of the contract value. However, Authorised Dealer/Exim Bank
may clear proposals involving bridge finance in excess of 25% of
contract value also wherever they are satisfied that such finance is
necessary.
! !454
g. Ordinarily, deferred payment terms in respect of the services segment

of a turnkey contract may be offered only if the competitors of the
exporter from other countries are known to have offered similar terms.
In such cases, other terms for the deferred receivables towards services
like period of credit, rate of interest and security should be the same as
offered for the supply portion of the contract.
Note: Authorised Dealer/Exim Bank may relax conditions at (d) and (e)
above, if necessary, based on their commercial judgement.
B.6 Cases where exporters desire to offer, due to local conditions,

commercial credit not exceeding one year in respect of goods specified in
Annexure-I may be considered by the Authorised Dealers/Exim Bank as per
powers delegated to them.
Post-award Clearance of Proposals
B.7 (i) After entering into contract, the exporter should submit to his
bankers an application in form DPX-1 (in respect of turnkey and deferred
payment supply contracts) or in form PEX-1 (in respect of civil construction
contracts), as the case may be, in six copies along with six copies of the
contract. Authorised Dealers should deal expeditiously with all applications
made by exporters in connection with project exports. In cases where the
proposal is within the powers delegated to him, authorised dealer may
grant post-award approval for the terms and conditions of the contract,
provided the contract basically satisfies the conditions laid down in this
para.
B.5. Copies of the approval letter along with copies of the application and
the contract may be forwarded by the authorised dealer to ECGC and Exim
bank where their participatory interest by way of funded/non-funded
facilities, insurance/risk cover, etc., is involved.
(ii) Authorised dealers/Exim Bank may grant post-award clearance to the

project proposal without any monetary limit. If the authorised dealer
desires participation of Exim Bank in the financial arrangements and/or
guarantee facilities, concurrence of Exim Bank should be obtained before
granting post-award clearance. In case, the authorised dealer is unable for
any reason to grant post-award clearance, he should forward four copies of
the application to Exim Bank for consideration within two days indicating,
! !455
inter alia, the extent upto which his bank would be prepared to take a
share in the fund-based and /or non-fund based facilities required by the
exporter for execution of the overseas contract. Exim Bank may also
receive directly applications for project export proposals of the value
without any limit, without being routed through an authorised dealer
provided
a. All facilities required for execution of the project are being extended
by Exim Bank,
b. Exim Bank makes necessary arrangement with an authorised dealer

to handle exchange control matters like GR formality, etc., in
connection with execution of the project, and
c. Exim Bank monitors such projects cleared by them till their

completion and ensures compliance with the requirements of
completed projects as per paragraph B.10 of Memorandum PEM.
(iii) In all cases mentioned at (ii) above, Authorised Dealers/Exim Bank

have to consult ECGC in advance if counter-guarantees of the Corporation
are required and/or insurance cover is desired to be obtained from it. In
cases where ECGC agrees to extend counter-guarantees/insurance cover,
the Authorised Dealer/Exim Bank should, while granting clearance, advise
the exporter that they will become effective only after the guarantee
commission/deposit premium as prescribed by the Corporation is paid to it.
(iv) While according package approval, Authorised Dealers/Exim Bank

should specifically indicate in the approval letter, the terms of clearance
giving, inter alia, the break-up of contract value with details of Indian, third
country and local supplies and services, payment terms, currency of
payment, rate of agency commission, amount of overseas borrowings,
funded and non-funded facilities with respective shares of different
agencies therein, the value of plant, machinery, equipment etc. to be
exported on reimport basis and the extent of ECGC cover guarantee.
(v) If there are any Indian subcontractors, they should be advised by the
prime contractor to submit similar applications to the bankers of the prime
contractor for obtaining approval for the portion of the contract entrusted
to each subcontractor. The institution which will consider the application of
! !456
the prime contractor at the post-award stage will also clear applications of
all the sub-contractors.
(vi) Export of Goods (Pure Supply Contracts) The procedure outlined in the
preceding sub-paragraphs for post-award clearance will not apply to
exports of goods (pure supply contracts) where at least 90% of the export
value will be realised within the prescribed period, i.e., six months from the
date of export and the balance amount within a maximum period of two
years from the date of export, provided the exporter does not require/
avail of any funded or nonfunded facility for such exports, from authorised
dealers.
18.3.6 Appointment of Subcontractors
B.8 In the case of large value contracts, applicant firms/companies

normally take the assistance of other contractors. In such cases the
applicant firm/company will be treated as the prime contractor while other
contractors will be treated as subcontractors. The prime contractor will be
accountable to the various authorities in India for compliance with the
requirements laid down by them and will at the same time be equally
responsible to the overseas buyer for proper and timely completion of the
contract. The prime contractor should accordingly enter into suitable inter
se arrangement with the subcontractors after satisfying himself about the
capacity and competence of the latter. Credit reports on subcontractors and
confirmation of financial arrangement proposed to be made by them in
respect of their portion of the contract should be obtained by the prime
contractor from their bankers and furnished along with the application.
Overseas financial requirements of the subcontractors will have to be met
by the prime contractor. Appointment of all subcontractors and/or any
subsequent change in subcontractors will require prior clearance of the
concerned approving authority.
18.3.7 Follow-up of Turnkey/Construction Contracts

B.9 Exporters and all their Indian subcontractors executing turnkey
contracts or civil construction contracts abroad should furnish progress
reports in form DPX 2 on a half-yearly basis (June and December) to
concerned approving authority viz. Authorised Dealer/Exim Bank, and to
ECGC/Exim Bank in all cases where their risk/guarantee cover participation
in the funded/non-funded facilities has been obtained. The final report in
Form DPX 2 should clearly indicate the fact of completion of the project and
! !457
full compliance with the requirements relating to completed projects as laid

down in this paragraph.
18.3.8 Requirements relating to Completed Projects
B.10 (i) Exporters executing turnkey/construction contracts abroad should

take the following steps after completion of the contracts to
a. close the foreign currency accounts and transfer the balances to

India;
b. wind-up site and liaison offices opened abroad;
c. ensure that the guarantees for performance of the contract and other
guarantees issued are cancelled and returned to exporters;
d. liquidate fully overseas borrowings/overdrafts obtained, if any and

cancel counter-guarantees;
e. make suitable provision for payment of taxes, customs and other

statutory obligations in the country of project;
f. dispose of the equipment, machinery, vehicles, etc., purchased

abroad and/or to arrange their import into India. In case the
machinery, etc., is to be used for another overseas project, the
market value (not less than book value) should be recovered from
the project to which equipment/machinery has been transferred; and
g. recover funds, if any, transferred to other overseas project/s and

repatriate them to India.
(ii) A report giving full account of the various steps taken should be sent by
the exporter through his bankers to the concerned Authorised Dealer/Exim
Bank as the case may be depending upon the authority, which had granted
post-award approval for the project contract within one month from the
completion of the project. Such report should also invariably be sent to
Exim Bank/ECGC where their participation in funded/non-funded facilities,
risk sharing is involved. The following documents should also be forwarded
along with such report:
! !458
a. A completion or final handing over certificate.
b. A certificate from the overseas bank regarding closure of the account

held with it.
c. A statement of remittances made to India. Bank certificates about

repatriation of funds to India should be enclosed.
d. Tax clearance certificate/No tax liability certificate about the overseas

project.
e. Bills of Entry for re-import of machinery, etc.
f. Statements of income and expenditure and profit and loss account of

the project duly certified by a Chartered Accountant/Project Manager.
18.3.9 Buyer’s Credit Scheme of Exim Bank
B.11 (i) Buyer’s credit is extended under a scheme by Exim Bank known as
‘Buyer’s Credit Scheme’ which envisages grant of credit by Exim Bank in
participation with commercial banks in India to foreign buyers in
connection with export of capital goods and turnkey projects from India.
The Scheme provides for payments being made to exporters out of buyer’s
credit on a non-recourse basis on their fulfilling the commercial terms of
the export contracts to be financed under the Scheme. All offers for
deferred payment exports or turnkey projects against buyer’s credit require
specific prior approval of the Exim Bank. Exim Bank has been authorised to
extend Buyer’s Credit under the Scheme upto the limit of U.S. Dollar 20
Million. The procedure for clearance of proposals as set out in paragraph B.
7 shall apply, mutatis mutandis, to such proposals. Exporters should not
ordinarily negotiate with overseas buyer’s credit terms requiring financing
against buyer’s credits without prior consultation with their bankers and
Exim Bank. To assist Indian exporters in carrying out negotiations with
importers, Exim Bank will be prepared to indicate its willingness, in
principle, in suitable cases, to provide the credit. The following principal
factors will weigh with Exim Bank while considering proposals under the
Buyer’s Credit Scheme:
! !459
a. Competence and capability of the exporter in executing the proposed

contract.
b. Commercial justification for the contract.
c. Economic viability of the overseas project for which the credit is

required to be offered.
d. Creditworthiness, standing and financial position of foreign borrower

and general economic conditions of buyer’s country.
(ii) Since payments to exporters in India in respect of exports financed

under buyer’s credit will be made on behalf of non-resident buyers,
permission of Reserve Bank under Regulation 3 of Notification No. FEMA
3/2000-RB dated 3rd May 2000 [Foreign Exchange Management
(Borrowing or Lending in Foreign Exchange) Regulations, 2000] should be
obtained by banks in India before agreeing to extend buyer’s credit to
importers abroad. The necessary applications for the purpose should be
made by authorised dealers to Reserve Bank in form DPX 4 after the
proposal is cleared in principle. Where two or more authorised dealers are
participating with Exim Bank, the application should be made by the
principal participating bank (Process Agent). The banks are also required to
comply with the instructions issued by Department of Banking Operations
and Development, Reserve Bank of India in this regard from time to time.
(iii) Since exporter will be receiving payments for the goods and services
on a non-recourse basis from the financing institutions in India, the
exchange risk will fall on the institutions extending the credit. To meet the
situation, the exporter will either have to provide in the contract itself for
the exchange fluctuation risk to be borne by the importer or to bear the
cost of the appropriate exchange risk cover to be taken by the financing
institutions in India. It will, however, be the responsibility of the financing
bank to receive the repayments of the loan and interest thereon from the
overseas buyer. The lending institution (Process Agent in the case of
consortium credits) should, therefore, take necessary steps to realise the
instalments on due dates. If for any reason, instalments are not received
on due dates, the institution concerned should promptly bring the matter
to the notice of Reserve Bank and Exim Bank indicating steps, if any, taken
or proposed to be taken to recover the instalments.
! !460
18.4 PART C — EXPORT OF SERVICES
18.4.1 General
C.1 (i) Contracts for export of consultancy, technical and other services by
Indian companies/firms generally fall in the following categories:
a. Preparation of project/feasibility reports, drawings, designs, etc.
b. Supply of technical know-how/engineering services in different fields.
c. Operation, maintenance and supervision of manufacturing plants,

buildings and structures, etc.
d. Management contracts for commercial concerns.
Export of services may also involve supply of some associated mechanical

wherewithal’s, consumables and spares, e.g., contractors may generally
have to procure tools and instruments for their own personnel for
performing their jobs. They may sometimes be called upon to give
performance guarantees but the scope of such guarantees would be limited
to their own work, i.e., satisfactory performance of the personnel provided
and/or technical services rendered.
(ii) Indian exporters of services have normally to undertake overseas

contracts on “cash” terms. Overseas service contracts undertaken on
“cash” terms do not require prior clearance of Reserve Bank if no facilities
are required. Resident individuals, firms and companies may, therefore,
freely provide consultancy/technical/management services to overseas
clients subject to the condition that the income earned abroad minus
expenses will be promptly repatriated to India through normal banking
channels. Individuals/firms/companies executing service contract in
computer software should, however, repatriate the profits to India. Indian
companies/firms executing service contracts abroad, requiring facilities like
opening of foreign currency bank accounts and site offices abroad, etc., will
need approval from Authorised Dealer/Exim Bank. In the case of exporters
executing software service contracts abroad, authorised dealers may
permit remittances towards maintenance expenses of the persons deputed
abroad to execute such contracts, out of receipts of advance/down
payments in respect of the contract from the overseas client and on
! !461
submission of a declaration by the exporter that the aggregate exchange

facilities already availed of/to be availed of for execution of the contract
would be within the overall ceiling of project related expenses viz., 70% of
the contract value.
18.4.2 Service Contracts Requiring Authorised Dealers’/Exim

Bank’s Approval
C.2 In some cases service contractors may be required to furnish a

performance guarantee to the overseas employer in respect of the project
as a whole especially for contracts in the field of erection/installation of
plant and machinery as well as services like electrical or air-conditioning
installations associated with civil construction work. Such service contracts
often involve high contract values and some are as complex in character as
contracts for turnkey or civil construction projects. They also involve direct
and indirect foreign exchange liabilities by way of execution of
performance/advance payments guarantees, counter-guarantees for loans/
overdrafts raised from banks abroad and even considerable expenditure in
foreign exchange on purchase of instruments/equipment of third country
origin, which necessitates recourse to fund-based and/or non-fund-based
facilities from Indian commercial banks, Exim Bank and ECGC apart from a
variety of foreign exchange approvals. Such contracts are treated on par
with turnkey/construction projects and therefore require clearance at post-
award stage of Authorised Dealers/Exim Bank. All Service contracts
involving deferred payment (DP) terms also require post-award clearance
of Authorised Dealers/Exim Bank.
18.4.3 Prerequisites for Consideration of Proposals of Service

Contracts Involving Cash Payment Terms
C.3 Before granting clearance to the exporters who have secured Service
Contracts abroad, Authorised Dealers/Exim Bank should ensure that the
proposals satisfy, inter alia, the following broad guidelines/conditions:
a. Contract should be technically feasible and economically viable.
b. Ordinarily, exporters should secure mobilisation advance to the extent of

15 per cent of the contract value. Exporters should not undertake any
responsibility for organising supplies of machinery/equipment and/or
materials going into the project. In case, contracts involve purchase of
! !462
materials/machinery/equipment from third countries, such purchases

should be financed directly by employers.
c. ECGC may be consulted in advance for its commercial and/or political

risk cover/guarantees etc., if required.
d. Ratio of the currencies of payment for the contract should be

appropriately stipulated in order to avoid a surplus being generated in a
non-repatriable local currency.
Note: Condition at (b) above regarding mobilisation advance may be

relaxed by Authorised Dealer/Exim Bank on merits of each case on the
basis of their commercial judgement.
18.4.4 Prerequisites for Consideration of Proposals of Service

Contracts on DP Terms
C.4 The periods for which credit may be offered in respect of a service
contract will depend on merits of each individual case and may be
determined by the exporter and his banker in mutual consultation on the
basis of commercial judgement. The moratorium will be available only for
the principal amount and not interest and should not exceed one year. The
Authorised Dealers/Exim Bank will consider proposals for clearance of
service contracts abroad on DP terms at post-award stage subject, inter
alia, to the fulfilment of the following conditions in addition to those at
paragraph C.3(a), (c) and (d).
a. The rate of interest on deferred receivables should cover fully the cost
to the exporter of export credit to be availed of from the Indian banking
system. Periodicity of repayment of principal and payment of interest
should not exceed half-yearly intervals.
b. Ordinarily, payment terms should provide for advance payment upto 25

per cent of the contract value. In exceptional cases, the advance
payment may be reduced to 5 per cent of the contract value. In any
case advance/progress payment should cover fully the foreign exchange
outgo as well as wages and salaries of personnel employed on the
project.
! !463
c. Payment of instalments should be secured by letters of credit and/or

acceptable bank guarantees. In case the overseas employer is a
Government department or a public sector undertaking, a guarantee
from the Government and/or promissory notes from the Government or
public sector undertaking concerned may be accepted. An undertaking
from the Central Bank of the importer country indicating that necessary
foreign exchange would be made available on due dates for payment of
instalments including interest should be obtained, where stipulated by
the approving authority.
d. If services of an agent are considered necessary for ensuring smooth

execution of the contract every effort should be made to keep the rate
of agency commission as low as possible.
Note: Authorised Dealer/Exim Bank may relax conditions at (b) and (c)
above, if necessary, based on their commercial judgement.
18.4.5 Clearance of Proposals at Post-award Stages
C.5 (i) After entering into contract for rendering managerial, technical,
consultancy services to overseas employers, the exporter should submit to
his bankers an application in form TCS 1 in six copies alongwith six copies
of contract for necessary post-award clearance. For Contract value without
any limit Authorised Dealers/Exim Bank should examine the proposals in
the light of nature and scope of the services to be rendered, terms of
payment, period available for completion of the project/assignment,
penalty provisions, etc. and grant clearance provided the proposal satisfies
the conditions listed in paragraphs C.3/C.4.
(ii) AD bank/Exim Bank may receive such applications provided
a. All facilities required for execution of the contract are being extended
by Exim Bank,
b. Exim Bank makes necessary arrangement with an authorised dealer

to handle exchange control matters like export declaration formality,
etc., in connection with execution of the contract, and
! !464
c. Exim Bank monitors such contracts cleared by them till their

completion and ensures compliance with the requirements of
completed contracts as per paragraph B.10 of Memorandum PEM.
(iii) The procedure outlined in paragraph B.7 in respect of project export

proposals should be followed, mutatis mutandis, by Authorised Dealer/
Exim Bank while granting post-award clearance.
18.4.6 Follow-up of Service Contracts

C.6 Exporters executing service contracts abroad should furnish progress
reports at half yearly intervals ending June and December of each year to
institutions concerned in the same manner as stated in paragraph B.9
through their bankers.
Requirements relating to Completed Projects
C.7 Exporters should comply with the requirements laid down in paragraph
B.10 in regard to submission of reports, statements and documentary
evidence after completion of the service contracts abroad.
18.5 PART D - OTHER MATTERS CONNECTED WITH

PROJECT EXPORTS AND SERVICE EXPORTS
18.5.1 Foreign Currency Accounts/Site Offices Abroad/ Agency

Commission/Financial Requirements
D.1 (i) Project/Service exporters may avail of facilities such as opening of

foreign currency accounts, temporary site offices, payment of agency
commission and availing of temporary overseas borrowings subject to the
conditions as may be stipulated Exim Bank/Authorised Dealer. The project
exporters may also be permitted to open temporary liaison offices overseas
in connection with the execution of the contract abroad by the authority
approving the relative project export proposal subject to the conditions as
may be specified by the said authority. Exim Bank/Authorised Dealers may
convey to the exporters, at the post-award stage, the detailed conditions
subject to which the various facilities have been granted by the authority
which grants the post award approval. In the case of pure supply contracts
on deferred payment terms where the exporter does not maintain any
foreign currency account abroad, authorised dealers may remit commission
in accordance with the terms and conditions set out in the letter of
! !465
approval issued by them/Exim Bank at the post-award stage subject to the

conditions stipulated in Annexure-III. The exporter, if he so desires, may
maintain a single foreign currency account for more than one project being
executed in the same country subject to the conditions as may be
stipulated by the Authorised Dealer/Exim Bank. It will, however, be
necessary in such cases, for the exporter to submit project-wise statement
of accounts duly certified by a Chartered Accountant to the project
monitoring authority/authorised dealer. Conditions mentioned at A(i) in
Annexure-II may be suitably amended by Authorised Dealer/Exim Bank in
case the exporter desires to maintain a single foreign currency account for
more than one project being executed in the same country. It may be
noted that even if the exporter opts for maintaining a single foreign
currency account for more than one project it will be necessary for the
exporter to comply with the instructions on inter-project transfer of funds.
It will be in order for the approving authority of the overseas contract to
approve the proposal of exporter, to open, hold and maintain foreign
currency account in India subject to terms and conditions indicated at A(ii)
in the Annexure-II. The following will however need to be noted in this
regard by the concerned Authorised Dealer:
a. Exporter will have to open, hold and maintain separate foreign currency
account for each project under execution abroad.
b. Authorised Dealers shall not avail of rupee loan against the security of
balances held in such account and no overdraft in the account shall be
permitted.
c. The balance in the account will be subject to SLR/CRR requirement as

prescribed by Reserve Bank (DBOD) from time to time.
Approving authority may on request allow such of the project/service

exporters, as have been permitted to open foreign currency account in
India, to pay their Indian suppliers/service providers in foreign currency
from foreign currency account subject to the following conditions:
a. Project/service exporter should not claim export benefit on the

payment made to Indian supplier/service provider.
! !466
b. Indian supplier of goods/services should comply with export

procedure as per provisions/requirements of Foreign Exchange
Management Act, 1999.
(ii) In cases where adequate advance payment or an overdraft/loan abroad

cannot be arranged, authorised dealer monitoring the project on an
application by the project exporter, may allow remittance from India
provided such remittance has been approved by the Authorised Dealer/
Exim Bank granting clearance to the project export proposal at the post
award stage. Authorised dealer may allow such remittances after obtaining
an undertaking from the project exporter that the amount remitted will be
repatriated to India within a period stipulated by the Authorised Dealer/
Exim Bank. Compliance of the condition regarding repatriation of the funds
so remitted within the period determined by the approving authority should
be monitored by the concerned authorised dealer who allows remittance
and who is also required to monitor the project.
It will be in order for Authorised Dealer/Exim Bank while considering

proposals at post-award stage, against an undertaking to repatriate the
amount of remittance, to approve initial remittance upto a limit deemed
necessary on the basis of inflow/outflow of payments concerning the
project, where adequate advance payment or an overdraft/loan abroad
cannot be arranged by the exporter. The period of repatriation of the
amount sought to be remitted may also be determined by the Authorised
Dealer/Exim Bank as the case may be.
18.5.2 Third Country Purchases
D.2 (i) While granting package approval for turnkey/civil construction

contracts involving purchase of machinery/equipment/materials from third
country sources, the Authorised Dealer or Exim Bank will indicate the
extent upto which such purchases may be made. Ordinarily, the third
country purchases should be paid for separately by the overseas project
authority or by the Indian exporter out of advance/down payment received
from the project authority. Where the payments for the contract are
receivable on deferred payment basis, the exporter should, as far as
possible, try to secure matching deferred payment terms in respect of third
country purchases required for the project to avoid a net outlay of funds in
foreign exchange. Authorised Dealers may, however, as far as possible
open letters of credit in such cases in favour of the third country suppliers
! !467
on a back-to-back basis, provided the amount for which the credit is to be

opened from India in favour of the third country supplier does not exceed
the amount for which a credit has been opened by the project authority in
favour of the Indian exporter. Where however, the exporter is unable to
provide security of a letter of credit opened by buyer, authorised dealer
may open a letter of credit in favour of third country suppliers even if it is
not on a back-to-back basis provided the amount of such letter of credit
does not exceed the value of third country imports approved by the
approving authority while according post-award clearance to the project
export proposal and payments under such letters of credits are made out
of project receipts.
(ii) In respect of third country purchases by the exporter for execution of

the project/service contract abroad, which are directly transported by the
overseas supplier to the project site and for which payment is proposed to
be made under letter of credit opened with banks in India, authorised
dealer on an application made by the exporter, may grant waiver for
submission of the exchange control copy of the bill of entry subject to the
conditions that (a) the third country purchases have been approved by the
concerned approving authority while according post-award approval to the
project/service export proposal and (b) the exporter submits the invoice
raised on him by the overseas supplier in respect of the goods supplied by
him direct to the project site as also documentary evidence for having
received the goods at the project site.
18.5.3 Inter-project Transfer of Funds
D.3 Requests from the project exporters executing turn-key/construction/

service contracts abroad for temporary inter-project transfer of funds to
meet cash flow deficits should be submitted to the exporter’s banker
monitoring the project, together with the cash-flow statements in respect
of the borrowing and lending projects. The authorised dealer may consider
the application on merits taking into account the overall funds-flow position
of both the projects and permit such temporary transfers. In case the
banker to the lending project is other than the banker of the borrowing
project, consent of the former should be obtained. The exporter should be
advised to retransfer the funds to the lending project as soon as the funds-
flow position of the borrowing project improves. The transfer of surplus
funds of completed overseas project to another ongoing project of the
same project exporter is not permitted since such surplus becomes
! !468
repatriable to India as soon as the project is completed and provisional

completion certificate is issued. Copies of such applications, together with
the approval accorded by the authorised dealer, should be forwarded to the
approving authority which had cleared the project export contract and the
banker of the lending project. Copies may also be forwarded to Exim Bank/
ECGC in all cases where their participation in funded/non-funded facilities,
risk sharing is involved in the concerned project export contracts.
18.5.4 Construction etc. Equipment
D.4 (i) Exporters executing turnkey/construction/service contracts abroad

should normally take from India construction and other equipment required
for performance of the contracts. Authorised Dealer may permit, on
application, export of equipment from India on the condition that it will be
re-imported into India on completion of the contract and if let out/sold, the
full hire charges/sale proceeds will be promptly repatriated to India.
Applications may be made to the authorised dealer by letter citing a
reference to the post-award package approval granted by Authorised
Dealer/Exim Bank and enclosing a set of GR forms duly completed for the
export together with an undertaking in form PEX-2 regarding re-import of
such equipment into India. Requisite EDF/SDF approval may be granted by
authorised dealer. Authorised dealer will need to monitor the compliance of
the undertaking furnished by the exporter to him.
(ii) Exporters will also be permitted to purchase construction equipment

abroad, where necessary. Approval will be given by approving authority,
provided the equipment will be paid for fully out of payments to be
received for the services segment of the contract. Full details of such
purchases should be reported in the half-yearly statements of foreign
currency accounts supported by documentary evidence. Similarly, some
exporters may be required to purchase abroad motor vehicles necessary
for execution of their contract. Requests for permission to purchase
vehicles abroad will be considered by the approving authority on merits of
each case.
(iii) Exporters may also obtain construction etc. equipment abroad on hire
against payment of hire charges out of foreign currency receipts in respect
of service segments of their contracts.
! !469
(iv) Exporters may freely use the equipment for performing any other
contract secured by them in the same or any nearby country. They may, if
they so wish, also sell the equipment or give it on hire to other contractors
abroad, provided the full amount of sale proceeds or hire charges, as the
case may be, is repatriated to India promptly through normal banking
channels. Documentary evidence showing repatriation of full amount
realised should be produced to the authorised dealer monitoring the
project.
18.5.5 Import of Equipment/Machinery/Motor Vehicles Purchased

Abroad
D.5 Exporters may sometimes desire to import the used equipment/

machinery or motor vehicles into India after completion of the overseas
contract unless they are disposed of abroad. Import of such items into
India will be governed by the prevailing import policy of Government of
India.
Foreign Travel in connection with Execution of Contracts Abroad
D.6 Firms/Companies executing turnkey/construction/service contracts

abroad have to depute their technical and managerial personnel abroad for
supervising construction, erection, commissioning of the projects, etc.
Expenses of such personnel should ordinarily be met out of payments
receivable towards erection and commissioning services which are retained
abroad in foreign currency accounts opened with permission of Authorised
Dealer/Exim Bank, unless such expenses are to be met by the overseas
employers in terms of the contract. Passage fares for sending such
personnel abroad will also have to be met in a similar manner. Accordingly,
wherever such fares are paid in India in rupees, an equivalent amount in
foreign exchange should be repatriated to India promptly.
18.5.6 Bid Bonds and Guarantees against Project Exports
D.7 (i) Authorised Dealers may consider and furnish, without prior
permission of Reserve Bank, all types of guarantees required to be
furnished in connection with execution of project/contract abroad, in cases
where they have been authorised to approve proposals of exporters to
undertake contracts abroad. Authorised dealer may also consider/furnish
bid bonds/tender guarantees in connection with bids/offers being
! !470
submitted by exporters for execution of contracts abroad. Authorised

Dealers should satisfy themselves before furnishing the bond/guarantee
that the exporter is in a position to fulfil his contractual obligations and the
bid/contract satisfies the conditions stipulated in paragraph B.5/C.3/C.4. In
other cases, authorised dealers should issue the guarantees after package
approval has been secured from Exim Bank either under powers delegated
to it in this behalf.
(ii) Exporters desiring to submit bids for execution of projects abroad

including service contract may furnish their own Corporate Guarantee in
lieu of Bid Bond Guarantee, if they so desire, subject to the condition that
the amount of such guarantee shall not exceed 5% of the contract value.
Exporters, however, have to ensure that provisions contained in
Memorandum PEM and other instructions issued by Reserve Bank from
time to time for submission of bids are complied with.
(iii) In terms of Reserve Bank Notification No.FEMA 8/2000-RB dated 3rd

May 2000, project/service exporters, have been granted general
permission to furnish their own corporate guarantees for performance of
the contract or for availing of fund-based and/or non-fund based facilities
from banks/financial institutions abroad for the purpose of execution of
projects abroad subject to approval of approving authority at post award
stage. The details of guarantee/s issued as above should be reported by
the project/service exporters to the concerned Regional Office of Reserve
Bank (FED) as also to the concerned authorised dealer/Exim Bank who had
cleared the proposal, within 15 days from the issue of such guarantee/s.
18.5.7 Guarantees for Borrowings Abroad
D.8 In all cases where exporters executing turnkey/civil construction/

service contracts abroad are granted an approval by the approving
authority to raise foreign currency loans/overdrafts abroad against counter
guarantees of their bankers in India, for bridging temporary short-falls in
the cash-flows, the authorised dealer concerned may issue the requisite
guarantee in favour of the overseas bank from which the loan/overdraft is
to be raised.
! !471
18.5.8 Project Exports to Nepal/Bhutan

D.9 All project export proposals to Nepal and Bhutan require the clearance
of the concerned authorities like the Authorised Dealer/Exim bank on terms
and conditions of the contract at post-award stage. Provisions of para.
D1(i) regarding opening of foreign currency bank account, temporary site
office, liaison office and availing of temporary overseas borrowings, etc.,
are applicable, mutatis mutandis, in respect of project exports to Nepal and
Bhutan.
18.6 Summary

referred to as ‘Project Exports’. Project export contracts are generally of
high value and exporters undertaking them are required to offer
competitive credit terms to be able to secure orders from foreign buyers in
the face of stiff international competition. Indian exporters offering
deferred payment terms to overseas buyers in respect of export of goods
and those who have been awarded turnkey, civil construction contracts by
overseas parties have to secure prior approval at post award stage from
Authorised Dealer/Exim Bank for credit terms to be offered, third country
imports etc.
Exporters who have secured orders for undertaking supply contracts on

deferred payment terms, those who have secured turnkey/civil
construction contracts abroad or for export of services in the area of
management, technical consultancy, etc., where execution of the contracts
involves grant of fund-based and/or non-fund based facilities from the
Indian banking system or where deferred payment terms are to be offered
require approval from Authorised Dealer/Exim Bank Contracts for export of
goods against payment to be received partly or fully beyond the period
statutorily prescribed for realisation of export proceeds are treated as
deferred payment exports. Ordinarily, contracts providing for deferred
payment terms will be allowed only for export of engineering goods (capital
goods and consumer durables). Turnkey projects involve rendering of
services like designing, civil construction and erection and commissioning
of plant/factory along with supply of machinery, equipment and materials.
Execution of civil construction contracts abroad involves mainly erection
and civil construction work and supply of construction materials and
equipment going into the civil works. Payment in respect of goods supplied
! !472
under both turnkey and civil construction contracts may be received on

‘cash’ basis but sometimes exporters are required to offer deferred
payment terms in respect of such supplies depending on the nature and
size of the project.
Export of services may also involve supply of some associated mechanical

wherewithal’s, consumables and spares, e.g., contractors may generally
have to procure tools and instruments for their own personnel for
performing their jobs. They may sometimes be called upon to give
performance guarantees but the scope of such guarantees would be limited
to their own work, i.e., satisfactory performance of the personnel provided
and/or technical etc. services rendered.
Indian exporters of services have normally to undertake overseas contracts

on “cash” terms. Overseas service contracts undertaken on “cash” terms
do not require prior clearance of Reserve Bank if no facilities are required.
Resident individuals, firms and companies may, therefore, freely provide
consultancy/technical/management services to overseas clients subject to
the condition that the income earned abroad minus expenses will be
promptly repatriated to India through normal banking channels.
Individuals/firms/companies executing service contract in computer
software should, however, repatriate the profits to India. Indian
companies/firms executing service contracts abroad, requiring facilities like
opening of foreign currency bank accounts and site offices abroad, etc. will
need approval from Authorised Dealer/Exim Bank.
Project/Service exporters may avail of facilities such as opening of foreign

currency accounts, temporary site offices, payment of agency commission
and availing of temporary overseas borrowings subject to the conditions as
may be stipulated Exim Bank/Authorised Dealer. The project exporters may
also be permitted to open temporary liaison offices overseas in connection
with the execution of the contract abroad by the authority approving the
relative project export proposal subject to the conditions as may be
specified by the said authority. Exim Bank/Authorised Dealers may convey
to the exporters, at the post-award stage, the detailed conditions subject
to which the various facilities have been granted by the authority which
grants the post award approval. In the case of pure supply contracts on
deferred payment terms where the exporter does not maintain any foreign
currency account abroad, authorised dealers may remit commission in
accordance with the terms and conditions set out in the letter of approval
! !473
issued by them/Exim Bank at the post award stage subject to the

conditions
All project export proposals to Nepal and Bhutan require the clearance of
the concerned authorities like the Authorised Dealer/Exim bank on terms
and conditions of the contract at post-award stage.
18.7 Questions
1. What do you know by deferred payment financing? Explain
2. What are the conditions necessary for clearance of proposals of project

export by Authorised Dealers/Exim Bank?
3. Explain prerequisites for consideration of proposals of service contracts

Involving cash payment terms.
4. Write short notes on: Foreign Currency Accounts/Site Offices Abroad/

Agency Commission/Financial Requirements.
5. What are Guidelines for third country purchases?
! !474
1. Commercial banks who are authorised dealers in foreign exchange in

India, can provide in principle clearance for contracts valued upto
__________.
(a) Rs. 25 crs
(b) Rs. 10 crs
(c) Rs. 5 crs
(d) Rs. 1 cr
2. Applications in the prescribed form are required to be submitted by the

exporters sufficiently in advance to the __________ to enable to it to
consider the proposal and grant a package clearance to it
(a) Authorised Dealer
(b) Exim Bank
(c) Authorised Dealer/Exim Bank
(d) RBI
3. The project exporters may also be permitted to __________ in

connection with the execution of the contract abroad by the authority
approving the relative project export proposal subject to the conditions
as may be specified by the said authority
(a) Establish permanent Branch office overseas
(b) Open temporary liaison offices overseas
(c) Open foreign currency account overseas
(d) Open Permanent Liaison office overseas
4. Exporters will also be permitted to purchase construction etc. equipment

abroad, where necessary. Approval will be given by __________,
provided the equipment will be paid for fully out of payments to be
received for the services segment of the contract.
(a) Exim Bank
(b) AD bank
(c) RBI
(d) approving authority
! !475
5. All project export proposals to __________ require the clearance of the

concerned authorities like the Authorised Dealer/Exim bank on terms
and conditions of the contract at post-award stage
(a) Nepal
(b) Bhutan
(c) Nepal and Bhutan
(d) ACU countries
Answers: 1.(a), 2. (c), 3. (b), 4. (d), 5. (c).
! !476
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !477
EXPORT PROMOTION INCENTIVES
Chapter 19
Export Promotion Incentives
Objectives

various incentives offered by various government organisations at different
stages of exports. You will also understand role of regulatory and other
authorities granting export promotion incentives.
Structure
19.1 Introduction
19.2 Role of Government
19.3 Role of Reserve Bank of India
19.5 Role of Banks
19.6 Export Incentives Offered by the Government
19.7 Rupee Export Credit Interest Rates Subvention
19.8 Export Incentives by RBI/Banks
19.9 Export Assistance by EXIM Bank
19.10 Export Credit Insurance
19.11 ECGC Covers
19.12 Summary
19.13 Questions
! !478
19.1 Introduction
After independence, India’s need for foreign exchange to finance the

import of capital goods , such as plant and machinery, heavy equipments,
components, spares, raw materials for end products for export, foreign
services, such as shipping insurance, consultancy, technical know-how etc.,
which are required for developing and restructuring her economy has
become almost unlimited. Even a fraction of these requirement could not
possibly be met out of the meagre foreign exchange earned by the export
of few traditional items, such as tea, jute, etc. Hence, export promotion
and the exploration of fields hitherto unexplored have assumed an
importance hitherto unprecedented.
Considering the need of export growth government has taken various

measures such as setting up of number of autonomous organisations to
function as export promotion councils under the ministry of commerce and
textiles which is being discussed in this chapter.
19.2 Role of Government
With a view to making exports an effective instrument for promoting

greater economic activity and employment, a number of schemes which
have been in existence for some time now have been strengthened and
improved upon while some new ones have been introduced. Assistance to
States for Developing Export Infrastructure and Allied activities (ASIDE),
scheme aims at encouraging the active involvement of State Governments
for development of export infrastructure through assistance linked to
export performance. The scheme provides an outlay for development of
export infrastructure which is distributed among the States, inter alia, on
the basis of the States' export performance in the previous year. The
Scheme subsumed the three ongoing Central Schemes viz., the Export
Promotion Industrial Park (EPIP), Critical Infrastructure Balance (CIB)
Scheme and the Export Development Fund (EDF) Scheme for the North
East. The specific purposes for which the funds allocated under the Scheme
that can be sanctioned and utilised are as follows:
! !479
• Creation of new Export Promotion Industrial Parks/Zones (including

Special Economic Zones (SEZs)/Agri-Business Zones) and augmenting
facilities in the existing zones.
• Setting up of electronic and other related infrastructure in export

conclaves.
• Equity participation in infrastructure projects, including the setting up of

SEZs.
• Meeting the requirements of capital outlay of EPIPs/SEZs.
• Development of complementary infrastructure such as roads connecting

the production centres with ports, setting up of Inland Container Depots
and Container Freight Stations.
• Stabilising power supply through additional transformers and islanding of

export production centres, etc.
• Development of minor ports and jetties of a particular specification to

serve exports.
• Assistance for setting up common effluent treatment plants.
• Projects of national and regional importance.
• Activities permitted as per the Export Development Fund in relation to

the North East and Sikkim.
! !480
19.3 Role of Reserve Bank of India
There are various functions of the Reserve Bank of India. Besides, other
important functions the Reserve Bank of India plays the role of Monetary
Authority and Manager of Foreign Exchange. As the Monetary Authority
aims to maintain price stability and ensure adequate flow of credit to
productive sectors and being the Manager of Foreign Exchange, it seeks to
facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India. In India, exports
have played a major role in accelerating the economic growth of the
country. The initiatives taken by Reserve Bank of India and Government of
India have contributed to the impressive increase in our exports. Export
Credit is an important factor which helps exporters in executing their
export orders efficiently. Export finance is granted in rupees as well as in
foreign currency. The RBI has taken some measures to enable timely and
hassle free flow of credit to the export sector which includes rationalisation
and liberalisation of export credit interest rates, flexibility in repayment/
prepayment of pre-shipment credit, special financial package for large
value exporters, export finance for agricultural exports, Gold Card Scheme
for exporters etc. The RBI has granted freedom to the Banks to get funds
from abroad without any limit, exclusively for the purpose of granting
export credit in foreign currency. This has enabled banks to increase their
lending capacity under export credit in foreign currency.
Export-Import Bank of India was set up in 1982 by an Act of Parliament for

the purpose of financing, facilitating and promoting India’s foreign trade. It
is the principal financial institution in the country for coordinating the
working of institutions engaged in financing exports and imports. Exim
Bank is fully owned by the Government of India and the Bank’s authorised
and paid-up capital are Rs. 10,000 crores and Rs. 2,300 crores
respectively.

