Trade Finance 402 v1 PDF

Trade Finance
Sub Code - 402
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1st Edition (May-2014)

CONTENTS
Contents
Chapter Name Page No.
Chapter 1: Foreign Trade 12-79

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 INCOTERMS: Foreign Contracts
1.9 International Trade Agreements/Institutions
1.10 Asian Clearing Union (ACU)
1.11 Most Favoured Nation (MFN) Clause
1.12 Euro Money
1.13 Method of Foreign Trade
1.14 Banking Facilities
1.15 Role of Exim Bank
1.16 Free Port/Free Trade Zones
1.17 Offshore Banking Operations
1.18 LIBOR
1.19 European Currency Unit (ECU)
1.20 Summary
1.21 Self Assessment Questions
Chapter 2: Instruments of Foreign Trade 80-129

2.1 Documents Used in Foreign Trade
! !3
CONTENTS
2.2 Commercial Documents
2.3 Official Documents
2.4 Insurance Documents
2.5 Transport Documents
2.6 Financial and Financing Documents
2.7 Summary
Chapter 3: Import Control 130-173

3.1 Trade under Deficit
3.2 Import Trade Control
3.3 Import Licence
3.4 Types of Import Licenses
3.5 Imports without Licence
3.6 Evidence of Import
3.7 Import of Gold, Silver, Platinum, Jewellery, Foreign

Exchange, Indian Currency
3.8 Import of Bills/Receipt of Documents Directly
3.9 Import under Foreign Currency Loan/Credit
3.10 Acquisition of Foreign Currency/Exchange
3.11 Opening of LC
3.12 Restrictions
3.13 Deferred Payment LC
3.14 Summary
Chapter 4: Export Control 174-220

4.1 Export Control Overview
4.2 Export of Gold etc.
! !4
CONTENTS
4.3 Exporters Code Number
4.4 Methods of Payment
4.5 Prescribed Period for Realisation of Exports: Realisation and

Repatriation of Export Proceeds
4.6 Direct Dispatch of Documents by the Exporter
4.7 Opening/Hiring of Warehouses Abroad
4.8 Exempted Categories of Export Declaration Form
4.9 EDF/SDF Approval for Trade Fairs/Exhibitions Abroad
4.10 EDF/SDF approval for Export of Goods for re-imports
4.11 Invoicing of Software Exports
4.12 Short Shipments and Shut out Shipments
4.13 Counter-Trade Arrangement
4.14 Part Drawings/Undrawn Balances
4.15 Consignment Exports
4.16 Exports on Elongated Credit Terms
4.17 Export of Goods by Special Economic Zones (SEZs)
4.18 Project Exports and Service Exports
4.19 Forfeiting
4.20 Exports to Neighbouring Countries by Road, Rail or River
4.21 Border Trade with Myanmar
4.22 Repayment of State Credits
4.23 Countertrade Arrangements with Romania
4.24 Mid-sea Trans-shipment of Catch by Deep Sea Fishing

Vessels (Effective from November 21, 2011)
4.25 EDF/SDF/SOFTEX Procedure
4.26 Certification for EEFC Credits
4.27 Foreign Trade Policy (FTP) 2009-14
4.28 RBI Credit Policies
! !5
CONTENTS
4.29 Conclusion
4.30 Summary
Chapter 5: Exchange Control In India 221-260

5.1 Introduction
5.2 Control of Exchange Rates
5.3 Transactions Subject to Control
5.4 Permitted Currencies
5.5 Approved/Permitted Method of Receipt and Payments
5.6 Convertible Currencies
5.7 Choice of Currency in International Transaction
5.8 Authorised Dealer
5.9 Authorised Dealer’s Transactions with RBI
5.10 FEDAI
5.11 Correspondent
5.12 Foreign Currency Accounts Overseas
5.13 Countertrade
5.14 Escrow Account
5.15 Barter Trade
5.16 Summary
Chapter 6: Import Finance (Documentary Credit) 261-350

