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INTERNATIONAL TRADE FINANCE

1. The Need & Importance of International Trade Finance.


Importance of Foreign Trade Trade is an exchange or dealing in goods and services. If the trading is taking place internally within the political boundaries of a country, it is a domestic trade. If it takes place externally with other countries beyond the boundaries of a country, then, it is a foreign trade. Foreign trade of a country includes the imports and exports or merchandise and services. In the modern economic environment Foreign Trade (FT) is inevitable for a countrys growth and development for the following reasons:

It earns foreign exchange required for payment for imports and to pay foreign debts. It reduces the burden for the foreign debts. Export increases the economic activity and results in greater income and standard of living. Increased competition reduces prices. For example TV, computers other electronic goods, cars etc. Contributes to the national income of the country. Expands and widens the market for domestic products and hence fetches better price and profit. Foreign exchange earned through FT, generates economic development activities. People live happily, gratifying the varied tastes and wants. It encourages international specialization using the special facilities and natural resources, capital efficiency and efficiency of human power. FT provides for expanding employment opportunities and industrial production. Helps to import capital goods and technology which will modernize the industrial sector and increase the efficiency. FT enables to make the best use of all available resources including human resources. FT makes available by sharing the scarce resources. FT enables to equalize the prices among countries. It moves the commodities where it is available in plenty to countries where it is costly. The vast difference in prices will be reduced in due course by the principle of demand and supply. FT expands market and leads to large scale production to achieve the benefits of economic of scale and to improve specialization and modernization.

Any invention in any corner of the country spreads to all countries through International Trade / FT.

3. BUYERS CREDIT
A financial arrangement whereby a financial institution in the exporting country extends a loan directly or indirectly to a foreign buyer to finance the purchase of goods and services from the exporting country. This arrangement enables the buyer to make payments due to the supplier under the contract. SUPPLIERS CREDIT A financing arrangement under which an exporter extends credit to the buyer in the importing country to finance the buyers purchases.

13. FDI & FII


What is FDI? Foreign direct investment (FDI) is direct investment into production in a country by a company located in another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment it done for many reasons including to take advantage of cheaper wages in the country, special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. What is FII? Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets. They can also include operating companies which decide to invest their profits to some degree in these types of assets. Types of typical investors include banks, insurance companies, retirement, pension funds, hedge funds, investment advisors and mutual funds. Their role in the economy is to act as highly specialized investors on behalf of others. For instance, an ordinary person will have a pension from his employer. The employer gives that person's pension contributions to a fund. The fund will buy shares in a company, or some other financial product. Funds are useful because they will hold a broad portfolio of investments in many companies. This spreads risk, so if one company fails, it will be only a small part of the whole fund's investment. Institutional investors will have a lot of influence in the management of corporations because they will be entitled to exercise the voting rights in a company.

6. INCOTERMS
For business terminology to be effective, phrases must mean the same thing throughout the industry. That is why the International Chamber of Commerce created "INCOTERMS" in 1936.INCOTERMS are designed to create a bridge between different members of the industry by acting as a uniform language they can use. Each INCOTERM refers to a type of agreement for the purchase and shipping of goods internationally. There are 11 different terms, each of which helps users deal with different situations involving the movement of goods. For example, the term FCA is often used with shipments involving Ro/Ro or container transport. INCOTERMS also deal with the documentation required for global trade, specifying which parties are responsible for which documents. Determining the paperwork required to move a shipment is an important job, since requirements vary so much between countries. Two items, however, are standard: the commercial invoice and the packing list. INCOTERMS were created primarily for people inside the world of global trade. Outsiders frequently find them difficult to understand. Seemingly common words such as "responsibility" and "delivery" have different meanings in global trade than they do in other situations. In global trade, "delivery" refers to the seller fulfilling the obligation of the terms of sale or to completing a contractual obligation. "Delivery" can occur while the merchandise is on a vessel on the high seas and the parties involved are thousands of miles from the goods. In the end, however, the terms wind up boiling down to a few basic specifics: Costs: who is responsible for the expenses involved in a shipment at a given point in the shipment's journey? Control: who owns the goods at a given point in the journey? Liability: who is responsible for paying damage to goods at a given point in a shipment's transit? It is essential for shippers to know the exact status of their shipments in terms of ownership and responsibility. It is also vital for sellers & buyers to arrange insurance on their goods while the goods are in their "legal" possession. Lack of insurance can result in wasted time, lawsuits, and broken relationships. INCOTERMS can thus have a direct financial impact on a company's business. What is important is not the acronyms, but the business results. Often companies like to be in control of their freight. That being the case, sellers of goods might choose to sell which gives them a good grasp of shipments moving out of their country, and buyers may prefer to purchase FOB, which gives them a tighter hold on goods moving into their country.