! !481
facility, expansion/modernisation or up gradation of existing facilities and

Indian companies in their globalisation efforts through a wide range of
The Bank has introduced a new lending programme to finance research

and development activities of export-oriented companies. R&D finance by
Exim Bank is in the form of term loan to the extent of 80 per cent of the
R&D cost. In order to assist in the creation and enhancement of export
capabilities and international competitiveness of Indian companies, the
Bank has put in place an Export Marketing Services (EMS) Programme.
Through EMS, the Bank proactively assists companies in identification of
prospective business partners to facilitating placement of final orders.
Under EMS, the Bank also assists in identification of opportunities for
setting up plants or projects or for acquisition of companies overseas. The
service is provided on a success fee basis.
Exim Bank supplements its financing programmes with a wide range of

value-added information, advisory and support services, which enable
exporters to evaluate international risks, exploit export opportunities and
improve competitiveness, thereby helping them in their globalisation
efforts
19.4.1 The Functions of Export-Import Bank of India
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;
! !482
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
19.4.2 Important Objectives and Functional Areas of the Exim Bank
1. Project export
Projects involve activities like engineering, procurement, construction (civil,
mechanical, electrical or instrumental), including provision of all desired
and specified equipment and/supplies, construction and building materials,
consultancy, technical know-how, technology transfer, design, engineering
(basic or detailed), commissioning with other all such related services as
are needed by the existing or new projects/plants/processes involving
international competitive bidding (thus including even Multilaterally Funded
Projects in India). Project exports occupy an important place in India's
export portfolio. The contracts secured in the recent years have been quite
diverse in nature, indicating the growing versatility and technological
capabilities of Indian project exporters.
2. Overseas investment programme

Exim Bank encourages Indian companies to invest abroad for, inter alia,
setting up manufacturing units and for acquiring overseas companies to get
access to the foreign market, technology, raw material, brand, IPR etc. For
financing such overseas investments, Exim Bank provides:
a. Term loans to Indian companies’ upto 80% of their equity investment

in overseas JV/ WOS.
b. Term loans to Indian companies towards upto 80% of loan extended

by them to the overseas JV/ WOS.
c. Term loans to overseas JV/ WOS towards part financing

i. capital expenditure towards acquisition of assets,
ii. working capital,
iii. equity investment in another company,
iv. acquisition of brands/patents/rights/other IPR,
v. acquisition of another company,
! !483
vi. any other activity that would otherwise be eligible for finance from
Exim Bank had it been an Indian entity.
d. Guarantee facility to the overseas JV/ WOS for (i) raising term loan/
working capital.
3. Lines of credit
A Line of Credit (LOC) is a financing mechanism through which Exim Bank

extends support for export of projects, equipment, goods and services
from India. Exim Bank extends LOCs on its own and also at the behest and
with the support of Government of India. Exim Bank extends Lines of
Credit to:
a. Foreign Governments or their nominated agencies such as central

banks, state owned commercial banks and para-statal organisations;
b. National or regional development banks;
c. Overseas financial institutions;
d. Commercial banks abroad;
e. Other suitable overseas entities.
The above-mentioned recipients of LOCs act as intermediaries and on lend

to overseas buyers for import of Indian equipment, goods and services.
LOC is a financing mechanism that provides a safe mode of non-recourse
financing option to Indian exporters to enter new export markets or
expand business in existing export markets without any payment risk from
the overseas importers.
4. Buyer's credit
Overseas buyers/importers can avail this facility for import of eligible goods
and services from India on deferred payment terms. The facility enables
exporters/contractors to expand abroad and into non-traditional markets.
It also enables exporters/contractors to be competitive when bidding or
negotiating for overseas jobs.
Benefits to Foreign Customers
• Enables overseas buyers to obtain medium-and long-term financing
• Competitive interest rate against host country's high cost of borrowing;
! !484
Buyer's Credit is extended to a foreign project company that intends to

award the project execution to an Indian project exporter. The financing
will be available to all kinds of projects and service exports from India.
Facility is available for development, upgrading or expansion of
infrastructure facilities; financing of public or private projects such as
plants and buildings; professional services such as surveyors, architecture,
consultations, etc.
5. Marketing advisory services

Exim Bank plays a promotional role and seeks to create and enhance
export capabilities and international competitiveness of Indian companies.
Exim Bank through its Marketing Advisory Services [MAS] helps Indian
exporting firms in their globalisation efforts by proactively assisting in
locating overseas distributor(s)/buyer(s)/partner(s) for their products and
services. The Bank assists in identification of opportunities overseas for
setting up plants or projects or for acquisition of companies overseas. MAS
Group leverages the Bank's high international standing, in-depth
knowledge and understanding of the international markets and well
established institutional linkages, coupled with its physical presence, to
support Indian companies in their overseas marketing initiatives on a
success fee basis. The fees for Marketing Advisory Service is payable in
Indian Rupees and applies to the subsequent orders from the client
introduced by the Bank for a period of at least 2 years.
6. Finance for corporate

Research and Development Finance for Export-oriented Units: Exim
Bank encourages Indian exporters to invest more in their R&D spending in
order to develop new products/processes/ IPRs for enhancing export
capabilities. Considering the need to bridge the funding gap of Indian
exporters in R&D space, the Bank has a dedicated R&D Financing
Programme. Under the said programme, financing for R&D can be
extended to any export-oriented company/SPV promoted by companies,
irrespective of the nature of industry. The financing covers both capital and
revenue expenditure including inter alia:
• Land and building, civil works for housing eligible R&D activities;
• Equipment, tools, computer hardware/software, miscellaneous fixed

assets used in eligible R&D activities;
! !485
• Acquisition of technology from India or overseas at the “proof of concept”

or design stage, which will be used to develop new product/process.
• Salaries of R&D personnel, support staff during the R&D project phase
including training costs;
• Cost of regulatory approvals, filing and maintenance of patent

registration;
• Product documentation and allied costs during the R&D project phase.
• Costs of materials, surveys, technology demonstration studies and field

trial
• Any other costs to enhance R&D capability.
• Pre-shipment/Post-shipment Credit Programme
Exim Bank extends export credit to Indian exporters to meet a wide range
of trade financing requirements for execution of an export transaction. The
Bank provides working capital finance by way pre-shipment credit and
post-shipment credit. Bank also extends as part of export credit assistance,
non-fund based limits inter alia including issuance of Letters of Credit (both
foreign and inland) and Bank Guarantees (both foreign and inland) for its
clients. The credit limits are generally extended as part of Borrower’s
consortium limit and are operated as a running account facility. The limits
may be renewed for further period subject to satisfactory review of account
and depending on the Borrower’s export credit requirement. The facilities
can be drawn in either Indian Rupee or Foreign Currency.
• Lending Programme for Export-oriented Units

Exim Bank provides term loans to export oriented Indian companies to
finance various capital expenditures including certain soft expenditures in
order to improve their export capability and to enhance their international
competitiveness. Loans/Guarantees are extended for the following
purposes: Expansion, modernisation, upgradation or diversification projects
including acquisition of equipment, technology etc.; export marketing;
export product development; setting up of Software Technology Parks.
! !486
7. SME-ADB Line
Exim Bank has arranged for a credit line from the Asian Development Bank
(ADB) for providing foreign currency term loans to the MSME borrowers in
certain specific lagging states of India, viz., Assam, Madhya Pradesh,
Orissa, Uttar Pradesh, Chhattisgarh, Jharkhand, Rajasthan and
Uttarakhand. These foreign currency term loans can also finance domestic
capital expenditure of the borrowers in Indian Rupees, besides meeting
their foreign currency capital expenditure requirements. The assistance to
these MSMEs will help in increasing competitiveness in the relatively
backward States and help in integrating them into the mainstream
economy.
8. For cluster of Indian MSME EOUs
Exim Bank, besides providing financial assistance to individual MSME EOUs,

also provides financial assistance to Special Purpose Vehicles (SPVs) of a
cluster of MSMEs. Term loans are provided to such clusters of MSME units
for the following activities:
• Development of new geographically contiguous cluster/industrial park,

involving creation and maintenance of common infrastructure and
common facilities, including inter alia construction of buildings and civil
works, acquisition of assets/technology, for the benefit of industrial units
within the cluster/industrial park.
• Development of an industrial estate, by industrial users, industry

associations and/or Government bodies.
• Upgradation of an existing industrial cluster or industrial estate.
• Development of specific infrastructure, including common effluent

treatment plant, captive power plant, transportation linkages, hazardous
waste disposal.
• Development of Common Facilities Centres like testing centres, cold

storages, for industrial clusters, industrial estates, or a group of
industries with common interests.
! !487
9.Technology and Innovation Enhancement and Infrastructure

Development Fund (TIEID)
With a view to facilitate credit flow to the MSME sector at competitive

rates, Exim Bank has set up a Technology and Innovation Enhancement
and Infrastructure Development (TIEID) fund of USD 500 Million
exclusively for MSMEs, to augment their export competitiveness and
internationalisation efforts, by partnering with Banks/FIs. TIEID seeks to
meet long-term foreign currency loan requirements of Indian exporting
entities in the MSME sector for meeting capital expenditure, through
refinancing of Banks/FIs against their eligible SME financing portfolio.
10. Lending Programme for Financing Creative Economy

The creative industries are those industries which have their origin in
individual creativity, skill and talent and which have a potential for wealth
and Job creation through the generation and exploitation of intellectual
property, viz., Advertising, Architecture, Art and Antiques Market, Crafts,
Design, Designer Fashion, Film and Video, Interactive Leisure Software,
Music, Performing Arts, Publishing, Software and Computer Services,
Television and Radio etc. In view of the large untapped potential for
increasing exports by the creative industries and in order to provide a
strategic focus to this sector and enhance Exim Bank’s presence in the
creative economy space, and as a corollary, in the MSME segment, Exim
Bank has introduced a programme specifically for financing the creative
economy.
11. Finance for grass roots enterprises

The Bank supports globalisation of enterprises based out of rural areas of
the country through its GRID programme. Through this initiative, the Bank
extends financial support to promote grassroots initiatives/technologies,
particularly those having export potential. The objective of the programme
is to help artisans/producer groups/clusters/small enterprises across the
country realise remunerative return on their produce essentially through
facilitating exports from these units. The group handles credit proposals
from such organisations working at the rural/grassroots level and offers
tailor-made financial products to cater to their needs. The group is
mandated to work towards developing a robust, vibrant and holistic
approach in its intervention by providing assistance at various stages of
product development/business cycle including capacity building, export
capability creation, expansion/diversification and finally exports. The broad
! !488
areas of support extended by the Bank through its grass roots initiatives
inter alia include capacity building, development of common facility
centres, and construction of raw material bank, technology upgradation
and creation of export capability.
19.5 Role of Banks
Commercial banks, in their turn, play an important part of promoting

exports. This role consist primary in providing export credits, i.e., pre-
shipment and/or post shipment credit to exporters and/or furnishing
guarantees on behalf of Exporters.
Export bills, supported by shipping documents, cannot be sent directly to

the foreign buyers, but have, under the exchange control regulations, to be
negotiated or lodged for collection with a banker authorised to deal in
foreign exchange. The banker may provide post-shipment finance to the
exporter by negotiating such bills drawn under the letter of credit or by
purchasing/discounting bills covering export under a firm order/contract or
on consignment basis. Where exports are covered by letter of credit or a
firm order, the banker may, if required by the exporter, provide packing
credit, i.e., pre-shipment finance to him for the purpose of manufacturing,
processing, purchasing and/or packing the goods for export.
Further, banker may establish credit for the Indian importers in favour of
foreign suppliers of capital goods, raw materials for export of goods.
19.6 Export Incentives offered by the Government
It is more important for a country like India where foreign exchange

outflow on account of imports is much higher as compared to foreign
exchange inflows on account of exports. In fact, as per current statistics of
WTO for the year 2009, India ranks No. 3 in trade deficit behind US and
UK. US is at first position with a trade deficit of USD 549 billion and UK at
second with USD 129 billion and India at 3rd with USD 87 billion. More
worrying is the estimate of Ministry of Commerce for the year 2010-11
which expects deficit to touch USD 135 billion. India, therefore, has no
options but to increase its exports substantially for the health of our
economy.
! !489
When major developed countries are yet to come out of recession, India is
expected to achieve 8.5% growth annually. The quality goods produced in
India therefore should be able to make their presence felt internationally.
To support this, Government of India has taken many measures
particularly to neutralise the Indirect Taxation and to boost cost
competitiveness of Indian products and services.
Most of these initiatives are announced by Directorate General of Foreign

Trade [DGFT] under policy framework known as ‘Foreign Trade Policy
[FTP]’. The schemes announced under FTP form a significant part of
strategy of export promotion. The schemes include ‘exemption’ or
‘neutralisation’ from Indirect taxes (Customs Duty, Excise Duty, Service
Tax, etc.) on one hand and performance-based rewards by way of duty
credits on the other hand.
The exemption or neutralisation is offered at pre-export or post-export

stage to facilitate manufacturers and merchants to avail the duty
exemption or neutralisation. For import or local procurement of inputs
required for manufacturing of export products the following instruments
are available under FTP. For import or local procurement of inputs required
for manufacturing of export products the following instruments are
available under FTP:
EXPORT PROMOTION SCHEMES
Foreign Trade Policy 2015-20 and other schemes provide promotional

measures to boost India’s exports with the objective to offset
infrastructural inefficiencies and associated costs involved to provide
exporters a level playing field. Brief of these measures are as under:
1.1 Exports from India Scheme
(i)Merchandise Exports from India Scheme (MEIS)
Under this scheme, exports of notified goods/products to notified markets

as listed in Appendix 3B of Handbook of Procedures, are granted freely
transferable duty credit scrips on realised FOB value of exports in free
foreign exchange at specified rate (2-5%). Such duty credit scrips can be
used for payment of custom duties for import of inputs or goods, payment
! !490
of excise duty on domestic procurement, payment of service tax and

payment of custom duties in case of EO default.
Exports of notified goods of FOB value upto Rs. 25,000 per consignment,
through courier or foreign post office using e-commerce shall be entitled
for MEIS benefit.
(ii) Service Exports from India Scheme (SEIS)
Service providers of notified services as per Appendix 3E are eligible for

freely transferable duty credit scrip @ 5% of net foreign exchange earned.
2. DUTY EXEMPTION AND REMISSION SCHEMES
These schemes enable duty free import of inputs for export production with
export obligation. These scheme consists of:
2.1 Advance Authorisation Scheme

Under this scheme, duty free import of inputs are allowed, that are
physically incorporated in the export product (after making normal
allowance for wastage) with minimum 15% value addition. Advance
Authorisation (AA) is issued for inputs in relation to resultant products as
per SION or on the basis of self declaration, as per procedures of FTP. AA
normally have a validity period of 12 months for the purpose of making
imports and a period of 18 months for fulfillment of Export Obligation (EO)
from the date of issue. AA is issued either to a manufacturer exporter or
merchant exporter tied to a supporting manufacturer(s).
2.2 Advance Authorisation for annual requirement

Exporters having past export performance (in at least preceding two
financial years) shall be entitled for Advance Authorisation for Annual
requirement. This shall only be issued for items having SION.
2.3 Duty Free Import Authorisation (DFIA) Scheme

DFIA is issued to allow duty free import of inputs, with a minimum value
addition requirement of 20%. DFIA shall be exempted only from the
payment of basic customs duty. DFIA shall be issued on post export basis
for products for which SION has been notified. Separate schemes exist for
gems and jewellery sector for which FTP may be referred.
! !491
2.4 Duty Drawback of Customs/Central Excise Duties/Service Tax

The scheme is administered by Department of Revenue. Under this scheme
products made out of duty paid inputs are first exported and thereafter
refund of duty is claimed in two ways:
a. All Industry Rates: As per Schedule

b. Brand Rate: As per application on the basis of data/documents
2.5 Rebate of Service tax through all industry rates

Refund of service tax paid on specified output services used for export of
goods is available at specified all industry rates.
3. EPCG SCHEME
3.1 Zero duty EPCG scheme

Under this scheme import of capital goods at zero custom duty is allowed
for producing quality goods and services to enhance India’s export
competitiveness. Import under EPCG shall be subject to export obligation
equivalent to six times of duty saved in six years. Scheme also allows
indigenous sourcing of capital goods with 25% less export obligation.
3.2 Post Export EPCG Duty Credit Scrip Scheme

A Post Export EPCG Duty Credit Scrip Scheme shall be available for
exporters who intend to import capital goods on full payment of applicable
duty in cash.
4. EOU/EHTP/STP AND BTP SCHEMES

Units undertaking to export their entire production of goods and services
may be set up under this scheme for import/procurement domestically
without payment of duties. For details of the scheme and benefits available
therein FTP may be required.
5. OTHER SCHEMES
5.1 Towns of Export Excellence (TEE)

Selected towns producing goods of Rs. 750 crores or more are notified as
TEE on potential for growth in exports and provide financial assistance
under MAI Scheme to recognised Associations.
! !492
5.2 Rebate of Duty on “Export Goods” and “Material” used in

Manufacture of such Goods
Rebate of duty paid on excisable goods exported or duty paid on the
material used in manufacture of such export goods may be claimed under
Rule of 18 of Central Excise Rules, 2002.
5.3 Export of Goods under Bond, i.e., without Payment of Excise

Duty
Rule 19 of Central Excise Rules 2002 provides clearance of excisable goods
for exports without payment of central excise duty from the approved
factory, warehouse and other premises.
5.4 Market Access Initiative (MAI) Scheme

Under the Scheme, financial assistance is provided for export promotion
activities on focus country, focus product basis to EPCs, Industry and Trade
Associations, etc. The activities are like market studies/surveys, setting up
showroom/warehouse, participation in international trade fairs, publicity
campaigns, brand promotion, reimbursement of registration charges for
pharmaceuticals, testing charges for engineering products abroad, etc.
Details of the Scheme are available at www.commerce.nic.in
5.5 Marketing Development Assistance (MDA) Scheme

Financial assistance is available for exporters having an annual export
turnover upto Rs. 30 crores for trade fairs, buyer seller meets organised by
EPC’s/Trade promotion organisations. MDA guidelines available at
www.commerce.nic.in
5.6 Status Holder Scheme

Upon achieving prescribed export performance, status recognition as one
star Export House, two star export house, three star export house, four
star export house and five star export house is accorded to the eligible
applicants as per their export performance. Such Status Holders are
eligible for various non-fiscal privileges as prescribed in the Foreign Trade
Policy.
In addition to the above schemes, facilities like 24 × 7 customs clearance,

single window in customs, self assessment of customs duty, prior filing
facility of shipping bills, etc., are available to facilitate exports.
! !493
Advance Authorisation [AA] including Annual Advance

Authorisation [AAA]:
• All inputs which are consumed for producing export product can be
imported under Advance Authorisation.
• Export items for which advance authorisation is to be obtained should be

covered under Standard Input Output Norms [SION]. If SION is not
available, application on basis of self declared norms can be made.
• Exempts all duties — Basic Customs Duty [BCD], Additional Customs

Duty or Countervailing Duty [CVD], Special AdditionalDuty [SAD], Anti-
dumping duty and Safeguard duty.
• Subject to Actual User Condition.
• AA and materials imported under AA are not transferable.
• Minimum value addition [VA] of 15% is required to be maintained.
• AA is valid for a period of 24 months and export obligation is required to

be fulfilled within a period of 36 months.
• AA can be obtained in cases where foreign buyer supplies all or few

inputs on ‘free of cost’ basis.
• By invalidating AA for direct import, authorisation holder can procure

inputs from local market. This can be done by availing facility of Advance
Authorisation for Intermediate Supply or Advance Release Order or Back-
to-Back Letter of Credit, as the case maybe.
• Facility of AAA is allowed to Status Certificate holders like Export House,

Trading House, etc. and all other categories of exporters having past
export performance (in preceding two years).
• Entitlement in terms of CIF value of imports under AAA shall be upto

300% of the FOB value of physical export and/or FOR value of deemed
export in preceding licensing year.
! !494
Duty Free Import Authorisation [DFIA]
• DFIA can be availed for all export products having fixed SION.
• 20% Value Addition [VA] is required to be maintained.
• Unlike AA, DFIA is a transferable instrument subject to fulfilment of

export obligation.
• All other provisions are similar to AA.
Duty Entitlement Passbook Scheme [DEPB]
• DEPB is towards neutralisation of basic customs duty on the inputs.
• DEPB is duty credit instrument and therefore allows import of any

permissible input irrespective of the fact whether the same input has
been utilised in the export product or not. DEPB is, therefore, more
flexible in nature.
• DEPB is transferable instrument.
• CVD and SAD can also be debited under DEPB scrip.
• DEPB rates are prescribed under the DEPB Rate Schedule.
• DEPB is valid for a period of 24 months.
Duty Drawback [DBK]
• Duty Drawback in relation to the export of indigenously manufactured

goods, means refund of duties paid on raw materials, Component parts
and packing materials consumed in the production and export thereof.
• These duties may be duties of Customs paid on imported materials and/

or duties of Central Excise paid on indigenous materials.
• There are three types of DBK rates, which are —
! !495
❖ All Industry Rate of DBK — Available to all exporters who export items
covered by Drawback Rate Schedule. The rates prescribed under this
category are based on determination of average incidence of duties
suffered on inputs.
❖ Brand Rate of DBK — If All Industry Rate of DBK is not available,

application for Brand Rate of DBK can be made. Here, the actual amount
of duty suffered on inputs is calculated and then Brand Rate for that
particular export item is fixed.
❖ Special Brand Rate of DBK — Where all industry rate of DBK is less than
4/5th of the duties paid on inputs, exporter can apply for fixation of an
appropriate rate of DBK for his specific product.
In addition to above, FTP also offers rewards/incentives by way of Duty

Credit Scrips. All these incentives except SFIS are transferable and can be
sold in open market.
Like inputs, capital goods can also be imported by payment of 3%

concessional rate of duty or at absolutely NIL duty for specified sectors.
The scheme is known as Export Promotion Capital Goods Scheme [EPCG]
and offers technology up gradation on one hand and export promotion on
the other.
Main features of EPCG scheme are —
1. Eligibility
Manufacturer exporters with or without supporting manufacturer/vendor,
merchant exporters tied to supporting manufacturers and service providers
can claim EPCG Authorisation.
2. Zero Duty EPCG Scheme
• Allows import of capital goods [CGs] at zero customs duty.
• Subject to fulfilment of Export Obligation [EO] equivalent to 6 times of

duty saved on capital goods imported under EPCG scheme, to be fulfilled
in 6 years reckoned from Authorisation issue-date.
! !496
• It is available to exporters of following sectors:
❖ Engineering and Electronic Products
❖ Basic Chemicals and Pharmaceuticals
❖ Apparels and Textiles
❖ Plastics
❖ Handicrafts
❖ Chemicals and Allied Products
❖ Leather and Leather Products
❖ Paper and Paperboard and Articles thereof
❖ Ceramic Products
❖ Refractory
❖ Glass and Glassware
❖ Rubber and Articles Thereof
❖ Plywood and Allied Products, Marine Products, Sports Goods and Toys
However, this scheme is not available to the exporters who have availed
the benefits under Technology Upgradation Fund Scheme (TUFS)
administered by Ministry of Textiles and Status Holder Incentive Scheme
[SHIS].
! !497
3. Concessional 3% Duty EPCG Scheme
• This scheme is available to all exporters for import of CGs at 3% customs

duty.
EO to be fulfilled under this scheme is equivalent to 8 times of duty

saved on capital goods imported under EPCG scheme, to be fulfilled in 8
years reckoned from Authorisation issue-date. EPCG Authorisation with a
duty saved amount of Rs. 100 crores or more, export obligation shall be
fulfilled in 12 years.
• However for agro units, and units in cottage or tiny sector, reduced EO
has to be fulfilled, which is equivalent to 6 times of duty saved on capital
goods imported, in 12 years.
• In case of SSI units, EO equivalent to 6 times of duty saved amount has

to be fulfilled, in 8 years.
4. Import of Spares under EPCG Scheme:
• Spares, moulds, dies, jigs, fixtures, tools, refractory for initial lining and
catalyst for initial charge can be imported under EPCG Authorisation,
subject to EO of 50% of the normal EO, to be fulfilled in 8 years in case
of 3% EPCG Scheme and 6 years in case of zero duty EPCG Scheme.
• However, C.I.F., value of import of the above spares, etc., will be limited
to 10% of the value of plant and machinery imported under the EPCG
scheme.
5. EPCG for Annual Requirement
• EPCG Authorisation for annual requirement can be issued, both under

zero duty and 3% duty EPCG Scheme.
• Status Holders and other exporters having past export performance of

minimum two years can opt for this facility.
• This avoids transaction cost on account of application fees and paper

work.
! !498
6. Other Important Features of EPCG Scheme
• EPCG authorisation can also be issued to the service providers, common

service providers, and retail sector.
• Nexus between CGs and export product/service is required to be

maintained.
• Average of past three years’ exports is required to be maintained by the

authorisation holder.
To promote investment in upgradation of technology of some specified

sectors, DGFT introduced reward scheme for Status Holders. Under this
scheme, incentive scrip @ 1% of FOB value of exports in the form of duty
credit scrip is issued. The duty credit scrip is non-transferable and can be
used only for import capital goods. Status holder who have availed benefit
of TUFS and Zero duty EPCG scheme are not eligible for this scheme.
Specified sectors are —
• Leather Sector (excluding finished leather)
• Textiles and Jute Sector
• Handicrafts
• Engineering Sector (excluding Iron and Steel, Non-ferrous metals in

primary or intermediate forms, Automobiles and two wheelers, Nuclear
reactors and parts and Ships, Boats and Floating Structures)
• Plastics
• Basic Chemicals (excluding Pharma Products)
! !499
The following benefits are also equally important:
(1) Concessional Finance:

Finance at concessional rate of interest is granted by Banks at pre-
shipment and post-shipment stages. This finance can be used for
procurement of raw materials, packing materials, etc. at pre-shipment
stage and for giving longer credit to the foreign buyers at post-shipment
stage.
(2) Credit Insurance-Export Credit Guarantee Corporation of India

Limited [ECGC]:
The political and commercial risks arising out of credit transactions can be
covered by obtaining credit insurance policy from ECGC. Various policies
offered by ECGC are available on their website – www.ecgc.in.
(3) Market Development Assistance [MDA]:

MDA provides financial assistance for a range of export promotion activities
implemented by Export Promotion Councils [EPCs]. Direct assistance under
MDA for exporters is given for participation in fairs/exhibitions and
publicity.
Following basic conditions are applicable for availing MDA by an individual

exporter for participation in EPC led Trade Delegations/Buyer-Seller Meets/
Trade Fares and Exhibitions:
• FOB value of exports in the preceding year should not exceed Rs. 15
crores.
• Exporter is having membership for minimum 12 months with EPC, except

in case of New EPCs.
• Assistance on Air travel is provided, for economy class air fare and/or
charges of the built-up furnished stall, subject to upper ceiling as per the
table in the adjoining page:
! !500
(4) Freight Subsidy for perishable goods:

The scheme is known as “Transport Assistance” [transport by sea or air],
which is available to the exporters of floriculture, fresh fruits and
vegetables, fresh medicinal plants and culinary herbs, meat and poultry
products and processed food products. Website of Agricultural and
Processed Food Products Export Development Authority [APEDA] –
www.apeda.com provides detailed information in this respect.
Similarly, State Governments also provide Air Freight Subsidy to SSI units
on their finished goods for any destination. The facilities are available in
Uttar Pradesh. Likewise Dept. of Industries and Commerce, Haryana grants
sea freight subsidy to the exporters.
Apart from all these, there are special facilities granted by Government of
India to dedicated establishments for exports.
These dedicated establishments are classified as under:
(1) EOU/EHTP/STP/BTP
In case of EOU/EHTP/STP/BTP, these are product specific dedicated
establishments, committed to exporting their product or services. These
establishments enjoy exemption from Customs/Excise duties on CGs as
well as on inputs. They are also entitled to Cenvat Credit of Service Tax
paid and refund of Central Sales Tax [CST].
(2) SEZs
Based on the success story of Chinese SEZs, Government of India
introduced SEZ Act, 2005 and SEZ Rules, 2006. Under this scheme a zone
is approved which is expected to be a smart industrial township having
manufacturing and warehousing infrastructure called “processing area” and
social infrastructure called “non-processing area”. The developers of the
SEZ get direct and indirect tax exemptions primarily for creation and
maintenance of infrastructure and units get direct as well as indirect tax
exemption for export activities in the field of manufacturing, services,
trading and warehousing.
There are number of other facilities provided to units in SEZ as well as EOU
units to smoothen their activities for hassle-free transaction. Both these
schemes encourage investment from overseas as well as domestic sources
! !501
19.7 Rupee Export Credit Interest Rates Subvention
In a bid to arrest the decline in exports, the Central government has

announced an interest equalisation scheme on pre and post-shipment
rupee export credit with effect from 1st April, 2015 for five years.
The rate of interest equalisation would be 3 per cent. The scheme would be
available to all exports made by small and medium-scale enterprises across
416 tariff lines. Merchant exporters will not be eligible for the sop.
The scheme covers mostly labour intensive and employment generating

sectors like processed agriculture/food items, handicrafts, handmade
carpet (including silk), handloom products, coir and coir manufactures, jute
raw and yarn, readymade garments, etc. Fabrics of all types, toys, sports
goods, paper and stationary, cosmetics and toiletries, leather goods and
footwear, ceramics and allied products, glass and glassware are also
included. Medical and scientific instruments, optical frames, lenses,
sunglasses, auto components industrial machinery, electrical and
engineering items, manufactured by SMEs are also covered.
According to an official press release, the scheme is expected to cost the

government at least Rs. 2,500 crore annually. The actual financial outgo,
though, would depend on the level of exports and the claims filed by the
exporters with the banks.
Funds to the tune of Rs. 1,625 crore would be made available to RBI during
2015/16, the commerce ministry stated.
Terming it as a long-awaited announcement, S.C. Ralhan, President,

Federation of Indian Exporters Organisation (FIEO), said the scheme would
provide stability and help exporters factor the same in their pricing to
become more competitive.
“Credit cost has become all the more important as the cycle of exports has
elongated due to global contraction in demand and liquidity forcing the
exporters to borrow for longer periods,” he said.
The scheme will be evaluated after three years.
! !502
While it will be funded from the funds available with Department of

Commerce under non-plan head during 2015/16, the restructured scheme
would be funded from plan side from 2016/17 onwards.
The scheme was earlier called Interest Subvention Scheme.
19.8 Export Incentives by RBI/Banks
• Duty Drawback Credit Scheme
Banks are permitted to grant post-shipment advances to exporters against

their duty drawback entitlements and covered by ECGC guarantee as
provisionally certified by Customs Authorities pending final sanction and
payment.
The advance against duty drawback receivables can also be made available
to exporters against export promotion copy of the shipping bill containing
the EGM Number issued by the Customs Department. Where necessary,
the financing bank may have its lien noted with the designated bank and
arrangements may be made with the designated bank to transfer funds to
the financing bank as and when duty drawback is credited by the Customs.
These advances granted against duty drawback entitlements would be
maximum period of 90 days from the date of advance.
The exporter in each case is required to apply for finance and the
application should contain his endorsement authorising the disbursing
authority to make payment to Bank. The bank in its turn is required to
issue certificate of export in the copy of the invoice.
This scheme is eligible for full refinance from RBI. On receipt of the cheque
from the Customs authorities in payment of exporter’s entitlement the
lending bank is required to refund the refinance obtained from RBI.
Apart from the application, a demand pro-note, a letter of continuity and a

letter of hypothecation of book debts, the banker should obtain a power of
attorney form the exporter and get it registered with the disabusing
authority concerned
! !503
• Advances against Undrawn Balances on Export Bills

value of the contract, the residuary amount being ‘undrawn balance’ is
quantity of goods.
Payment of undrawn balance is contingent in nature. Banks may consider

granting advances against undrawn balances at concessional rate of
interest based on their commercial judgement and the track record of the
buyer. Such advances are, however, eligible for concessional rate of
interest for a maximum period of 90 days only to the extent these are
repaid by actual remittances from abroad and provided such remittances
are received within 180 days after the expiry of NTP in the case of demand
bills and due date in the case of usance bills. For the period beyond 90
days, the rate of interest specified for the category Export Credit Not
Otherwise Specified (ECNOS) at post-shipment stage may be charged.
• Advances against Retention Money
(i) In the case of turnkey projects/construction contracts, progressive

stipulated period from the date of the completion of the contract,
subject to abstention of certificate(s) from the specified authority.
(ii)Retention money may also be sometimes stipulated against the supplies

portion in the case of turnkey projects. It may likewise arise in the case
of sub-contracts. The payment of retention money is contingent in
nature as it is a deferred liability.
(iii)The following guidelines should be followed in regard to grant of

advances against retention money:
• No advances may be granted against retention money relating to

services portion of the contract.
! !504
• Exporters may be advised to arrange, as far as possible, provision of

suitable guarantees, instead of retention money.
• Banks may consider, on a selective basis, granting of advances against

retention money relating to the supplies portion of the contract taking
into account, among others, the size of the retention money
accumulated, its impact on the liquid funds position of the exporter and
the past performance regarding the timely receipt of retention money.
• The payment of retention money may be secured by LC or Bank

Guarantee where possible.
• Where the retention money is payable within a period of one year from
the date of shipment, according to the terms of the contract, banks
should charge prescribed rate of interest upto a maximum period of 90
days. The rate of interest prescribed for the category ‘ECNOS’ at post-
shipment stage may be charged for the period beyond 90 days.
• Where the retention money is payable after a period of one year from the
date of shipment, according to the terms of the contract and the
corresponding advance is extended for a period exceeding one year, it
will be treated as post-shipment credit given on deferred payment terms
exceeding one year, and the bank is free to decide the rate of interest.
• Advances against retention money will be eligible for concessional rate of

interest only to the extent the advances are actually repaid by
remittances received from abroad relating to the retention money and
provided such payments are received within 180 days from the due date
of payment of the retention money, according to the terms of the
contract
! !505
19.9 Export Assistance by EXIM Bank
Exim Bank extends funded and non-funded facilities for overseas turnkey
projects, civil construction contracts, technical and consultancy service
contracts as well as supplies.
• Turnkey Projects are those which involve supply of equipment along with
related services, like design, detailed engineering, civil construction,
erection and commissioning of plants and power transmission and
distribution.
• Construction Projects involve civil works, steel structural works, as well

as associated supply of construction material and equipment for various
infrastructure projects.
• Technical and Consultancy Service Contracts, involving provision of

know-how, skills, personnel and training are categorised as consultancy
projects. Typical examples of services contracts are: project
implementation services, management contracts, super vision of erection
of plants, CAD/CAM solutions in software exports, finance and accounting
systems.
• Supplies: Supply Contracts involve primarily export of capital goods and

industrial manufactures. Typical examples of supply contracts are: supply
of stainless steel slabs and ferro-chrome manufacturing equipments,
diesel generators, pumps and compressors.
Funded Facilities
• PRE-SHIPMENT CREDIT in Indian Rupees and Foreign Currency

provides access to finance at the manufacturing stage — enabling
exporters to purchase raw materials and other inputs. The facility also
enables provision of Rupee/FC mobilisation expenses for construction/
turnkey projects. Exporters can also avail Foreign Currency Pre-shipment
Credit facility to import raw materials and other inputs required for
export production.
• POST-SHIPMENT CREDIT finances the export bill after shipment has

been made. This facility enables Indian exporters to extend term credit
to importers (overseas) of eligible goods at the post-shipment stage.
! !506
Construction/turnkey projects. Exporters can also avail Foreign Currency

Pre-shipment Credit facility to import raw materials and other inputs
required for export production. These facilities are extended by Exim
Bank individually or in participation with commercial banks on a case-to-
case basis. Indian manufacturers and project exporters can take
advantage of these facilities to support their export trade financing
requirement. The facilities cover Indian capital and engineering goods
and related services. One of the following securities is taken by Exim
Bank: Cash Collateral; Corporate Guarantee; Shareholders and/or
Directors’ Guarantee; Landed property; Charge on fixed and/or floating
assets of customers; Assignment of insurance policies, agreements,
contract proceeds, rights and benefits; Any other security acceptable to
the Bank.
• EXPORT PROJECT CASH FLOW DEFICIT FINANCE (EPCDF) is

provided to Indian Project exporters executing project export contract
overseas. The facility (INR/FC) enables project exporters to take care of
temporary deficits in their cash-flow during contract execution period.
Indian companies executing contracts within India, but which are
financed by multilateral funding agencies, or contracts for which deemed
export benefits are available under Foreign Trade Policy, can avail of
credit under our Finance for Deemed Exports facility, aimed at helping
them meet cash flow deficits.
Non-funded Facilities
Indian companies can avail of these facilities to secure and facilitate

execution of export contracts or deemed export contracts.
• ADVANCE PAYMENT GUARANTEE (APG): Issued to project exporters

to secure a project mobilisation advance as a percentage (10-20%) of
the contract value, which is generally recovered on a pro-rata basis from
the progress payment during project execution.
• PERFORMANCE GUARANTEE (PG): IPG for up to 5-10% of contract

value is issued valid until completion of maintenance period and/or grant
of Final Acceptance Certificate (FAC) by the overseas employer/client.
• RETENTION MONEY GUARANTEE (RMG): This enables the exporter to

obtain the release of retained payments from the client prior to issuance
! !507
of Project Acceptance Certificate (PAC)/ Final Acceptance Certificate

(FAC).
• OTHER GUARANTEES: e.g., in lieu of customs duty or security deposit

for expatriate labour, equipment etc.
Refinance of Export Credit
The Exim bank provides refinance to eligible banks, i.e., scheduled banks
authorised to deal in foreign exchange, against the medium or long-term
export credit granted by them on deferred payment terms. The credit
should be granted against export of capital and/or engineering goods or for
the export of capital and/or engineering goods, equipment materials,
services, etc., of Indian origin under construction projects abroad and
should be for a period exceeding 6 months but not exceeding 5 years in
the case of medium term project and 10 years in the case long term
project. Refinance is also available to banks against packing credit granted
by them for the manufactures and processing of export goods.
The refinance could be up to 100% of the export credit, without prescribed

minimum or maximum limit at concessional rate of interest which are fixed
from time to time by the Exim bank.
19.10 Export credit insurance
Exporters face a problem of not being paid by the overseas importer for
various reasons. Hence exporters’ amount is blocked or delayed. The loss
of amount brings a disaster for any exporter however he is financially
sound, intelligent and competent. Financial institutions like commercial
banks, Export-Import Bank of India do not provide financial assistance
without insurance cover. Export credit insurance provided by ECGC helps in
preventing the risks with insurance cover.
Exporters can do business confidently and in the process can increase or

expand and penetrate into overseas market significantly without fear of
loss.
Payments for exports are open to risks even at the best of times. The risks
have assumed large proportions today due to the far-reaching political and
economic changes that are sweeping the world. An outbreak of war or civil
! !508
war may block or delay payment for goods exported. A coup or an

insurrection may also bring about the same result. Economic difficulties or
balance of payment problems may lead a country to impose restrictions on
either import of certain goods or on transfer of payments for goods
imported. In addition, the exporters have to face commercial risks of
insolvency or protracted default of buyers. The commercial risks of a
foreign buyer going bankrupt or losing his capacity to pay are aggravated
due to the political and economic uncertainties. Export credit insurance is
designed to protect exporters from the consequences of the payment risks,
both political and commercial, and to enable them to expand their overseas
business without fear of loss.
Cooperation is in agreement with MIGA (Multilateral Investment Guarantee

Agency) an arm of World Bank. MIGA provides:
1. Political insurance for foreign investment in developing countries.
2. Technical assistance to improve investment climate.
3. Dispute mediation service.
Under this agreement protection is available against political and economic

risks such as transfer restriction, expropriation, war, terrorism and civil
disturbances etc.
! !509
19.11 ECGC Covers
1. Standard policy issued to exporters to protect them against payment

risks involved in exports on short-term credit and small exporter policy
issued for the same purpose to exporters with small exports.
2. Specific Policies designed to protect Indian firms against payment risks

involved in
(a) export on deferred terms of payment, (b) services rendered to
foreign parties and
(c) construction works and turnkey projects undertaken abroad;
3. Financial guarantees issued to banks in India to protect them from risks

of loss involved in their extending financial support to exporters at the
pre-shipments well as post-shipment stages; and
4. Special schemes, viz., Transfer guarantee meant to protect banks which

add confirmation to letters of credit opened by foreign banks, insurance
cover for buyer's credit; Line of Credit, Overseas investment insurance
and Exchange fluctuation risk insurance.
! !510
19.12 Summary
With a view to making exports an effective instrument for promoting

greater economic activity and employment, a number of schemes which
have been in existence for some time now have been strengthened and
improved upon while some new ones have been introduced. Assistance to
States for Developing Export Infrastructure and Allied activities (ASIDE)
scheme aims at encouraging the active involvement of State Governments
for development of export infrastructure through assistance linked to
export performance. The scheme provides an outlay for development of
export infrastructure which is distributed among the States, inter-alia, on
the basis of the States' export performance in the previous year.
There are various functions of the Reserve Bank of India. Besides, other
important functions the Reserve Bank of India plays the role of Monetary
Authority and Manager of Foreign Exchange. As the Monetary Authority
aims to maintain price stability and ensure adequate flow of credit to
productive sectors and being the Manager of Foreign Exchange, it seeks to
facilitate external trade and payment and promote orderly development
and maintenance of foreign exchange market in India. In India exports
have played a major role in accelerating the economic growth of the
country. The initiatives taken by Reserve Bank of India and Government of
India have contributed to the impressive increase in our exports. Export
Credit is an important factor which helps exporters in executing their
export orders efficiently. Export finance is granted in rupees as well as in
foreign currency. The RBI has taken some measures to enable timely and
hassle free flow of credit to the export sector which includes rationalisation
and liberalisation of export credit interest rates, flexibility in repayment/
prepayment of pre-shipment credit, special financial package for large
value exporters, export finance for agricultural exports, Gold Card Scheme
for exporters etc. The RBI has granted freedom to the Banks to get funds
from abroad without any limit for exclusively for the purpose of granting
export credit in foreign currency.