6.1 Need of Imports
6.2 Barriers to International Trade
6.3 Important Policy Provisions
6.4 Various Methods for Financing of Imports by an Importer
6.5 Import Letter of Credit
! !6
CONTENTS
6.6 Methods for Financing Imports
6.7 Security behind the Credit
6.8 Specimen of the Irrevocable Letter of Credit
6.9 Establishing Credit
6.10 Margin Commission etc.
6.11 Accounting
6.12 Amendment
6.13 Insurance
6.14 Booking of Exchange
6.15 Import Bills
6.16 Recording etc.
6.17 Discrepant/Irregular Documents
6.18 Payment of Import Bills
6.19 Time Limit for Settlement of Import Payment
6.20 Delivery of Shipping Documents
6.21 Endorsement on LC
6.22 Exchange Control Copy of Licence
6.23 Form A1
6.24 Import Packing Credit
6.25 Trust Receipt
6.26 Cash Credit against Imports
6.27 Import Bills on Collection
6.28 Remittances against the Direct and Post Parcel Imports
6.29 Remittance against the Replacement of Import
6.30 Interest on Import Bills
6.31 Import of Equipment by Business Process Outsourcing (BPO)

Companies for their Overseas Sites
! !7
CONTENTS
6.32 Advance Remittance against Imports
6.34 Issue of Bank Guarantee
6.35 Import Factoring
6.36 Merchanting Trade
6.37 Summary
Chapter 7: Cross-border Financing: Export Finance – Pre- 351-408

Shipment
7.1 Introduction to Cross-border Banking
7.2 Cross-border Trade Finance
7.3 Export Finance
7.4 Pre-shipment Finance
7.5 Rupee Pre-shipment Credit to Specific Sectors/Segments
7.6 ECGC Cover
7.7 Pre-shipment Credit in Foreign Currency (PCFC)
7.8 Diamond Dollar Account (DDA) Scheme
7.9 Export under Deferred Payment Arrangement and Turnkey

Contract
7.10 Buyer’s Credit Scheme of Exim Bank
7.11 Export of Services
7.12 Joint Ventures Abroad
7.13 Summary
Chapter 8. Cross-border Banking: Export Finance – Post- 409-469

shipment
8.1 Post-shipment Finance
8.2 Negotiation of Bills
! !8
CONTENTS
8.3 Export Bills Purchased/Discounted
8.4 Advance against Export Bills Sent for Collection
8.5 Post-shipment Credit on Deferred Payment Terms
8.6 Export on Consignment Basis
8.7 ECGC Whole Turnover Post-shipment Guarantee Scheme
8.8 Deemed Exports – Rupee Export Credit at Prescribed Rates
8.9 Interest Rate on Rupee Export Credit
8.10 Export Credit in Foreign Currency
8.11 Interest Rate Structure on Export Credit in Foreign Currency
8.12 Export Credit Guidelines for Banks
8.13 Sanction of Export Credit proposals
8.14 Simplification of Procedure for Delivery of Export Credit in

Foreign Currency and in Rupees
8.15 Other General Guidelines for Exports
8.16 Setting Up of Offices Abroad and Acquisition of Immovable

Property for Overseas Offices
8.17 Advance Payments against Exports
8.18 Important Operational Guidelines on Export
8.19 Summary
Chapter 9: Cross-border Banking: External Funds Mobilisation 470-548

9.1 Introduction: Need for External Funds Mobilisation
9.2 Foreign Direct Investment in India
9.3 External Commercial Borrowing (ECB)
9.4 Foreign Currency Convertible Bonds (FCCBs)
9.5 Foreign Currency Exchangeable Bonds (FCEB)
9.6 Miscellaneous
9.7 Trade Credits (TC) for Imports into India
! !9
CONTENTS
9.8 Syndicated Loan
9.9 Floating Rate Note (FRN)/Bonds
9.10 Raising Equity through ADRs/GDRs/IDRs
9.11 Foreign Investments under Portfolio Investment Scheme

(PIS)
9.12 Foreign Venture Capital Investments (FVCI)
9.13 Indian Depository Receipts (IDR)
9.14 Purchase of Other Securities by FIIs, QFIs and Long-term

Investors
9.15 Qualified Foreign Investors (QFIs) Investment in the Units of

Domestic Mutual Funds
9.16 Infrastructure Debt Funds (IDF)
9.17 Purchase of Other Securities by QFIs
9.18 Investment in Partnership Firm/Proprietary Concern
9.19 Investments with Repatriation Benefits
9.20 Investment by Non-residents Other than NRIs/PIO
9.21 Reporting Guidelines for Foreign Investments in India
9.22 Non-resident Accounts
9.23 Bilateral/Multilateral Assistance
9.24 Summary
Chapter 10: Export Promotion Incentives 549-627