In this glossary, we'll tell you what terms such as CIF and FOB mean and their impact on the trade process. In addition, since we realize that most international buyers and sellers do not handle goods themselves, but work through customs brokers and freight forwarders, we'll discuss how both fit into the terms under discussion. INCOTERMS are most frequently listed by category. Terms beginning with F refer to shipments where the primary cost of shipping is not paid for by the seller. Terms beginning with C deal with shipments where the seller pays for shipping. E-terms occur when a seller's responsibilities are fulfilled when goods are ready to depart from their facilities. D terms cover shipments where the shipper/seller's responsibility ends when the goods arrive at some specific point. Because shipments are moving into a country, D terms usually involve the services of a customs broker and a freight forwarder. In addition, D terms also deal with the pier or docking charges found at virtually all ports and determining who is responsible for each charge. Recently the ICC changed basic aspects of the definitions of a number of INCOTERMS, buyers and sellers should be aware of this. Terms that have changed have a star alongside them. EXW (EX-Works) One of the simplest and most basic shipment arrangements places the minimum responsibility on the seller with greater responsibility on the buyer. In an EX-Works transaction, goods are basically made available for pickup at the shipper/seller's factory or warehouse and "delivery" is accomplished when the merchandise is released to the consignee's freight forwarder. The buyer is responsible for making arrangements with their forwarder for insurance, export clearance and handling all other paperwork. FOB (Free on Board) One of the most commonly used-and misused-terms, FOB means that the shipper/seller uses his freight forwarder to move the merchandise to the port or designated point of origin. Though frequently used to describe inland movement of cargo, FOB specifically refers to ocean or inland waterway transportation of goods. "Delivery" is accomplished when the shipper/seller releases the goods to the buyer's forwarder. The buyer's responsibility for insurance and transportation begins at the same moment. FCA (Free Carrier) In this type of transaction, the seller is responsible for arranging transportation, but he is acting at the risk and the expense of the buyer. Where in FOB the freight forwarder or carrier is the choice of the buyer, in FCA the seller chooses and works with the freight forwarder or the carrier. "Delivery" is accomplished at a predetermined port or destination point and the buyer is responsible for Insurance. FAS (Free alongside Ship)* In these transactions, the buyer bears all the transportation costs and the risk of loss of goods. FAS requires the shipper/seller to clear goods for export, which is a reversal from past practices. Companies selling on these terms will ordinarily use their freight forwarder to clear the goods for export. "Delivery" is accomplished when the goods are turned over to the Buyers Forwarder for insurance and transportation.

CFR (Cost and Freight) This term formerly known as CNF (C&F) defines two distinct and separate responsibilities-one is dealing with the actual cost of merchandise "C" and the other "F" refers to the freight charges to a predetermined destination point. It is the shipper/seller's responsibility to get goods from their door to the port of destination. "Delivery" is accomplished at this time. It is the buyer's responsibility to cover insurance from the port of origin or port of shipment to buyer's door. Given that the shipper is responsible for transportation, the shipper also chooses the forwarder. CIF (Cost, Insurance and Freight) This arrangement similar to CFR, but instead of the buyer insuring the goods for the maritime phase of the voyage, the shipper/seller will insure the merchandise. In this arrangement, the seller usually chooses the forwarder. "Delivery" as above, is accomplished at the port of destination. CPT (Carriage Paid To) In CPT transactions the shipper/seller has the same obligations found with CIF, with the addition that the seller has to buy cargo insurance, naming the buyer as the insured while the goods are in transit. CIP (Carriage and Insurance Paid To) This term is primarily used for multimodal transport. Because it relies on the carrier's insurance, the shipper/seller is only required to purchase minimum coverage. When this particular agreement is in force, Freight Forwarders often act in effect, as carriers. The buyer's insurance is effective when the goods are turned over to the Forwarder. DAT (Delivered At Terminal) This term is used for any type of shipments. The shipper/seller pays for carriage to the terminal, except for costs related to import clearance, and assumes all risks up to the point that the goods are unloaded at the terminal. DAP (Delivered At Place) DAP term is used for any type of shipments. The shipper/seller pays for carriage to the named place, except for costs related to import clearance, and assumes all risks prior to the point that the goods are ready for unloading by the buyer. DDP (Delivered Duty Paid) DDP term tend to be used in intermodal or courier-type shipments. Whereby, the shipper/seller is responsible for dealing with all the tasks involved in moving goods from the manufacturing plant to the buyer/consignee's door. It is the shipper/seller's responsibility to insure the goods and absorb all costs and risks including the payment of duty and fees.