! !511
facility, expansion/modernisation or up gradation of existing facilities and

Indian companies in their globalisation efforts through a wide range of
Commercial Banks, in their turn, play an important part of promoting

exports. This role consist primary in providing export credits, i.e., pre-
shipment and/or post shipment credit to exporters and/or furnishing
guarantees on behalf of Exporters. Export bills, supported by shipping
documents, cannot be sent directly to the foreign buyers, but have, under
the exchange control regulations, to be negotiated or lodged for collection
with a banker authorised to deal in foreign exchange. The banker may
provide post-shipment finance to the exporter by negotiating such bills
drawn under the letter of credit or by purchasing/discounting bills covering
export under a firm order/contract or on consignment basis. Where exports
are covered by letter of credit or a firm order, the banker may, if required
by the exporter, provide packing credit, i.e., pre-shipment finance to him
for the purpose of manufacturing, processing, purchasing and/or packing
the goods for export.
! !512
19.13 Questions
1. What is the role of Exim Bank for export promotions?
2. What are the incentives offered by Government to Exporters? Describe

in brief.
3. Write short notes on — India Trade Promotion Organisation (ITPO).
4. What are the concessions granted to exporters by RBI?
5. Describe: Rupee Export Credit Interest Rates Subvention.
1. The RBI has granted freedom to the Banks to get funds from abroad
__________ for exclusively for the purpose of granting export credit in
foreign currency.
(a) with prescribed limit
(b) without any limit
2. The banker may provide post-shipment finance to the exporter by

__________.
(a) negotiating such bills drawn under the letter of credit
(b) purchasing/discounting bills covering export under a firm order/
contract
(c) on consignment basis
(d) all above
3. The EXIM Bank grants credit against export of capital and/or

engineering goods or for the export of capital and/or engineering goods,
equipment materials, services etc of Indian origin under construction
projects abroad and should be for a period exceeding 6 months but not
exceeding __________ in the case of medium term project.
(a) 5 years
(b) 3 years
(c) 2 years
(d) 1 years
! !513
4. The rate of interest equalisation for rupee export credit interest rate
subvention is …………………
(a) 5 per cent
(b) 3 per cent
(c) 2.5 per cent
(d) 2 per cent
5. Indian companies executing contracts within India, but which are

financed by multilateral funding agencies is called __________.
(a) General export
(b) Conditional export
(c) Deemed export
(d) Restricted export
Answers: 1.(b), 2. (d), 3. (a), 4. (b), 5. (c).
! !514
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !515
ECGC: ROLE IN EXPORT PROMOTION
Chapter 20
ECGC: Role In Export Promotion
Objectives

functions of ECGC and its rate in support of boosting the exact from the
country. You will also understand various policies issued by ECGC to
exporters and guarantees issued by the to Banks.
Structure
20.1 Introduction
20.2 Functions
20.3 Covers issued by ECGC
20.4 Financial Guarantees
20.5 Summary
20.6 Questions
! !516
20.1 Introduction
The ECGC Limited (Formerly Export Credit Guarantee Corporation of India

Ltd) is a company wholly owned by the Government of India based in
Mumbai, Maharashtra. It provides export credit insurance support to Indian
exporters and is controlled by the Ministry of Commerce. Government of
India had initially set up Export Risks Insurance Corporation (ERIC) in July
1957. It was transformed into Export Credit and Guarantee Corporation
Limited (ECGC) in 1964 and to Export Credit Guarantee Corporation of
India in 1983. It functions under the administrative control of the Ministry
of Commerce and Industry, Department of Commerce, Government of
India. It is managed by a Board of Directors comprising representatives of
the Government, Reserve Bank of India, banking, insurance and exporting
community.
Name of EXPORT CREDIT GUARANTEE CORPORATION OF INDIA LIMITED

changed to ECGC Limited with effect from 8 August 2014. ECGC Ltd is the
seventh largest credit insurer of the world in terms of coverage of national
exports. The present paid-up capital of the company is Rs. 1,200 crores
and authorised capital Rs. 5,000 crores
20.2 Functions
ECGC Provides a range of credit risk insurance covers to exporters against

loss in export of goods and services as well.
Offers guarantees to banks and financial institutions to enable exporters to

obtain better facilities from them. Provides Overseas Investment Insurance
to Indian companies investing in joint ventures abroad in the form of
equity or loan and advances…
1. Offers insurance protection to exporters against payment risks

2. Provides guidance in export-related activities
3. Makes available information on different countries with its own credit
ratings
4. Makes it easy to obtain export finance from banks/financial institutions
5. Assists exporters in recovering bad debt
6. Provides information on creditworthiness of overseas buyers
! !517
20.2.1 Need for Export Credit Insurance
imported. In addition, the exporters have to face commercial risks of
insolvency or protracted The default of buyers. The commercial risks of a
foreign buyer going bankrupt or losing his capacity to pay are aggravated
due to the political and economic uncertainties. Export credit insurance is
designed to protect exporters from the consequences of the payment risks,
both political and commercial, and to enable them to expand their overseas
business without fear of loss.
Cooperation agreement with MIGA (Multilateral Investment Guarantee

Agency) an arm of World Bank. MIGA provides:
• Political insurance for foreign investment in developing countries.

• Technical assistance to improve investment climate.
• Dispute mediation service.
• It helps the exporter.
• Under this agreement protection is available against political and
economic risks such as transfer restriction, expropriation, war, terrorism
and civil disturbances etc.
! !518
20.3 Covers issued by ECGC
The policies issued to exporters and guarantees issued to Banks. They are
as under:
• Standard Policies
• Specific Policies
• Financial Guarantees
• Special Scheme Guarantees
20.3.1 Standard Policies
Shipments (Comprehensive Risks) Policy, commonly known as the

Standard Policy, is the one ideally 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.
The risks covered under the Standard Policy:
(a) Commercial Risks
I. Risks covered on the overseas buyers:
• Insolvency of the buyer.

• Failure of the buyer to make the payment due within a specified period,
normally four months from the due date.
• Buyer's failure to accept the goods, subject to certain conditions
II. Risks covered on the LC opening bank:
• Insolvency of the LC opening bank.

• Failure of the LC opening bank to make the payment due within a
specified period normally four months from the due date.
! !519
(b) Political Risks
• Imposition of restriction by the Government of the buyer’s country or

any Government action, which may block or delay the transfer of
payment made by the buyer.
• War, civil war, revolution or civil disturbances in the buyer’s country.

New import restrictions or cancellation of a valid import license in the
buyer's 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
general insurers, and beyond the control of both the exporter and the
buyer.
1. Small Exporters Policy
The Small Exporter's Policy is basically the Standard Policy, incorporating

certain improvements in terms of cover, in order to encourage small
exporters to obtain and operate the policy. It is issued to exporters whose
anticipated export turnover for the period of one year does not exceed Rs.
50 lacs. The nature of commercial risks and political risks cover is similar to
that of the Shipment Comprehensive Risk (SCR) or Standard policy. In
order to enable small exporters to deal with their buyers in a flexible
manner, the following facilities are allowed:
• A small exporter may, without prior approval of ECGC convert a D/P bill
into D/A bill, provided that he has already obtained suitable credit limit
on the buyer on D/A terms.
• Where the value of this bill is not more than Rs. 3 lacs, conversion of D/P
bill into D/A bill is permitted even if credit limit on the buyer has been
obtained on D/P terms only, but only one claim can be considered during
the policy period on account of losses arising from such conversions.
! !520
• A small exporter may, without the prior approval of ECGC extend the due
date of payment of a D/A bill provided that a credit limit on the buyer on
D/A terms is in force at the time of such extension.
2. Specific Shipment Policy (SSP)
Specific Shipment Policies - Short-term (SSP-ST) provide cover to Indian

exporters against commercial and political risks involved in export of goods
on short-term credit not exceeding 180 days. Exporters can take cover
under these policies for either a shipment or a few shipments to a buyer
under a contract. These policies can be availed of by exporters who do not
hold SCR Policy and by exporters having SCR Policy, in respect of
shipments permitted to be excluded from the preview of the SCR Policy.
The risks covered under the SSP Policy:
Under the Specific Shipment Policies, ECGC covers from the date of
shipment, the following risks:
(a) Commercial Risks: Risks covered on the overseas buyers:
• Buyer's failure to accept the goods, subject to certain conditions.
Political Risks:
• Imposition of restriction by the Government of the buyer's country or any

Government action, which may block or delay the transfer of payment
made by the buyer.
• War, civil war, revolution or civil disturbances in the buyer's country. New
import restrictions or cancellation of a valid import license in the buyer's
country.
! !521
• Interruption or diversion of voyage outside India resulting in payment of

additional freight or insurance charges which cannot be recovered from
the buyer.
buyer.
3. Services Policy
Where Indian companies conclude contracts with foreign principals for

providing them with technical or professional services, payments due under
the contracts are open to risks similar to those under supply contracts. In
order to give a measure of protection to such exporters of services, ECGC
has introduced the Services Policy.
Specific Services Policy, as its name indicates, is issued to cover a single

specified contract. It is issued to provide cover for contracts, which are
large in value and extend over a relatively long period. Whole-turnover
services policies are appropriate for exporters who provide services to a set
of principles on a repetitive basis and where the period of each contract is
relatively short. Such policies are issued to cover all services contracts that
may be concluded by the exporter over a period of 24 months ahead.
4. Export Turnover Policy — (ETP)
Turnover policy is a variation of the standard policy for the benefit of large
exporters who contribute not less than Rs. 10 lacs per annum towards
premium. Therefore, all the exporters who will pay a premium of Rs. 10
lacs in a year are entitled to avail of it.
The turnover policy envisages projection of the export turnover of the

exporter for a year and the initial determination of the premium payable on
that basis, subject to adjustment at the end of the year based on actual.
The policy offers simplified procedure for premium remittance and filing of
shipment information and a substantial turnover based discount on
premium rate applicable for standard policy, i.e., Shipment Comprehensive
Risk (SCR) policy. It also provides for higher discretionary credit limits on
overseas buyers, based on the total premium paid by the exporter under
the policy. The turnover policy is issued with a validity period of one year.
! !522
In most of the other respects including commercial and political risks

covers, the provisions relating to standard policy will apply to turnover
policy.
5. Export (Specific Buyers) Policy
Buyer-wise Policies - Short-term (BP-ST) provide cover to Indian exporters

against commercial and political risks involved in export of goods on short-
term credit to a particular buyer. All shipments to the buyer in respect of
whom the policy is issued will have to be covered (with a provision to
permit exclusion of shipments under LC). These policies can be availed of
by
a. exporters who do not hold SCR Policy, and

b. by exporters having SCR Policy,
All the shipments to the buyer in question have been permitted to be

excluded from the purview of the SCR Policy. The risks covered under the
Buyer-wise Policy:
(a)Commercial Risks
Risks covered on the overseas buyers:

• Buyer's failure to accept the goods, subject to certain condition
(b) Political Risks
• Imposition of restriction by the Government of the buyer's country or any

Government action, which may block or delay the transfer of payment
made by the buyer.
• War, civil war, revolution or civil disturbances in the buyer's country. New
import restrictions or cancellation of a valid import license in the buyer's
country.
! !523
• Interruption or diversion of voyage outside India resulting in payment of

additional freight or insurance charges which cannot be recovered from
the buyer.
buyer
6. Consignment Exports Policy (Stockholding Agent and Global

Entity)
Economic liberalisation and gradual removal of international barriers for

trade and commerce are opening up various new avenues of export
opportunities to Indian exporters of quality goods. One of the methods
being increasingly adopted by Indian exporters is consignment exports
where the goods are shipped and held in stock overseas ready for sale to
overseas ready for sale to overseas buyers, as and when orders are
received. The Consignment Policy cover protects the Indian Exporters from
possible losses when selling goods to ultimate buyers. There are two
policies available for covering consignment export viz.
• Consignment Exports (Stock-holding Agent)

• Consignment Exports (Global Entity Policy)
A Consignment Exports (Stock-holding Agent) Policy will be appropriate for

each exporter – stock-holding agent combination provided the following
criteria are satisfied
• Merchandise are shipped to an overseas entity in pursuance of an agency

agreement;
• The overseas agent would be an independent and separate legal entity

with no associate/sister concern relationship with the exporter;
• The agent’s responsibilities could be any or all of the following, viz.,

receiving the shipment, holding the goods in stock, identifying ultimate
buyers and selling the goods to them in accordance with the directions,
receiving payments, if any, of his principal (exporter); and
! !524
• The sales being made by the agent would be at the risk and on behalf of
the exporter (whether or not such sales are in the agent’s own name or
otherwise) in consideration of a commission or some similar reward or
compensation on sales completed
The policy can be availed of in respect of consignment exports made by the

Indian exporter through its overseas associate viz. branch office, sister
concern/subsidiary company, etc., who is called as the global entity, in the
following manner —
• Merchandise are shipped to overseas associates;
• Overseas associates receives and holds the goods whether or not under
written agreement;
The overseas party’s responsibilities could, depending upon its legal status,
be any or all of the following, viz., receiving the shipment, holding the
goods in stock, identifying ultimate buyers and selling the goods to them in
accordance with the directions, if any, of the principal (exporter in India);
the sales made by the overseas party need not necessarily be at the risk or
on behalf of the exporter.
20.3.2 Specific Policies issued by ECGC
• Buyer Exposure Policies
Presently, in the policies offered to exporters premium is charged on the

export turnover, though the Corporation’s exposure on each buyer is
controlled through a system of approval of credit limits on the buyer for
covering commercial risks. While this suits the small and medium
exporters, many large exporters having large number of shipments have
been complaining about the volume of returns to be filed under the policy
necessitating the deployment of their resources for this purpose and also
resulting in possible unintentional omissions or commissions in such
reporting, which have an impact on the settlement of claims. There has
been a demand for simplification of the procedures as well as for
rationalisation of the premium structure. Considering the requirements of
such exporters, the Corporation has decided to introduce policies on which
premium would be charged on the basis of the expected level of exposure.
! !525
Two types of exposure policies – one for covering the risks on a specified
buyer and another for covering the risks on all buyers – are offered.
Two types of Exposure policies are offered, viz.,
• Exposure (Single Buyer) Policy – for covering the risks on a specified

buyer and
• Exposure (Multi Buyer) Policy – for covering the risks on all buyers
• IT-enabled Services Policy
IT-enabled Services Policy is issued to cover the following commercial and

political risks involved in rendering IT-enabled services to a particular
customer. ITES policy will provide cover in respect of contracts for
rendering service during a defined period with billing on the basis of
service rendered during a period say, a week, a month or a quarter, where
the payments due for the services rendered will be received in foreign
currency
• Policy for SME Sector

ECGC introduced a Policy exclusively for the SME sector units in 4th July,
2008. The Policy particularly provides the SME Sector easy administrative
and operational convenience. This Policy is meant for exporters engaged in
manufacturing activities having invested in plant and machinery or
engaged in export of services having invested in equipment as per MSMED
Act, 2006. This Policy can be issued to an exporter qualifying as per the
MSMED Act, 2006. This Policy can be issued to an exporter qualifying as
per the MSMED Act, 2006. The exporter desirous of obtaining the Policy
should furnish the certificate issued by the designated authority. (District
Industries Centres) This Policy is not meant for the exporters carrying out
trade activities only.
• Software Project Policy - (SPP)

The Services Policies of the Corporation which have been in existence for
some time were offered to provide protection of exporters of services
including software and related services. However it was found that the
general services policy does not meet with the exact requirements of
software exporters. It was, therefore, decided to introduce a new credit
insurance cover to meet the needs of the software exporters, namely,
! !526
software projects policy, where the payments will be received in foreign

exchange. The general services policies will continue to be offered for the
export of services other than software and related services. For the cover
under the policy would be available to the maximum extent 25% of the
value of export.
• Construction Works Policy

Construction Works Policy is designed to provide cover to an Indian
contractor who executes a civil construction job abroad. The distinguishing
features of a construction contract are that (a) the contractor keeps raising
bills periodically throughout the contract period for the value of work done
between one billing period and another.
To be eligible for payment, the bills have to be certified by a consultant or

supervisor engaged by the employer for the purpose and (c) that, unlike
bills of exchange raised by suppliers of goods, The bills raised by the
contractor do not represent conclusive evidence of debt but are subject to
payment in terms of the contract which may provide, among other things,
for penalties or adjustments on various counts. The scope for disputes is
very large. Besides, the contract value itself may only be an estimate of
the work to be done, since the contract may provide for cost escalation,
variation contracts, additional contracts, etc.
• Specific Policy for Supply Contract

The Standard Policy is a whole turnover policy designed to provide a
continuing insurance for the regular flow of an exporter's shipments for
which credit period does not exceed 180 days. Contracts for export of
capital goods or turnkey projects or construction works or rendering
services abroad are not of a repetitive nature and they involve medium/
long-term credits. Such transactions are, therefore, insured by ECGC on a
case-to-case basis under Specific Contract Policies.
• Specific Shipment Policy

Specific Shipments Policy can be obtained by exporters that have secured
contract for supply of capital goods such as machinery or equipments on
deferred terms of payment. The cover provides protection against non-
receipt of payments due to commercial and/or political risks.
! !527
• Specific Services Policy

Where Indian companies conclude contracts with foreign principals for
providing them with technical or professional services, payments due under
the contracts are open to risks similar to those under supply contracts. In
order to give a measure of protection to such exporters of services, ECGC
has introduced the Services Policy. A wide range of services like technical
or professional, hiring or leasing can be covered under these Policies.
• Letter of Credit confirmation Cover

When a bank in India adds its confirmation to a foreign Letter of Credit, it
binds itself to honor the drafts drawn by the beneficiary of the Letter of
Credit without any recourse to him provided such drafts are drawn strictly
in accordance with the terms of the Letter of Credit. The confirming bank
will suffer a loss if the foreign bank fails to reimburse it with the amount
paid to the exporter. This may happen due to the insolvency or default of
the opening bank or due to certain political risks such as war, transfer
delays or moratorium, which may delay or prevent the transfer of funds to
the bank in India. The Transfer Cover seeks to safeguard banks in India
against losses arising out of such risks.
Transfer Cover is issued, at the option of the bank to cover either political
risks alone, or both political and commercial risks. Loss due to political
risks is covered up to 90% and loss due to commercial risks up to 75%
20.3.3 How actually risk is covered by ECGC once policy is taken by

the exporter?
PROCESS: (Considering the Standard policy taken by the exporter)
Maximum Liability
As the policy is intended to cover all the shipments that may be made by
the exporter in a period of 24 months ahead, ECGC will fix the maximum
liability under each policy. The maximum liability is the limit, up to which
ECGC will accept the liability for shipment made in each of the policy year
for both commercial and political risk. The maximum liability fixed under
the policy can be enhanced subsequently, if necessary.
! !528
Credit Limit on Buyers

Commercial risks are covered subject to credit limit approved by ECGC on
each buyer to whom shipments are made on credit terms. The exporter
has, therefore to apply for suitable credit limit on each buyer. On the basis
of creditworthiness of the buyer, ECGC will approve the credit limit which is
the limit up to which it will pay claim on account of losses arising from
default by buyer.
Commercial Risk
The credit limit is revolving limit and once approved it will hold good for all
shipments to buyer as long as there is no gap of more than 12 months
between 2 shipments. Credit limit is the limit on the ECGC‘s exposure on
the buyer for commercial risk and not a limit on value of shipments that
may be made to him. Therefore, premium has to be paid on the full value
of each shipment even where the value of shipment of the total value of
the bills outstanding for payment is in excess of the credit limit.
As the credit limit is indicative of the safe limit that can be extended to the
buyer, it will be advisable for exporters to see that the total value of the
bills outstanding with the buyer at any one time is not out of proportion to
the credit limit. If exporter desires to obtain higher limit they should
approach ECGC with full details and also the reason for higher exports they
propose to do with that buyer.
Credit limit need not be obtained if the shipment is made on DP/CAD terms
and if the value of the shipment does not exceed Rs. 5 lacs. The political
and commercial risk will stand automatically covered for such shipments
the only qualification being the claim will not be paid on more than 2
buyers during the policy period.
Discretionary Limits
The discretionary limit applies where exporter has made at least 3
shipments to the buyer in the preceding 2 years and the buyer made the
payments promptly o due dates. In such cases, discretionary limit is the
highest amount at any time outstanding on similar terms of payment
subject to maximum of Rs. 10, 00,000for DP bills and Rs. 3, 00,000 for DA
bills.
! !529
Restricted Cover Countries

For a large majority of countries ECGC places no restrictions on limit for
covering political risk. However in the case of certain countries where the
political risk are very high, cover for political as well as commercial risks is
granted on a restricted basis. Exporters are expected to approach ECGC at
the time of concluding the contract itself for specific approval. Where a
specific approval is granted it may be subject to certain conditions and in
some cases subject to payment of specific approval fee of the contract
value.
Specific approval fee is payable in addition to the premium on the

shipments. A portion of the fee is refundable in the event if shipment is not
taking place or if the payments are received before the expiry of the
waiting period of claim.
Percentage of Cover
ECGC normally pays 90% of the loss whether it arises due to commercial
risk or political risk. The remaining 10% has to be borne by exporter
himself.
Minimum Premium
Policy will be issued by ECGC against the minimum premium of Rs. 7,500
(subject to change from time to time) which will be adjusted against
premium payable on shipment declared. Additional premium will have to be
paid on the shipment declared after the minimum premium gets fully
adjusted. No part of the minimum premium will be refunded if the
premium payable on actual shipment falls below the amount of the
minimum premium.
Declaration of Shipment
On or before 15th of every month the policyholder is required to declare to
ECGC, in prescribed form all shipments made by him in the preceding
calendar month. The premium due on the shipments will be first adjusted
against the minimum premium and minimum premium due on further
shipment will be remitted along with the declaration. If no shipment is
made during the month, NIL declaration has to be submitted.
! !530
Premium Rate
The rate of premium, which vary depending up on the terms of payment,
classification of country, length of the credit and whether the shipment is
covered against Comprehensive risk or only Political risk.
For enabling the policyholder to calculate the premium, schedule of the

premium rates are given along with the policy. Exporter is expected to pay
the premium on all their shipments whether such bills are sent on
collection or discounted or purchased whether they are covered against
irrevocable LC or where the ECGC refused to approve the credit limit on
certain buyer.
20.3.4 Reporting Default

The event of non-payment of any export bill, policyholder is required to
take prompt and effective steps to prevent or minimise the loss. A monthly
statement of all bills which remains unpaid for more than 30 days should
be submitted to ECGC in prescribed form which will be available at request
from the regional office of ECGC.
Extension of Credit Period, Changing Tenor or Resale of Goods

Granting extension of time for payment covering the payment terms form
DP to DA or resale of un accepted goods at the lower rate requires prior
approval of ECGC. However sometimes it may become necessary for
exporter to extend the credit period of DA bills or to convert DP bill to DA
bill in circumstances in which the buyer is unable to meet the payment
obligation as per the original tenor of the bill. Wherever a policyholder
wishes to grant such extension or conversions of good reason he should
obtain prior approval of ECGC and to pay the additional premium. If the
exporter wishes to resale the goods to an alternate buyer on account of
refusal by original buyer, the prior permission of ECGC has to be obtained.
Notices of resale has to be given to original buyer so that the action
against the original buyer can be initiated later, if found necessary. If the
exporter decides to bring the goods back to India, ECGC will make the
good 90% of the reshipment expenses.
Time for Payment of Claim

A claim will arise when any of the risk insured under the policy
materialises. If an overseas buyer goes insolvent the exporter becomes
eligible for the claim one month after his loss is admitted to rank against
the insolvents estate or after 4 months from the due date whichever is
! !531
earlier. In case of protracted default, the claim is payable after 4 months

from the due date.
In case of exports to countries where long transfer delays are experienced,

ECGC may extend the waiting period and claim for such shipments are
payable after expiry of such extended period.
Where the buyer does not accept the goods or pay for them because of
dispute, ECGC considers claim after the dispute is resolved and amount
payable is established by obtaining a decree in the court of law in the
country of buyer. This condition is waived in cases where ECGC is satisfied
that the exporter is not at fault and no useful purpose would be served by
proceeding against the buyer.
Settlement of Claim
When the claim is admitted by ECGC, the settlement amount will be paid to
the exporter through his banker who handled the export bills. Payment of
claim by ECGC does not relieve an exporter of the responsibility for taking
recovery action and realising whatever amount that can be recovered.
The exporter should consult ECGC and take prompt and effective steps for
recovery of dues.
Bank’s Responsibility
Whenever the limit sanction letter stipulates that the exporter should
obtain post-shipment comprehensive risk policy disbursing authority should
ensure the following:
• Obtain the post-shipment comprehensive risk policy form exporter and

hold the same with other master documents. If the exporter is enjoying
the facilities with more than one banker, then hold the copy of the said
policy.
• Diarise the expiry date of the policy for proper follow-up of its renewals.
• Ensure that the exporter makes payment of premium to ECGC promptly

by calling monthly declaration form duly countersigned by ECGC.
• Ensure that the exporter paid the premium for all eligible export bill
routed through them.
! !532
• If buyer wise limit is stipulated by sanctioning authority, ensure that the

same is obtained by the exporter and ensure that the outstanding bills
are within the permissible limit.
• Go through the conditions of the policy such as terms of delivery,

payment terms, mode of despatch, usance terms etc., to ensure that
they are in the line with the facility sanctioned to the exporter.
• On receipt of the claim amount, bank is expected to adjust the proceeds

towards their outstanding post shipment export dues if any, and take
such bills on collection basis for proper follow up of realisation of export
proceeds as per RBI Guidelines.
In the event of ECGC having settled the claim of branch under WTPSG,
then the amount received by the exporter from ECGC through them shall
be considered as recovery, shall be shared with ECGC as per the agreed
terms after adjusting all their legal expenses, outstanding charges, out of
pocket expenses, etc.
20.4 Financial Guarantees
Exporters require adequate financial support from banks to carry out their
export contract. ECGC Guarantee cover protects the bank from losses on
account of their lending to exporters. These guarantees have been
designed by ECGC to encourage banks to give adequate credit and other
facilities for exports both at pre and post shipment stages on a liberal
basis. Some of the guarantees are as under:
A. Individual Packing Credit - (INPC)
A bank or a financial institution authorised to deal in foreign exchange can

obtain the Individual Packing Credit Cover for each of its exporter clients
who has been classified as a standard asset and whose CR is acceptable to
ECGC. Period of cover is max. 12 months. Risk covered is against losses
that may be incurred in extending packing credit advances due to
protracted default or insolvency of the exporter-client. Premium payable is
12 paisa per Rs. 100 p.m. on the highest amount outstanding on any day
during the month. Max. liability that will be covered is 66-2/3% of the
Packing Credit Limit sanctioned and approved by ECGC.
! !533
Monthly declaration of advances granted and payment of premium before

10th of succeeding month. Approval of the Corporation for extension of due
date beyond 360 days from due date to be obtained. Default to be reported
within 4 months from due date or extended due date of advances, if not
recovered, filing of claim within 6 months of the Report of Default.
B. Individual Post-shipment Guarantee (INPS):
Any bank or financial institution who is an authorised dealer in foreign

exchange that provides post-shipment finance to the exporter by way of
purchase, negotiation or discount of export bills after the shipment has
been affected pertaining to a particular project. Risk covered will be
protracted default or insolvency of the exporter-client. Period of Cover will
be 12 months. 75%% risk is covered by ECGC. Premium rate is
0.09%payable on the highest amount outstanding on any day during the
month. The obligation of the bank is to obtain cover for each project
separately. Maintain advance deposit equivalent to one month’s premium.
Submission of monthly declaration of advances granted and repayments
made in the account and payment of due premium on or before 10th of the
succeeding month. Approval of the Corporation for extension of due date
should be obtained. Default to be reported within 4 months from due date
or extended due date of advances. If not recovered, filing of claim within 6
months of the report of default.
C. Export Performance (EP)
During execution of projects exporters are required to furnish bonds duly

supported by bank guarantees at various stages starting from bidding,
Advance payment, due performance to releasing retention money which is
furnished for completion of defects/warranty period. The exporter furnishes
advance payment bond for receiving advance payment and due
performance bond for assuring due performance of the contract. The
exporter may also have to furnish bank guarantee to foreign bank for
overseas borrowings in foreign currency abroad. The cover provides
protection to the banks against losses that it may suffer due to insolvency
and/ or protracted default of the borrower. Covers can be obtained for each
Bank Guarantees issued by the Bank at various stages of the contract. The
risk covered is Insolvency of Borrower and Protracted Default of Borrower
to the extent of 75 to 90%.
! !534
The obligation of the bank is to obtain cover prior to issuance of Bank

Guarantee to seek extension in period of cover prior to its expiry, Advise
when beneficiary invokes the guarantee, recall advances from exporter,
filing of claim within 6 months from the date for reporting default and
recovery action after payment of claim and sharing of recovery.
D. Export Finance [Overseas Lending] (EF-OL)
If a bank financing an overseas project provides a foreign currency loan to

the contractor, it can protect itself from the risk of non-payment by the
contractor by obtaining Export Finance (Overseas Lending) Guarantee. The
premium rate is 0.90% per annum for 75% cover and 1.08% per annum
for 90% cover. Premium is payable in Indian Rupees. Claims under the
guarantee will also be paid in Indian Rupees.
E. Whole Turnover Packing Credit Guarantee - (WTPCG)
A bank or a financial institution dealing in foreign exchange is eligible to

obtain this Whole Turnover Cover for all its accounts. The period of cover is
12 months. Eligible advances include all packing credit advances as per RBI
guidelines. Protection offered under this guarantee is against losses that
may be incurred in extending packing credit advances due to protracted
default or insolvency of the exporter-client. Percentage of cover for banks
taking the cover for the first time it is 75% up to certain limit and 65%
beyond the said limit. (For others varies from 55% to 75% depending on
claim premium ratio of the bank.). For Small-scale Exporters (SSE)/ Small-
scale Industrial Units (SSI), it is 90%. Premium payable for a fresh cover it
is 8.5 paisa. (For others, varies from 6 to 9.5 paisa per Rs. 100 p.m.
depending on claim premium ratio.) Overall limit up to which claims can be
paid by the Corporation in respect of advances granted in any ECIB year
and will be determined on the basis of aggregate outstanding.
Important obligation of the bank is monthly declaration of advances

granted and payment of premium before the end of the month. Approval of
the Corporation for extension of due date beyond 360 days from due date
to be obtained. Default to be reported within 4 months from due date or
extended due date of advances, if not recovered, filing of claim within 6
! !535
Highlights of this guarantee banks can exercise option to exclude, Govt.

cos., and Units in OBU under the cover. Submission of a single proposal for
all accounts to be covered (Premium is payable on average daily product
for the month. Declaration is required to be submitted by the end of the
succeeding month.) Higher percentage of cover and lower premium rate as
compared to individual credit insurance cover can be offered. Less
procedural formalities, administrative work and greater convenience
F. Banks Branch-wise Packing Credit (ECIB-BIPC)
A branch of a bank or a financial institution authorised to deal in foreign

exchange can obtain the Branch-wise Packing Credit Cover in respect of
one or more of its exporter clients who has been classified as a standard
asset and whose Credit Rating is acceptable to ECGC. Period of cover is 12
months. All packing credit advances as per RBI guidelines. Protection
offered is losses that may be incurred in extending packing credit advances
due to protracted default or insolvency of the exporter-client. Percentage
cover available is 66-2/3%. Premium payable is 12 paisa per
Rs. 100 p.m. on the highest amount outstanding on any day during the
month. Max. Liability is 66-2/3% of the aggregate of Packing Credit Limits
of the accounts being covered. Submission of single proposal and a single
monthly declaration for all the accounts are covered. Bank Branch can
include additional accounts during the cover period with due approval of
the Corporation. Exclusion of account(s) permitted at the time of renewal
only. No enhancement in limit without approval of ECGC. Reduction in
premium rate to 10 paisa could be allowed provided branch remits a
premium of not less than Rs. 50,000 during a month under the cover.
G. Whole Turnover Post-shipment Guarantee - (WTPSG)
A bank or a financial institution dealing with foreign exchange is eligible to

obtain this Whole Turnover Cover for all its accounts. Period covered under
this guarantee is 12 months. All post-shipment advances granted to
exporters by way of purchase/discount/negotiation of export documents or
advances granted against export bills sent on collection basis, as per RBI
guidelines are covered. Protection offered is losses that may be incurred in
extending post-shipment advances due to protracted default or insolvency
of the exporter-client. Percentage Cover varies from 90% to 95% in
respect of exporters who are policyholders of ECGC and 50% to 75% for
! !536
non-Policyholders, depending upon the claim premium ratio of the bank.

For bills drawn on Associates of Policyholders coverage is 60% and of non-
policyholders it is 50%. Premium payable is 4.5 paisa to 6.00 paisa per Rs.
100 p.m. if advances against L/C bills are included for cover otherwise it is
5.5 paisa to 7.00 paisa depending upon the Claim Premium Ratio for the
last 5 years. For maximum liability overall limit will be fixed for the bank up
to which claims can be paid by the Corporation in respect of advances
granted during the ECIB-WTPS year.
An important obligation for bank is to submit monthly declaration of

advances granted and payment of premium before the end of the
succeeding month. Approval of the Corporation for extension of due date
beyond 180 days (360 days for status holders) from due date is required to
be obtained. Default to be reported within 4 months from due date or
H. Banks Individual Post-shipment (ECIB -INPS)

exchange can obtain the Individual Post-shipment Export Credit Cover in
respect of its exporter client who is holding the appropriate Comprehensive
Risks Policy of ECGC but with specific exclusions. All post-shipment
advances given through purchase, negotiation or discount of export bills or
advances against bills sent on collection for a period of 12 months.
Protection offered is against losses that may be incurred in extending post-
shipment advances due to protracted default or insolvency of the exporter-
client. Percentage cover offered is 75% for advances against bills drawn on
buyers other than associates. 60% for advances against bills drawn on
associates provided relevant shipments are covered for comprehensive
risks. Premium payable is 9 paisa per Rs. 100 p.m. payable on the highest
amount outstanding on any day during the month. Maximum liability
covered is 75% of the Post-shipment Limit sanctioned to the account.
Banks obligation is to submit monthly declaration of advances granted and
payment of premium before 10th of the succeeding month. Approval of the
Corporation for extension of due date beyond 180 days from due date to
be obtained. Default to be reported within 4 months from due date or
months of the Report of Default.
! !537
I. Banks ECIB-INPS (Without Any Exclusion)

respect of each of its exporter-clients who is holding the Standard Policy of
ECGC without any exclusion. All post-shipment advances given through
purchase, negotiation or discount of export bills or advances against bills
sent on collection and period covered will be for 12 months. Premium
payable is 6 paisa per Rs. 100 p.m. payable on the highest amount
outstanding on any day during the month and coverage will be 75%.
J. Export Credit Insurance For Banks Individual Post-shipment

(ECIB-INPS) – for Non-Policy Holders:

respect of each of its exporter-clients who is not holding the Standard
Policy of ECGC. Eligible advance is (a) all post-shipment advances against
L/C bills. (b) All other post-shipment advances except bills drawn on
associates and period covered is 12 months. Protection offered is against
losses that may be incurred in extending post-shipment advances due to
protracted default or insolvency of the exporter-client. Premium payable is
9 paisa per Rs. 100 p.m. in respect of (a) and 13 paisa per Rs. 100 in
respect of (b) under Eligible Advances above payable on the highest
amount outstanding on any day during the month and coverage available is
60%.
K. Export Credit Insurance for Banks Individual Post-shipment

(ECIB-INPS):

respect of each of its exporter-clients who is holding the appropriate
Comprehensive Risks Policy of ECGC excluding cover for shipments made
against L/Cs. All post-shipment advances given through purchase,
negotiation or discount of export bills or advances against bills sent on
collection are covered. Protection offered is against losses that may be
incurred in extending post-shipment advances due to protracted default or
insolvency of the exporter-client. Percentage cover offered is 75% for
advances against bills drawn on buyers other than L/C bills and on
! !538
associates. 60% on associates and L/C bills and premium payable is 9

paisa per Rs. 100 p.m. payable on the highest amount outstanding on any
day during the month. Maximum liability covered is 75% of the Post-
shipment Limit sanctioned to the account.
20.5 Summary
ECGC Provides a range of credit risk insurance covers to exporters against

loss in export of goods and services as well.
Offers guarantees to banks and financial institutions to enable exporters to

obtain better facilities from them. Provides Overseas Investment Insurance
to Indian companies investing in joint ventures abroad in the form of
equity or loan and advances.
1. Offers insurance protection to exporters against payment risks

2. Provides guidance in export-related activities
3. Makes available information on different countries with its own credit
ratings
4. Makes it easy to obtain export finance from banks/financial institutions
5. Assists exporters in recovering bad debt
6. Provides information on creditworthiness of overseas buyers
imported.
The policies issued to exporters and guarantees issued to Banks. They are
as under:
• Standard Policies
• Specific Policies
• Financial Guarantees
• Special Scheme Guarantees
! !539
Presently, in the policies offered to exporters premium is charged on the

export turnover, though the Corporation’s exposure on each buyer is
controlled through a system of approval of credit limits on the buyer for
covering commercial risks. While this suits the small and medium
exporters, many large exporters having large number of shipments have
been complaining about the volume of returns to be filed under the policy
necessitating the deployment of their resources for this purpose and also
resulting in possible unintentional omissions or commissions in such
reporting, which have an impact on the settlement of claims. Two types of
exposure policies are offered, viz.
• Exposure (Single Buyer) Policy – for covering the risks on a specified

buyer and
• Exposure (Multi Buyer) Policy – for covering the risks on all buyers
Exporters require adequate financial support from banks to carry out their
export contract. ECGC Guarantee cover protects the bank from losses on
account of their lending to exporters. These guarantees have been
designed by ECGC to encourage banks to give adequate credit and other
facilities for exports both at pre-and post-shipment stages on a liberal
basis.
Various types of guarantees issued by ECGC are discussed in nut shell in
this chapter which includes:
• Individual Packing Credit - (INPC)

• Individual Post-shipment Guarantee (INPS)
• Export Performance (EP)
• Export Finance [Overseas Lending] (EF-OL)
• Whole Turnover Packing Credit Guarantee - (WTPCG)
• Banks Individual Post-shipment (ECIB-INPS)
• Banks ECIB-INPS (Without Any Exclusion)
• Export Credit Insurance for Banks Individual Post-shipment (ECIB-
INPS) – for Non -Policyholders
• Export Credit Insurance for Banks Individual Post-shipment (ECIB-
INPS)
All these guarantees are issued by ECGC considering the underlying trade
by exporters and risk to be covered by Banks granting the credit facilities
to exporters.
! !540
20.6 Questions
1. What are the functions of ECGC?

2. What types of policies are issued by ECGC?
3. What are the types of guarantees issued by ECGC and to whom are
guarantees issued? Explain.
4. Explain: How is risk covered by ECGC once policy is taken by the
exporter?
5. Write short note on: Whole Turnover Post-shipment Guarantee -
(WTPSG)
1. ECGC issues policies to __________.

(a) Banks
(b) Exporters
(c) Importers
(d) Individuals
2. ECGC issues guarantees to __________.