10.1 Export Promotion
10.2 Role of Government
10.3 Role of Reserve Bank of India
10.5 Role of Banks
10.6 Export Incentives Offered by the Government
! !10
CONTENTS
10.7 Rupee Export Credit Interest Rates Subvention
10.8 Export Incentives by RBI/Banks
10.9 Export Assistance by the Exim Bank
10.10 Export Credit Insurance
10.11 Covers Issued by ECGC
10.12 Export Promotion Institutions
10.13 India Trade Promotion Organisation (ITPO)
10.14 Economical and Technical Cooperation Agreements
10.15 Combine Transport Document (CTD)
10.16 Sum up: Concessions Granted to Exporters
10.17 Summary
Chapter 11: Import/Export Guarantees 628-657

11.1 Definition of Guarantee
11.2 Definition of Import Guarantees
11.3 Beneficiaries and Purposes
11.4 Exchange Control Regulations
11.5 General Guidelines
11.6 Particulars of Guarantees
11.7 Import Guarantees
11.8 Export Guarantees
11.9 Furnishing of Guarantee
11.10 Particulars of Export Guarantees
11.11 Deferred Payment Export Guarantee
11.12 Other Types of Export Guarantees
11.13 ECGC Counter-guarantee
11.14 Redemption or Invocation
! !11
CONTENTS
11.15 Other Types of Guarantees
11.16 Summary
! !12
FOREIGN TRADE
Chapter 1
FOREIGN TRADE
Objectives
After going through the chapter, students should be able to understand:

• Meaning and method of Foreign Trade
• Meaning, type and causes of Dumping
• Meaning, factors affecting Balance of Trade and Corrective Measures
• Meaning of Balance of Payment and policy measures for correcting the
deficit
• Role, function, important objectives and functional areas of Exim Bank
• Concept, objective, purpose, benefits of Free Trade Zones (FTZs) and
FTZs in India
• Scheme for setting up of Offshore Banking Units (OBUS) in SEZs
Structure:

1.3 Dumping
1.5 Balance of Payment (BOP)
1.6 Disequilibrium
1.7 Correcting the Deficit
1.8 Incoterms: Foreign Contracts
1.9 International Trade Agreements/Institutions
1.11 Most Favoured Nation (MFN) Clause
1.12 Euro Money
1.16 Free Port/Free Trade Zones
1.17 Offshore Banking Operations
1.18 Libor
1.20 Summary
! !13
FOREIGN TRADE
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 70 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. From the beginning of mid-1991, the 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 the foreign trade in driving the economy,
importance is given to understand the terms related to 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.
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
behavior of 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 factor affecting
the international trade are summarised in the pictorial manner as under:
! !14
FOREIGN TRADE
Typically, features of foreign trade can be grouped into the 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 rule in different
countries
Foreign trade is of two types:
a. Import: When seller is abroad/across the border and buyer is in home

country, the 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.
Considering the visibility, trade can also be grouped into two types: visible
trade and invisible 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.
Invisible is not visible but it exists, e.g., shipping transfer of technical
know-how, insurance, transportation, fees on the professional services
! !15
FOREIGN TRADE
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.
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 derive 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 maximize total profits by selling the commodity at a higher price in
the domestic market than internationally (to meet the competition of
foreign rivals).
! !16
FOREIGN TRADE
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.
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 in to 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 of
time, are seldom equal, the balance of trade will not ordinarily balanced.
India’s Balance of Trade

India recorded a trade deficit of USD 8130.20 million in February 2014.
Balance of Trade in India is reported by the Ministry of Commerce and
Industry, India. Balance of Trade in India averaged USD – 1809.03 million
from 1957 until 2014, reaching an all-time high of USD 258.90 million in
March 1977 and a record low of USD – 20210.90 million in October 2012.
India had been recording sustained trade deficits due to low exports base
! !17
FOREIGN TRADE
and high imports of coal and oil for its energy needs. India is leading
exporter of petroleum products, gems and jewellery, textiles, engineering
goods, chemicals and services. Main trading partners are European Union
countries, United States, China and UAE.
India's Exports, Imports, and Balance of Trade from 2000-01 to 2010-11

Value in Rs. '00 crores Percentage Growth
Year Balance Balance
Export Import Export Import
of Trade of Trade
2000-01 2035.71 2308.73 -273.02 27.58 7.26 -50.97