14. MERGERS & ACQUISITIONS


Distinction between Mergers and Acquisitions

Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things. When one company takes over another and clearly established itself as the new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded. In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created. In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable. A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition. Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

Types of Merger & Acquisition


1. Horizontal - when the two companies involved are in the same type of business, usually as competitors. This is the most common type of M&A. e.g. Royal Bank of Scotlands ill-fated acquisition of banking competitor ABN Amro.

2. Vertical - when two companies in the same production chain join together. Its backward integration when the acquirer purchases a target that is ahead of it in the production chain. For example, lets be totally unrealistic and say British Airways (BAY) decided to acquire Boeing(NYSE:BA), well that would be backward integration as British Airways would now be in control of the manufacture of their aircraft. On the other side, its forward integration when the acquirer purchases a target that is after it in the production chain. Here an example would be British Airways buying a travel agent that sells the seats on its flights. 3. Conglomerate - when two companies come together and their core competences are completely unrelated. General Electric (NYSE:GE) is often used as the prime example of a conglomerate as they have purchased companies in a wide range of industries including media, finance, aircraft parts and medical equipment. Motives for Mergers and Acquisitions Mergers and acquisitions are expensive and a lot of resources go into making them happen. Whats more, only about 35% of them add value to the company, which means about 65% destroy shareholder wealth. But when a merger or acquisition goes well, the benefits are huge. Heres a list of them:

Synergy. The combined company is worth more than the sum of its parts. This includes cost reductions by removing duplicate departments. M&A means job losses!

Economies of scale. Better deals because of increased order size, bulk-buying discounts and other activities. Increased revenue and market share. Increased size of the combined company increases market power and ability to set higher prices. Cross-selling. This is when the two companies involved in the deal sell each others products and services, increasing sales. Diversification. This helps smooth the earnings results of a company, which over the long term, is rewarded by a higher share price. Acquiring unique capabilities and resources. Sometimes its simply impossible for a company to create the technology, resource etc it needs to sustain its growth. It can be a lot simpler to just buy it.

International Expansion. Acquiring a local competitor helps to get over culture issues, government policy, regulation and other issues related to international expansion.

Other advantages include taxation issues, resource transfer and unlocking hidden value.

Simply put, a company can increase its profits and financial performance much more quickly through M&A than simple organic growth. This over-riding motivation will always drive M&A growth. So thats a quick overview of Mergers and Acquisitions. In Part II, Ill look at the process of how a merger or acquisition works and how we can make money from it.

5. THE VARIOUS RISKS THAT INFLUENCE INTERNATIONAL FINANCIAL MARKETS USUALLYINCLUDE THE FOLLOWING: 1. Political risk 2. Financial risk 3. Economic risk 4. Country risk 5. Market risk 6. Exchange rate risk 7. Operational risk 8. Legal risk 9. Hedging risk 10.Systemic risk Political Risk
The risk that an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers, or military control. Political risk is also known as "geopolitical risk," and becomes more of a factor as the time horizon of an investment gets longer.

Financial Risk

Financial risk management is the practice of creating economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc. Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them. Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.

Economic Risk
Economic risks can be manifested in lower incomes or higher expenditures than expected. The causes can be many, for instance, the hike in the price for raw materials, the lapsing of deadlines for construction of a new operating facility, disruptions in a production process, emergence of a serious competitor on the market, the loss of key personnel, the change of a political regime, or natural disasters. Additionally, it is worth noting that from a societal standpoint, losses are much more lucrative than gains, as governmental bodies will do anything it takes, according to recent research, to avoid losing or resorting to an inferior position.

Country Risk
Country risk refers to the risk of investing in a country, dependent on changes in the business environment that may adversely affect operating profits or the value of assets in a specific country. For example, financial factors such as currency controls, devaluation or regulatory changes, or stability factors such as mass riots, civil war and other potential events contribute to companies' operational risks. This term is also sometimes referred to as political risk; however, country risk is a more general term that generally refers only to risks affecting all companies operating within a particular country. Political risk analysis providers and credit rating agencies use different methodologies to assess and rate countries' comparative risk exposure. Credit rating agencies tend to use quantitative econometric models and focus on financial analysis, whereas political risk providers tend to use qualitative methods, focusing on political analysis. However, there is no consensus on methodology in assessing credit and political risks.

Market Risk
The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, also called "systematic risk," cannot be eliminated through diversification, though it can be hedged against. The risk that a major

natural disaster will cause a decline in the market as a whole is an example of market risk. Other sources of market risk include recessions, political turmoil, changes in interest rates and terrorist attacks.