(a) Banks
(b) Exporters
(c) Importers
(d) Individuals
3. The Small Exporter's Policy is basically the Standard Policy,

incorporating certain improvements in terms of cover, in order to
encourage small exporters to obtain and operate the policy. It is issued
to exporters whose anticipated export turnover for the period of one
year does not exceed __________.
(a) Rs. 100 lacs
(b) Rs. 75 lacs
(c) Rs. 50 lacs
(d) Rs. 25 lacs
! !541
4. In case of Individual Packing Credit - (INPC) Max. Liability that will be

covered is __________ of the Packing Credit Limit sanctioned and
approved by ECGC.
(a) 100 %
(b) 75%
(c) 66-2/3%
(d) 60%
5. In case of Export Credit Insurance for Banks Individual Post-shipment,

Percentage of protection cover offered by ECGC is __________ for
advances against bills drawn on buyers other than L/C bills
(a) 100%
(b) 75%
(c) 66.33%
(d) 60%
Answers: 1. (b), 2. (a), 3. (c), 4. (c), 5. (b).
! !542
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !543
GUARANTEES FOR IMPORTS AND EXPORTS
Chapter 21
Guarantees For Imports And Exports
Objectives

various types of guarantees required to be issued by Banks to undertake
export or import transactions. You will also understand characteristic
features of each type of guarantees issued by banks.
Structure
21.1 Introduction
21.2 Import Guarantees
21.4 Types of Guarantees relating to Import
21.5 Export Guarantees
21.6 Other Types of Guarantees
21.7 Summary
21.8 Questions
! !544
21.1 Introduction
A bank guarantee is a commercial instrument in the nature of a contract,

intended between two parties, to secure compliance with the contract. It is
an off-shoot of the main contract between two parties.
A bank guarantee is a guarantee made by a bank on behalf of a customer

(usually an established corporate customer) should it fail to deliver the
payment, essentially making the bank a co-signer for one of its customer's
purchases.
There are 3 parties to guarantee: The surety - also called as obligator, that
is the person who gives the guarantee; the principal debtor - that is person
in respect of whose default the guarantee is given (the banks customer),
and the creditor, that is the person to whom the guarantee is given.
21.2 Import Guarantees

The guarantee given in connection with import of goods and services is an
import guarantee. An Import guarantee should be specific covering only
particular transaction.
21.2.1 Beneficiaries and Purposes

The person to whom, and purposes for which, bankers are usually
approached by their customers for guarantee in connection with import
are:
! !545
Beneficiary Purposes
1 2
The President of For authorisation to open a letter of credit in foreign
India currency, usually other than pound sterling. For the
arrangement, by the government, of a foreign currency
usually other than pound sterling and payment in
rupees by the principal debtor on receipt of relative
shipping documents negotiated at the foreign centres,
etc.
The Collector of For the clearance of imported goods without production
C u s t o m s / T h e of import licence (customs purpose copy) or without
Central Excise payment of customs duty or central excise duty, or
Authorities against defective documents etc., for clearance of
goods without tendering the bill of lading.
The steamship For allowing the delivery of the imported goods without
company surrender of bill of lading or against defective
documents.
Foreign Supplier For due payment of the instalments against imported
or Manufacturer goods under deferred payment arrangement.
21.2.2 Exchange Control Regulations

In terms of Regulation 4 of the Foreign Exchange Management
(Guarantees) Regulations, 2000 notified by Notification no FEMA.8/2000-
RB dated May 3, 2000, AD banks are allowed to give guarantees in certain
cases, as stated therein.
• Precautions for Issuing Guarantees
Banks should adopt the following precautions while issuing guarantees on

behalf of their customers.
a. As a rule, banks should avoid giving unsecured guarantees in large

amounts and for medium and long-term periods. They should avoid
undue concentration of such unsecured guarantee commitments to
particular groups of customers and/or traders.
b. Unsecured guarantees on account of any individual constituent should

be limited to a reasonable proportion of the bank's total unsecured
! !546
guarantees. Guarantees on behalf of an individual should also bear a

reasonable proportion to the constituent's equity.
c. In exceptional cases, banks may give deferred payment guarantees on

an unsecured basis for modest amounts to first class customers who
have entered into deferred payment arrangements in consonance with
Government policy.
d. Guarantees executed on behalf of any individual constituent, or a group

of constituents, should be subject to the prescribed exposure norms.
It is essential to realise that guarantees contain inherent risks and that it

would not be in the bank's interest or in the public interest, generally, to
encourage parties to overextend their commitments and embark upon
enterprises solely relying on the easy availability of guarantee facilities.
• Precautions for Averting Frauds
While issuing guarantees on behalf of customers, the following safeguards

should be observed by banks:
a. At the time of issuing financial guarantees, banks should be satisfied

that the customer would be in a position to reimburse the bank in case
the bank is required to make payment under the guarantee.
b. In the case of performance guarantee, banks should exercise due

caution and have sufficient experience with the customer to satisfy
themselves that the customer has the necessary experience, capacity
and means to perform the obligations under the contract, and is not
likely to commit any default.
c. Banks should refrain from issuing guarantees on behalf of customers

who do not enjoy credit facilities with them. However, BG/LC may be
issued by scheduled commercial banks to clients of co-operative banks
against counter guarantee of the co-operative bank. Further, banks
must satisfy themselves that the concerned co-operative banks have
sound credit appraisal and monitoring systems as well as robust Know
Your Customer (KYC) regime. Before issuing BG/LCs to specific
constituents of co-operative banks, they must satisfy themselves that
KYC has been done properly in these cases.
! !547
• Ghosh Committee Recommendations
Banks should implement the following recommendations made by the High

Level Committee (Chaired by Shri A. Ghosh, the then Dy. Governor of
RBI):
a. In order to prevent unaccounted issue of guarantees, as well as fake

guarantees, as suggested by IBA, bank guarantees should be issued in
serially numbered security forms.
b. Banks should, while forwarding guarantees, caution the beneficiaries

that they should, in their own interest, verify the genuineness of the
guarantee with the issuing bank.
• Internal Control Systems

Bank guarantees issued for Rs. 50,000/- and above should be signed by
two officials jointly. A lower cut-off point, depending upon the size and
category of branches, may be prescribed by banks, where considered
necessary. Such a system will reduce the scope for malpractices/losses
arising from the wrong perception/judgement or lack of honesty/integrity
on the part of a single signatory. Banks should evolve suitable systems and
procedures, keeping in view the spirit of these instructions and allow
deviation from the two signature discipline only in exceptional
circumstances. The responsibility for ensuring the adequacy and
effectiveness of the systems and procedures for preventing perpetration of
frauds and malpractices by their officials would, in such cases, rest on the
top managements of the banks. In case, exceptions are made for affixing
of only one signature on the instruments, banks should devise a system for
subjecting such instruments to special scrutiny by the auditors or
inspectors at the time of internal inspection of branches.
! !548
• Particulars of Guarantees
1. Purpose and period: A guarantee should be for a specific purpose and

for a definite period, normally not exceeding 10 years. The extension
may be effected by a letter or by a fresh guarantee, if the beneficiary so
desires. As regards the purpose of the guarantee, as a general rule, the
banks should confine themselves to the provision of financial guarantees
and exercise due caution with regard to performance guarantee
business.
As regards maturity, as a rule, banks should guarantee shorter

maturities and leave longer maturities to be guaranteed by other
institutions. No bank guarantee should normally have a maturity of more
than 10 years. However, in view of the changed scenario of the banking
industry where banks extend long term loans for periods longer than 10
years for various projects, it has been decided to allow banks to also
issue guarantees for periods beyond 10 years. While issuing such
guarantees, banks are advised to take into account the impact of very
long duration guarantees on their Asset Liability Management. Further,
banks may evolve a policy on issuance of guarantees beyond 10 years as
considered appropriate with the approval of their Board of Directors.
2. Amount: The amount of guarantee should also be specifically stated

therein. It should be commensurate with the customers’ own means and
resources, and should, in no case, exceed the value of imports against
which it is given
3. Security: Norms for unsecured advances and guarantees are as

under:
Guarantee should be adequately secured. The security may be in the

form of a cash margin of 100% where necessary, title deed deposited for
the purpose or earmarking of cash credit limit of principal debtor if he
has any. Until June 17, 2004, banks were required to limit their
commitments by way of unsecured guarantees in such a manner that 20
per cent of a bank's outstanding unsecured guarantees plus the total of
its outstanding unsecured advances should not exceed 15 per cent of its
total outstanding advances. In order to provide further flexibility to
banks on their loan policies, the above limit on unsecured exposure of
banks was withdrawn and banks' Boards have been given the freedom to
! !549
fix their own policies on their unsecured exposures. “Unsecured

exposure” is defined as an exposure where the realisable value of the
security, as assessed by the banks/approved valuers/Reserve Bank’s
inspecting officers, is not more than 10 per cent, ab initio, of the
outstanding exposure. Exposure shall include all funded and non-funded
exposures (including underwriting and similar commitments). ‘Security’
will mean tangible security properly charged to the bank and will not
include intangible securities like guarantees, comfort letters, etc.
For determining the amount of unsecured advances for reflecting in

Schedule 9 of the published balance sheet, the rights, licenses,
authorisations, etc., charged to the banks as collateral in respect of
projects (including infrastructure projects) financed by them, should not
be reckoned as tangible security. Banks, may however, treat annuities
under build-operate-transfer (BOT) model in respect of road/highway
projects and toll collection rights where there are provisions to
compensate the project sponsor if a certain level of traffic is not
achieved, as tangible securities, subject to the condition that banks' right
to receive annuities and toll collection rights is legally enforceable and
irrevocable.
All exemptions allowed for computation of unsecured advances stand

withdrawn by RBI.
When the principal debtor is limited company, the guarantee required to

be covered by resolution of the company board of directors. The
resolution should contain a full text of the guarantees. In case of
guarantee for of imported goods without the production of shipping
documents, a pro forma invoice as well as declaration that the goods
have been shipped and that the shipping documents have not been, and
will not be negotiated with any other bank, should be obtained from the
customer.
4. Commission: Commission for issue of the guarantee or for an

extension thereof is to be recovered in advance from the customer as
per individual bank’s schedule of charges. This charges vary from bank
to bank.
! !550
5. Indemnity: By giving a guarantee, the banker incurs contingent

liability which may crystallise, i.e., becomes actual, in the event of
default on the part of the customer. Hence for better security, he should
obtain a countervailing indemnity from the customer against the
guarantee given by him. The indemnity should contain a full text of the
guarantee.
6. Accounting: The guarantee should, as in the case of letter of credit be

accounted for through contra accounts as under:
Debit: Customers liability on account of guarantee
Credit: Acceptance on account of customers
7. Redemption: On the expiry of the guarantee period, the guarantee

duly cancelled by beneficiary should be called back, provided that no
claim has been made under it on the bank.
8. Invocation: If by reason of default on the part of the customer, a

guarantee is invoked, banker has to honour it by making payment of
guarantee amount to the beneficiary out of the security held or not held
against it and, if necessary, by debit to the customer’s account. Before
making such payments, a notice of claim which has been received
should be sent to customer demanding payment. Report of such
payment should also be sent to RBI in case of invocation of USD 5,000
or more giving details of approval if any of RBI enclosing the copy of the
claim received. (Notification No. FEMA 8/ 2000 Dated 03/05/2000).
21.4 Types of Guarantees relating to Import
1. Trade Credits for Imports into India — Issue of Guarantees
(i) Credit extended for imports directly by the overseas supplier, bank and
financial institution for maturity of less than three years is hereinafter
referred to as ‘trade credit’ for imports. Depending on the source of
finance, such trade credit will include suppliers’ credit or buyers’ credit.
It may be noted that buyers’ credit and suppliers’ credit for three years
and above come under the category of External Commercial Borrowings
(ECB), which are governed by ECB guidelines issued vide A.P. (DIR
! !551
Series) Circular No.60 dated January 31, 2004 and modified from time
to time.
(ii)AD banks are permitted to approve trade credits for imports into India
up to USD 20 million per import transaction for imports permissible
under the current Foreign Trade Policy of DGFT with a maturity period
up to one year from the date of shipment. For import of capital goods
classified by DGFT, AD banks may approve trade credits up to USD 20
million per import transaction with a maturity period of more than one
year and less than three years. No roll-over/extension will be permitted
by the AD banks beyond the permissible period.
(iii)General permission has been granted to Authorised Dealer banks to

issue Guarantees/Letter of Undertaking (LoU)/Letter of Comfort (LoC) in
favour of the overseas supplier, bank and financial institution up to USD
20 million per import transaction for a period up to one year for import
of all non-capital goods permissible, under the Foreign Trade Policy
(except gold) and up to three years for import of capital goods, subject
to prudential norms issued by the Reserve Bank from time to time. The
period of such Guarantees/LoUs/LoCs has to be co-terminus with the
period of credit, reckoned from the date of shipment.
(iv)As regards reporting arrangements, AD banks are required to furnish

data on issuance of Guarantees/LoUs/LoCs by all its branches, in a
consolidated statement, at quarterly intervals to the Chief General
Manager-in-Charge, Foreign Exchange Department, ECB Division,
Reserve Bank of India, Central Office Building, 11th floor, Fort, Mumbai -
400 001.
2. Issue of Bank Guarantee on behalf of Service Importers
With a view to further liberalise the procedure (other than in respect of a

Public Sector Company or a Department/Undertaking of the Government of
India/State Governments) for import of services, it has been decided to
increase the limit for issue of guarantee by AD Category-I Banks from USD
100,000 to USD 500,000. Accordingly, AD Category-I banks are now
permitted to issue guarantee for amount not exceeding USD 500,000 or its
equivalent in favour of a non-resident service provider, on behalf of a
resident customer who is a service importer, provided
! !552
a. the AD Category-I bank is satisfied about the bona fides of the

transaction;
b. the AD Category-I bank ensures submission of documentary evidence

for import of services in the normal course; and
c. the guarantee is to secure a direct contractual liability arising out of a

contract between a resident and a non-resident.
In the case of a Public Sector Company or a Department/Undertaking of

the Government of India/State Governments, approval from the Ministry of
Finance, Government of India for issue of guarantee for an amount
exceeding USD 100,000 (USD One hundred thousand) or its equivalent
would be required.
3. Guarantee for Replacement Import

their commercial judgment
4. Deferred Payment Import Guarantees
Nature: A guarantee against the import of goods under deferred payment

arrangement, i.e., on condition that the total payment authorised under
import licence is spread over the number of years may be given only with
prior approval of Reserve Bank of India. Such guarantees ordinarily given
in respect of the import of high priced plant and machinery, heavy
electrical plant, ship etc., under counter guarantee or an HEP import
licence issued on deferred payment basis.
The period of deferred payment guarantee should not normally exceed 10
years, nor should the guarantee amount exceed the price of the goods
imported.
! !553
RBI approval: An application for Reserve Bank approval should be made

through banker and should be supported by the documents, these are:
• The exchange control copy of the import licence
• A statement in duplicate on the prescribed form giving the details of the

deferred payment arrangement.
• Certified copy of the contract between importer and overseas supplier
Security: Except in the cases of first class customer, a deferred payment

guarantee should be backed by adequate tangible securities or by the
counter guarantee of the Central or any State government or any public
sector financial institutions or by 100% margin.
Remittances of instalments: Once the Reserve Bank of India approval is

obtained, the instalments due under the guarantee may be remitted to the
overseas supplier in accordance with the schedule of payment approved by
the Reserve Bank. The instalments are usually 6 monthly and are payable
against the acceptance by the importer or by the banker. Banker should be
on the alert to ensure that the instalments are paid by the importer as and
when they fall due.
Exchange cover: The instalment payments including the interest payable

on them should be covered by sale of forward exchange on roll over basis.
A forward contract on roll over basis implies that the initial contract will be
for aggregate amount of the payment for a period of 6 months, and
thereafter, as each deferred instalment is taken up, the outstanding
balance of the forward contract may be extended at the rate already
agreed up on for period of 6 months each time. The deliveries may
conveniently be arranged to coincide with the dates of deferred payments
under guarantee.
! !554
21.5 Export guarantees
1. Bid Bonds and Performance Bonds or Guarantees for Exports
In terms of Notification No FEMA.8/2000-RB dated May 3, 2000, Authorised

Dealer banks have the permission to give performance bond or guarantee
in favour of overseas buyers on account of bona fide exports from India.
An export performance guarantee is the guarantee of a bond executed by

banker in favour of foreign buyer, government, etc., covering the due
execution of the export order by the Indian exporter. The export order may
relate to the supply of capital and engineering goods, whether under
deferred payment arrangement or not, or the supply of capital and
engineering goods and also erection and commissioning thereof at the
foreign buyers place under deferred payment arrangement in a turnkey
project. In the later case the exporter usually acts as the prime contractor,
and the machinery, etc., may be manufactured by the exporter himself or
by any other entrepreneur in India or may be imported from outside India.
Prior approval of RBI should be obtained by the Authorised Dealer banks

for issue of performance bonds/guarantees in respect of caution-listed
exporters. Before issuing any such guarantees, they should satisfy
themselves with the bona fides of the applicant and his capacity to perform
the contract and also that the value of the bid/guarantee as a percentage
of the value of the contract/tender is reasonable and according to the
normal practice in international trade, and that the terms of the contract
are in accordance with the Foreign Exchange Management Regulations.
Authorised Dealer banks, should also, subject to what has been stated
above, issue counter-guarantees in favour of their branches/
correspondents abroad in cover of guarantees required to be issued by the
latter on behalf of Indian exporters, in cases where guarantees of only
resident banks are acceptable to overseas buyers in accordance with local
laws/regulations.
If and when the bond/guarantee are invoked, Authorised Dealer banks may
make payments due there under to non-resident beneficiaries.
! !555
2. Financial Guarantee
Export Guarantee, i.e., guarantee that the banker authorised to deal in

foreign exchange may be called up on to give in connection with export
from India, may be financial or performance guarantees. An export
guarantee of a financial nature is usually a bid bond or tender guarantee
executed by the banker in favour of foreign government, railways,
statutory bodies, etc. in lieu of the tender money or security deposit
required under a global tender invited by any of these authorities. Financial
export guarantees may also be required in favour of Customs/Central
Excise authorities in connection with export without the payment of
customs or excise duty payable on them.
• Before issuing such guarantee the authorised dealer should satisfy

himself with the bonafides of the applicant and his ability to perform the
contract and also the value of the bid/guarantee as percentage of value
of the contract/tender is reasonable and according to the normal practice
in international trade and that the terms of the contract are in
accordance with the exchange control regulations.
• Authorised dealers may also issue counter guarantee in favour of their

branches/correspondent banks abroad in cover of the guarantee required
to be issued by the latter on behalf of Indian exporter in cases where
guarantee of only resident banks are acceptable to overseas buyer in
accordance with local laws/regulations.
• If and when the bond/guarantee is invoked, authorised dealer may make

the payment due there under to non-resident beneficiaries but a report
has to be sent to RBI when the amount of remittance USD 5000 or more
21.5.1 Furnishing of Guarantee

With the exception of deferred payment guarantee, an advance payment or
performance guarantee/bond/tender guarantee in favour of overseas buyer
on account of an Indian exporter may be furnished by the banker
authorised to deal in foreign exchange without prior reference to RBI. But
before furnishing the guarantee, the banker should satisfy himself as to the
bonafides – ability to execute the export contract in question, financial
worth, integrity, etc., of exporter and check whether the terms of the
contract between the exporter and foreign buyer regulations are in
accordance with exchange control. The Reserve Bank of India wants the
! !556
bankers to exercise due caution with regard to their performance

guarantee business.
21.5.2 Particulars of Export Guarantees
1. Amount: The amount of guarantee is generally fixed under the tender

invited or specified by the overseas buyer as a percentage of the value
of the tender. Even so it would be in the best interest of the banker to
make sure that the amount is commensurate with the financial worth of
the exporter. This amount may, where necessary, be 1 % above the
tender invitation.
2. Guarantee period: The period of validity of the guarantee except in

the deferred payment one, should not be initially more that 1 or 2 years
even though the period may be extended subsequently up to 10 years.
The claim period should be definitely indicated in the guarantee.
3. Security: The guarantee should be adequately secured and should also

be covered by the counter guarantee (indemnity) by the exporter. In
case of limited company, the banker should verify, by reference to its
Memorandum and Articles of Association, that the company is
authorised to give such indemnity, and see to it that the indemnity is
covered by resolution of its board of directors containing a full text of
the guarantee.
21.5.3 Deferred Payment Export Guarantee
A deferred payment export guarantee is a performance guarantee or bond

which a banker may be called up on to furnish the overseas buyer on
account of an Indian exporter, when the total payment to be made against
the export by foreign buyer is spread over a number of years. The
guarantee may relate to supply of capital and engineering goods
manufactured by exporter or to a turnkey project, i.e., supply of capital
and engineering goods and erection and commissioning thereof at the
buyers place.
Banker may furnish, without prior permission of RBI a bid bond/tender

guarantee, or an advance payment performance guarantee only in cases
where he has been permitted to approve without reference to working
group consisting of representative of RBI, EXIM Bank and ECGC,
! !557
applications from exporters to make an offer and enter in to contract with

the buyer abroad for the export of capital and engineering goods on
deferred payment basis. Before issuing guarantee the banker should satisfy
himself:
i. The exporter is in a position, as will be evident from his past

performance to undertake the transaction
ii. That the terms of the contract between the exporter and foreign buyer
are in accordance with FEMA Regulations 2000
iii. That the clauses of the contract involving the foreign exchange
remittance, i.e., the deferred payments in foreign currency, have been
approved by the Reserve Bank
iv. That the amount of guarantee is not beyond the known means of the
exporter
v. That the guarantee is adequately covered, even to the extent of 10% to

15% where deemed necessary, and
vi. That the guarantee period is between 5 to 7 years
In all other cases of deferred payment export contract or turnkey project,

the bond or guarantee may be issued only after a package approval has
been obtained from the Exim Bank.
A bond or guarantee on behalf of firm or company in India, which wishes to

render consultancy/technical services abroad, may be issued only with the
A bond or a guarantee in respect of construction contract to be executed

abroad may be given by the banker only when the construction firm or
company has secured a package approval of the Exim Bank.
! !558
21.5.4 Other Types of Export Guarantees
1. Guarantees for Export Advance
(i) It had come to the notice of Reserve Bank that exporters with low
export turnover are receiving large amounts as export advances, in low
interest rate currencies, against domestic bank guarantees and are
depositing such advances with banks in Indian Rupees for interest rate
arbitrage. Further, the guarantees are being issued even before the
receipt of the advances, with a proviso that the guarantees would be
operational only upon receipt of the advances. The guarantees have
been issued at par values, against the discounted values of the export
advances. The exporters have also been allowed to freely book, cancel
and rebook forward contracts without any crystallised exports and/or
past performances, in contravention of the FEMA regulations. It has also
been observed that the exporters keep a substantial part of their Indian
Rupee - US Dollar leg of the currency exposure open, thereby exposing
both the exporters and the domestic banks to foreign exchange risk. In
such cases, generally no exports have taken place and the exporters
have neither the track record nor the ability to execute large export
orders. The transactions have basically been designed for taking
advantage of the interest rate differential and currency movements and
have implications for capital flows.
(ii)Guarantees are permitted in respect of debt or other liability incurred by

an exporter on account of exports from India. It is therefore intended to
facilitate execution of export contracts by an exporter and not for other
purposes. In terms of extant instructions banks have also been advised
that guarantees contain inherent risks, and that it would not be in the
banks' interest or in the public interest generally to encourage parties to
over-extend their commitments and embark upon enterprises solely
relying on the easy availability of guarantee facilities. Banks should,
therefore, be careful while extending guarantees against export
advances so as to ensure that no violation of FEMA regulations takes
place and banks are not exposed to various risks. It will be important
for the banks to carry out due diligence and verify the track record of
such exporters to assess their ability to execute such export orders.
! !559
(iii)Banks should also ensure that the export advances received by the
exporters are in compliance with the regulations/directions issued under
the Foreign Exchange Management Act, 1999.
2. Unconditional Guarantees in Favour of Overseas Employers/

Importers on Behalf of Indian Exporters
(i) While agreeing to give unconditional guarantee in favour of overseas

employers/importers on behalf of Indian Exporters, banks should obtain
an undertaking from the exporter to the effect that when the guarantee
is invoked, the bank would be entitled to make payment,
notwithstanding any dispute between the exporter and the importer.
Although, such an undertaking may not prevent the exporter from
approaching the Court for an injunction order, it might weigh with the
Court in taking a view whether injunction order should be issued.
(ii)Banks should, while issuing guarantees in future keep the above points
in view and incorporate suitable clauses in the agreement, in
consultation with their legal advisers. This is considered desirable as
non-honouring of guarantees on invocation might prompt overseas
banks not to accept guarantees of Indian banks, thus hampering the
country's export promotion effort.
3. Certain Precautions in Case of Project Exports
i. Banks are aware that the Working Group mechanism has been evolved
for the purpose of giving package approvals in principle at post-bid
stages for high value overseas project exports. The role of the Working
Group is mainly regulatory in nature, but the responsibility of project
appraisal and that of monitoring the project lies solely on the sponsor
bank.
ii. As the Working Group approvals are based on the recommendations of

the sponsor banks, the latter should examine the project proposals
thoroughly with regard to the capacity of the contractor/subcontractors,
protective clauses in the contracts, adequacy of security, credit ratings
of the overseas subcontractors, if any, etc.
iii. Therefore, the need for a careful assessment of financial and technical
demands involved in the proposals vis-a-vis the capability of the
! !560
contractors (including subcontractors) as well as the overseas

employers can hardly be under-rated to the financing of any domestic
projects. In fact, the export projects should be given more attention, in
view of their high values and the possibilities of foreign exchange losses
in case of failure, apart from damage to the image of Indian
entrepreneurs.
iv. While bid bonds and performance guarantees cannot be avoided, it is to

be considered whether guarantees should be given by the banks in all
cases of overseas borrowings for financing overseas projects. Such
guarantees should not be executed as a matter of course, merely
because of the participation of Exim Bank and availability of counter-
guarantee of ECGC. Appropriate arrangements should also be made for
post-award follow-up and monitoring of the contracts.
4. Overseas Investment — Guarantee on Behalf of Wholly Owned

Subsidiaries (WOSs)/Joint Ventures (JVs) Abroad
i. An Indian party may have financial commitment to its JV/WOS to the

limit of 400 per cent of the net worth of the Indian party as on the date
of the last audited balance sheet. The financial commitment may be in
the form of
a. capital contribution and loan to the JV/WOS;
b. corporate guarantee (only 50 per cent value in case of performance

guarantee) and/or bank guarantee (which is backed by a counter
guarantee/collateral by the Indian party) on behalf of the JV/WOS
and
c. charge on immovable/movable property and other financial assets of

the Indian party (including group company) on behalf of JV/WOS.
ii. An Indian party may offer any form of guarantee on behalf of the JV/
WOS [corporate or personal/primary or collateral/guarantee by the
promoter company/guarantee by group company, sister concern or
associate company in India] provided that :
! !561
a. The total financial commitment of the Indian party, including all forms
of guarantees, are within the overall ceiling prescribed for overseas
direct investment;
b. No guarantee should be 'open ended', i.e., the amount and period of

the guarantee should be specified upfront.
c. In the case of performance guarantee, time specified for the

completion of the contract shall be the validity period of the related
performance guarantee;
d. In cases where invocation of the performance guarantee breaches the

specified ceiling for the financial commitment of 100 per cent, the
Indian party shall seek prior approval of the Reserve Bank before
remitting funds from India;
e. All forms of guarantees are required to be reported to the Reserve

Bank in Form ODI Part II.
iii. An Indian party may extend corporate guarantee on behalf of the first
generation step down operating subsidiary under the Automatic Route
within the prevailing limit for the overseas direct investments.
iv. An Indian party may issue corporate guarantee on behalf of second

generation or subsequent generation step down operating subsidiaries
with prior approval from the Reserve Bank, provided the Indian party
indirectly holds 51 per cent or more stake in the overseas subsidiary for
which such guarantee is intended to be issued.
v. The bank guarantee issued by a resident bank on behalf of an overseas

JV/WOS of the Indian party, which is backed by a counter guarantee/
collateral by the Indian party, shall be reckoned for computation of the
financial commitment of the Indian party for overseas direct
investments. The bank guarantee to be issued would be subject to the
prudential norms issued by the Reserve Bank (DBOD) from time to
time.”
! !562
1. ECGC Counter Guarantee
A counter guarantee, known as export performance guarantee, is available

from the ECGC against the export guarantees given by a bank as detailed
in earlier chapter.
Accounting: For ready reference, the guarantee/bonds executed by the

banker should be recorded separately in the name of each exporter on
whose behalf a guarantee is given and the total liability shown in contra
account:
Debit – Customers liability for acceptance
Credit – Acceptance on behalf of customers
21.5.4 Redemption or Invocation
Where guarantees are invoked, payment should be made to the

beneficiaries without delay and demur. An appropriate procedure for
ensuring such immediate honouring of guarantees should be laid down so
that there is no delay on the pretext that legal advice or approval of higher
authorities is being obtained.
Delays on the part of banks in honouring the guarantees when invoked

tend to erode the value of the bank guarantees, the sanctity of the scheme
of guarantees and image of banks. It also provides an opportunity to the
parties to take recourse to courts and obtain injunction orders. In the case
of guarantees in favour of Government departments, this not only delays
the revenue collection efforts but also gives an erroneous impression that
banks are actively in collusion with the parties, which tarnish the image of
the banking system.
There should be an effective system to process the guarantee business to

ensure that the persons on whose behalf the guarantees are issued will be
in a position to perform their obligations in the case of performance
guarantees and honour their commitments out of their own resources, as
and when needed, in the case of financial guarantees.
! !563
The top management of the banks should bestow their personal attention
to the need to put in place a proper mechanism for making payments in
respect of invoked guarantees promptly, so that no room is given for such
complaints. When complaints are made, particularly by the Government
departments for not honouring the guarantees issued, the top
management of the bank, including its Chief Executive Officer, should
personally look into such complaints.
In this regard, the Delhi High Court has made adverse remarks against
certain banks in not promptly honouring the commitment of guarantees
when invoked. It has been observed that a bank guarantee is a contract
between the beneficiary and the bank. When the beneficiary invokes the
bank guarantee and a letter invoking the same is sent in terms of the bank
guarantee, it is obligatory on the bank to make payment to the beneficiary.
i. In the interest of the smooth working of the Bank Guarantee Scheme, it

is essential to ensure that there is no discontentment on the part of the
Government departments regarding its working. Banks are required to
ensure that the guarantees issued by them are honoured without delay
and hesitation when they are invoked by the Government departments
in accordance with the terms and conditions of the guarantee deed,
unless there is a Court order restraining the banks.
ii. Any decision not to honour the obligation under the guarantee invoked
may be taken after careful consideration, at a fairly senior level, and
only in the circumstances where the bank is satisfied that any such
payment to the beneficiary would not be deemed a rightful payment in
accordance with the terms and conditions of the guarantee under the
Indian Contract Act.
iii. The Chief Executive Officers of banks should assume personal

responsibility for such complaints received from Government
departments. Sufficient powers should be delegated to the line
functionaries so that delay on account of reference to higher authorities
for payment under the guarantee does not occur.
iv. Banks should also introduce an appropriate procedure for ensuring

immediate honouring of guarantees; so that there is no delay on the
pretext that legal advice or approval of higher authorities is being
obtained.
! !564
v. For any non-payment of guarantee in time, staff accountability should

be fixed and stern disciplinary action including award of major penalty
such as dismissal, should be taken against the delinquent officials at all
levels.
vi. Where banks have executed bank guarantees in favour of Customs and
Central Excise authorities to cover differential duty amounts in
connection with interim orders issued by High Courts, the guarantee
amount should be released immediately when they are invoked on
vacation of the stay orders by Courts. Banks should not hold back the
amount on the pretext that it would affect their liquidity position.
There have also been complaints by Ministry of Finance that some of the
departments such as Department of Revenue, Government of India are
finding it difficult to execute judgements delivered by various Courts in
their favour as banks do not honour their guarantees, unless certified
copies of the Court judgements are made available to them. In this regard,
the banks may follow the following procedure:
i. Where the bank is a party to the proceedings initiated by Government

for enforcement of the bank guarantee and the case is decided in favour
of the Government by the Court, banks should not insist on production
of certified copy of the judgement, as the judgement/order is
pronounced in open Court in presence of the parties/their counsels and
the judgement is known to the bank.
ii. In case the bank is not a party to the proceedings, a signed copy of the
minutes of the order certified by the Registrar/Deputy or Assistant
Registrar of the High Court or the ordinary copy of the judgement/order
of the High Court, duly attested to be true copy by Government
Counsel, should be sufficient for honouring the obligation under
guarantee, unless the guarantor bank decides to file any appeal against
the order of the High Court.
iii. Banks should honour the guarantees issued by them as and when they
are invoked in accordance with the terms and conditions of the
guarantee deeds. In case of any disputes, such honouring can be done
under protest, if necessary, and the matters of dispute pursued
separately.
! !565
iv. The Government, on their part, have advised the various Government
departments, etc. that the invocation of guarantees should be done
after careful consideration at a senior-level that a default has occurred
in accordance with the terms and conditions of the guarantees and as
provided in the guarantee deed.
v. Non-compliance of the instructions in regard to honouring commitments

under invoked guarantees will be viewed by Reserve Bank very seriously
and Reserve Bank will be constrained to take deterrent action against
the banks.
21.6 Other Types of Guarantees
An export contract may run in to various stages:
a. Acceptance of contract by exporter

b. Actual supply/erection of machinery etc.
c. Proper functioning of machinery for minimum period
Various types of guarantees have been evolved to cover these

aspects separately.
Bid Bond or Tender Guarantee: The importer in the case of construction

contract and turnkey projects and other contracts involving huge amount,
may call for global tenders. To participate in the tender, the contractors are
required to furnish bank guarantee for a value of 1% to 10% of the
contract amount, the bid bond is normally issued for a short period of 3 to
6 months and is terminated on contractor taking up the contract or on the
expiry of the contract.
If an exporter is awarded contract and withdraws his offer, for whatever

reason, the importer can obtain the compensation for his loss by claiming
payment under the tender/bid bond guarantee in order to cover the cost of
new invitation to tender and also loss incurred on account of delay in
supply.
Performance Guarantee: If the contract is awarded to the contractor he

would be required to furnish the guarantee whereby his execution of
contract as per the terms and conditions agreed is guaranteed. The value
of guarantee should normally be about 10-20%of contract amount.
! !566
The guarantee meant for performance of contract entered into by customer

are called performance guarantee. The bank in such cases does not only
agree undertake that his customer on his part shall duly and effectively
observe and perform the conditions of the contract entered into to by him
but also declares that in the event of default by the customer he will on
being informed of such default and such information being conclusive make
payment for such default as agreed in the guarantee. There are 2 types of
performance guarantees. First- type secures warranty obligation, i.e.,
proper functioning of machinery or quality of the goods shipped. The
second type is intended to ensure that all the contractual obligations are
met, viz., the delivery of the goods and services performed in time.
Advance Payment Guarantee: In the case of advance payment

guarantee the exporter has received some advance and the amount
equivalent to this would be paid by the bank to the importer in case of
exporter’s failure. Advance payment guarantee is also known as repayment
guarantee.
Exporters customarily insist on an advance payment from the buyer when

capital goods are exported. The advance payment guarantee in favour of
the buyer serves to ensure that the advance payment will be refunded if
the seller fails to meet his obligations. The amount of guarantee
corresponds to the amount of advance payment which is 15-30% of the
contract value, although it can be as much as 100%. The validity of the
guarantee depends on the period of time expected for delivery of the
goods. If no exact date can be specified, include a clause stating that the
guarantee will automatically expire when certain requirements have been
met. (viz., copies of invoices, shipping documents, etc.)
Retention Money Guarantee: The contract provides that on completion

of the contract 95% of the contract amount be paid to the exporter, the
balance 5% could be paid to him after a period of say 6 months, during
which time the importer would be watching the performances of the work
executed to verify that it is of the required standard and does not develop
any problem.
Delivery Guarantee: It ensures that the seller meets his obligations

promptly. Such guarantees are mainly required for long-term transactions
(deferred exports). If the seller does not ship the goods in time or
! !567
shipment is incomplete, the buyer can revoke the guarantee and obtain
compensation for his loss.
Payment Guarantee: These are intended to ensure that the exporter will
receive prompt payment form the importer. As a rule the guarantee
amount is equivalent to the invoiced amount for the goods purchased and
the guarantee extends somewhat beyond the deadline for payment in order
to have time for mailing the claim.
Covering Credit Facilities: These guarantees serves as securities for

proper repayment of loan which customers are willing to borrow from
abroad (e.g. ECB). The guarantee amount is usually equal to the amount of
loan and either includes interest or changes of the lending bank. The
guarantee period depends on the time fixed for repayment. Since
guarantee amount is expressed in foreign currency and expiry period is
longer, there is risk of exchange fluctuations in the case of revocation.
Customs Guarantee: Banks issues guarantee to pay customs in case of

goods which are intended only for temporary imports in to country (e.g.,
goods for fair, building, machinery etc). In these cases, indirect guarantees
are usually required since customs authority only accepts the guarantee
form local banks. Such guarantees are usually unlimited in time.
Standby Letter of Credit: This form of obligation is special form of the

letter of credit, which functions as guarantee. It is most common in US
since all the branches of the banks are not allowed to issue guarantees
there. The external appearance of the standby letter of credit resembles
that of a regular letter of credit payment is effected on first demand
against presentation of written declaration that certain conditions have not
been met.
Financial Guarantee: Where cash deposit or earnest money is required to

be deposited for due performance of the contract. It may be stipulated that
the customer may in lieu of cash deposit/earnest money furnish bank
guarantee for the same amount.
Deferred Payment Guarantee: This is guarantee for payment which has

been deferred or postponed. In case of purchase of capital goods like
machinery, the necessity to issue DPG arises. In such guarantees the banks
are undertaking to pay the instalments due under DPG schedule. The terms
! !568
for such guarantees are normally advance payment of 10 to 15% of the

price of the capital goods and payment of another 10% to 15% on receipt
of the goods or documents.
21.7 Summary
A bank guarantee is a commercial instrument in the nature of a contract,

intended between two parties, to secure compliance with the contract. It is
an off-shoot of the main contract between two parties. There are 3 parties
to guarantee: The surety — also called as obligator, that is the person go
gives the guarantee; the principal debtor – that is person in respect of
whose default the guarantee is given (the banks customer), and the
creditor, that is the person to whom the guarantee is given. In terms of
Regulation 4 of the Foreign Exchange Management (Guarantees)
Regulations, 2000 notified by Notification no FEMA.8/2000-RB dated May 3,
2000, AD banks are allowed to give guarantees in certain cases.
As a rule, banks should avoid giving unsecured guarantees in large

amounts and for medium and long-term periods. While issuing guarantees
on behalf of customers, certain safeguards should be observed by banks.
In order to prevent unaccounted issue of guarantees, as well as fake
guarantees, as suggested by IBA, bank guarantees should be issued in
serially numbered security forms.
A guarantee should be for a specific purpose and for a definite period,

normally not exceeding 10 years. Import Guarantees consists of
guarantees issued for Trade Credits for imports into India. Banks are now
permitted to issue guarantee for amount not exceeding USD 500,000 or its
equivalent in favour of a non-resident service provider, on behalf of a
resident customer who is a service importer. Similarly, banks may issue
guarantees at the request of importer client for dispatch/return of the
defective goods, according to their commercial judgment. A guarantee
against the import of goods under deferred payment arrangement, i.e., on
condition that the total payment authorised under import license is spread
over the number of years may be given only with prior approval of Reserve
Bank of India.
Under Export guarantees banks are issuing bid bonds and performance
bonds or guarantees for exports for goods and services. An export
guarantee of a financial nature is usually a bid bond or tender guarantee
! !569
executed by the banker in favour of foreign government, railways,

statutory bodies etc. in lieu of the tender money or security deposit
required under a global tender invited by any of these authorities. Financial
export guarantees may also be required in favour of Customs/central
excise authorities in connection with export without the payment of
customs or excise duty payable on them.
A deferred payment export guarantee is a performance guarantee or bond

which a banker may be called up on to furnish the overseas buyer on
account of an Indian exporter, when the total payment to be made against
the export by foreign buyer is spread over a number of years. Other types
of Export Guarantees include Guarantees for Export Advance, Unconditional
Guarantees in favour of Overseas Employers/Importers on behalf of Indian
Exporters and guarantees issued for project exports. Overseas Investment
— Guarantee on behalf of Wholly Owned Subsidiaries (WOSs)/Joint
Ventures (JVs) abroad are permitted to issue by banks. A counter
guarantee, known as export performance guarantee, is available from the
ECGC against the export guarantees given by a bank.
There are various types of guarantees that have been evolved to cover
specific business task. These guarantees are Bid Bond or Tender Guarantee
under which the importer in the case of construction contract and turnkey
projects and other contracts involving huge amount, may call for global
tenders. To participate in the tender, the contractors are required to furnish
bank guarantee for a value of 1% to 10% of the contract amount, the bid
bond is normally issued for a short period of 3 to 6 months and is
terminated on contractor taking up the contract or on the expiry of the
contract. If the contract is awarded to the contractor he would be required
to furnish the guarantee whereby his execution of contract as per the
terms and conditions agreed is guaranteed is called as performance
guarantee.
In the case of advance payment guarantee the exporter has received some
advance and the amount equivalent to this would be paid by the bank to
the importer in case of exporter’s failure.
Standby letter of credit is special form of the letter of credit, which

functions as guarantee. It is most common in US since all the branches of
the banks are not allowed to issue guarantees there. The external
appearance of the standby letter of credit resembles that of a regular letter
! !570
of credit payment is effected on first demand against presentation of

written declaration that certain conditions have not been met.
Deferred payment guarantee can be issued for payment which has been
deferred or postponed. Banks issues guarantee to pay customs in case of
goods which are intended only for temporary imports in to country (e.g.,
goods for fair, building, machinery etc). In these cases, indirect guarantees
are usually required since customs authority only accepts the guarantee
form local banks.
21.8 Questions
1. What are the exchange control regulations for issue of guarantees?

2. What type of Import guarantees are issued by AD banks?
3. What is export performance guarantee?
4. Explain: Deferred Payment Export Guarantee.
(I) Bid Bond Guarantee
(II) Standby Letter of Credit
(III) Retention Money Guarantee
(IV) Guarantee invocation
B. Multiple Choice Questions
1. What is the maximum period up to which guarantee can be issued?

(a) 2 years
(b) 3 years
(c) 5 years
(d) 10 years
2. What is the prerequisite for issuance of deferred payment import
guarantee?
(a) Prior approval of sanctioning authority
(b) Prior approval of Reserve Bank
(c) Approval from customs dept.
(d) Approval of leader consortium bank
! !571
3. __________ is the amount up to which general permission to issue

LOU/LOC by authorised dealer is granted by RBI.
(a) USD 100,000
(b) USD 10,00,000
(c) USD 10 million
(d) USD 20 million
4. Corporate guarantee issued by Indian company to its JV/WOS should be

within __________ % of net worth of Indian company
(a) 100
(b) 200
(c) 300
(d) 400
5. Which type of guarantee is issued to participate in tender?

(a) Performance
(b) Bid Bond
(c) Financial
(d) Any one of above
Answers: 1: (d), 2. (b), 3. (d), 4. (d), 5. (b).
! !572
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !573
EXPORT PROMOTION MEASURES
Chapter 22
Export Promotion Measures
Objectives

different measures taken by various authorities, institutions, Government
bodies, councils etc. to increase the export from country.
Structure
22.1 Introduction
22.2 Export Promotion Institutions
22.3 Functions undertaken by Export Promotion Institutions
22.4 Export Promotion Councils
22.5 Other Organisations
22.6 India Trade Promotion Organisation (ITPO)
22.7 Economical and Technical Co-operation Agreements
22.8 Summary
22.8 Questions
! !574
22.1 Introduction
There are several measures taken by various organisation, government,

government sponsored organisation, banking institutions, financial
institutions, etc., for boost the export from the country. There are
autonomous bodies, public sector undertaking, export promotion councils
and other federations/bodies actively engaged to help the exporter
community to increase their export turnover.
In this chapter, we are discussing briefly about these organisations and

measures undertaken by them to help the exporters and increase the
export of the country, thereby earning good amount of foreign exchange.
22.2 Export Promotion Institutions
For the purpose of export promotions, the government of India has set up
certain institutions to advise the central government, local authorities,
public bodies and exporters on matters concerning exports. These
institutions are grouped as — Autonomous Bodies/Public Sector
Undertakings/Export Promotion Councils/Other Organisations: Broadly they
are as under:
• Autonomous Bodies
1. Commodity Boards
2. Marine Products Export Development Authority
3. Agricultural and Processed Food Products Export Development Authority
4. Export Inspection Council
5. Indian Institute of Foreign Trade
6. Indian Institute of Packaging
• Public Sector Undertakings:
1. State Trading Corporation (STC)

2. MMTC Limited
3. PEC Limited
4. Export Credit Guarantee Corporation of India Limited
5. India Trade Promotion Organisation
! !575
• Export Promotion Councils
• Other Organisations:
1. Federation of Indian Export Organisations

2. Indian Council of Arbitration
3. Indian Diamond Institute
4. Footwear Design and Development Institute (FDDI)
5. National Centre for Trade Information
6. Price Stabilisation Fund Trust
7. GS1-India
22.3 Functions undertaken by Export promotion

institutions
Autonomous Bodies
1. Commodity Boards
There are five statutory Commodity Boards under the Department of
Commerce. These Boards are responsible for production, development and
export of tea, coffee, rubber, spices and tobacco. (coffee board, rubber
board, tea board, tobacco board, Spices board)
2. Marine Products Export Development Authority

The Marine Products Export Development Authority was set up as a
Statutory Body in 1972 under an Act of Parliament (No.13 of 1972). The
Authority, with its headquarters at Kochi and field offices in all the Maritime
States of India, is headed by a Chairman/Chairperson. The Authority is
responsible for development of the marine industry with special focus on
marine exports
3. Agricultural and Processed Food Products Export Development

Authority
The Authority has five Regional Offices at Guwahati, Hyderabad, Kolkata,
Bangalore and Mumbai and is entrusted with the task of promoting
agricultural exports, including the export of processed foods in value added
form. APEDA has also been entrusted with monitoring of export of 14
agricultural and processed food product groups listed in the Schedule to
the APEDA Act
! !576
APEDA provides financial assistance to the registered exporters under its

Schemes for Market Development, Infrastructure Development, Quality
Development, Research and Development and Transport Assistance
4. Export Inspection Council

The Export Inspection Council was set up as a Statutory Body on 1st
January, 1964 under section 3 of the Export (Quality Control and
Inspection) Act, 1963 to ensure sound development of export trade of
India through quality control and inspection and for matters connected
therewith. The Council is an advisory body to the Central Government, with
its office located at New Delhi and is headed by a Chairman. The Executive
Head of the EIC is the Director of Inspection and Quality Control who is
responsible for the enforcement of quality control and compulsory pre-
shipment inspection of various commodities meant for export and notified
by the Government under the Export (Quality Control and Inspection) Act,
1963.
5. Indian Institute of Foreign Trade

The Indian Institute of Foreign Trade was registered in May, 1963 under the
Societies Registration Act, 1860. The Institute, with its head office at New
Delhi and one regional branch at Kolkata, is headed by a Director. The
Institute has been conferred “Deemed University” status and is engaged in
the following activities:-
• Conducting academic courses leading to issue of degrees in International

Business and Export Management;
• Training of personnel in international trade;
• Organising research on issues in foreign trade, marketing research, area

surveys, commodity surveys, market surveys; and
• Dissemination of information arising from its activities relating to

research and market studies
! !577
6. Indian Institute of Packaging

The Institute, with its office located at Mumbai and branch offices at Delhi,
Chennai, Kolkata and Hyderabad, is headed by a Director. The main
function of the Institute is to undertake research on raw materials for the
packaging industry, organise training programmes on packaging
technology, consultancy services on packaging problems and stimulate
consciousness of the need for good packaging.
Public Sector undertakings:
1. State Trading Corporation (STC)

STC has played an important role in country’s economy by arranging
imports of essential items of mass consumption (such as wheat, pulses,
sugar, etc.) into India and developing exports of a large number of items
from India. The core strength of STC lies in handling exports/imports of
bulk agro commodities. During past 4-5 years, STC has diversified into
exports of steel raw materials, gold jewellery and imports of bullion,
hydrocarbons, minerals, metals, fertilisers, petro-chemicals, etc. Achieving
record breaking performances year-after-year, STC is today able to
structure and execute trade deals of any magnitude, as per the specific
requirement of its customers.
2. MMTC Limited
The MMTC Limited (Minerals and Metals Trading Corporation) was created
in 1963 as an individual entity on separation from State Trading
Corporation of India Ltd. primarily to deal in exports of minerals and ores
and imports of non-ferrous metals. In 1970, MMTC took over imports of
fertiliser raw materials and finished fertilisers. Over the years import and
exports of various other items like steel, diamonds, bullion, etc., were
progressively added to the portfolio of the company. Keeping pace with the
national economic development, MMTC over the years has grown to
become the largest trading organisation in India.
3. PEC Limited
The PEC Ltd (Project and Equipment Corporation of India) was carved out
of the STC in 1971-72 to take over the canalised business of STC’s railway
equipment division, to diversify into turn-key projects especially outside
India and to aid and assist in promotion of exports of Indian engineering
equipment. The main functions of PEC Ltd. includes export of projects,
engineering equipment and manufactured goods, defence equipment and
! !578
stores; import of industrial raw materials, bullion and agro commodities;

consolidation of existing lines of business and simultaneously developing
new products and new markets; diversification in export of non-
engineering items e.g., Coal and coke, iron ore, edible oils, steel scraps,
etc.; and structuring countertrade/special trading arrangements for further
exports
4. Export Credit Guarantee Corporation of India Limited

The ECGC is the premier organisation in the country, which offers credit
risk insurance cover to exporters, banks, etc. The primary objective of the
Corporation is to promote the country’s exports by covering the risk of
export on credit. It provides (a) a range of insurance covers to Indian
exporters against the risk of non-realisation 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.
5. India Trade Promotion Organisation

India Trade Promotion Organisation has been formed by merging erstwhile
Trade Development Authority (TDA) with Trade Fair Authority of India
(TFAI) with effect from 1st January, 1992. India Trade Promotion
Organisation is the premier trade promotion agency of India and provides a
broad spectrum of services to trade and industry so as to promote India’s
exports. These services include organisation of trade fairs and exhibitions
in India and abroad, Buyer-Seller Meets, Contact Promotion Programmes
apart from information dissemination on products and markets.
22.4 Export Promotion Councils
Presently, there are fourteen Export Promotion Councils under the

administrative control of the Department of Commerce. These Councils are
registered as non-profit organisations under the Companies Act/Societies
Registration Act. The Councils perform both advisory and executive
functions. The role and functions of these Councils are guided by the
Foreign Trade Policy, 2015-20. These Councils are also the registering
authorities for exporters under the Foreign Trade Policy 2015-20. The
export promotion councils under Department of Commerce are as under:
! !579
1. EEPC India
2. Project Exports Promotion Council of India (PEPC)
3. Basic Chemicals, Pharmaceuticals and Cosmetics Export Promotion
Council (Chemexcil)
4. Chemicals and Allied Products Export Promotion Council (CAPEXIL)
5. Council for Leather Exports
6. Sports Goods Export Promotion Council
7. Gem and Jewellery Export Promotion Council
8. Shellac Export Promotion Council
9. Cashew Export Promotion Council
10. The Plastics Export Promotion Council
11. Export Promotion Council for EOUs & SEZ Units
12. Pharmaceutical Export Promotion Council
13. Indian Oil Seeds and Produce Exporters Association
14. Services Export Promotion Council
22.5 Other Organisations
1. Federation of Indian Export Organisations

The Federation of Indian Export Organizations set up in 1965, is an Apex
body registered under the Societies Registrations Act XXI of 1860, of
various export promotion organizations and institutions with its major
regional offices at Delhi, Mumbai, Chennai and Kolkata. The main objective
of FIEO is to render an integrated package of services to various
organizations connected with export promotion. It provides the content,
direction and thrust to India’s global export effort. It also functions as a
primary servicing agency to provide integrated assistance to its members
comprising professional exporting firms holding recognition status granted
by the Government, consultancy firms and service providers. The
Federation organizes seminars and arranges participation in various
exhibitions in India and abroad. It also brings out ‘FIEO News’, for creating
awareness amongst its member exporters and importers.
2. Indian Council of Arbitration

The Indian Council of Arbitration, India’s premier Arbitral Institution, is a
Society registered under the Societies Registration Act, 1860 operating on
no profit basis, with its head office in New Delhi and eight branches with a
pan India network. The organization originally established in 1965
promotes and administers the use of Alternative Dispute Resolution
mechanisms in commercial disputes, thereby expediting dispute resolution
! !580
and encouraging greater domestic and international commerce. The main

objectives of the Council are to promote the knowledge and use of
arbitration and provide arbitration facilities for amicable and quick
settlement of commercial disputes with a view to maintaining the smooth
flow of trade, particularly export trade on a sustained and enduring basis.
3. Indian Diamond Institute

With the objective of enhancing the quality, design and global
competitiveness of the Indian Jewellery, the Indian Diamond Institute was
established as a Society in 1978 with its office located at Surat. The
Institute is sponsored by the Department of Commerce and patronized by
the Gems and Jewellery Export Promotion Council (GJEPC). The Institute
conducts various diploma and other courses related to diamond trade and
industry. The three year diploma course on Diamond, Gem and Jewellery
Design and Manufacture conducted by IDI has been accredited by All India
Council for Technical Education (AICTE). The Institute also has certification
services for diamonds, coloured stones and gold jewellery. IDI has a Gem
Testing Lab (GTL), which is recognized by Government of India as an
approved Diamond Grading/Certification Institution for cut and polished
diamonds up to weight of 0.25 carat. The Institute has been recognized
world over as a Diamond Certification and Grading Laboratory. The
Laboratory services provided by IDI are ISO 9001:2000 quality compliant.
4. Footwear Design and Development Institute (FDDI)

Footwear Design and Development Institute was established in the year
1986 as a Society under the Societies Registration Act, 1860 with an
objective to train the professional manpower for footwear industry. The
Institute is an ISO:9001 and ISO:14001 certified Institute, which conducts
wide range of long term and short term programmes in the area of Retail
Management, Fashion, Footwear Merchandising, Marketing, Creative Design
and CAD/CAM and Leather Goods and Accessories Design, etc. The
Institute, having Pan-India presence with seven well designed campuses at
Noida, Fusatganj, Chennai, Kolkata, Rohtak, and Chhindwara and Jodhpur
is providing trained human resource to the industry besides the upcoming
campus at Guna. Crossing the national boundaries, the Institute is
providing consultancy and training to the South Asian Association for
Regional Cooperation (SAARC) countries besides African countries in the
area of footwear design, technology and management.
! !581
5. National Centre for Trade Information

National Centre for Trade Information was set up in 1995 with a view to
create an institutional mechanism for collection and dissemination of trade
data and improving information services to the business community,
especially small and medium enterprises. NCTI is a Government of India
recognized Trade Point in India under the Trade Efficiency Programme of
United Nations Conference on Trade and Development (UNCTAD). NCTI is
the Operational Trade Point in India and is also the recognized Focal Point
of Trade Analysis and Information System (TRAINS) of UNCTAD Trade Point
Development Centre (UNTPDC). NCTI is promoted by India Trade
Promotion Organization (ITPO) and National Informatics Centre (NIC).
6. Price Stabilization Fund Trust

The Price Stabilization Fund (PSF) scheme was launched by Government of
India in April 2003 against the backdrop of decline in international and
domestic prices of tea, coffee, rubber, and tobacco causing distress to
primary growers. The growers of these commodities were particularly
affected due to substantial reduction in unit value realization for these
crops, at times falling below their cost of production. The objective of the
scheme is to safeguard the interests of the growers of these commodities
and provide financial relief when prices fall below a specified level without
resorting to the practice of procurement operations by the Government
agencies.
A Personal Accident Insurance Scheme is also under implementation by

PSFT through National Insurance Corporation Ltd., which provides
insurance cover to the growers in the sectors of tea, coffee, rubber,
tobacco and spices (chillies, cardamom, ginger, turmeric and pepper)
having plantations up to 4 hectares. The Scheme also covers all plantation
workers working on these plantations regardless of the size of holdings.
The insurance cover is up to Rs. 1.00 lakh per person. The premium of Rs.
17/- is shared between the beneficiary and the PSF Trust in the ratio
50:50. The target coverage is 57.17 lakh growers and workers
7. GS1-India
GS1 India is a not-for-profit standards body promoted by the Ministry of
Commerce (GOI) and Indian Industry to spread awareness and provide
guidance on adoption of global standards in Supply Chain Management by
Indian Industry for the benefit of consumers, Industry, Govt. etc.
! !582
GS1 India is the only organisation in India authorised to issue company

prefix numbers for use in barcodes, RFID tags etc. for unique,
unambiguous and universal identification of products, cartons, containers
etc. GS1 standards find wide application in supply chains across sectors for
unique-yet-universal product, consignment and entity identification, EDI
(Electronic Data Interchange), product data synchronisation etc. GS1
standards are the de-facto global standards in identification of consumer
products in Retail. GS1 India is an affiliate of GS1 Global Office, twin
headquartered at Brussels (Belgium) and Lawrenceville, New Jersey
(U.S.A.), which oversees operations of a network of over 100 GS1
organisations across the world.
22.6 India Trade Promotion Organisation (ITPO)
India Trade Promotion Organisation (ITPO), headquartered at Pragati

Maidan, is the nodal agency of the Government of India under aegis of
Ministry of Commerce and Industry (India) for promoting country’s
external trade. ITPO is a Schedule-B Miniratna Central Public-Sector
Enterprise (CPSE) with 100 per cent shareholding of Government of India.
India Trade Promotion Organisation (ITPO) was incorporated by merger of

Trade Development Authority (TDA), a Registered Society under the
administrative control of the Ministry of Commerce and Industry, with
Trade Fair Authority of India (TFAI) with effect from 1 January 1992. TFAI
was earlier incorporated, under section 25 of the Indian Companies Act,
1956, on 30 December 1976 by amalgamating 3 organizations of the
Government of India, viz., India International Trade Fair Organization,
Directorate of Exhibitions and Commercial Publicity and Indian Council of
Trade Fairs and Exhibitions and commenced operations with effect from 1
March 1977. ITPO, during its existence of more than 3 decades has played
a proactive role in catalysing trade, investment and technology transfer
processes. Its promotional tools include organizing of fairs and exhibitions
in India and abroad, Buyer-Seller Meets, Contact Promotion Programmes,
Product Promotion Programmes, Promotion through Overseas Department
Stores, Market Surveys and Information Dissemination.
ITPO has an extensive infrastructure as well as marketing and information

facilities that are availed by both exporters and importers. ITPO's overseas
offices assist buyers seeking information relating to sourcing products from
India. ITPO had had overseas offices at New York, Frankfurt, Tokyo,
! !583
Moscow and São Paulo for pursuing opportunities for enhancement of

India's trade and investment. However, all overseas offices are now closed
by ITPO. ITPO has four Regional Offices at Bengaluru, Chennai, Kolkata and
Mumbai. The Regional Offices, through their respective profile of activities,
ensure a concerted and well-coordinated trade promotion drive throughout
the country.
The Main Activities and Services of ITPO are:
• Managing the extensive trade fair complex, Pragati Maidan in the heart of
Delhi
• Organising various trade fairs and exhibitions at its exhibition complex in

Pragati Maidan and other centres in India.
• Facilitating the use of Pragati Maidan for holding of trade fairs and
exhibitions by other fair organisers both from India and abroad.
• Timely and efficient services to overseas buyers in vendor identification,

drawing itineraries, fixing appointments and even accompanying them
where required.
• Establishing durable contacts between Indian suppliers and overseas

buyers.
• Assisting Indian companies in product development and adaptation to

meet buyers’ requirements.
• Organising Buyer-Seller Meets and other exclusive India shows with a

view to bringing buyers and sellers together.
• Organising India Promotions with Department Stores and Mail Order

Houses abroad.
• Participating in overseas trade fairs and exhibitions.
• Arranging product displays for visiting overseas buyers.
• Organising seminars/conferences/workshops on trade-related subjects.
! !584
• Encouraging small and medium-scale units in export promotion efforts.
• Conducting in-house and need-based research on trade and export

promotion.
• Enlisting the involvement and support of the State Governments in India

for promotion of India's foreign trade.
• Trade information services through electronic accessibility at Business

Information Centre.
22.7 Economical and Technical Co-operation Agreements
India has entered into agreement for economic and technical cooperation
with some major countries. Some of the agreements which are recently
entered into are briefed as under:
1. India-Sri Lanka Comprehensive Economic Partnership

Agreement (CEPA) negotiations
India-Sri Lanka Free Trade Agreement (ISLFTA), which was signed in 1998,
has become operational in 2000. Sri Lanka is India’s largest trading partner
country in the SAARC region. The bilateral trade between India and Sri
Lanka has grown four times in the last nine years increasing from US $ 658
million in 2000 to US $ 2719 million in 2009. The main Indian exports to
Sri Lanka are Petroleum (Crude & Products), Transport Equipments,
Cotton, Yarn Fabrics, Sugar, Drugs Pharmaceuticals and Fine Chemicals.
The main Sri Lankan exports to India are, spices, electrical Machinery
except electronic, Transport Equipments, Pulp & Waste, Natural Rubber and
Paper Board.
2.Joint Study Group (JSG) and Comprehensive Economic

Partnership Agreement (CEPA)
A JSG was set up in April, 2003 with a view to widen the ambit of ISLFTA
and include Services and Investment. Report of JSG was submitted in
October, 2003. Based on the recommendation of the JSG, CEPA
negotiations were started in February, 2005 and concluded in July 2008
after 13 rounds of negotiations. But due to reservations expressed by
Government of Sri Lanka, both sides have still not signed the Agreement.
! !585
Negotiations on Investment and Services have been resumed in December,

2010.
3. India-Gulf Cooperation Council (GCC) Free Trade Agreement

(FTA) negotiations:
A Framework Agreement on Economic Cooperation between Republic of

India and Gulf Cooperation Council was signed on 25th August 2004. The
Framework Agreement provided that both the parties shall consider ways
and means for extending and liberalizing the trade relations and also for
initiating discussions on the feasibility of a FTA between them. 2 rounds of
negotiations have been held so far. The 1st round of negotiations was held
in Riyadh on 21st-22nd March 2006. During this round, GCC side has
agreed to include services, investment and general economic cooperation
along with goods in the GCC-India FTA. Further, the Agreement on the
modalities for negotiations was finalised. The 2nd round of negotiations
was also held in Riyadh on 9-10 September 2008. Proposed Tariff
Liberalisation Schedule was discussed during this round. It was further
decided that the 3rd round of negotiations would be held in Delhi. The
dates for 3rd round of negotiations is being finalized in consultations with
Gulf Cooperation Council Secretariat.
4. India-Mauritius Comprehensive Economic Cooperation and

Partnership Agreement (CECPA) negotiations.
A Joint Study Group (JSG) was constituted in November 2003 to study

modalities of the CECPA. The JSG discussed in detail the
complementariness and potential synergies between the two economies
and, in its report of November 2004, identified Investment, Trade in Goods
and Services and General Economic Cooperation for developing modalities
of CECPA. Negotiations were held on Trade in Services with a view to
creating a more liberal, facilitative, transparent and competitive services
regime in the two countries and to strengthen cooperation in services
sector. Negotiations were also held on Trade in Investments for improving
the legal framework existing in both countries, including the bilateral
Double Taxation Avoidance Convention (DTAC) and Bilateral Investment
Promotion and Protection Agreement (BIPA). However, the Chapters on
Trade in Services and Trade in Investment could not be finalized as the two
sides did not agree on the definition of ‘Enterprise’ and treatment to ‘Shell
Companies’. Consequently, negotiations are at a standstill since the 10th
! !586
round of negotiations which was held on 23-24 October 2006. India’s

proposal for modifications to India-Mauritius DTAC has not so far been
accepted by Mauritius. Hence, India has put on hold the CECPA
negotiations until India’s proposal for modifications to the India-Mauritius
DTAC are accepted by Mauritius.
5. India-SACU Preferential Trade Agreement (PTA) negotiations
South African Customs Union (SACU) comprises of South Africa, Lesotho,

Swaziland, Botswana and Namibia. So far, 5 rounds of negotiations of
India-SACU PTA have been held. The 1st round of technical discussions for
India-SACU PTA took place in Pretoria on 5th–6th October 2007. The 2nd
round of PTA negotiations was held at Walvis Bay, Namibia on 21-22
February 2008 while 3rd round was held at New Delhi on 25th–27th
November 2008 During the 3rd round of negotiations, a Memorandum of
Understanding (MOU), was signed on 26th November 2008 by the
representatives of India and SACU to facilitate negotiations. 4th round of
negotiations was held at Pretoria on 7th-8th October 2009. The 5th round
of negotiations was held during 7th-8th October 2010. During this round of
negotiations, SACU has presented a revised text of the PTA as a working
document. Further, both sides have agreed on the following:
a. The text on ‘Dispute Settlement Procedures’

b. To use the text proposed by India on ‘Customs Cooperation and Trade
Facilitation’ and TBT as the working text
c. To use the text on ‘SPS’ proposed by SACU as the working text.
6. Second Review of India-Singapore Comprehensive Economic

Cooperation Agreement (CECA)
The Comprehensive Economic Cooperation Agreement (CECA) between

India and Singapore was signed on 29th June 2005 by the Prime Minister
Mr. Manmohan Singh and H.E. Mr. Lee Hsien Loong, Prime Minister of
Singapore. The CECA has become operational with effect from 1-8-2005.
The details of the India-Singapore CECA are available on this web-page
under the heading ‘Agreements already concluded’. India-Singapore CECA
is reviewed from time to time. 1st Review was concluded on 1st October
2007. The 2nd Review of India-Singapore CECA was launched by the
Commerce and Industry Minister, India on 11th May, 2010. The 1st
Secretary level meeting of the 2nd Review was held in Singapore on 3rd
! !587
August 2010. Thereafter, Working Group meetings on Goods and Services

and Investment were held time to time, with the last meeting held in
Singapore in September 2011
7. Expansion of India-Chile Preferential Trade Agreement (PTA)

A Framework Agreement to promote economic cooperation between India
and Chile was signed on January 20, 2005 which envisaged for a
Preferential Trade Agreement (PTA) between the two countries as a first
step. The India-Chile PTA was signed on 8th March 2006 and has become
operational on September 2007. The details of India-Chile PTA are
available on this web-page under the heading ‘Agreements already
concluded’.
In the 2nd meeting on expansion of India-Chile PTA, which was held in

August 2010, both sides discussed the further modalities of the expansion
of the PTA including exchange of initial offer lists.
The 3rd meeting on expansion of India-Chile PTA was held in 30 June- 1

July 2011 in Chile. During the meeting, both sides agreed on broad
principle for expansion of the PTA. They also agreed to exchange new wish
lists in order of priority and to hold the next meeting by November 2011.
8. India-Pakistan Trading Arrangement
India and Pakistan have no formal trade agreement. India has granted
Most Favoured Nation (MFN) status to Pakistan, whereas Pakistan
maintains a List of Importable Items from India called ‘Positive List’ which
now consists of 1938 items. To see this list, please visit Government of
Pakistan website http://www.commerce.gov.pk.
Both countries have constituted a Joint Study Group (JSG) at the level of
Commerce Secretary. Apart from the JSG, the issues pertaining to
commercial and economic cooperation are discussed at Commerce
Secretary level within the framework of the Composite Dialogue. The fourth
round of dialogue was held in New Delhi on 31 July-1 August 2007.
Bilateral trade and commerce talks were held between Commerce

Secretaries of India and Pakistan on 27-28 April 2011, in Islamabad. The
two sides, inter alia, agreed to improve trade infrastructure and expand
trade through Attari-Wagah land route. It was agreed to set up a Working
! !588
Group to address and resolve clearly identified sector-specific barriers to

trade. Both sides agreed to undertake new initiatives to enable trade in
electricity and Bt. Cotton seeds as also expand trade in petroleum
products. It was agreed that cooperation in Information Technology sector
would be encouraged through the private sector. Both sides agreed to
facilitate grant of Business Visas to encourage expansion of trade.
Joint Working Groups have been set up for Customs cooperation, trade in
electricity and trade in all types of Petroleum Products. A Joint Working
Group on ‘Economic and Commercial Cooperation and Trade Promotion’ to
be co-chaired by the Joint Secretaries of the respective Departments of
Commerce has been set up for reviewing the implementation of the
decisions taken during the meeting of the two Commerce Secretaries and
also other trade promotion issues.
9. India-EU Broad-based Trade and Investment Agreement

negotiations
On 28th June 2007, India and the EU began negotiations on a Broad-based

Bilateral Trade and Investment Agreement (BTIA) in Brussels, Belgium.
These negotiations are pursuant to the commitment made by political

leaders at the India-EU Summit held in Helsinki on 13 October 2006 to
move towards negotiations for a broad-based trade and investment
agreement. India and the EU expect to promote bilateral trade by removing
barriers to trade in goods and services and investment across all sectors of
the economy. Both parties believe that a comprehensive and ambitious
agreement that is consistent with WTO rules and principles would open
new markets and would expand opportunities for Indian and EU
businesses.
The negotiations cover Trade in Goods, Trade in Services, Investment,

Sanitary and Phytosanitary Measures, Technical Barriers to Trade, Rules of
Origin, Trade Facilitation and Customs Cooperation, Competition, Trade
Defence mechanism, Government Procurement, Dispute Settlement, IPR
and GIs. So far, 13 rounds of negotiations have been held alternately at
Brussels and New Delhi. The 13th round was held in Delhi during 31st
March to 6th April, 2011.
! !589
10. India-European Free Trade Association (EFTA) Negotiations on

Broad-based Bilateral Trade and Investment Agreement
The European Free Trade Association (EFTA) comprises Switzerland,

Iceland, Norway and Liechtenstein. These countries are not part of the
European Union (EU). Recognizing the need for enhancing bilateral trade, a
Joint Study Group between India and EFTA was established and mandated
to take a comprehensive view of bilateral economic linkages between India
and EFTA, covering among other, trade in goods and services, investment
flows, and other areas of economic cooperation, and to examine the
feasibility of a bilateral broad based trade and investment agreement. 8
rounds of negotiations have been held so far, in addition to the meeting of
Chief Negotiators (CNs) held on May 30-31, 2011. The 8th round of
negotiations was held during June 14-17, 2011.
11. Asia Pacific Trade Agreement (APTA)

The Asia-Pacific Trade Agreement (APTA), previously named the Bangkok
Agreement, signed in 1975 as an initiative of ESCAP, is a preferential tariff
arrangement that aims at promoting intra-regional trade through exchange
of mutually agreed concessions by member countries. APTA has five
members namely Bangladesh, China, India, Republic of Korea, Lao People's
Democratic Republic and Sri Lanka. ESCAP functions as the secretariat for
the Agreement. During the Second Session of the Ministerial Council at Goa
on 26 October 2007 the following important decisions were taken:
a. To launch the 4th Round of Negotiations;
b. To adopt modalities for extension of negotiations in other areas such

as non-tariff measures, trade facilitation, services, and investment;
c. A common set of Operational Procedures for the Certificate and

Verification of the Origin of Goods for APTA was approved and it was
decided that the same would be implemented, w.e.f. 1st January
2008; and
d. To explore the possibilities of expanding the membership of the

Agreement.
! !590
Under the 4th Round, the Standing Committee of Participating States has
finalised framework agreements in the areas of (i) trade facilitation, (ii)
trade in services and (iii) promotion and liberalisation of investments.
Offers of further tariff liberalisation in goods have also been exchanged.
The Standing Committee is also considering a framework agreement on
non-tariff measures and a revision of the APTA rules of origin.
12. India-New Zealand Free Trade Agreement/Comprehensive

Economic Cooperation Agreement.
India and New Zealand are negotiating Free Trade Agreement/
Comprehensive Economic Cooperation Agreement (CECA). 6 rounds of
negotiations have been held so far. The 6th round of negotiations was held
during August, 2011.
13. India-Canada Comprehensive Economic Partnership Agreement

(CEPA)
During the visit of Prime Minister of Canada, Mr. Stephen Harper to India
during November 15-18, 2009, two countries announced the setting up of
a Joint Study Group (JSG) that will explore the possibility of a
Comprehensive Economic Partnership Agreement (CEPA) between India
and Canada.
The JSG was mandated to undertake a detailed study of bilateral economic

relationship between the two countries, covering among others, trade in
goods and services, investment flows and other areas of economic
cooperation and make comprehensive recommendations for enhancing
bilateral economic engagements between the two countries.
The JSG in its report has concluded that a CEPA between the two countries
is likely to increase bilateral trade both in goods and services and enhance
linkages in investment flows, technology transfer, movement of natural
persons, R&D etc.
Both countries have agreed to initiate negotiations towards a CEPA

covering trade in goods, services and other areas of economic cooperation.
The inaugural session of the negotiations was held in New Delhi on 16th
November 2010.
! !591
14. India-Australia Comprehensive Economic Cooperation

Agreement (CECA)
In April 2008, a Joint Study Group (JSG) was constituted to, inter alia,
examine the feasibility for establishing a Free Trade Agreement (FTA)
between India and Australia. Based on the recommendations of the JSG,
India-Australia are negotiating CECA covering trade in goods, services,
investment and IPR related issues. The 1st round of India-Australia CECA
negotiations was held during 28th-29th July 2011.
15. India-Indonesia Comprehensive Economic Cooperation

Agreement (CECA)
Commencement of negotiations on India-Indonesia CECA was announced

on 25th January 2011 during the visit of Indonesian President to New Delhi
! !592
22.8 Summary
For the purpose of export promotions, the government of India has set up
certain institutions to advise the central government, local authorities,
public bodies and exporters on matters concerning exports. These
institutions are grouped as — Autonomous Bodies/Public Sector
Undertakings/Export Promotion Councils/Other Organisations.
There are five statutory Commodity Boards under the Department of

Commerce. These Boards are responsible for production, development and
export of tea, coffee, rubber, spices and tobacco. (coffee board, rubber
board, tea board, tobacco board, Spices board). The Marine Products
Export Development Authority was set up as a Statutory Body in 1972
under an Act of Parliament (No.13 of 1972). Agricultural and Processed
Food Products Export Development Authority, Export Inspection Council,
Indian Institute of Foreign Trade, Indian Institute of packaging etc
important bodies helping exporters.
Among the public-sector undertaking MMTC, STS, ECGC, etc. are playing
the crucial role to promote the export.
There are fourteen Export Promotion Councils under the administrative

control of the Department of Commerce. These Councils are registered as
non-profit organizations under the Companies Act/Societies Registration
Act. The Councils perform both advisory and executive functions. The role
and functions of these Councils are guided by the Foreign Trade Policy,
2015-20. These Councils are also the registering authorities for exporters
under the Foreign Trade Policy 2015-20.
India Trade Promotion Organisation (ITPO), headquartered at Pragati

Ministry of Commerce and Industry (India) for promoting country's
external trade. ITPO is a Schedule-B Miniratna Central Public-Sector
Enterprise (CPSE) with 100 per cent shareholding of Government of India.
India has entered in to agreement for economic and technical cooperation
with some major countries.
! !593
22.9 Questions
1. Explain the role payed by the autonomous bodies to promote the

export.
2. Write short notes on: Public sector undertakings to promote the export.
3. Explain the role played by Export Promotion Councils?
4. What are the functions of India Trade Promotion Organisation (ITPO).
5. Economical and Technical Co-operation Agreements entered into with

various countries by India. Do you think that this is helping India to
promote export from India? Discuss.
1. Under Autonomous bodies, there are five statutory Commodity Boards

under the __________.
(a) Department of Commerce.
(b) Home ministry
(c) Agriculture ministry
(d) State governments
2. Export promotion councils are registered as non-profit organizations

under the __________.
(a) Companies Act
(b) Societies Registration Act.
(c) Companies or Societies registration act.
(d) Banking regulation act
! !594
3. The role of Indian institute of foreign trade is to __________.