Exchange rate Risk


Foreign exchange risk (also known as exchange rate risk or currency risk) is a financial risk posed by an exposure to unanticipated changes in the exchange rate between two currencies. Investors and multinational businesses exporting or importing goods and services or making foreign investments throughout the global economy are faced with an exchange rate risk which can have severe financial consequences if not managed appropriately

Opertional Risk
Operational risk management differs from other types of risk, because it is not used to generate profit (e.g. credit risk is exploited by lending institutions to create profit, market risk is exploited by traders and fund managers, and insurance risk is exploited by insurers). They all however manage operational risk to keep losses within their risk appetite - the amount of risk they are prepared to accept in pursuit of their objectives. What this means in practical terms is that organisations accept that their people, processes and systems are imperfect, and that losses will arise from errors and ineffective operations. The size of the loss they are prepared to accept, because the cost of correcting the errors or improving the systems is disproportionate to the benefit they will receive, determines their appetite for operational risk.

12. MONEY LAUNDERING


Money laundering is the process of concealing sources of money. Money evidently gained through crime is "dirty" money, and money that has been "laundered" to appear as if it came from a legitimate source is "clean" money. Money can be laundered by many methods, which vary in complexity and sophistication.

Different countries may or may not treat tax evasion or payments in breach of international sanctions as money laundering. Some jurisdictions differentiate these for definition purposes, and others do not. Some jurisdictions define money laundering as obfuscating sources of money, either intentionally or by merely using financial systems or services that do not identify or track sources or destinations. Other jurisdictions define money laundering to include money from activity that would have been a crime in that jurisdiction, even if it was legal where the actual conduct occurred. This broad brush of applying money laundering to incidental, extra-territorial or simply privacy-seeking behaviors has led some to label it financial thought crime. Acts to prevent money laundering PREVENTION OF MONEY LAUNDERING ACT, 2002 The Prevention of Money Laundering Act, 2002 (PMLA) was enacted with effect from July 1, 2005. The PMLA forms the core of the legal framework to combat money laundering and terrorist financing in India. The PMLA and Prevention of Money-laundering (Maintenance of Records of the Nature and Value of Transactions, the Procedure and Manner of Maintaining and Time for Furnishing Information and Verification and Maintenance of Records of the Identity of the Clients of the Banking Companies, Financial Institutions and Intermediaries) Rules, 2005 (PMLA Rules) impose obligation on banking companies, financial institution and intermediary to verify the identity of investors & maintain records of transactions with each investor. Rule 3 of PMLA Rules inter-alia requires maintains of records relating to following transactions: All cash transactions of the value of more than Rs.10lakhs or its equivalent in foreign currency. All series of cash transactions integrally connected to each other which have been valued below Rs.10lakhs or its equivalent in foreign currency where such series of transactions take place within one calendar month. All transactions involving receipts by non-profit organizations of value more than Rs.10lakhs, or its equivalent in foreign currency. All suspicious transactions whether or not made in cash and including, inter-alia, credits or debits into from any non monetary account such as demat account, security account maintained by the registered intermediary. All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the transactions.

8. POLICY OF ECGC
The Export Credit Guarantee Corporation of India Limited (ECGC) 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.

Salient Features 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 will be issued to exporters whose anticipated export turnover for the next 12-month does not exceed Rs.50 Lakhs. Period of Policy: Small Exporter's Policy is issued for a period of 12 months, as against 24 months in the case of Standard Policy. Minimum premium: Minimum premium payable for a Small Exporter's Policy is equal to Rs.2,000/- as against Rs.10,000/- for the Standard Policy. No claim bonus in the premium rate is granted every year at the rate of 5% (as against once in two years for Standard Policy at the rate of 10%). Declaration of shipments: Shipments need to be declared quarterly (instead of monthly as in the case of Standard Policy)Declaration of overdue payments: Small exporters are required to submit monthly declarations of all payments Remaining overdue by more than 60 days from the due date, as against 30 days in the case of exporters holding the Standard Policy .Percentage of cover: For shipments covered under the Small Exporter's Policy ECGC will pay claims to the extent of 95% where the loss is due to commercial risks and 100% if the loss is caused by any of the political risks (Under the Standard Policy, the extent of cover is 90% for both commercial and political risks). Waiting period for claims: The normal waiting period of 4 months under the Standard Policy has been halved in the case of claims arising under the Small Exporter's Policy. Change in terms of payment of extension in credit period: In order to enable small exporters heir 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 DA 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 lac, 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; 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. Resale of unaccepted goods: If, upon non-acceptance of goods by a buyer, the exporter sells the goods to an alternate buyer without obtaining prior approval of ECGC even when the loss exceeds 25% of the gross invoice value, ECGC may consider payment of claims upto an amount considered reasonable, provided that ECGC is satisfied that the exporter did his best under the circumstances to minimize the loss.