(a)Conducting academic courses leading to issue of degrees in
International Business and Export Management; Training of
personnel in international trade
(b)Organizing research on issues in foreign trade, marketing
research, area surveys, commodity surveys, market surveys
(c)Dissemination of information arising from its activities relating to
research and market studies
(d)All above
4. India Trade Promotion Organisation (ITPO), headquartered at Pragati

Ministry of Commerce and Industry (India) for promoting __________.
(a) Country’s external trade
(b) Internal Trade
(c) Trade with neighbouring countries
(d) Trade with ACU countries
5. India has entered in to agreement for __________ with some major

countries
(a) Economic Cooperation
(b) Technical cooperation
(c) Economic and technical cooperation
(d) Building relationship
Answers: 1. 2. (c), 3. (d),4. (a), 5. (c).
! !595
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !596
FOREIGN TRADE POLICY
Chapter 23
Foreign Trade Policy
Objectives
After going through the chapter, students should be able to understand in

brief various provisions under foreign trade policy and its applicability. You
will also understand various concessions/exemptions under different
schemes as foreign trade policy provisions.
Structure
23.1 Introduction
23.2 General Provisions regarding Imports and Exports
23.3 Export from India Schemes
23.4 Duty Exemption/Remission Schemes
23.5 Export Promotion Capital Goods (EPCG) Scheme
23.6 Export Oritned Units (EOUs), Electronic Hardware Technology Parks

(EHTPs), Software Technology Parks (STPs) and Biotechnology Parks
(BTPs)
23.7 Deemed Exports
23.8 Summary
23.9 Questions
! !597
23.1 Introduction
The Foreign Trade Policy, 2015-20, is notified by Central Government, in

exercise of powers conferred under section 5 of the Foreign Trade
(Development and Regulation) Act, 1992 (No. 22 of 1992) [FT (D&R) Act],
as amended. The Foreign Trade Policy (FTP), 2015-2020, incorporating
provisions relating to export and import of goods and services, shall come
into force with effect from the date of notification and shall remain in force
up to 31st March 2020, unless otherwise specified. All exports and imports
made upto the date of notification shall, accordingly, be governed by the
relevant FTP, unless otherwise specified. Central Government, in exercise
of powers conferred by section 5 of FT (D and R) Act, 1992, as amended
from time to time, reserves the right to make any amendment to the FTP,
by means of notification, in public interest.
Director General of Foreign Trade (DGFT) may, by means of a Public Notice,

notify Hand Book of Procedures, including Appendices and Aayat Niryat
Forms or amendment thereto, if any, laying down the procedure to be
followed by an exporter or importer or by any Licensing/Regional Authority
or by any other authority for purposes of implementing provisions of FT (D
and R) Act, the Rules and the Orders made there under and provisions of
FTP.
a. Any License/Authorisation/Certificate/Scrip/any instrument bestowing

financial or fiscal benefit issued before commencement of FTP 2015-20
shall continue to be valid for the purpose and duration for which such
License/Authorisation/ Certificate/Scrip/Any instrument bestowing
Financial or Fiscal Benefit Authorisation was issued, unless otherwise
stipulated.
b. In case an export or import that is permitted freely under FTP is

subsequently subjected to any restriction or regulation, such export or
import will ordinarily be permitted, notwithstanding such restriction or
regulation, unless otherwise stipulated. This is subject to the condition
that the shipment of export or import is made within the original validity
period of an irrevocable commercial letter of credit, established before
the date of imposition of such restriction and it shall be restricted to the
balance value and quantity available and time period of such irrevocable
letter of credit. For operationalising such irrevocable letter of credit, the
applicant shall have to register the Letter of Credit with jurisdictional
! !598
Regional Authority (RA) against computerised receipt, within 15 days of

the imposition of any such restriction or regulation.
23.2 GENERAL PROVISIONS REGARDING IMPORTS AND

EXPORTS
• Exports and Imports – ‘Free’, unless regulated
a. Exports and Imports shall be ‘Free’ except when regulated by way of

‘prohibition’, ‘restriction’ or ‘exclusive trading through State Trading
Enterprises (STEs)’ as laid down in Indian Trade Classification
(Harmonised System) [ITC (HS)] of Exports and Imports. The list of
‘Prohibited’, ‘Restricted’ and ‘STE’ items can be viewed by clicking on
‘Downloads’ at http://dgft.gov.in.
b. Further, there are some items which are ‘free’ for import/export, but
subject to conditions stipulated in other Acts or in law for the time
being in force.
• Indian Trade Classification (Harmonised System) [ITC (HS)] of

Exports and Imports
a. ITC (HS) is a compilation of codes for all merchandise/goods for

export/ import. Goods are classified based on their group or
subgroup at 2/4/6/8 digits.
b. ITC (HS) is aligned at 6 digit level with international Harmonised

System goods nomenclature maintained by World Customs
Organisation (http://www. wcoomd.org). However, India maintains
national Harmonised System of goods at 8 digit level which maybe
viewed by clicking on ‘Downloads’ at http://dgft.gov.in.
c. The import/export policies for all goods are indicated against each
item in ITC (HS). Schedule 1 of ITC (HS) lays down the Import Policy
regime while Schedule 2 of ITC (HS) details the Export Policy regime.
d. Except where it is clearly specified, Schedule 1 of ITC (HS), Import

Policy is for new goods and not for the Second-hand goods. For
Second-hand goods, the Import Policy regime is given in Para 2.31 in
this FTP.
! !599
• Compliance of Imports with Domestic Laws
a. Domestic Laws/Rules/Orders/Regulations/Technical specifications/

environmental/ safety and health norms applicable to domestically
produced goods shall apply, mutatis mutandis, to imports, unless
specifically exempted.
b. However, goods to be utilised/consumed in manufacture of export

products, as notified by DGFT, may be exempted from domestic
standards/quality specifications.
• Authority to specify Procedures

DGFT may specify procedure to be followed by an exporter or importer or
by any Licensing/Regional Authority (RA) or by any other authority for
purposes of implementing provisions of FT (D and R) Act, the Rules and the
Orders made there under and FTP. Such procedure, or amendments, if any,
shall be published by means of a Public Notice.
• Importer-Exporter Code/e-IEC
I. An IEC is a 10-digit number allotted to a person that is mandatory for

undertaking any export/import activities. Now the facility for IEC in
electronic form or e-IEC has also been operationalised.
II. No Export/Import without IEC:
a. No export or import shall be made by any person without obtaining

an IEC number unless specifically exempted.
b. Exempt categories and corresponding permanent IEC numbers are

given in Para 2.07 of Handbook of Procedures.
III.Only one IEC against one Permanent Account Number (PAN)
Only one IEC is permitted against on Permanent Account Number (PAN). If

any PAN card holder has more than one IEC, the extra IECs shall be
disabled.
! !600
• Mandatory documents for export/import of goods from/into

India
a. Mandatory documents required for export of goods from India:

1. Bill of Lading/Airway Bill
2. Commercial Invoice cum Packing List*
3. Shipping Bill/Bill of Export
b. Mandatory documents required for import of goods into India

1. Bill of Lading/Airway Bill
2. Commercial Invoice cum Packing List*
3. Bill of Entry
[Note: *(i) As per CBEC Circular No. 01/15-Customs dated 12/01/2015. (ii)
Separate Commercial Invoice and Packing List would also be accepted.]
c. For export or import of specific goods or category of goods, which are

subject to any restrictions/policy conditions or require NOC or product
specific compliances under any statute, the regulatory authority
concerned may notify additional documents for purposes of export or
import.
d. In specific cases of export or import, the regulatory authority concerned

may electronically or in writing seek additional documents or
information, as deemed necessary to ensure legal compliance.
e. The above stipulations are effective from 1st April, 2015.
• Actual User Condition
Goods which are importable freely without any ‘Restriction’ may be

imported by any person. However, if such imports require an Authorisation,
actual user alone may import such good(s) unless actual user condition is
specifically dispensed with by DGFT.
! !601
Prohibitions (Country and Product Specific):
• Prohibition on Import and Export of ‘Arms and related material’

from/to Iraq
Notwithstanding the policy on Arms and related materials in Chapter 93 of

ITC(HS), the import/export of Arms and related material from/to Iraq is
‘Prohibited’. However, export of Arms and related material to Government
of Iraq shall be permitted subject to ‘No Objection Certificate’ from the
Department of Defence Production.
• Prohibition on Direct or Indirect Import and Export from/to

Democratic People’s Republic of Korea
Direct or indirect export and import of following items, whether or not

originating in Democratic People’s Republic of Korea (DPRK), to/from, DPRK
is ‘Prohibited’:
• Prohibition on Direct or Indirect Import and Export from/ to Iran

(a)Direct or indirect export and import of all items, materials, equipment,
goods and technology which could contribute to Iran’s enrichment-
related, reprocessing or heavy water related activities, or to
development of nuclear weapon delivery systems, as mentioned below,
whether or not originating in Iran, to/from Iran is ‘Prohibited’:
i. Items listed in INFCIRC/254/Rev.9/Part 1 and INFCIRC/254/Rev.7/

Part 2 (IAEA Documents).
ii. Items listed in S/2006/263 (UN Security Council document).
(b)All the UN Security Council Resolutions/Documents and IAEA Documents

referred to above are available on the UN Security Council website
(www.un.org/Docs/sc) and IAEA website (www.iaea.org).
• Prohibition on Import of Charcoal from Somalia

Direct or indirect import of charcoal is prohibited from Somalia, irrespective
of whether or not such charcoal has originated in Somalia [United Nations
Security Council Resolution 2036 (2012)]. Importers of charcoal shall
submit a declaration to Customs that the consignment has not originated in
Somalia.
! !602
Import/Export Through State Trading Enterprises:
• State Trading Enterprises (STEs)
(a)State Trading Enterprises (STEs) are governmental and non-

governmental enterprises, including marketing boards, which deal with
goods for export and/or import. Any good, import or export of which is
governed through exclusive or special privilege granted to State Trading
Enterprises (STE), may be imported or exported by the concerned STE
as per conditions specified in ITC (HS). The list of STEs notified by DGFT
is in Appendix 2J.
(b)Such STE(s) shall make any such purchases or sales involving imports
or exports solely in accordance with commercial considerations,
including price, quality, availability, marketability, transportation and
other conditions of purchase or sale in a non-discriminatory manner and
shall afford enterprises of other countries adequate opportunity, in
accordance with customary business practices, to compete for
participation in such purchases or sales.
(c)DGFT may, however, grant an authorisation to any other person to

import or export any of the goods notified for exclusive trading through
STEs.
Trade with Specific Countries
• Trade with neighbouring Countries

DGFT may issue instructions or frame schemes as may be required to
promote trade and strengthen economic ties with neighbouring countries.
• Transit Facility
Transit of goods through India from/or to countries adjacent to India shall
be regulated in accordance with bilateral treaties between India and those
countries and will be subject to such restrictions as may be specified by
DGFT in accordance with International Conventions.
• Trade with Russia under Debt Repayment Agreement

In case of trade with Russia under Debt Repayment Agreement, DGFT may
issue instructions or frame schemes as may be required, and anything
! !603
contained in FTP, in so far as it is inconsistent with such instructions or

schemes, shall not apply.
Import of Specific Categories of Goods
• Import of Samples
Import of samples shall be governed by para 2.65 of Handbook of
Procedures.
• Import of Gifts
Import of gifts shall be ‘free’ where such goods are otherwise freely
importable under ITC (HS). In other cases, such imports shall be permitted
against an authorisation issued by DGFT.
• Passenger Baggage
a. Bona fide household goods and personal effects may be imported as

part of passenger baggage as per limits, terms and conditions thereof in
Baggage Rules notified by Ministry of Finance.
b. Samples of such items that are otherwise freely importable under FTP
may also be imported as part of passenger baggage without an
Authorisation.
c. Exporters coming from abroad are also allowed to import drawings,

patterns, l abel s, pri ce tags, buttons, bel ts, tri mmi ng and
embellishments required for export, as part of their passenger baggage
without an Authorisation.
Re-import of goods repaired abroad
Capital goods, equipments, components, parts and accessories, whether

imported or indigenous, except those restricted under ITC (HS) may be
sent abroad for repairs, testing, quality improvement or upgradation or
standardisation of technology and re-imported without an Authorisation.
• Import of goods used in projects abroad

Project contractors after completion of projects abroad, may import without
an Authorisation, goods including capital goods used in the project,
provided they have been used for at least one year.
! !604
• Import of Prototypes
Import of new/second hand prototypes/second hand samples may be
allowed on payment of duty without an Authorisation to an Actual User
(industrial) engaged in production of or having industrial licence/letter of
intent for research in item for which prototype is sought for product
development or research, as the case may be, upon a self-declaration to
that effect, to satisfaction of customs authorities
• Import through courier service

Imports through a registered courier service are permitted as per
Notifications issued by DoR. However, importability/exportability of such
items shall be regulated in accordance with this FTP/ ITC(HS).
Import Policy for Second Hand Goods
Categories of Second- Import

S. No. Conditions, if any
hand Goods Policy
I Second Hand Capital Goods
(i) Personal computers/
laptops including their
refurbished / re-
conditioned spares
Importable against
(a) (ii) Photocopier machines/ Restricted
authorisation
Digital multifunction Print &
Copying Machines
(iii) Air conditioners
(iv) Diesel generating sets.
Subject to production
of Chartered Engineer
Refurbished/re-conditioned certificate to the effect
(b) Free
spares of Capital Goods that such spares have
at least 80% residual
life of original spare.
All other second-hand
(c) capital goods {other than Free
(a) & (b) above}
Second-hand Goods other Importable against
II Restricted
than capital goods Authorisation
! !605
Other Provisions Related to Imports:
•Import under Lease Financing

No specific permission of RA is required for lease financed capital goods.
• Execution of Legal Undertaking (LUT)/Bank Guarantee (BG)
(a)Wherever any duty free import is allowed or where otherwise specifically

stated, importer shall execute, Legal Undertaking (LUT)/Bank Guarantee
(BG)/Bond with the Customs Authority, as prescribed, before clearance
of goods.
(b)In case of indigenous sourcing, Authorisation holder shall furnish LUT/

BG/Bond to RA concerned before sourcing material from indigenous
supplier/nominated agency as prescribed in Chapter 2 of Handbook of
Procedures.
• Private/Public Bonded Warehouses for Imports
(a) Private/Public bonded warehouses may be set up in DTA as per terms

and conditions of notification issued by DoR. Any person may import goods
except prohibited items, arms and ammunition, hazardous waste and
chemicals and warehouse them in such bonded warehouses.
(b) Such goods may be cleared for home consumption in accordance with
provisions of FTP and against Authorisation, wherever required. Customs
duty as applicable shall be paid at the time of clearance of such goods.
(c) If such goods are not cleared for home consumption within a period of
one year or such extended period as the customs authorities may permit,
importer of such goods shall re-export the goods.
• Special provision for Hides Skins and semi-finished goods

Hides, Skins and semi-finished leather may be imported in the Public
Bonded warehouse for the purpose of DTA sale and the unsold items
thereof can be re-exported from such bonded warehouses at 50% of the
applicable export duty. However, this facility shall not be allowed for import
under Private Bonded warehouse.
! !606
• Sale on High Seas

Sale of goods on high seas for import into India may be made subject to
FTP or any other law in force.
• Exports
All goods may be exported without any restriction except to the extent that
such exports are regulated by ITC (HS) or any other provision of FTP or
any other law for the time being in force. DGFT may, however, specify
through a public notice such terms and conditions according to which any
goods, not included in ITC (HS), may be exported without an Authorisation.
• Exemption/Remission of Service Tax in DTA on goods and

services exported
For all goods and services which are exported from units in DTA and units
in EOU/EHTP/STP/BTP, exemption/remission of service tax levied and
related to exports, shall be allowed, as per prescribed procedure in Chapter
4 of Handbook of Procedures.
• Benefits for Supporting Manufacturers

For any benefit to accrue to the supporting manufacturer (as defined in
para 9.58 of FTP), the names of both supporting manufacturer as well as
the merchant exporter must figure in the concerned export documents,
especially in ARE-1/ARE-3/Shipping Bill/Bill of Export/ Airway Bill.
• Third Party Exports

Third party exports (except Deemed Export) shall be allowed under FTP. In
such cases, export documents such as shipping bills shall indicate name of
both manufacturing exporter/manufacturer and third-party exporter(s).
Bank Realisation Certificate (BRC), export order and invoice should be in
the name of third party exporter.
Exports of Specific Categories
• Export of Samples
Export of Samples and Free of charge goods shall be governed by
provisions given in para 2.66 of Handbook of Procedures.
• Export of Gifts
Goods including edible items, of value not exceeding Rs. 5,00,000/- in a
licensing year, may be exported as a gift. However, items mentioned as
! !607
restricted for exports in ITC (HS) shall not be exported as a gift, without an
Authorisation.
• Export of Passenger Baggage
(a)Bona fide personal baggage may be exported either along with

passenger or, if unaccompanied, within one year before or after
passenger's departure from India. However, items mentioned as
restricted in ITC (HS) shall require an Authorisation. Government of
India officials proceeding abroad on official postings shall, however, be
permitted to carry along with their personal baggage, food items (free,
restricted or prohibited) strictly for their personal consumption.
(b)Samples of such items that are otherwise freely exportable under FTP
may also be exported as part of passenger baggage without an
Authorisation.
• Import for export
I. (a) Goods imported, in accordance with FTP, may be exported in same or

substantially the same form without an Authorisation provided that item to
be imported or exported is not restricted for import or export in ITC (HS).
(b) Goods, including capital goods (both new and second hand), may be
imported for export provided:
i. Importer clears goods under Customs Bond;
ii. Goods are freely exportable, i.e., are not “Restricted”/“Prohibited”/

subject to “exclusive trading through State Trading Enterprises” or
any conditionality/requirement as may be required under Schedule
2 – Export Policy of the ITC (HS);
iii. Export is against freely Convertible currency.
(c) Goods in (b) above will include ‘Restricted’ goods for import (except
‘Prohibited’ items).
(d) Capital goods, which are freely importable and freely exportable, may
be imported for export on execution of LUT/BG with Customs Authority.
! !608
II. (a) Goods imported against payment in freely convertible currency

would be permitted for export only against payment in freely convertible
currency, unless otherwise notified by DGFT.
(b) Export of such goods to the notified countries (presently only Iran)
would be permitted against payment in Indian Rupees, subject to minimum
15% value addition.
(c) However, re-export of food, medicine and medical equipment, namely,

items covered under ITC(HS) Chapters 2 to 4, 7 to 11, 15 to 21, 23, 30
and items under headings 9018, 9019, 9020, 9021 and 9022 of Chapter-90
of ITC(HS) will not be subject to minimum value addition requirement for
export to Iran. Exports of these items to Iran shall, however, be subject to
all other conditions of FTP 2015-20 and ITC (HS) 2012, as applicable.
Bird’s eggs covered under ITC (HS) 0407 and 0408 and Rice covered under
ITC (HS) 1006 are not covered under this dispensation, as at II (a) above
(d) Exports under this dispensation, as at II(b) and (c) above shall not be
eligible for any export incentives.
• Export through Courier Service

Exports through a registered courier service are permitted as per
Notification issued by DoR. However, importability/exportability of such
items shall be regulated in accordance with FTP/ITC (HS).
• Export of Replacement Goods

Goods or parts thereof on being exported and found defective/damaged or
otherwise unfit for use may be replaced free of charge by the exporter and
such goods shall be allowed clearance by Customs authorities, provided
that replacement goods are not mentioned as restricted items for exports
in ITC (HS).
• Export of Repaired Goods
a. “Goods or parts thereof, except restricted under ITC (HS), on being

exported and found defective, damaged or otherwise unfit for use may
be imported for repair and subsequent re-export. Such goods shall be
allowed clearance without an Authorisation and in accordance with
customs notification.
! !609
b. However, re-export of such defective parts/spares by the Companies/

Firms and Original Equipment Manufacturers shall not be mandatory if
they are imported exclusively for undertaking root cause analysis,
testing and evaluation purpose.”
• Export of Spares
Warranty spares (whether indigenous or imported) of plant, equipment,
machinery, automobiles or any other goods, [except those restricted under
ITC (HS)] may be exported along with main equipment or subsequently
but within contracted warranty period of such goods, subject to approval of
RBI.
• Private Bonded Warehouses for Exports
a. Private bonded warehouses exclusively for exports may be set up in DTA

as per terms and conditions of notifications issued by Department of
Revenue.
b. Such warehouses shall be entitled to procure goods from domestic

manufacturers without payment of duty. Supplies made by a domestic
supplier to such notified warehouses shall be treated as physical exports
provided payments are made in free foreign exchange.
Payments and Receipts on Imports/Exports
• Denomination of Export Contracts
a. All export contracts and invoices shall be denominated either in freely

convertible currency or Indian rupees but export proceeds shall be
realised in freely convertible currency.
b. However, export proceeds against specific exports may also be realised

in rupees, provided it is through a freely convertible Vostro account of a
non resident bank situated in any country other than a member country
of Asian Clearing Union (ACU) or Nepal or Bhutan. Additionally, rupee
payment through Vostro account must be against payment in free
foreign currency by buyer in his non-resident bank account. Free foreign
exchange remitted by buyer to his non-resident bank (after deducting
bank service charges) on account of this transaction would be taken as
export realisation under export promotion schemes of FTP.
! !610
c. Contracts (for which payments are received through Asian Clearing

Union (ACU) shall be denominated in ACU Dollar. Central Government
may relax provisions of this paragraph in appropriate cases. Export
contracts and invoices can be denominated in Indian rupees against
EXIM Bank/Government of India line of credit.
• Export to Iran – Realisations in Indian Rupees to be eligible for

FTP benefits/incentives
Notwithstanding the provisions contained in para 2.52 (a) above, export

proceeds realised in Indian Rupees against exports to Iran are permitted to
avail exports benefits/incentives under the Foreign Trade Policy (2015-20),
at par with export proceeds realised in freely convertible currency.
• Non-realisation of Export Proceeds
a. If an exporter fails to realise export proceeds within time specified by

RBI, he shall, without prejudice to any liability or penalty under any law
in force, be liable to return all benefits/incentives availed against such
exports and action in accordance with provisions of FT (D and R) Act,
Rules and Orders made there under and FTP.
b. In case an Exporter is unable to realise the export proceeds for reasons

beyond his control (force majeure), he may approach RBI for writing off
the unrealised amount as per procedure laid down in Handbook of
Procedures.
c. The payment realised through insurance cover, would be eligible for

benefits under FTP.
Export Promotion Councils
• Recognition of Export Promotion Councils (EPCs) to function as

Registering Authority for issue of RCMC.
a. Export Promotion Councils (EPCs) are organisations of exporters, set up

with the objective to promote and develop Indian exports. Each Council
is responsible for promotion of a particular group of products/ projects/
services as given in Appendix 2T of AANF.
! !611
b. EPCs are also eligible to function as Registering Authorities to issue

Registration-cum-Membership Certificate (RCMC) to its members. The
criteria for EPCs to be recognised as Registering Authorities for issue of
RCMC to its members
• Registration-cum-Membership Certificate (RCMC)
Any person, applying for:
a. An Authorisation to import/export (except items) listed as ‘Restricted’

items in ITC (HS)
Or
b. Any other benefit or concession under FTP shall be required to furnish or

upload on DGFT’s website in the Importer Exporter Profile, the RCMC
granted by competent authority in accordance with procedure specified
in HBP, unless specifically exempted under FTP. Certificate of
Registration as Exporter of Spices (CRES) issued by Spices Board shall
be treated as Registration-Cum-Membership Certificate (RCMC) for the
purposes under this Policy.
Policy Interpretation and Relaxations
• Interpretation of Policy
a. The decision of DGFT shall be final and binding on all matters relating to
interpretation of Policy, or provision in Handbook of Procedures,
Appendices and Aayat Niryat Forms or classification of any item for
import/export in the ITC (HS).
b. A Policy Interpretation Committee (PIC) may be constituted to aid and

advise DGFT. The composition of the PIC would be as follows:
i. DGFT: Chairman
ii. All Additional DGFTs in Headquarters: Members
iii. All Joint DGFTs in Headquarters looking after Policy matters:
Members
iv. Joint DGFT (PRC/PIC) : Member Secretary
v. Any other person/representative of the concerned Ministry/
! !612
vi. Department, to be co-opted by the Chairman.
• Exemption from Policy/Procedures
DGFT may in public interest pass such orders or grant such exemption,
relaxation or relief, as he may deem fit and proper, on grounds of genuine
hardship and adverse impact on trade to any person or class or category of
persons from any provision of FTP or any procedure.
• Personal Hearing by DGFT for Grievance Redressal
a. Government is committed to easy and speedy redressal of grievances

from Trade and Industry. Paragraph 2.58 of FTP provides for relaxation
of Policy and Procedures on grounds of genuine hardship and adverse
impact on trade. DGFT may consider request for relaxation after
consulting concerned Norms Committee, EPCG Committee or Policy
Relaxation Committee (PRC).
b. As a last resort to redress grievances of Importers/Exporters, DGFT may

provide an opportunity for Personal Hearing (PH) before PRC. For such
PH, a specific request along with the prescribed application fee as per
Appendix-2K has to be made to DG, if following conditions are satisfied:
i. If an importer/exporter is aggrieved by any decision taken by Policy

Relaxation Committee (PRC), or a decision/order by any authority in
the Directorate General of Foreign Trade and
ii. A request for review before the said Committee or Authority has been
filed.
iii. Such Committee or Authority has considered the request for a
review, and
iv. The exporter/importer continues to be aggrieved.
c. The decision conveyed in pursuance to the personal hearing shall be

final and binding.
d. The opportunity for Personal Hearing will not apply to a decision/order

made in any proceeding, including an adjudication proceeding, whether
at the original stage or at the appellate stage, under the relevant
provisions of FT (D and R) Act, 1992, as amended from time to time.
! !613
• Regularisation of EO default and settlement of Customs duty and

interest through Settlement Commission
With a view to providing assistance to firms who have defaulted under FTP
for reasons beyond their control as also facilitating merger, acquisition and
rehabilitation of sick units, it has been decided to empower Settlement
Commission in Central Board of Excise and Customs to decide such cases
also with effect from 01.04.2005.
Self-certification of Originating Goods
• Approved Exporter Scheme for Self-certification of Certificate of

Origin.
a. Currently, Certificates of Origin under various Preferential Trade

Agreements [PTA], Free Trade Agreements [FTAs], Comprehensive
Economic Cooperation Agreements [CECA] and Comprehensive
Economic Partnerships Agreements [CEPA] are issued by designated
agencies as per Appendix 2B of Appendices and Aayat and Niryat Forms.
A new optional system of self-certification is being introduced with a
view to reducing transaction cost.
b. The Manufacturers who are also Status Holders shall be eligible for
Approved Exporter Scheme. Approved Exporters will be entitled to self-
certify their manufactured goods as originating from India with a view to
qualifying for preferential treatment under different PTAs/FTAs/CECAs/
CEPAs which are in operation. Self-certification will be permitted only for
the goods that are manufactured as per the Industrial Entrepreneurial’s
Memorandum (IEM)/Industrial Licence (IL)/Letter of Intent (LOI) issued
to manufacturers.
c. Status Holders will be recognised by DGFT as Approved Exporters for

self-certification based on availability of required infrastructure, capacity
and trained manpower as per the details in Para 2.109 of Handbook of
Procedures 2015-20 read with Appendix 2F of Appendices & Aayaat
Niryaat Forms.
d. The details of the Scheme, along with the penalty provisions, are
provided in Appendix 2F of Appendices and Aayaat Niryaat Forms and
will come into effect only when India incorporates the scheme into a
! !614
specific agreement with its partner/s and the same is appropriately

notified by DGFT.
23.3 EXPORTS FROM INDIA SCHEMES
The objective of schemes under this chapter is to provide rewards to

exporters to offset infrastructural inefficiencies and associated costs
involved and to provide exporters a level playing field. There shall be
following two schemes for exports of Merchandise and Services
respectively:
a. Merchandise Exports from India Scheme (MEIS).

b. Service Exports from India Scheme (SEIS).
• Nature of Rewards
Duty Credit Scrips shall be granted as rewards under MEIS and SEIS. The
Duty Credit Scrips and goods imported/domestically procured against them
shall be freely transferable. The Duty Credit Scrips can be used for :
a. Payment of Customs Duties for import of inputs or goods, except items

listed in Appendix 3A.
b. Payment of excise duties on domestic procurement of inputs or goods,

including capital goods as per DoR notification.
c. Payment of service tax on procurement of services as per DoR
notification.
d. Payment of Customs Duty and fee as per paragraph 3.18 of this Policy.
• Merchandise Exports from India Scheme (MEIS)

Objective of Merchandise Exports from India Scheme (MEIS) is to offset
infrastructural inefficiencies and associated costs involved in export of
goods/products, which are produced/manufactured in India, especially
those having high export intensity, employment potential and thereby
enhancing India’s export competitiveness.
• Entitlement under MEIS

Exports of notified goods/products with ITC[HS] code, to notified markets
as listed in Appendix 3B, shall be rewarded under MEIS. Appendix 3B also
lists the rate(s) of rewards on various notified products [ITC (HS) code
! !615
wise]. The basis of calculation of reward would be on realised FOB value of

exports in free foreign exchange, or on FOB value of exports as given in
the Shipping Bills in free foreign exchange, whichever is less, unless
otherwise specified.
• Export of goods through courier or foreign post offices using e-

commerce
a. Exports of goods through courier or foreign post office using e-

commerce, as notified in Appendix 3C, of FOB value upto Rs. 25,000
per consignment shall be entitled for rewards under MEIS.
b. If the value of exports using e-commerce platform is more than Rs.

25,000 per consignment then MEIS reward would be limited to FOB
value of Rs. 25,000 only.
c. Such goods can be exported in manual mode through Foreign Post

Offices at New Delhi, Mumbai and Chennai.
d. Export of such goods under Courier Regulations shall be allowed

manually on pilot basis through Airports at Delhi, Mumbai and Chennai
as per appropriate amendments in regulations to be made by
Department of Revenue. Department of Revenue shall fast track the
implementation of EDI mode at courier terminals.
• Ineligible categories under MEIS
The following exports categories/sectors shall be ineligible for Duty Credit

Scrip entitlement under MEIS
a. EOUs/EHTPs/BTPs/STPs who are availing direct tax benefits/exemption.
b. Supplies made from DTA units to SEZ units
c. Export of imported goods covered under paragraph 2.46 of FTP;
d. Exports through transshipment, meaning thereby exports that are

originating in third country but transshipped through India;
e. Deemed Exports;
! !616
f. SEZ/EOU/EHTP/BPT/FTWZ products exported through DTA units;
g. Items, which are restricted or prohibited for export under Schedule-2 of

Export Policy in ITC (HS), unless specifically notified in Appendix 3B.
h. Service Export.
i. Red sanders and beach sand.
j. Export products which are subject to Minimum export price or export

duty.
k. Diamond, gold, silver, platinum, other precious metal in any form

including plain and studded jewellery and other precious and semi-
precious stones.
l. Ores and concentrates of all types and in all formations.
m. Cereals of all types.
n. Sugar of all types and all forms.
o. Crude/petroleum oil and crude/primary and base products of all types

and all formulations.
p. Export of milk and milk products.
q. Export of meat and meat products.
r. Products wherein precious metal/diamond are used or articles which are

studded with precious stones.
s. Exports made by units in FTWZ.
! !617
Service Exports from India Scheme (SEIS)
Objective of Service Exports from India Scheme (SEIS) is to encourage

export of notified Services from India.
• Eligibility
a. Service Providers of notified services, located in India, shall be rewarded

under SEIS, subject to conditions as may be notified. Only Services
rendered in the manner as per Para 9.51(i) and Para 9.51(ii) of this
policy shall be eligible. The notified services and rates of rewards are
listed in Appendix 3D.
b. Such service provider should have minimum net free foreign exchange
earnings of US$15,000 in preceding financial year to be eligible for Duty
Credit Scrip. For Individual Service Providers and sole proprietorship,
such minimum net free foreign exchange earnings criteria would be
US$10,000 in preceding financial year.
c. Payment in Indian Rupees for service charges earned on specified

services, shall be treated as receipt in deemed foreign exchange as per
guidelines of Reserve Bank of India. The list of such services is indicated
in Appendix 3E.
d. Net Foreign exchange earnings for the scheme are defined as under:
Net Foreign Exchange = Gross Earnings of Foreign Exchange minus Total

Expenses/Payment/Remittances of Foreign Exchange by the IEC holder,
relating to service sector in the Financial year.
e. If the IEC holder is a manufacturer of goods as well as service provider,

then the foreign exchange earnings and total expenses/payment/
remittances shall be taken into account for service sector only.
f. In order to claim reward under the scheme, Service provider shall have
to have an active IEC at the time of rendering such services for which
rewards are claimed.
! !618
• Ineligible categories under SEIS
1. Foreign exchange remittances other than those earned for rendering of

notified services would not be counted for entitlement. Thus, other
sources of foreign exchange earnings such as equity or debt
participation, donations, receipts of repayment of loans etc. and any
other inflow of foreign exchange, unrelated to rendering of service,
would be ineligible.
2. Following shall not be taken into account for calculation of entitlement

under the scheme
(a) Foreign Exchange remittances:
I. Related to Financial Services Sector

a. Raising of all types of foreign currency Loans;
b. Export proceeds realisation of clients;
c. Issuance of Foreign Equity through ADRs/GDRs or other similar
instruments;
d. Issuance of foreign currency Bonds;
e. Sale of securities and other financial instruments;
f. Other receivables not connected with services rendered by financial
institutions; and
II.Earned through contract/regular employment abroad (e.g.,

labour remittances);
a. Payments for services received from EEFC Account;
b. Foreign exchange turnover by Health Care Institutions like equity
participation, donations etc.
c. Foreign exchange turnover by Educational Institutions like equity
participation, donations etc.
d. Export turnover relating to services of units operating under SEZ/
EOU/EHTP/STPI/BTP Schemes or supplies of services made to such
units;
e. Clubbing of turnover of services rendered by SEZ/EOU /EHTP/STPI/
BTP units with turnover of DTA Service Providers;
f. Exports of Goods.
g. Foreign Exchange earnings for services provided by Airlines, Shipping
lines service providers plying from any foreign country X to any
foreign country Y routes not touching India at all.
! !619
h. Service providers in Telecom Sector.
• Entitlement under SEIS

Service Providers of eligible services shall be entitled to Duty Credit Scrip
at notified rates (as given in Appendix 3D) on net foreign exchange earned.
• Remittances through Credit Card and other instruments for MEIS

and SEIS
Free Foreign Exchange earned through international credit cards and other
instruments, as permitted by RBI shall also be taken into account for
computation of value of exports.
• Effective date of schemes (MEIS and SEIS)

The schemes shall come into force with effect from the date of notification
of this Policy, i.e. the rewards under MEIS/SEIS shall be admissible for
exports made/services rendered on or after the date of notification of this
Policy.
• Special Provisions
a. Government reserves the right in public interest, to specify export

products or services or markets, which shall not be eligible for
computation of entitlement of duty credit scrip.
b. Government reserves the right to impose restriction/change the rate/

ceiling on Duty Credit Scrip under this chapter.
c. Government may also notify goods in Appendix 3A which shall not be

allowed for debiting through Duty Credit Scrips in case of import.
d. Government may prescribe value cap of any kind for a product(s) or

limit total reward per IEC holder under this chapter at any time.
Common Provisions for Exports from India Schemes (MEIS and

SEIS)
• Transitional Arrangement
For the goods exported or services rendered upto the date of notification of
this Policy, which were otherwise eligible for issuance of scrips under
erstwhile Chapter 3 of the earlier Foreign Trade Policy(ies) and scrip is
! !620
applied/issued on or after notification of this Policy against such export of

goods or services rendered, the then prevailing policy and procedure
regarding eligibility, entitlement, transferability, usage of scrip and any
other condition in force at the time of export of goods or rendering of the
services, shall be applicable to such scrips.
• CENVAT/Drawback
Additional Customs duty/excise duty/Service Tax paid in cash or through
debit under Duty Credit scrip shall be adjusted as CENVAT Credit or Duty
Drawback as per DoR rules or notifications. Basic Custom duty paid in cash
or through debit under Duty Credit scrip shall be adjusted for Duty
Drawback as per DoR rules or notifications.
• Import under lease financing

Utilisation of Duty Credit Scrip shall be permitted for payment of duty in
case of import of capital goods under lease financing in terms of provision
in paragraph 2.34 of FTP.
• Transfer of export performance
a. Transfer of export performance from one IEC holder to another IEC

holder shall not be permitted. Thus, a shipping bill containing name of
applicant shall be counted in export performance/turnover of applicant
only if export proceeds from overseas are realised in applicant’s bank
account and this shall be evidenced from e-BRC/FIRC.
b. However, MEIS, rewards can be claimed either by the supporting

manufacturer (along with disclaimer from the company/firm who has
realised the foreign exchange directly from overseas) or by the
company/firm who has realised the foreign exchange directly from
overseas.
• Facility of payment of custom duties in case of E.O. defaults and

fee through duty credit scrips
a. Duty Credit Scrip can be utilised/debited for payment of Custom Duties

in case of EO defaults for Authorisations issued under Chapters 4 and 5
of this Policy. Such utilisation /usage shall be in respect of those goods
which are permitted to be imported under the respective reward
schemes. However, penalty/interest shall be required to be paid in cash.
! !621
b. Duty credit scrips can also be used for payment of composition fee
under FTP, for payment of application fee under FTP, if any and for
payment of value shortfall in EO under para 4.49 of HBP 2015-20.
• Risk Management System
a. A Risk Management System shall be in operation whereby every month

Computer system in DGFT Headquarters, on random basis, will select
10% of cases for each RA where scrips have already been issued, under
each scheme. RA in turn may call for original documents in all such
selected cases for further examination in detail. In case any discrepancy
and/ or over claim is found on such examination, the applicant shall be
under obligation to rectify such discrepancy and/or refund over claim in
cash with interest at the rate prescribed under section 28 A A of the
Customs Act 1962, from the date of issue of scrip in the relevant Head
of Account of Customs within one month. The original holder of scrip,
however, may refund such over claim by surrendering the same scrip
whether partially utilised or fully unutilised, without interest.
b. Regional Authority may ask for original proof of landing certificate,

annexures attached to ANFs or any other document, which has been
uploaded digitally at any time within three years from the date of issue
of scrip. Failure to submit such documents in original would make
applicant liable to refund the reward granted along with interest at the
rate prescribed under section 28 A A of the Customs Act 1962, from the
date of issuance of scrip. It would be the responsibility of applicant to
maintain such documents, certificate etc. for a period of at least three
years from the date of issuance of scrips.
• Status Holder
a. Status Holders are business leaders who have excelled in international

trade and have successfully contributed to country’s foreign trade.
Status Holders are expected to not only contribute towards India’s
exports but also provide guidance and handholding to new
entrepreneurs.
b. All exporters of goods, services and technology having an import-export

code (IEC) number shall be eligible for recognition as a status holder.
Status recognition depends upon export performance. An applicant shall
! !622
be categorised as status holder upon achieving export performance

during current and previous two financial years, as indicated in
paragraph 3.21 of Foreign Trade Policy. The export performance will be
counted on the basis of FOB value of export earnings in free foreign
exchange.
c. For deemed export, FOR value of exports in Indian Rupees shall be

converted in US$ at the exchange rate notified by CBEC, as applicable
on 1st April of each Financial Year.
d. For granting status, export performance is necessary in at least two out

of three years.
• Status Category
Status Category Export Performance

FOB/FOR (as converted) Value
(in US $ million)
One Star Export House 3
Two Star Export House 25

Three Star Export House 100
Four Star Export House 500
Five Star Export House 2000
• Grant of double weightage
a. The exports by IEC holders under the following categories shall be

granted double weightage for calculation of export performance for
grant of status.
i. Micro, Small and Medium Enterprises (MSME) as defined in Micro,
Small and Medium Enterprises Development (MSMED) Act 2006.
ii. Manufacturing units having ISO/BIS.
iii. Units located in North Eastern States including Sikkim and Jammu
and Kashmir.
iv. Units located in Agri Export Zones.
b. Double Weightage shall be available for grant of One Star Export House
Status category only. Such benefit of double weightage shall not be
! !623
admissible for grant of status recognition of other categories namely

Two Star Export House, Three Star Export House, Four Star export
House and Five Star Export House.
c. A shipment can get double weightage only once in any one of above
categories.
• Other conditions for grant of status
a. Export performance of one IEC holder shall not be permitted to be

transferred to another IEC holder. Hence, calculation of exports
performance based on disclaimer shall not be allowed.
b. Exports made on re-export basis shall not be counted for recognition.
c. Export of items under authorisation, including SCOMET items, would be

included for calculation of export performance.
• Privileges of Status Holders
A Status Holder shall be eligible for privileges as under:
a. Authorisation and Customs Clearances for both imports and exports

may be granted on self-declaration basis;
b. Input-Output norms may be fixed on priority within 60 days by the

Norms Committee;
c. Exemption from furnishing of Bank Guarantee for Schemes under FTP,

unless specified otherwise anywhere in FTP or HBP;
d. Exemption from compulsory negotiation of documents through banks.

Remittance/ receipts, however, would be received through banking
channels;
e. Two star and above Export houses shall be permitted to establish Export
Warehouses as per Department of Revenue guidelines.
! !624
f. Three Star and above Export House shall be entitled to get benefit of
Accredited Clients Programme (ACP) as per the guidelines of CBEC
(website: http://cbec.gov.in).
g. The status holders would be entitled to preferential treatment and

priority in handling of their consignments by the concerned agencies.
h. Manufacturers who are also status holders (Three Star/Four Star/Five

Star) will be enabled to self-certify their manufactured goods (as per
their IEM/IL/LOI) as originating from India with a view to qualify for
preferential treatment under different preferential trading agreements
(PTA), Free Trade Agreements (FTAs), Comprehensive Economic
Cooperation Agreements (CECA) and Comprehensive Economic
Partnership Agreements (CEPA). Subsequently, the scheme may be
extended to remaining Status Holders.
i. Manufacturer exporters who are also Status Holders shall be eligible to

self-certify their goods as originating from India as per para 2.108 (d) of
Hand Book of Procedures.
j. Status holders shall be entitled to export freely exportable items on free

of cost basis for export promotion subject to an annual limit of Rs. 10
lakh or 2% of average annual export realisation during preceding three
licencing years whichever is higher.
! !625
23.4 DUTY EXEMPTION/REMISSION SCHEMES
Schemes under this Chapter enable duty free import of inputs for export
production, including replenishment of input or duty remission.
a. Duty Exemption Schemes.
The Duty Exemption schemes consist of the following:
i. Advance Authorisation (AA) (which will include Advance Authorisation

for Annual Requirement).
ii. Duty Free Import Authorisation (DFIA).
b. Duty Remission Scheme.
Duty Drawback (DBK) Scheme, administered by Department of Revenue.
• Applicability of Policy and Procedures
Authorisation under this Chapter shall be issued in accordance with the

Policy and Procedures in force on the date of issue of the Authorisation.
• Advance Authorisation
a. Advance Authorisation is issued to allow duty free import of input, which

is physically incorporated in export product (making normal allowance
for wastage). In addition, fuel, oil, catalyst which is consumed/utilised in
the process of production of export product, may also be allowed.
b. Advance Authorisation is issued for inputs in relation to resultant

product, on the following basis:
(i) As per Standard Input Output Norms (SION) notified (available in Hand
Book of Procedures);
OR
(ii) On the basis of self declaration as per paragraph 4.07 of Handbook of

Procedures.
! !626
• Advance Authorisation for Spices
Duty free import of spices covered under Chapter-9 of ITC (HS) shall be
permitted only for activities like crushing/grinding/sterilisation/manufacture
of oils or oleoresins. Authorisation shall not be available for simply
cleaning, grading, re-packing etc.
• Eligible Applicant/Export/Supply
a. Advance Authorisation can be issued either to a manufacturer exporter

or merchant exporter tied to supporting manufacturer.
b. Advance Authorisation for pharmaceutical products manufactured

through Non-Infringing (NI) process (as indicated in paragraph 4.18 of
Handbook of Procedures) shall be issued to manufacturer exporter only.
c. Advance Authorisation shall be issued for:

i. Physical export (including export to SEZ);
ii. Intermediate supply; and/or
iii. Supply of goods to the categories mentioned in paragraph 7.02 (b),
(c), (e), (f), (g) and (h) of this FTP.
iv. Supply of ‘stores’ on board of foreign going vessel/aircraft, subject to
condition that there is specific Standard Input Output Norms in
respect of item supplied.
• Advance Authorisation for Annual Requirement
i. Advance Authorisation for Annual Requirement shall only be issued for

items notified in Standard Input Output Norms (SION), and it shall not
be available in case of adhoc norms under paragraph 4.03 (b)(ii) of FTP.
ii. Advance Authorisation for Annual Requirement shall also not be

available in respect of SION where any item of input appears in
Appendix 4-J.
! !627
• Eligibility Condition to obtain Advance Authorisation for Annual

Requirement
i. Exporters having past export performance (in at least preceding two

financial years) shall be entitled for Advance Authorisation for Annual
requirement.
ii. Entitlement in terms of CIF value of imports shall be upto 300% of the
FOB value of physical export and/or FOR value of deemed export in
preceding financial year or Rs 1 crore, whichever is higher.
• Value Addition
Value Addition for the purpose of this Chapter (except for Gems and
Jewellery sector for which value addition is prescribed in paragraph 4.38 of
FTP) shall be: -
!
A = FOB value of export realised/FOR value of supply received.
B = CIF value of inputs covered by Authorisation, plus value of any other

input used on which benefit of DBK is claimed or intended to be claimed.
• Minimum Value Addition
i. Minimum value addition required to be achieved under Advance

Authorisation is 15%.
ii. Export Products where value addition could be less than 15% are given
in Appendix 4D.
iii. For physical exports for which payments are not received in freely
convertible currency, value addition shall be as specified in Appendix 4C.
iv. Minimum value addition for Gems and Jewellery Sector is given in
paragraph 4.61 of Handbook of Procedures.
v. In case of Tea, minimum value addition shall be 50%.
! !628
• Import of Mandatory Spares

Import of mandatory spares which are required to be exported/supplied
with the resultant product shall be permitted duty free to the extent of
10% of CIF value of Authorisation.
• Ineligible categories of import on Self Declaration basis
a. Import of following products shall not be permissible on self-declaration

basis:
i. All vegetable/edible oils classified under Chapter-15 and all types of

oilseeds classified under Chapter-12 of ITC (HS) book;
ii. All types of cereals classified under Chapter–10 of ITC (HS) book;
iii. All Spices other than light black pepper (light berries) having a basic
customs duty of more than 30%, classified under Chapter-9 and 12
of ITC (HS) book;
iv. All types of fruits/vegetables having a duty of more than 30%,
classified under Chapter-7 and Chapter-8 of ITC (HS) book;
v. Horn, hoof and any other organ of animal;
vi. Honey;
vii.Rough Marble Blocks/Slabs; and
viii.Rough Granite.
ix. Vitamins except for use in pharmaceutical industry.
b. For export of perfumes, perfumery compounds and various feed

ingredients containing vitamins, no Authorisation shall be issued by
Regional Authority under paragraph 4.07 of Handbook of Procedures
and applicants shall be required to apply under paragraph 4.06 of
Handbook of Procedures to the Norms Committee.
c. Where export and/or import of biotechnology items and related products

are involved, Authorisation under paragraph 4.07 of Handbook of
Procedures shall be issued by Regional Authority only on submission of a
“No Objection Certificate” from Department of Biotechnology.
! !629
• Accounting of Input
i. Wherever SION permits use of either (a) a generic input or (b)

alternative input, unless the name of the specific input [which has been
used in manufacturing the export product] gets indicated/endorsed in
the relevant shipping bill and these inputs, so endorsed, match the
description in the relevant bill of entry, the concerned Authorisation will
not be redeemed. In other words, the name/description of the input
used (or to be used) in the Authorisation must match exactly with the
name/description endorsed in the shipping bill.
ii. In addition, if in any SION, a single quantity has been indicated against
a number of inputs (more than one input), then quantities of such
inputs to be permitted for import shall be in proportion to the quantity
of these inputs actually used/consumed in production, within overall
quantity against such group of inputs. Proportion of these inputs
actually used/consumed in production of export product shall be clearly
indicated in shipping bills.
iii. At the time of discharge of export obligation (issue of EODC) or at the

time of redemption, Regional Authority shall allow only those inputs
which have been specifically indicated in the shipping bill.
iv. The above provisions will also be applicable for supplies to SEZs and
supplies made under Deemed export. Details as given above will have to
be indicated in the relevant Bill of Export, ARE-3, Central Excise certified
Invoice/import document/document for domestic procurement/supply.
• Pre-import condition in certain cases
i. DGFT may, by Notification, impose pre-import condition for inputs under

this Chapter.
ii. Import items subject to pre-import condition are listed in Appendix 4-J
or will be as indicated in Standard Input Output Norms (SION).
iii. Import of drugs from unregistered sources shall have pre-import

condition.
! !630
• Details of Duties exempted

Imports under Advance Authorisation are exempted from payment of Basic
Customs Duty, Additional Customs Duty, Education Cess, Anti-dumping
Duty, Safeguard Duty and Transition Product Specific Safeguard Duty,
wherever applicable. However, Import against supplies covered under
paragraph 7.02 (c), (d) and (g) of FTP will not be exempted from payment
of applicable Anti-dumping Duty, Safeguard Duty and Transition Product
Specific Safeguard Duty, if any.
• Admissibility of Drawback
Drawback as per rate determined and fixed by Central Excise authority
shall be available for duty paid imported or indigenous inputs (not specified
in the norms) used in the export product. For this purpose, applicant shall
indicate clearly details of duty paid input in the application for Advance
Authorisation. As per details mentioned in the application, Regional
Authority shall also clearly endorse details of such duty paid inputs in the
condition sheet of the Advance Authorisation.
• Actual User Condition for Advance Authorisation
i. Advance Authorisation and/or material imported under Advance

Authorisation shall be subject to ‘Actual User’ condition. The same shall
not be transferable even after completion of export obligation. However,
Authorisation holder will have option to dispose of product
manufactured out of duty free input once export obligation is
completed.
ii. In case where CENVAT credit facility on input has been availed for the
exported goods, even after completion of export obligation, the goods
imported against such Advance Authorisation shall be utilised only in the
manufacture of dutiable goods whether within the same factory or
outside (by a supporting manufacturer). For this, the Authorisation
holder shall produce a certificate from either the jurisdictional Central
Excise Authority or Chartered Accountant, at the option of the exporter,
at the time of filing application for Export Obligation Discharge
Certificate to Regional Authority concerned.
iii. Waste/Scrap arising out of manufacturing process, as allowed, can be

disposed off on payment of applicable duty even before fulfillment of
export obligation.
! !631
• Validity Period for Import
i. Validity period for import of Advance Authorisation shall be 12 months

from the date of issue of Authorisation.
ii. Advance Authorisation for Deemed Export shall be co-terminus with

contracted duration of project execution or 12 months from the date of
issue of Authorisation, whichever is more.
• Importability/Exportability of Items that are Prohibited/

Restricted/ STE
i. No export or import of an item shall be allowed under Advance

Authorisation/DFIA if the item is prohibited for exports or imports
respectively. Export of a prohibited item may be allowed under Advance
Authorisation provided it is separately so notified, subject to the
conditions given therein.
ii. Items reserved for imports by STEs cannot be imported against Advance
Authorisation/DFIA. However those items can be procured from STEs
against ARO or Invalidation letter. STEs are also allowed to sell goods on
High Sea Sale basis to holders of Advance Authorisation/DFIA holder.
STEs are also permitted to issue “No Objection Certificate (NOC)” for
import by Advance Authorisation/DFIA holder. Authorisation Holder
would be required to file Quarterly Returns of imports effected against
such NOC to concerned STE and STE would submit half-yearly import
figures of such imports to concerned administrative Department for
monitoring with a copy endorsed to DGFT.
iii. Items reserved for export by STE can be exported under Advance
Authorisation/DFIA only after obtaining a ‘No Objection Certificate’ from
the concerned STE.
iv. Import of restricted items shall be allowed under Advance Authorisation/

DFIA.
v. Export of restricted/SCOMET items however, shall be subject to all

conditionality's or requirements of export authorisation or permission,
as may be required, under Schedule 2 of ITC (HS).
! !632
• Free of Cost Supply by Foreign Buyer

Advance Authorisation shall also be available where some or all inputs are
supplied free of cost to exporter by foreign buyer. In such cases, notional
value of free of cost input shall be added in the CIF value of import and
FOB value of export for the purpose of computation of value addition.
However, realisation of export proceeds will be equivalent to an amount
excluding notional value of such input.
• Domestic Sourcing of Inputs
i. Holder of an Advance Authorisation/Duty Free Import Authorisation can

procure inputs from indigenous supplier/ State Trading Enterprise in lieu
of direct import. Such procurement can be against Advance Release
Order (ARO), Invalidation Letter, Back-to-Back Inland Letter of Credit.
ii. When domestic supplier intends to obtain duty free material for inputs
through Advance Authorisation for supplying resultant product to
another Advance Authorisation/ DFIA/EPCG Authorisation, Regional
Authority shall issue Invalidation Letter.
iii. Regional Authority shall issue Advance Release Order if the domestic
supplier intends to seek refund of duty through Deemed Exports
mechanism as per provisions under Chapter-7 of FTP.
iv. Regional Authority may issue Advance Release Order or Invalidation

Letter at the time of issue of Authorisation simultaneously or
subsequently.
v. Advance Authorisation holder under DTA can procure inputs from EOU/
EHTP/ BTP/STP/SEZ units without obtaining Advance Release Order or
Invalidation Letter.
vi. Duty Free Import Authorisation holder shall also be eligible for Advance
Release Order/Invalidation Letter facility.
vii.Validity of Advance Release Order/Invalidation Letter shall be co-

terminous with validity of Authorisation.
! !633
• Currency for Realisation of Export Proceeds
i. Export proceeds shall be realised in freely convertible currency except

otherwise specified. Provisions regarding realisation of export proceeds
are given in paragraph 2.43 of FTP.
ii. Export to Rupee Payment Area (RPA) (for which payments are not
received in freely convertible currency) shall be subject to minimum
value addition as specified in Appendix-4C.
iii. Export to SEZ Units shall be taken into account for discharge of export
obligation provided payment is realised from Foreign Currency Account
of the SEZ unit.
iv. Export to SEZ Developers/Co-developers can also be taken into account

for discharge of export obligation even if payment is realised in Indian
Rupees.
v. Authorisation holder needs to file Bill of Export for export to SEZ unit/
developer/co-developer in accordance with the procedures given in SEZ
Rules, 2006.
• Export Obligation
i. Period for fulfilment of export obligation under Advance Authorisation

shall be 18 months from the date of issue of Authorisation or as notified
by DGFT.
ii. In cases of supplies to turnkey projects in India under deemed export

category or turnkey projects abroad, the Export Obligation period shall
be co-terminus with contracted duration of the project execution or 18
months whichever is more.
iii. Export Obligation for items falling in categories of defence, military

store, aerospace and nuclear energy shall be 24 months from the date
of issue of authorisation or co-terminus with contracted duration of the
export order whichever is more.
iv. Export Obligation Period for specified inputs, from the date of clearance
of each consignment, is given in Appendix 4-J
! !634
• Export Obligation Period (EOP) Extension for units under BIFR/

Rehabilitation.
A company holding Advance Authorisation and registered with BIFR/

Rehabilitation Department of State Government or any firm/company
acquiring a unit holding Advance Authorisation which is under BIFR/
Rehabilitation, may be permitted export obligation extension for the
Advance Authorisation(s) held by the acquired unit, as per rehabilitation
package prepared by operating agency and approved by BIFR/
Rehabilitation Department of State Government. If time-period upto which
EO extension is to be granted is not specifically mentioned in the BIFR
order, EO extension of two years from the date of expiry of EOP (including
extended period) or the date of BIFR order, whichever is later, shall be
granted without payment of composition fee.
• Re-import of exported goods under Duty Exemption/Remission

Scheme
Goods exported under Advance Authorisation/Duty Free Import
Authorisation may be re-imported in same or substantially same form
subject to such conditions as may be specified by Department of Revenue.
Authorisation holder shall also inform about such re-importation to the
Regional Authority which had issued the Authorisation within one month
from date of re-import.
23.4.1 Duty Free Import Authorisation Scheme (DFIA) DFIA

Scheme
(a) Duty Free Import Authorisation is issued to allow duty free import of
inputs. In addition, import of oil and catalyst which is consumed/utilised in
the process of production of export product, may also be allowed.
• Duties Exempted and Admissibility of Cenvat and Drawback
i. Duty Free Import Authorisation shall be exempted only from payment of

Basic Customs Duty.
ii. Additional customs duty/excise duty, being not exempt, shall be

adjusted as CENVAT credit as per DoR rules.
! !635
iii. Drawback as per rate determined and fixed by Central Excise authority
shall be available for duty paid inputs, whether imported or indigenous,
used in the export product. However, in case such drawback is claimed
for inputs not specified in SION, the applicant should have indicated
clearly details of such duty paid inputs also in the application for Duty
Free Import Authorisation, and as per the details mentioned in the
application, the Regional Authority should also have clearly endorsed
details of such duty paid inputs in the condition sheet of the Duty Free
Import Authorisation.
• Eligibility
i. Duty Free Import Authorisation shall be issued on post export basis for
products for which Standard Input Output Norms have been notified.
ii. Merchant Exporter shall be required to mention name and address of

supporting manufacturer of the export product on the export document,
viz., Shipping Bill/Airway Bill/Bill of Export/ARE-1/ARE-3.
iii. Application is to be filed with concerned Regional Authority before

effecting export under Duty Free Import Authorisation.
• Minimum Value Addition
Minimum value addition of 20% shall be required to be achieved. For items

where higher value addition has been prescribed under Advance
Authorisation in Appendix 4C, the same value addition shall be applicable
for Duty Free Import Authorisation also.
• Validity and Transferability of DFIA
i. Applicant shall file online application to Regional Authority concerned

before starting export under DFIA.
ii. Export shall be completed within 12 months from the date of online
filing of application and generation of file number.
iii. While doing export/supply, applicant shall indicate file number on the
export documents viz., Shipping Bill/Airway Bill/ Bill of Export/ARE-1/
ARE-3, Central Excise certified Invoice.
! !636
iv. After completion of exports and realisation of proceeds, request for

issuance of transferable Duty Free Import Authorisation may be made to
concerned Regional Authority within a period of twelve months from the
date of export or six months (or additional time allowed by RBI for
realisation) from the date of realisation of export proceeds, whichever is
later.
v. Applicant shall be allowed to file application beyond 24 months from the

date of generation of file number as per paragraph 9.03 of Handbook of
Procedures.
vi. Separate DFIA shall be issued for each SION and each port.
vii.Exports under DFIA shall be made from from a single port as mentioned
in paragraph 4.37 of Handbook of Procedures.
viii.No Duty Free Import Authorisation shall be issued for an export product
where SION prescribes ‘Actual User’ condition for any input.
ix. Regional Authority shall issue transferable DFIA with a validity of 12

months from the date of issue. No further revalidation shall be granted
by Regional Authority.
• Sensitive Items under Duty Free Import Authorisation
(a)In respect of resultant products requiring following inputs, exporter shall

be required to provide declaration with regard to technical
characteristics, quality and specification in Shipping Bill:
“Alloy steel including Stainless Steel, Copper Alloy, Synthetic Rubber,

Bearings, Solvent, Perfumes/Essential Oil/ Aromatic Chemicals,
Surfactants, Relevant Fabrics, marble, Articles made of polypropylene,
Articles made of Paper and Paper Board, Insecticides, Lead Ingots, Zinc
Ingots, Citric Acid, Relevant Glass fibre reinforcement (Glass fibre,
Chopped/Stranded Mat, Roving Woven Surfacing Mat), Relevant Synthetic
Resin (Unsaturated Polyester Resin, Epoxy Resin, Vinyl Ester Resin,
Hydroxy Ethyl Cellulose), Lining Material”.
! !637
(b)While issuing Duty Free Import Authorisation, Regional Authority shall

mention technical characteristics, quality and specification in respect of
above inputs in the Authorisation.
23.4.2 Schemes for Exporters of Gems and Jewellery
Exporters of gems and jewellery can import/procure duty free input for
manufacture of export product.
Following items, if exported, would be eligible:
a. Gold jewellery, including partly processed jewellery and articles

including medallions and coins (excluding legal tender coins), whether
plain or studded, containing gold of 8 carats and above;
b. Silver jewellery including partly processed jewellery, silverware, silver

strips and articles including medallions and coins (excluding legal tender
coins and any engineering goods) containing more than 50% silver by
weight;
c. Platinum jewellery including partly processed jewellery and articles

including medallions and coins (excluding legal tender coins and any
engineering goods) containing more than 50% platinum by weight.
The schemes are as follows:
a. Advance Procurement/Replenishment of Precious Metals from

Nominated Agencies;
b. Replenishment Authorisation for Gems;
c. Replenishment Authorisation for Consumables;
d. Advance Authorisation for Precious Metals.
! !638
• Advance Procurement/ Replenishment of Precious Metals from

Nominated Agencies
i. Exporter of gold/silver/platinum jewellery and articles thereof including

mountings and findings may obtain gold/silver/platinum as an input for
export product from Nominated Agency, in advance or as replenishment
after export in accordance with the procedure specified in this behalf.
ii. The export would be subject to wastage norms and minimum value
addition as prescribed in paragraph 4.60 and 4.61 respectively in the
Handbook of Procedures.
• Replenishment Authorisation for Gems
i. Exporter may obtain Replenishment Authorisation for Gems from

Regional Authority in accordance with procedure specified in Handbook
of Procedures.
ii. Replenishment Authorisation for Gems may be issued against export

including that made against supply by Nominated Agency (paragraph
4.41 of FTP) and against supply by foreign buyer (paragraph 4.45 of
FTP).
iii. In case of plain or studded gold/silver/platinum jewellery and articles,

value of such Authorisation shall be determined with reference to
realisation in excess of prescribed minimum value addition.
Replenishment Authorisation for Gems shall be freely transferable.
iv. Replenishment Rate and item of import will be as prescribed in Appendix

4G.
• Replenishment Authorisation for Consumables
a. Replenishment authorisation for duty free import of Consumables, Tools

and other items namely, Tags and labels, Security censor on card,
Staple wire, Poly bag (as notified by Customs) for Jewellery made out of
precious metals (other than Gold and Platinum) equal to 2% and for Cut
and Polished Diamonds and Jewellery made out of Gold and Platinum
equal to 1% of FOB value of exports of the preceding year, may be
issued on production of Chartered Accountant Certificate indicating the
! !639
export performance. However, in case of Rhodium finished Silver

jewellery, entitlement will be 3% of FOB value of exports of such
jewellery. This Authorisation shall be non-transferable and subject to
actual user condition.
b. Application for import of consumables as given above shall be filed

online to the concerned Regional Authority in ANF 4H.
• Advance Authorisation for Precious Metals.
a. Advance Authorisation shall be granted on pre-import basis with ‘Actual

User’ condition for duty free import of:
i. Gold of fineness not less than 0.995 and mountings, sockets, frames
and findings of 8 carats and above;
ii. Silver of fineness not less than 0.995 and mountings, sockets, frames
and findings containing more than 50% silver by weight;
iii. Platinum of fineness not less than 0.900 and mountings, sockets,
frames and findings containing more than 50% platinum by weight.
b. Advance Authorisation shall carry an export obligation which shall be

fulfilled as per procedure indicated in Chapter 4 of Handbook of
Procedures.
c. Value Addition shall be as per paragraph 4.38 of FTP and 4.61 of

Handbook of Procedures.
• Value Addition
Minimum Value Addition norms for gems and jewellery sector are given in
paragraph 4.61 of Handbook of Procedures. It would be calculated as
under:
A = FOB value of the export realised/FOR value of supply received.
B = Value of inputs (including domestically procured) such as gold/silver/

platinum content in export product plus admissible wastage along with
value of other items such as gemstone etc. Wherever gold has been
! !640
obtained on loan basis, value shall also include interest paid in free foreign
exchange to foreign supplier.
• Nominated Agencies
a. Exporters may obtain gold/silver/platinum from Nominated Agency.

Exporter in EOU and units in SEZ would be governed by the respective
provisions of Chapter-6 of FTP/SEZ Rules, respectively.
b. Nominated Agencies are MMTC Ltd, The Handicraft and Handlooms

Exports Corporation of India Ltd, The State Trading Corporation of India
Ltd, PEC Ltd, STCL Ltd, MSTC Ltd, and Diamond India Limited
c. Four Star Export House from Gems and Jewellery sector and Five Star
Export House from any sector may be recognised as Nominated Agency
by Regional Authority.
d. Reserve Bank of India can authorise any bank as Nominated Agency.
e. Procedure for import of precious metal by Nominated Agency (other

than those authorised by Reserve Bank of India and the Gems and
Jewellery units operating under EOU and SEZ schemes) and the
monitoring mechanism thereof shall be as per the provisions laid down
in Handbook of Procedures.
f. A bank authorised by Reserve Bank of India is allowed export of gold

scrap for refining and import standard gold bars as per Reserve Bank of
India guidelines.
• Import of Diamonds for Certification/Grading and Re- export
Following agencies are permitted to import diamonds to their laboratories

without any import duty, for the purpose of certification/grading reports,
with a condition that the same should be re-exported with the certification/
grading reports, as per the procedure laid down in Hand Book of
Procedures:
1. Gemological Institute of America (GIA), Mumbai, Maharashtra.
2. Indian Diamond Institute, Surat, Gujarat, India.
! !641
3. International Institute of Diamond Grading and Research India Pvt Ltd.,

Surat, Gujarat, India.
• Export of Cut and Polished Diamonds for Certification/ Grading &

Re-import
List of authorised laboratories for certification/grading of diamonds of 0.25

carat and above are given in paragraph 4.74 of Handbook of Procedures.
• Export of Cut and Polished Diamonds with Re-import Facility at

Zero Duty
An exporter (with annual export turnover of Rs. 5 crores for each of the
last three years) may export cut and polished diamonds (each of 0.25 carat
or above) to any of the agencies/laboratories mentioned under paragraph
4.74 of Handbook of Procedures with re-import facility at zero duty within 3
months from the date of export. Such facility of re-import at zero duty will
be subject to guidelines issued by Central Board of Customs and Excise,
Department of Revenue.
• Export against Supply by Foreign Buyer
i. Where export orders are placed on nominated agencies/status holder/

exporters of three years standing having an annual average turnover of
Rupees five crores during preceding three financial years, foreign buyer
may supply in advance and free of charge, gold/silver/platinum, alloys,
findings and mountings of gold/silver/platinum for manufacture and
export.
ii. Such supplies can also be in advance and may involve semi-finished
jewellery including findings/mountings/components for repairs/re-make
and export subject to minimum value addition as prescribed under
paragraph 4.61 of Handbook of Procedures. In such cases of export,
wastage norms as per paragraph 4.60 of Handbook of Procedures shall
apply.
iii. Exports may be made by nominated agencies directly or through their

associates or by status holder/exporter. Import and Export of findings
shall be on net to net basis.
! !642
• Export Promotion Tours/Export of Branded Jewellery
a. Nominated Agencies and their associates, with approval of Department

of Commerce and with approval of Gem and Jewellery Export Promotion
Council (GJEPC), may export gold/silver/platinum jewellery and articles
thereof for exhibitions abroad.
b. Personal carriage of gold/silver/platinum jewellery, precious, semi-

precious stones, beads and articles and export of branded jewellery is
also permitted, subject to conditions as in Handbook of Procedures.
• Personal Carriage of Export/Import Parcels

Personal carriage of gems and jewellery export parcels by foreign bound
passengers and import parcels by an Indian importer/foreign national may
be permitted as per the Handbook of Procedures.
• Export by Post
Export of jewellery through Foreign Post Office including via Speed Post is
allowed. The jewellery parcel shall not exceed 20 kgs by weight.
• Private/Public Bonded Warehouse

Private/Public Bonded Warehouses may be set up in SEZ/DTA for import
and re-export of cut and polished diamonds, cut and polished coloured
gemstones, uncut and unset precious and semi-precious stones, subject to
achievement of minimum value addition of 5% by DTA units.
• Diamond and Jewellery Dollar Accounts
a. Firms and companies dealing in purchase/sale of rough or cut and

polished diamonds/precious metal jewellery plain, minakari and/or
studded with/without diamond and/or other stones with a track record
of at least two years in import or export of diamonds/coloured
gemstones/diamond and coloured gemstones studded jewellery/plain
gold jewellery and having an average annual turnover of Rs. 3 crore or
above during preceding three licensing years may also carry out their
business through designated Diamond Dollar Accounts (DDA).
! !643
b. Dollars in such accounts available from bank finance and/or export

proceeds shall be used only for:
i. Import/purchase of rough diamonds from overseas/ local sources;

ii. Purchase of cut and polished diamonds, coloured gemstones and
plain gold jewellery from local sources;
iii. Import/purchase of gold from overseas/nominated agencies and
repayment of dollar loans from the bank; and
iv. Transfer to Rupee Account of exporter. Details of this DDA Scheme
are given in Handbook of Procedures.
c. A non DDA holder is also permitted to supply cut and polished diamonds
to DDA holder, receive payment in dollars and convert the same into
Rupees within 7 days. Cut and polished diamonds and coloured
gemstones so supplied by non-DDA holder will also be counted towards
discharge of his export obligation and/or entitle him to replenishment
Authorisation.
• Export of cut and polished precious and semi-precious stones for

treatment and re-import
Gems and Jewellery exporters shall be allowed to export cut and polished
precious and semi-precious stones for the treatment and re-import as per
customs rules and regulations. In case of re-export, the exporter shall be
entitled for duty drawback as per rules.
• Re-import of rejected Jewellery

Gems and Jewellery exporters shall be allowed to re-import rejected
precious metal jewellery as per paragraph 4.91 of Handbook of Procedures.
• Export and import on consignment basis

Gems and Jewellery exporters shall be allowed to export and import
diamond, gemstones and jewellery on consignment basis as per Handbook
of Procedures and Customs Rules and Regulations.
! !644
23.5 EXPORT PROMOTION CAPITAL GOODS (EPCG)

SCHEME
The objective of the EPCG Scheme is to facilitate import of capital goods

for producing quality goods and services to enhance India’s export
competitiveness.
a. EPCG Scheme allows import of capital goods for pre-production,

production and post-production at Zero customs duty. Alternatively, the
Authorisation holder may also procure Capital Goods from indigenous
sources in accordance with provisions of paragraph 5.07 of FTP. Capital
goods for the purpose of the EPCG scheme shall include:
• Capital Goods as defined in Chapter 9 including in CKD/SKD condition

thereof;
• Computer software systems;
• Spares, moulds, dies, jigs, fixtures, tools and refractories for initial
lining and spare refractories; and
• Catalysts for initial charge plus one subsequent charge.
b. Import of capital goods for Project Imports notified by Central Board of

Excise and Customs is also permitted under EPCG Scheme.
c. Import under EPCG Scheme shall be subject to an export obligation

equivalent to 6 times of duty saved on capital goods, to be fulfilled in 6
years reckoned from date of issue of Authorisation.
d. Authorisation shall be valid for import for 18 months from the date of
issue of Authorisation. Revalidation of EPCG Authorisation shall not be
permitted.
e. In case countervailing duty (CVD) is paid in cash on imports under

EPCG, incidence of CVD would not be taken for computation of net duty
saved, provided CENVAT is not availed.
f. Second hand capital goods shall not be permitted to be imported under

EPCG Scheme.
! !645
g. Authorisation under EPCG Scheme shall not be issued for import of any
Capital Goods (including Captive plants and Power Generator Sets of
any kind) for
(i) Export of electrical energy (power)

(ii) Supply of electrical energy (power) under deemed exports
(iii) Use of power (energy) in their own unit, and
(iv) Supply/Export of electricity transmission services
h. Import of items which are restricted for import shall be permitted under
EPCG Scheme only after approval from Exim Facilitation Committee
(EFC) at DGFT Headquarters.
i. If the goods proposed to be exported under EPCG authorisation are

restricted for export, the EPCG authorisation shall be issued only after
approval for issuance of export authorisation from Exim Facilitation
Committee at DGFT Headquarters.
• Coverage
a. EPCG scheme covers manufacturer exporters with or without supporting

manufacturer(s), merchant exporters tied to supporting manufacturer(s)
and service providers. Name of supporting manufacturer(s) shall be
endorsed on the EPCG authorisation before installation of the capital
goods in the factory/premises of the supporting manufacturer (s). In
case of any change in supporting manufacturer (s) the RA shall intimate
such change to jurisdictional Central Excise Authority of existing as well
as changed supporting manufacturer (s) and the Customs at port of
registration of Authorisation.
b. Export Promotion Capital Goods (EPCG) Scheme also covers a service

provider who is designated/certified as a Common Service Provider
(CSP) by the DGFT, Department of Commerce or State Industrial
Infrastructural Corporation in a Town of Export Excellence subject to
provisions of Foreign Trade Policy/Handbook of Procedures with the
following conditions:-
! !646
i. Export by users of the common service, to be counted towards

fulfilment of EO of the CSP shall contain the EPCG authorisation
details of the CSP in the respective Shipping bills and concerned RA
must be informed about the details of the Users prior to such export;
ii. Such export will not count towards fulfilment of specific export
obligations in respect of other EPCG authorisations (of the CSP/User);
and
iii. Authorisation holder shall be required to submit Bank Guarantee (BG)

which shall be equivalent to the duty saved. BG can be given by CSP
or by any one of the users or a combination thereof, at the option of
the CSP.
• Actual User Condition

Import of capital goods shall be subject to Actual User condition till export
obligation is completed.
• Export Obligation (EO)
Following conditions shall apply to the fulfilment of EO:-
a. EO shall be fulfilled by the authorisation holder through export of goods

which are manufactured by him or his supporting manufacturer/services
rendered by him, for which the EPCG authorisation has been granted.
b. EO under the scheme shall be, over and above, the average level of
exports achieved by the applicant in the preceding three licensing years
for the same and similar products within the overall EO period including
extended period, if any; except for categories mentioned in paragraph
5.13(a) of HBP. Such average would be the arithmetic mean of export
performance in the preceding three licensing years for same and similar
products.
c. In case of indigenous sourcing of Capital Goods, specific EO shall be

25% less than the EO stipulated in Para 5.01.
d. Shipments under Advance Authorisation, DFIA, Drawback scheme or

reward schemes under Chapter 3 of FTP; would also count for fulfillment
of EO under EPCG Scheme.
! !647
e. Export shall be physical export. However, deemed exports as specified

in paragraph 7.02 (a), (b), (e), (f) and (h) of FTP shall also be counted
towards fulfillment of export obligation, alongwith usual benefits
available under paragraph 7.03 of FTP.
f. EO can also be fulfilled by the supply of ITA-I items to DTA, provided

realisation is in free foreign exchange.
g. Royalty payments received by the Authorisation holder in freely

convertible currency and foreign exchange received for R&D services
shall also be counted for discharge under EPCG.
h. Payment received in rupee terms for such Services as notified in

Appendix 3E shall also be counted towards discharge of export
obligation under the EPCG scheme.
• Provision for units under BIFR /Rehabilitation

A company holding EPCG authorisation and registered with BIFR/
Rehabilitation Department of State Government or any firm/ company
acquiring a unit holding EPCG authorisation which is under BIFR/
Rehabilitation, may be permitted EO extension for the EPCG
authorisation(s) held by the acquired unit, as per rehabilitation package
prepared by operating agency and approved by BIFR/Rehabilitation
Department of State Government. If time-period upto which EO extension
is to be granted is not specifically mentioned in the BIFR order, EO
extension of 3 years from the date of expiry of EOP (including extended
period) or the date of BIFR order, whichever is later, shall be granted
without payment of composition fee.
• LUT/Bond/BG in case of Agro units

LUT/Bond or 15% BG, as applicable, may be furnished for EPCG
authorisation granted to units in Agri-Export Zones provided EPCG
authorisation is taken for export of primary agricultural product(s) notified
or their value added variants.
• Indigenous Sourcing of Capital Goods and Benefits to Domestic

Supplier
A person holding an EPCG authorisation may source capital goods from a
domestic manufacturer. Such domestic manufacturer shall be eligible for
deemed export benefit under paragraph 7.03 of FTP. Such domestic
! !648
sourcing shall also be permitted from EOUs and these supplies shall be
counted for purpose of fulfilment of positive NFE by said EOU as provided
in Para 6.09 (a) of FTP.
• Calculation of Export Obligation

In case of direct imports, EO shall be reckoned with reference to actual
duty saved amount. In case of domestic sourcing, EO shall be reckoned
with reference to notional Customs duties saved on FOR value.
• Incentive for Early EO Fulfilment

With a view to accelerating exports, in cases where Authorisation holder
has fulfilled 75% or more of specific export obligation and 100% of
Average Export Obligation till date, if any, in half or less than half the
original export obligation period specified, remaining export obligation shall
be condoned and the Authorisation redeemed by RA concerned. However
no benefit under para 5.21 of HBP shall be permitted where incentive for
early EO fulfilment has been availed.
• Reduced EO for Green Technology Products

For exporters of Green Technology Products, Specific EO shall be 75% of
EO as stipulated in Para 5.01. There shall be no change in average EO
imposed, if any, as stipulated in Para 5.04. The list of Green Technology
Products is given in Para 5.29 of HBP.
• Reduced EO for North East Region and Jammu and Kashmir

For units located in Arunachal Pradesh, Assam, Manipur, Meghalaya,
Mizoram, Nagaland, Sikkim, Tripura and Jammu and Kashmir, specific EO
shall be 25% of the EO, as stipulated in Para 5.01. There shall be no
change in average EO imposed, if any, as stipulated in Para 5.04.
• Post Export EPCG Duty Credit Scrip(s)
a. Post Export EPCG Duty Credit Scrip(s) shall be available to exporters

who intend to import capital goods on full payment of applicable
duties in cash and choose to opt for this scheme.
b. Basic Customs duty paid on Capital Goods shall be remitted in the

form of freely transferable duty credit scrip(s), similar to those issued
under Chapter 3 of FTP.
! !649
c. Specific EO shall be 85% of the applicable specific EO under the EPCG

Scheme. However, average EO shall remain unchanged.
d. Duty remission shall be in proportion to the EO fulfilled.
e. All provisions for utilization of scrips issued under Chapter 3 of FTP

shall also be applicable to Post Export EPCG Duty Credit Scrip (s).
f. All provisions of the existing EPCG Scheme shall apply insofar as they
are not inconsistent with this scheme.
23.6 EXPORT ORIENTED UNITS (EOUs), ELECTRONICS

HARDWARE TECHNOLOGY PARKS (EHTPs), SOFTWARE
TECHNOLOGY PARKS (STPs) AND BIO-TECHNOLOGY
PARKS (BTPs)
a. Units undertaking to export their entire production of goods and

services (except permissible sales in DTA), may be set up under the
Export Oriented Unit (EOU) Scheme, Electronics Hardware Technology
Park (EHTP) Scheme, Software Technology Park (STP) Scheme or Bio-
Technology Park (BTP) Scheme for manufacture of goods, including
repair, re-making, reconditioning, re-engineering, rendering of services,
development of software, agriculture including agro-processing,
aquaculture, animal husbandry, bio-technology, floriculture, horticulture,
pisciculture, viticulture, poultry and sericulture. Trading units are not
covered under these schemes.
b. Objectives of these schemes are to promote exports, enhance foreign

exchange earnings, attract investment for export production and
employment generation.
• Export and Import of Goods
a. An EOU/EHTP/STP/BTP unit may export all kinds of goods and services

except items that are prohibited in ITC (HS).
b. Export of Special Chemicals, Organisms, Materials, Equipment and

Technologies (SCOMET) shall be subject to fulfilment of the conditions
indicated in ITC (HS). In respect of an EOU, permission to export a
! !650
prohibited item may be considered, by BOA, on a case to case basis,

provided such raw materials are imported and there is no procurement
of such raw material from DTA.
c. Procurement and supply of export promotion material like brochure/

literature, pamphlets, hoardings, catalogues, posters etc up to a
maximum value limit of 1.5% of FOB value of previous years exports
shall also be allowed.
d. An EOU/EHTP/STP/BTP unit may import and/or procure, from DTA or

bonded warehouses in DTA/international exhibition held in India,
without payment of duty, all types of goods, including capital goods,
required for its activities, provided they are not prohibited items of
import in the ITC (HS). Any permission required for import under any
other law shall be applicable. Units shall also be permitted to import
goods including capital goods required for approved activity, free of cost
or on loan/lease from clients. Import of capital goods will be on a self-
certification basis. Goods imported by a unit shall be with actual user
condition and shall be utilised for export production.
e. State Trading regime shall not apply to EOU manufacturing units.

However, in respect of Chrome Ore/Chrome concentrate, State Trading
Regime as stipulated in export policy of these items, will be applicable
to EOUs.
f. EOU/EHTP/STP/BTP units may import/procure from DTA, without

payment of duty, certain specified goods for creating a central facility.
Software EOU/DTA units may use such facility for export of software.
g. An EOU engaged in agriculture, animal husbandry, aquaculture,

floriculture, horticulture, pisciculture, viticulture, poultry or sericulture
may be permitted to remove specified goods in connection with its
activities for use outside bonded area.
h. Gems and jewellery EOUs may source gold/silver/platinum through

nominated agencies on loan/outright purchase basis. Units obtaining
gold/silver/platinum from nominated agencies, either on loan basis or
outright purchase basis shall export gold/silver/platinum within 90 days
from date of release.
! !651
i. EOU/EHTP/STP/BTP units, other than service units, may export to

Russian Federation in Indian Rupees against repayment of State Credit/
Escrow Rupee Account of buyer subject to RBI clearance, if any.
j. Procurement and export of spares/components, upto 5% of FOB value

of exports, may be allowed to same consignee/buyer of the export
article, subject to the condition that it shall not count for NFE and direct
tax benefits.
k. BOA may allow, on a case to case basis, requests of EOU/EHTP/STP/

BTP units in sectors other than Gems and Jewellery, for consolidation of
goods related to manufactured articles and export thereof along with
manufactured article. Such goods may be allowed to be imported/
procured from DTA by EOU without payment of duty, to the extent of
5% FOB value of such manufactured articles exported by the unit in
preceding financial year. Details of procured/imported goods and articles
manufactured by the EOU will be listed separately in the export
documents. In such cases, value of procured/imported goods will not be
taken into account for calculation of NFE and DTA sale entitlement. Such
procured/imported goods shall not be allowed to be sold in DTA. BOA
may also specify any other conditions.
• Second-hand Capital goods
Second hand capital goods, without any age limit, may also be imported
duty free.
• Leasing of Capital Goods
a. An EOU/EHTP/STP/BTP unit may, on the basis of a firm contract

between parties, source capital goods from a domestic/foreign leasing
company without payment of customs/excise duty. In such a case, EOU/
EHTP/STP/BTP unit and domestic/foreign leasing company shall jointly
file documents to enable import/procurement of capital goods without
payment of duty.
b. An EOU/EHTP/BTP/STP unit may sell capital goods and lease back the
same from a Non Banking Financial Company (NBFC), subject to the
! !652
i. The unit should obtain permission from the jurisdictional Deputy/

Assistant Commissioner of Customs or Central Excise, for entering
into transaction of ‘Sale and Lease Back of Assets’, and submit full
details of the goods to be sold and leased back and the details of
NBFC;
ii. The goods sold and leased back shall not be removed from the unit’s
premises;
iii. The unit should be NFE positive at the time when it enters into sale
and lease back transaction with NBFC;
iv. A joint undertaking by the unit and NBFC should be given to pay duty
on goods in case of violation or contravention of any provision of the
notification under which these goods were imported or procured, read
with Customs Act, 1962 or Central Excise Act, 1944, and that the lien
on the goods shall remain with the Customs/Central Excise
Department, which will have first charge over the said goods for
recovery of sum due from the unit to Government under provision of
Section 142(b) of the Customs Act, 1962 read with the Customs
(Attachment of Property of Defaulters for Recovery of Govt. Dues)
Rules, 1995.
• Net Foreign Exchange Earnings

EOU/EHTP/STP/BTP unit shall be a positive net foreign exchange earner
except for sector specific provision of Appendix 6 B of Appendices and
ANFs, where a higher value addition shall be required. NFE Earnings shall
be calculated cumulatively in blocks of five years, starting from
commencement of production. Whenever a unit is unable to achieve NFE
due to prohibition/restriction imposed on export of any product mentioned
in LoP, the five year block period for calculation of NFE earnings may be
suitably extended by BoA. Further, wherever a unit is unable to achieve
NFE due to adverse market condition or any grounds of genuine hardship
having adverse impact on functioning of the unit, the five year block period
for calculation of NFE earnings may be extended by BOA for a period of
upto one year, on a case to case basis.
! !653
• Letter of Permission/Letter of Intent and Legal Undertaking
a. On approval, a Letter of Permission (LoP)/Letter of Intent (LoI) shall be

issued by DC/designated officer to EOU/ EHTP/STP/BTP unit. LoP/LoI
shall have an initial validity of 2 years to enable the Unit to construct
the plant and install the machinery and by this time the unit should
have commenced production. In case the unit is not able to commence
production in initial validity of 2 years, an extension of one year may be
given by the DC for valid reasons to be recorded in writing. Subsequent
extension of one year may be given by the Unit Approval Committee
subject to condition that two-thirds of activities including construction,
relating to the setting up of the Unit are complete and Chartered
Engineer’s certificate to this effect is submitted by the Unit. Further
extension, if necessary, will be granted by the Board of Approval. Once
unit commences production, LoP/LoI issued shall be valid for a period of
5 years for its activities. This period may be extended further by DC for
a period of 5 years at a time.
b. LoP/LoI issued to EOU/EHTP/STP/BTP units by concerned authority,

subject to compliance of provision in Para 6.01 above, would be
construed as an Authorisation for all purposes.
c. Unit shall execute an LUT with DC concerned. Failure to ensure positive

NFE or to abide by any of the terms and conditions of LoP/LoI/IL/LUT
shall render the unit liable to penal action under provisions of the FT (D
and R) Act, as amended, and Rules and Orders made thereunder,
without prejudice to action under any other law/rules and cancellation
or revocation of LoP/LoI/IL.
• Investment Criteria
Only projects having a minimum investment of Rs. 1 Crore in plant and
machinery shall be considered for establishment as EOUs. However, this
shall not apply to existing units, units in EHTP/STP/BTP, and EOUs in
Handicrafts/Agriculture/Floriculture/Aquaculture/Animal Husbandry/
Information Technology, Services, Brass Hardware and Handmade jewellery
sectors. BOA may allow establishment of EOUs with a lower investment
criteria.
! !654
• Applications and Approvals
a. Applications for setting up of units under EOU scheme shall be approved

or rejected by the Units Approval Committee within 15 days as per
criteria indicated in Handbook of Procedures (HBP).
b. In other cases, approval may be granted by BOA set up for this purpose
as indicated in HBP.
c. Proposals for setting up EOU requiring industrial licence may be granted

approval by DC after clearance of proposal by BOA and DIPP within 45
days.
d. Applications for conversion into an EOU/EHTP/STP/BTP unit from

existing DTA units, having an investment of Rs. 50 crores and above in
plant and machinery or exporting Rs. 50 crores and above annually,
shall be placed before BOA for a decision.
• DTA Sale of Finished Products/Rejects/Waste/ Scrap/Remnants

and By-products
Entire production of EOU/EHTP/STP/BTP units shall be exported subject to

following:
a. Units, other than gems and jewellery units, may sell goods upto 50% of
FOB value of exports, subject to fulfilment of positive NFE, on payment
of concessional duties. Within entitlement of DTA sale, unit may sell in
DTA, its products similar to goods which are exported or expected to be
exported from units. However, units which are manufacturing and
exporting more than one product can sell any of these products into
DTA, upto 90% of FOB value of export of the specific products, subject
to the condition that total DTA sale does not exceed the overall
entitlement of 50% of FOB value of exports for the unit, as stipulated
above. No DTA sale at concessional duty shall be permissible in respect
of motor cars, alcoholic liquors, books, tea (except instant tea), pepper
& pepper products, marble and such other items as may be notified
from time to time.
! !655
Such DTA sale shall also not be permissible to units engaged in activities
o f p a c k a g i n g / l a b e l l i n g / s e g r e g a t i o n / r e f r i g e ra t i o n / c o m p a c t i n g /
micronisation/pulverisation/granulation/conversion of monohydrate form
of chemical to anhydrous form or vice-versa. Sales made to a unit in SEZ
shall also be taken into account for purpose of arriving at FOB value of
export by EOU provided payment for such sales are made from Foreign
Currency Account of SEZ unit. Sale to DTA would also be subject to
mandatory requirement of registration of pharmaceutical products
(including bulk drugs). An amount equal to Anti Dumping duty under
section 9A of the Customs Tariff Act, 1975 leviable at the time of import,
shall be payable on the goods used for the purpose of manufacture or
processing of the goods cleared into DTA from the unit.
b. For services, including software units, sale in DTA in any mode,

including on line data communication, shall also be permissible up to
50% of FOB value of exports and /or 50% of foreign exchange earned,
where payment of such services is received in foreign exchange.
c. Gems and jewellery units may sell upto 10% of FOB value of exports of
the preceding year in DTA, subject to fulfilment of positive NFE. In
respect of sale of plain jewellery, recipient shall pay concessional rate of
duty as applicable to sale from nominated agencies. In respect of
studded jewellery, duty shall be payable as applicable.
d. Unless specifically prohibited in LoP, rejects within an overall limit of

50% may be sold in DTA on payment of duties as applicable to sale
under sub-para 6.08(a) on prior intimation to Customs authorities. Such
sales shall be counted against DTA sale entitlement. Sale of rejects upto
5% of FOB value of exports shall not be subject to achievement of NFE.
e. Scrap/waste/remnants arising out of production process or in

connection therewith may be sold in DTA, as per SION notified under
Duty Exemption Scheme, on payment of concessional duties as
applicable, within overall ceiling of 50% of FOB value of exports. Such
sales of scrap/waste/remnants shall not be subject to achievement of
positive NFE. In respect of items not covered by norms, DC may fix ad
hoc norms for a period of six months and within this period, norms
should be fixed by Norms Committee. Ad-hoc norms will continue till
such time norms are fixed by Norms Committee. Sale of waste/scrap/
remnants by units not entitled to DTA sale, or sales beyond DTA sale
! !656
entitlement, shall be on payment of full duties. Scrap/waste/remnants

may also be exported.
f. There shall be no duties/taxes on scrap/waste/remnants, in case same

are destroyed with permission of Customs authorities.
g. By-products included in LoP may also be sold in DTA subject to

achievement of positive NFE, on payment of applicable duties, within
the overall entitlement of sub-para 6.08(a). Sale of by-products by units
not entitled to DTA sales, or beyond entitlements of sub-para 6.08 (a),
shall also be permissible on payment of full duties.
h. EOU/EHTP/STP/BTP units may sell finished products, except pepper and

pepper products and marble, which are freely importable under FTP in
DTA, under intimation to DC, against payment of full duties, provided
they have achieved positive NFE. An amount equal to Anti Dumping
duty under section 9A of the Customs Tariff Act, 1975 leviable at the
time of import, shall be payable on the goods used for the purpose of
manufacture or processing of the goods cleared into DTA from the unit.
i. In case of units manufacturing electronics hardware and software, NFE
and DTA sale entitlement shall be reckoned separately for hardware and
software.
j. In case of DTA sale of goods manufactured by EOU/EHTP/STP/BTP,

where basic duty and CVD is nil, such goods may be considered as non-
excisable for payment of duty.
k. In case of new EOUs, advance DTA sale will be allowed not exceeding
50% of its estimated exports for first year, except pharmaceutical units
where this will be based on its estimated exports for first two years.
l. Units in Textile and Granite sectors shall have an option to sell goods
into DTA in terms of sub-paras 6.08 (a), (d), (e), (g) and (k) above, on
payment of an amount equal to aggregate of duties of excise leviable
under section 3 of the Central Excise Act, 1944 or under any other law
for the time being in force, on like goods produced or manufactured in
India other than in an EOU, subject to the condition that they have not
used duty paid imported inputs in excess of 3% of the FOB value of
exports of the preceding year and they have achieved positive NFE.
! !657
Once this option is exercised, the unit will not be allowed to import any
duty free inputs for any purpose.
m. Procurement of spares/components, up to 2% of the value of

manufactured articles, cleared into DTA, during the preceding year, may
be allowed for supply to the same consignee/buyer for the purpose of
after-sale-service. The same can be cleared in DTA on payment of
applicable duty but such clearances shall be within the overall
entitlement of the unit for DTA sale at concessional rate of duty as
prescribed in Para 6.08 (a) of FTP.
• Other Supplies
Following supplies effected from EOU/EHTP/STP/BTP units will be counted

for fulfilment of positive NFE. Such supplies shall not include “marble”,
except if such supply of marble is an inter unit supply as provided at sub-
para (c) below:
a. Supplies effected in DTA to holders of Advance Authorisation/Advance

Authorisation for annual requirement/DFIA under duty exemption/
remission scheme/EPCG scheme. However, printing sector EOUs (or any
other sector that may be notified in HBP), can’t supply goods, where
basic customs duty and CVD is nil or exempted otherwise, to holders of
Advance Authorisation/Advance Authorisation for annual requirement.
b. Supplies effected in DTA against foreign exchange remittance received

from overseas.
c. Supplies to other EOU/EHTP/STP/BTP/SEZ units, provided that such

goods are permissible for procurement in terms of Para 6.01 of FTP.
d. Supplies made to bonded warehouses set up under FTP and/or under

section 65 of Customs Act and free trade and warehousing zones, where
payment is received in foreign exchange.
e. Supplies of goods and services to such organisations which are entitled

for duty free import of such items in terms of general exemption
notification issued by MoF, as may be provided in HBP.
! !658
f. Supplies of Information Technology Agreement (ITA-1) items and

notified zero duty telecom/electronics items.
g. Supplies of items like tags, labels, printed bags, stickers, belts, buttons
or hangers to DTA unit for export.
h. Supply of LPG produced in an EOU refinery to Public Sector domestic oil

companies for being supplied to household domestic consumers at
subsidised prices under the Public Distribution System (PDS) Kerosene
and Domestic LPG Subsidy Scheme, 2002, as notified by the Ministry of
Petroleum and Natural Gas vide notification No. E-20029/18/2001-PP
dated 28.01.2003 (hereinafter referred to as PDS Scheme) subject to
the following conditions:-
i. Only supply of such quantity of LPG would be eligible for which

Ministry of Petroleum and Natural Gas declines permission for export
and requires the LPG to be cleared in DTA; and
ii. The Ministry of Finance by a notification has permitted duty free

imports of LPG for supply under the aforesaid PDS Scheme.
• Export through others
An EOU/EHTP/STP/BTP unit may export goods manufactured/software

developed by it through another exporter or any other EOU/EHTP/STP/SEZ
unit subject to conditions mentioned in Para 6.19 of HBP.
• Entitlement for Supplies from the DTA
a. Supplies from DTA to EOU/EHTP/STP/BTP units will be regarded as

“deemed exports” and DTA supplier shall be eligible for relevant
entitlements under chapter 7 of FTP, besides discharge of export
obligation, if any, on the supplier. Notwithstanding the above, EOU/
EHTP/STP/BTP units shall, on production of a suitable disclaimer from
DTA supplier, be eligible for obtaining entitlements specified in chapter 7
of FTP. For claiming deemed export duty drawback, they shall get brand
rates fixed by DC wherever All Industry Rates of Drawback are not
available.
! !659
b. Suppliers of precious and semi-precious stones, synthetic stones and

processed pearls from DTA to EOU shall be eligible for grant of
Replenishment Authorisations at rates and for items mentioned in HBP.
c. In addition, EOU/EHTP/STP/BTP units shall be entitled to following:-
i. Reimbursement of Central Sales Tax (CST) on goods manufactured in

India. Simple interest @ 6% per annum will be payable on delay in
refund of CST, if the case is not settled within 30 days of receipt of
complete application (as in Para 9.10 (b) of HBP).
ii. Exemption from payment of Central Excise Duty on goods procured

from DTA on goods manufactured in India.
iii. Reimbursement of duty paid on fuel procured from Domestic Oil

Companies/Depots of Domestic Oil Public Sector Undertakings as per
drawback rate notified by DGFT from time to time. Reimbursement of
additional duty of excise levied on fuel under the Finance Acts would
also be admissible.
iv. CENVAT Credit on service tax paid.
Other Entitlements
Other entitlements of EOU/EHTP/STP/BTP units are as under:
a. Exemption from industrial licensing for manufacture of items reserved

for SSI sector.
b. Export proceeds will be realised within nine months.
c. Units will be allowed to retain 100% of its export earnings in the EEFC
account.
d. Unit will not be required to furnish bank guarantee at the time of import
or going for job work in DTA, where:
(i) the unit has turnover Rs. 5 crore or above;
(ii) the unit is in existence for at least three years; and the unit:
! !660
• has achieved positive NFE/export obligation wherever applicable;
• has not been issued a show cause notice or a confirmed demand,

during the preceding 3 years, on grounds other than procedural
violations, under the penal provision of the Customs Act, the Central
Excise Act, the Foreign Trade (Development & Regulation) Act, the
Foreign Exchange Management Act, the Finance Act, 1994 covering
Service Tax or any allied Acts or the rules made thereunder, on
account of fraud/collusion/wilful mis-statement/suppression of facts
or contravention of any of the provisions thereof;
e. 100% FDI investment permitted through automatic route similar to SEZ

units.
f. Units shall pay duty on the goods produced or manufactured and

cleared into DTA on monthly basis in the manner prescribed in the
Central Excise Rules.
g. The Units Approval Committee may consider on a case-to-case basis

request for sharing of infrastructural facilities among EOUs and it shall
forward its recommendation to the Board of Approval for its
consideration. While accepting such proposals, the NFE obligations of
the Units shall not be altered. Such facilities will be available to Units in
EHTP/STP after getting approval from IMSC. However, sharing of
facilities between EOUs and SEZ Units shall not be permitted.
• Inter Unit Transfer
a. Transfer of manufactured goods from one EOU/EHTP/STP/BTP unit to

another EOU/EHTP/STP/BTP unit is allowed with prior intimation to
concerned Development Commissioners of the transferer and transferee
units as well as concerned Customs authorities, following procedure of
in-bond movement of goods. Transfer of manufactured goods shall also
be allowed from EOU/EHTP/STP/BTP unit to a SEZ developer or unit as
per procedure prescribed in SEZ Rules, 2006.
b. Capital goods may be transferred or given on loan to other EOU/EHTP/

STP/BTP/SEZ units, with prior intimation to concerned DC and Customs
authorities. Such transferred goods may also be returned by the second
! !661
unit to the original unit in case of rejection or for any reason without
payment of duty.
c. Goods supplied by one unit of EOU/EHTP/STP/BTP to another unit shall

be treated as imported goods for second unit for payment of duty, on
DTA sale by second unit.
d. In respect of a group of EOUs/EHTPs/STPs/BTP Units which source

inputs centrally in order to obtain bulk discount and/or reduce cost of
transportation and other logistics cost and/or to maintain effective
supply chain, inter unit transfer of goods and services may be permitted
on a case-to-case basis by the Unit Approval Committee. In case inputs
so sourced are imported and then transferred to another unit, then
value of the goods so transferred shall be taken as inflow for the unit
transferring these goods and as outflow for the unit receiving these
goods, for the purpose of calculation of NFE.
• Subcontracting
(a) (i) EOU/EHTP/STP/BTP units, including gems and jewellery units, may
on the basis of annual permission from Customs authorities, subcontract
production processes to DTA through job work which may also involve
change of form or nature of goods, through job work by units in DTA.
(ii) These units may subcontract upto 50% of overall production of

previous year in value terms in DTA with permission of Customs
authorities.
(b) (i) EOU may, with annual permission from Customs authorities,
undertake job work for export, on behalf of DTA exporter, provided that
goods are exported directly from EOU and export document shall jointly be
in name of DTA/EOU. For such exports, DTA units will be entitled for refund
of duty paid on inputs by way of brand rate of duty drawback.
(ii) Duty free import of goods for execution of export order placed on
EOU by foreign supplier on job work basis, would be allowed subject to
condition that no DTA clearance shall be allowed.
! !662
(iii) Subcontracting of both production and production processes may also

be undertaken without any limit through other EOU/EHTP/STP/ BTP/SEZ
units, on the basis of records maintained in unit.
(iv) EOU/EHTP/STP/BTP units may subcontract part of production process

abroad and send intermediate products abroad as mentioned in LoP. No
permission would be required when goods are sought to be exported from
sub-contractor premises abroad. When goods are sought to be brought
back, prior intimation to concerned DC and Customs authorities shall be
given.
(c) Scrap/waste/remnants generated through job work may either be

cleared from job worker’s premises on payment of applicable duty on
transaction value or destroyed in presence of Customs/Central Excise
authorities or returned to unit. Destruction shall not apply to gold, silver,
platinum, diamond, precious and semi-precious stones.
(d) Subcontracting/exchange by gems and jewellery EOUs through other

EOUs or SEZ units or units in DTA, shall be as per procedure indicated in
HBP.
• Sale of Unutilised Material
a. In case an EOU/EHTP/STP/BTP unit is unable to utilize goods and

services, imported or procured from DTA, it may be:
• Transferred to another EOU/EHTP/STP/BTP/SEZ unit; or
• Disposed of in DTA with approval of Customs authorities on payment of

applicable duties and submission of import authorisation; or
• Exported.
Such transfer from EOU/EHTP/STP/BTP unit to another such unit would

be treated as import for receiving unit.
b. Capital goods and spares that have become obsolete/surplus, may

either be exported, transferred to another EOU/EHTP/STP/BTP/SEZ unit
or disposed of in DTA on payment of applicable duties. Benefit of
depreciation, as applicable, will be available in case of disposal in DTA
! !663
only when the unit has achieved positive NFE taking into consideration
the depreciation allowed. No duty shall be payable in case capital goods,
raw material, consumables, spares, goods manufactured, processed or
packaged, and scrap/waste/remnants/rejects are destroyed within unit
after intimation to Customs authorities or destroyed outside unit with
permission of Customs authorities. Destruction as stated above shall not
apply to gold, silver, platinum, diamond, precious and semi-precious
stones.
c. In case of textile sector, disposal of left over material/fabrics upto 2% of

CIF value or quantity of import, whichever is lower, on payment of duty
on transaction value, may be allowed, subject to certification of Central
Excise/Customs officers that these are leftover items.
d. Disposal of used packing material will be allowed on payment of duty on

transaction value.
• Reconditioning/Repair and Re-engineering
a. EOUs shall be set up with approval of UAC to carry out reconditioning,

repair, remaking, testing, calibration, quality improvement, upgradation
of technology and re-engineering activities for export in foreign
currency. Provisions of paragraphs 6.08, 6.09, 6.10, 6.13, 6.14 of FTP
and para 6.29(a), (b), (c) and (d) of HBP shall not, however, apply to
such activities.
b. EHTP/STP/BTP units shall be set up with approval of IMSC to carry out

reconditioning, repair, remaking, testing, calibration, quality
improvement, upgradation of technology and re-engineering activities
for export in foreign currency. Provisions of paragraphs 6.08, 6.09,
6.10, 6.13, 6.14 of FTP and para 6.29(a), (b), (c) and (d) of HBP shall
not, however, apply to such activities.
• Replacement/Repair of Imported/Indigenous Goods
a. General provisions of FTP relating to export/import of replacement/

repair of goods would also apply equally to EOU/EHTP/STP/BTP units.
Cases not covered by these provisions shall be considered on merits by
DC.
! !664
b. Goods sold in DTA and not accepted for any reasons, may be brought
back for repair/replacement, under intimation to concerned jurisdictional
Customs/Central Excise authorities.
c. Goods or parts thereof, on being imported/indigenously procured and

found defective or otherwise unfit for use or which have been damaged
or become defective subsequently, may be returned and replacement
obtained or destroyed. In the event of replacement, goods may be
brought back from foreign suppliers or their authorised agents in India
or indigenous suppliers. The unit can take free of cost replacement
(duty paid) from the authorised agents in India of foreign suppliers,
provided the defective part is re-exported or destroyed. However,
destruction shall not apply to precious and semi-precious stones and
precious metals.
• Exit from EOU Scheme
a. With approval of DC, an EOU may opt out of scheme. Such exit shall be
subject to payment of Excise and Customs duties and industrial policy in
force.
b. If unit has not achieved obligations, it shall also be liable to penalty at

the time of exit.
c. In the event of a gems and jewellery unit ceasing its operation, gold and
other precious metals, alloys, gems and other materials available for
manufacture of jewellery, shall be handed over to an agency nominated
by DoC, at price to be determined by that agency.
d. An EOU/EHTP/STP/BTP unit may also be permitted by DC to exit from

the scheme at any time on payment of duty on capital goods under the
prevailing EPCG Scheme for DTA Units. This will be subject to fulfilment
of positive NFE criteria under EOU scheme, eligibility criteria under EPCG
scheme and standard conditions indicated in HBP.
e. Unit proposing to exit out of EOU scheme shall intimate DC and

Customs and Central Excise authorities in writing. Unit shall assess duty
liability arising out of de-bonding and submit details of such assessment
to Customs and Central Excise authorities. Customs and Central Excise
authorities shall confirm duty liabilities on priority basis, subject to the
! !665
condition that the unit has achieved positive NFE, taking into
consideration the depreciation allowed. After payment of duty and
clearance of all dues, unit shall obtain “No Dues Certificate” from
Customs and Central Excise authorities. On the basis of “No Dues
Certificate” so issued by the Customs and Central Excise authorities,
unit shall apply to DC for final de-bonding. In case there is no
proceeding pending under FT(D&R) Act, as amended, DC shall issue
final de-bonding order within a period of 7 working days. Between “No
Dues Certificate” issued by Customs and Central Excise authorities and
final de-bonding order by DC, unit shall not be entitled to claim any
exemption for procurement of capital goods or inputs. However, unit can
claim Advance Authorisation/DFIA/Duty Drawback. Since the duty
calculations and dues are disputed and take a long time, a BG/Bond/
Instalment processes backed by BG shall be provided for expediting the
exit process.
f. In cases where a unit is initially established as DTA unit with machines
procured from abroad after payment of applicable import duty, or from
domestic market after payment of excise duty, and unit is subsequently
converted to EOU, in such cases removal of such capital goods to DTA
after de-bonding would be without payment of duty. Similarly, in cases
where a DTA unit imported capital goods under EPCG Scheme and after
completely fulfilling export obligation gets converted into EOU, unit
would not be charged customs duty on capital goods at the time of
removal of such capital goods in DTA when de-bonding.
g. An EOU/EHTP/STP/BTP unit may also be permitted by DC to exit under

Advance Authorisation as one time option. This will be subject to
fulfilment of positive NFE criteria.
h. A simplified procedure may be provided to fast track the De-bonding/

Exit of the STP/EHTP Unit which has not availed any duty benefit on
procurement of raw material, capital goods etc.
! !666
• Conversion
a. Existing DTA units may also apply for conversion into an EOU/EHTP/STP/
BTP unit.
b. Existing EHTP/STP units may also apply for conversion/merger to EOU

unit and vice versa. In such cases, units will remain in bond and avail
exemptions in duties and taxes as applicable.
• Monitoring of NFE
Performance of EOU/EHTP/STP/BTP units shall be monitored by Units
Approval Committee as per guidelines in HBP.
• Export through Exhibitions/Export Promotion Tours/Showrooms

Abroad/Duty Free Shops
EOU/EHTP/STP/BTP are permitted to:
i. Export goods for holding/participating in exhibitions abroad with

permission of DC.
ii. Personal carriage of gold/silver/platinum jewellery, precious, semi-

precious stones, beads and articles.
iii. Export goods for display/sale in permitted shops set up abroad.
iv. Display/sell in permitted shops set up abroad, or in showrooms of their

distributors/ agents.
v. Set up showrooms/retail outlets at International Airports.
• Personal Carriage of Import/Export Parcels including through

Foreign Bound Passengers
Import/export through personal carriage of gems and jewellery items may

be undertaken as per Customs procedure. However, export proceeds shall
be realised through normal banking channel. Import/export through
personal carriage by units, other than gems and jewellery units, shall be
allowed provided goods are not in commercial quantity. An authorised
person of Gems and Jewellery EOU may also import gold in primary form,
! !667
upto 10 Kgs in a financial year through personal carriage, as per guidelines

prescribed by RBI and DoR.
• Export/Import by Post/Courier
Goods including free samples, may be exported/imported by airfreight or
through foreign post office or through courier, as per Customs procedure.
•Administration of EOUs/Powers of DC
Details of administration of EOUs and power of DC is given in HBP.
• Revival of Sick Units

Subject to a unit being declared sick by appropriate authority, proposals for
revival of the unit or its takeover may be considered by BOA.
• Approval of EHTP/STP
In case of units under EHTP/STP schemes, necessary approval/permission
under relevant paras of this Chapter shall be granted by officer designated
by Ministry of Communication and Information Technology, Department of
Electronics and Information Technology, instead of DC, and by Inter-
ministerial Standing Committee (IMSC) instead of BOA.
• Approval of BTP
B i o -Te c h n o l o g y P a r k s ( BT P ) w o u l d b e n o t i f i e d b y D G F T o n
recommendations of Department of Biotechnology. In case of units in BTP,
necessary approval/permission under relevant provisions of this chapter
will be granted by designated officer of Department of Biotechnology.
• Warehousing Facilities
An EOU which intends to set up warehousing facilities outside the EOU
premises and outside the jurisdiction of DC, at a place near to the port of
export, to reduce lead time for delivery of goods overseas and to address
unpredictability of supply orders, is permitted to do so subject to the
provisions related to export warehousing as per terms and conditions of
Notifications issued by the Department of Revenue.
! !668
23.7 DEEMED EXPORTS
To provide a level-playing field to domestic manufacturers in certain

specified cases, as may be decided by the Government from time to time.
“Deemed Exports” refer to those transactions in which goods supplied do

not leave country, and payment for such supplies is received either in
Indian rupees or in free foreign exchange. Supply of goods as specified in
Paragraph 7.02 below shall be regarded as “Deemed Exports” provided
goods are manufactured in India.
Supply of goods under following categories (a) to (d) by a manufacturer

and under categories (e) to (h) by main/subcontractors shall be regarded
as “Deemed Exports”:
• Supply by manufacturer
a. Supply of goods against Advance Authorisation/Advance Authorisation

for annual requirement/DFIA;
b. Supply of goods to EOU/STP/EHTP/BTP;
c. Supply of capital goods against EPCG Authorisation;
d. Supply of marine freight containers by 100% EOU (Domestic freight
containers-manufacturers) provided said containers are exported out of
India within 6 months or such further period as permitted by customs;
• Supply by main contractor(s)/sub-contractor(s)
(A) (i) Supply of goods to projects financed by multilateral or bilateral

Agencies/Funds as notified by Department of Economic Affairs (DEA), MoF,
where legal agreements provide for tender evaluation without including
customs duty.
(ii) Supply and installation of goods and equipment (single responsibility

of turnkey contracts) to projects financed by multilateral or bilateral
Agencies/Funds as notified by Department of Economic Affairs (DEA), MoF,
for which bids have been invited and evaluated on the basis of Delivered
Duty Paid (DDP) prices for goods manufactured abroad.
! !669
(iii) Supplies covered in this paragraph shall be under International

Competitive Bidding (ICB) in accordance with procedures of those
Agencies/Funds.
(iv) A list of agencies, covered under this paragraph, for deemed export
benefits, is given in Appendix 7A.
(B) (i)Supply of goods to any project or for any purpose in respect of which
the Ministry of Finance, by Notification No. 12/2012 –Customs dated
17.3.2012, as amended from time to time, permits import of such goods at
zero customs duty subject to conditions specified in the above said
Notification. Benefits of deemed exports shall be available only if the
supply is made under procedure of ICB.
(ii) Supply of goods required for setting up of any mega power project, as
specified in the list 32A, at Sl. No. 507 of Department of Revenue
Notification No. 12/2012- Customs dated 17.03.2012, as amended from
time to time, shall be eligible for deemed export benefits provided such
mega power project conforms to the threshold generation capacity
specified in the above said Notification.
(iii) For mega power projects, ICB condition would not be mandatory if the
requisite quantum of power has been tied up through tariff based
competitive bidding or if the project has been awarded through tariff based
competitive bidding.
(C) Supply of goods to United Nations or International Organisations for

their official use or supplied to the projects financed by the said United
Nations or an International organisation approved by Government of India.
List of such organisation and conditions applicable to such supplies is given
in the Excise Notification No 108/95-CE, dated 28.08.1995, as amended
from time to time. A list of Agencies, covered under this paragraph, is
given in Appendix-7B.
(D) Supply of goods to nuclear power projects provided:
i. Such goods are required for setting up of any Nuclear Power Project
as specified in the list 33 at Sl. No. 511 of Notification No. 12/2012 –
Customs dated 17.3.2012, as amended from time to time.
! !670
ii. The project should have a capacity of 440 MW or more.
iii. A certificate to the effect is required to be issued by an officer not

below the rank of Joint Secretary to Government of India, in
Department of Atomic Energy.
iv. Tender is invited through National competitive bidding (NCB) or

through ICB.
7.03 Benefits for Deemed Exports
Deemed exports shall be eligible for any/all of following benefits in respect

of manufacture and supply of goods, qualifying as deemed exports, subject
to terms and conditions as given in HBP and ANF-7A:
a. Advance Authorisation/Advance Authorisation for annual requirement/

DFIA.
b. Deemed Export Drawback.
c. Refund of terminal excise duty, if exemption is not available.
• Conditions for refund of terminal excise duty
i. Supply of goods will be eligible for refund of terminal excise duty as per
Para 7.03 (c) of FTP, provided recipient of goods does not avail CENVAT
credit/rebate on such goods.
ii. However, supply of goods which are exempted ab-initio from payment of
Terminal Excise Duty would be ineligible to get refund of TED.
Exemption from TED is available to the following:
a. Supplies under ICB;
b. Supplies of intermediate goods, against invalidation letter, made by

an Advance Authorisation holder to another Advance Authorisation
holder;
c. Goods Procured by EOU/EHTP/STP/BTP unit from a unit in DTA; and
! !671
d. Supply of goods to UN/International Organisation or project funded

by it.
• Conditions for refund of deemed export drawback
Supplies will be eligible for deemed export drawback as per para 7.03 (b)
of FTP, as under:
a. In case CENVAT credit/rebate has not been availed on the inputs/input

services, by the supplier of goods, then, benefit as per Column ‘A’ of All
Industry Rate of Duty Drawback Schedule shall be admissible.
b. If CENVAT credit/rebate has been availed by the supplier of goods, on

inputs/input services, then, no Drawback shall be admissible as per
Column ‘B’ of All Industry Rate of Duty Drawback Schedule. However, in
such cases, Basic Customs Duty paid can be claimed as Brand Rate of
Duty Drawback based upon submission of documents evidencing actual
payment of duties.
• Common conditions for deemed export benefits
a. Supplies shall be made directly to entities listed in the Para 7.02. Third
party supply shall not be eligible for benefits/exemption.
b. In all cases, supplies shall be made directly to the designated Projects/

Agencies/Units/ Advance Authorisation/EPCG Authorisation holder.
Subcontractors may, however, make supplies to main contractor instead
of supplying directly to designated Projects/ Agencies. Payments in such
cases shall be made to subcontractor by main contractor and not by
project Authority.
c. Supply of domestically manufactured goods by an Indian subcontractor

to any Indian or foreign main contractor, directly at the designated
project’s/Agency’s site, shall also be eligible for deemed export benefit
provided name of subcontractor is indicated either originally or
subsequently (but before the date of supply of such goods) in the main
contract. In such cases payment shall be made directly to subcontractor
by the Project Authority.
! !672
• Benefits on specified supplies
(i) Deemed export benefits shall be available for supplies of ‘Cement”

under Para 7.02 (e) only.
(ii) Deemed export benefit shall be available on supply of “Steel”:
• As an inputs to Advance Authorisation/Annual Advance Authorisation/

DFIA holder/ an EOU.
• To multilateral/ bilateral funded Agencies as per sub-Para 7.02(e).
(iii) Deemed export benefit shall be available on supply of “Fuel” provided

supplies are made to:
• Project listed for petroleum operations in the Customs Notification No.

12/2012–Cus. dated 17.03.2012 under Sr. No. 356, 358 to 360 and
covered in Para 7.02 (f) of FTP;
! !673
23.8 Summary
The release of Foreign Trade Policy was also accompanied by a FTP

Statement explaining the vision, goals and objectives underpinning India's
Foreign Trade Policy, laying down a road map for India’s global trade
engagement in the coming years. The FTP Statement describes the market
and product strategy and measures required for trade promotion,
infrastructure development and overall enhancement of the trade eco
system. It seeks to enable India to respond to the challenges of the
external environment, keeping in step with a rapidly evolving international
trading architecture and make trade a major contributor to the country’s
economic growth and development. She promised to have regular
interactions with all stakeholders, including State Governments to achieve
the national objectives.
FTP2015-20. introduces two new schemes, namely “Merchandise Exports

from India Scheme (MEIS)” for export of specified goods to specified
markets and “Services Exports from India Scheme (SEIS)” for increasing
exports of notified services, in place of a plethora of schemes earlier, with
different conditions for eligibility and usage. There would be no
conditionality attached to any scrips issued under these schemes. Duty
credit scrips issued under MEIS and SEIS and the goods imported against
these scrips are fully transferable. For grant of rewards under MEIS, the
countries have been categorised into 3 Groups, whereas the rates of
rewards under MEIS range from 2% to 5%. Under SEIS the selected
services would be rewarded at the rates of 3% and 5%.
Measures have been adopted to nudge procurement of capital goods from

indigenous manufacturers under the EPCG scheme by reducing specific
export obligation to 75% of the normal export obligation. This will promote
the domestic capital goods manufacturing industry. Such flexibilities will
help exporters to develop their productive capacities for both local and
global consumption. Measures have been taken to give a boost to exports
of defense and hi-tech items. At the same time e-commerce exports of
handloom products, books/periodicals, leather footwear, toys and
customised fashion garments through courier or foreign post office would
also be able to get benefit of MEIS (for values upto 25,000 INR). These
measures would not only capitalise on India's strength in these areas and
increase exports but also provide employment.
! !674
Commerce Minister stated that although exports from SEZs had seen
phenomenal growth, significantly higher than the overall export growth of
the country, in recent times they had been facing several challenges. In
order to give a boost to exports from SEZs, government has now decided
to extend benefits of both the reward schemes (MEIS and SEIS) to units
located in SEZs. It is hoped that this measure will give a new impetus to
development and growth of SEZs in the country.
Trade facilitation and enhancing the ease of doing business are the other
major focus areas in this new FTP. One of the major objective of new FTP is
to move towards paperless working in 24x7 environment. Recently, the
government has reduced the number of mandatory documents required for
exports and imports to three, which is comparable with international
benchmarks. Now, a facility has been created to upload documents in
exporter/importer profile and the exporters will not be required to submit
documents repeatedly. Attention has also been paid to simplify various
‘Aayat Niryat’ Forms, bringing in clarity in different provisions, removing
ambiguities and enhancing electronic governance.
Manufacturers, who are also status holders, will now be enabled to self
certify their manufactured goods in phases, as originating from India with a
view to qualifying for preferential treatment under various forms of
bilateral and regional trade agreements. This “Approved Exporter System”
will help these manufacturer exporters considerably in getting fast access
to international markets.
A number of steps have been taken for encouraging manufacturing and

exports under 100% EOU/EHTP/STPI/BTP Schemes. The steps include a
fast track clearance facility for these units, permitting them to share
infrastructure facilities, permitting inter unit transfer of goods and services,
permitting them to set up warehouses near the port of export and to use
duty free equipment for training purposes.
Considering the strategic significance of small and medium scale enterprise

in the manufacturing sector and in employment generation, ‘MSME
clusters’ 108 have been identified for focused interventions to boost
exports. Accordingly, ‘Niryat Bandhu Scheme’ has been galvanised and
repositioned to achieve the objectives of ‘Skill India’. Outreach activities
will be organised in a structured way at these clusters with the help of
EPCs and other willing “Industry Partners” and “Knowledge Partners”.
! !675
23.9 Questions
1. What is period of India’s foreign trade policy? Is there any provision to

review midway? Explain
2. What is duty free import authorisation scheme? Explain
3. Write short note on : Export from India Scheme.
4. Explain the general provision in FTP for export?
5. Explain the general provision in FTP for import?
1. Who is authority by means of a Public Notice, notify Handbook of

Procedures, laying down the procedure to be followed by an exporter or
importer or by any Licensing/Regional Authority or by any other
authority for purposes of implementing provisions of FT (D and R) Act,
the Rules and the Orders made thereunder and provisions of FTP:
(a) Director General of Foreign Trade
(b) Ministry of Home affairs
(c) Commerce Ministry
(d) Reserve Bank of India
2. As per FTP, Goods including edible items, of value not exceeding

__________ in a licensing year, may be exported as a gift.
(a) Rs. 10,00,000
(b) Rs. 5,00,000
(c) Rs. 1,00,000
(d) Rs. 2,50,000
3. The Export from India Scheme has the scheme for exports of
Merchandise and Services, which consists of __________.
(a) Merchandise Exports from India Scheme (MEIS)
(b) Service Exports from India Scheme (SEIS)
(c) Both MEIS and SEIS
(d) Only manufacturing of goods and export
! !676
4. The objective of the EPCG Scheme is to facilitate __________ for

producing quality goods and services to enhance India’s export
competitiveness
(a) Import of capital goods
(b) Export of Capital goods
(c) Local sale of capital goods
(d) Purchase of capital goods locally
5. An authorised person of Gems and Jewellery EOU may also import gold
in primary form, upto __________ in a financial year through personal
carriage, as per guidelines prescribed by RBI.
(a) 5 Kgs
(b) 10 Kgs
(c) 20 Kgs
(d) 50 Kgs
Answers: 1. (a), 2 (b), 3. (c), 4. (a), 5. (b)
! !677
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !678

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Trade Finance

Sub Code - 629

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition, March 2019

Abasaheb Chavan is a Professional Banker currently working with one of

His areas of expertise include International Trade Finance; Corporate and

Mr. Chavan is experienced in preparation of policies and issuance of

Mr. Chavan was an Executive Committee Member of International Chamber

Mr. Chavan holds a Master's degree in Science (M.Sc.) and is a Certified

He is also a professional trainer and is providing training to bank

1 Foreign Trade 6-31

2 Exchange Control in India 32-71

3 Asian Clearing Union, ACU European Currency Unit: 72-88

5 International Commercial Terms: Incoterms 109-119

6 Foreign Trade: Documents 120-166

7 Import Trade: Guidelines 167-191

8 Import Trade: Regulations 192-228

9 Documentary Credit: Method of Financing Imports 229-259

10 Establishment Of LC, Import Bills Under LC, Collections 260-293

12 Export: Guidelines and Regulations 315-343

13 Export: Obligations and Role of AD Banks 344-374

14 Export Finance — Pre-shipment Credit in Rupee 375-397

15 Export Finance — Pre-shipment Credit in Foreign 398-414

17 Export Finance — Post-shipment Credit in Foreign 435-445

19 Export Promotion Incentives 478-515

20 ECGC: Role in Export Promotion 516-543

21 Guarantees for Imports and Exports 544-573

22 Export Promotion Measures 574-678

23 Foreign Trade Policy

After going through the chapter, students should be able to understand

1.1 Foreign Trade Introduction

1.2 Foreign Trade Meaning

1.4 Balance of Trade

1.5 Balance of Payment (BoP)

1.7 Correcting the Deficit

1.1 Foreign Trade: Introduction

The country which produces more commodities has greater advantage of

1.2 Foreign Trade: Meaning

Any trade is nothing but exchange of goods and services between

Law International Trade

a. Involvement of different monetary units — Pricing

Foreign trade is of two types:

a. Import: When seller is abroad/across the border and buyer is in home

Considering the visibility, trade can also be grouped in to two types:

b. Invisible trade: Invisible is not visible but it exists, e.g., shipping,

In international trade, the export by a country or company of a product at

A standard technical definition of dumping is the act of charging a lower

1.3.1. Types of Dumping

1. Sporadic Dumping: Occasional sale of a commodity at below cost in

2. Predatory Dumping: Temporary sale of a commodity at below its