2001-02 2090.18 2452.00 - -361.82 2.68 6.21 32.53
2002-03 2551.37 2972.06 -420.69 22.06 21.21 16.27
2003-04 2933.67 3591.08 -657.41 14.98 20.83 56.27
2004-05 3753.40 5010.65 -1257.25 27.94 39.53 91.24
2005-06 4564.18 6604.09 -2039.91 21.60 31.80 62.25
2006-07 5717.79 8405.06 -2687.27 25.28 27.27 31.73
2007-08 6558.64 10123.12 -3564.48 14.71 20.44 32.64
2008-09 8407.55 13744.36 -5336.81 28.19 35.77 49.72
2010-11 8455.34 13637.36 -5182.02 0.57 -0.78 -2.90
2011-12 11429.22 16834.67 -5405.45 35.17 23.45 11.72
Source: Website of Commerce Ministry.
After the above dates, i.e., 2011-12, following is the position of India’s
balance of trade as per the Ministry of Commerce.
! !18
FOREIGN TRADE
Source: www.tradingeconomics.com/ministry of commerce and industry,

India.
CALENDAR EVENT REFERENCE ACTUAL PREVIOUS CONSENSUS FORECAST
BALANCE USD
2013-12-11 NOV 2013 USD -9.23B USD -9.1B
OF TRADE -10.55B
BALANCE USD
2014-01-10 DEC 2013 USD -9.23B USD -8.70B USD -8B
OF TRADE -10.14B
BALANCE USD
2014-02-11 JAN 2014 USD -9.91B USD -12.63B USD -7B
OF TRADE -10.14B
BALANCE
2014-03-11 FEB 2014 USD -8.13B USD -9.91B USD -11.05B USD -4.6B
OF TRADE
BALANCE
2014-04-11 MAR 2014 USD -8.13B USD -5.4B
OF TRADE
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.
! !19
FOREIGN TRADE
1. External Factors:
a. The sudden rise in price of essential commodities of imports like

edible oil, sugar, machinery, drugs and medical equipments 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 US 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 high-technology.
d. High consumption of internal production making it unable to export.
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.
! !20
FOREIGN TRADE
Corrective Measures
To come out of the above unfavourable balance of trade position, certain

corrective measures are required.
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
from October 07, 2013 is 9.0 per cent) and base rate (which replaced
prime lending rate) with effect from July 1, 2010, put restriction 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.
! !21
FOREIGN TRADE
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”.
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 of time; 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
! !22
FOREIGN TRADE
International Reserve Account. However, it can be vertically divided

into many categories as per the requirement.
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 drawal 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).
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.
! !23
FOREIGN TRADE
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.
Receipts (Credits) Payments (Debits)

1. Exports of goods 1. Imports of goods
Trade Account Balance

2. Exports of services 2. Imports of services
3. Interest, profits and dividends 3. Interest, profits and dividends paid

received
4. Unilateral receipts 4. Unilateral Payments
Current Account Balance

(1 to 4)
5. Foreign Investment 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
Capital Account Balance
(5 to 8)
9. Change in reserves (+) 9. Change in reserves

Total Receipts = Total Payments
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FOREIGN TRADE
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 broadly divided into:
1. Balance of payment on current account, i.e., the balance of payments

concerning the imports and exports of merchandise and services and
2. 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.
C. Balances within the Total: For the purpose of analysis, the items of
balance of payments are classified into different groups. There are at
least five separate types of balances, viz.:
1. Merchandise/trade balance, i.e., the balance of the imports and

exports of the merchandise.
2. Current account balance, i.e., the balance of the imports 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.
5. Official transactions balance, i.e., net liquidity balance plus liquid

liabilities to foreigners.
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FOREIGN TRADE
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,
• fiscal and
• non-monetary measures.
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 to 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.
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FOREIGN TRADE
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 USA, 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
per cent 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.
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 hyper-inflation causing further deficit in balance of

payments.
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FOREIGN TRADE
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 per cent in terms of various currencies. The 1991
devaluation brought the desired effect. The very next year the import
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.
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 to

be a weakness for the country.
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FOREIGN TRADE
Devaluation may bring inflation in the following conditions:
1. 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.
2. 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.
3. When demand for our export rises, more and more goods produced
in a country would go for exports thus creating shortage of such
goods at the domestic level. This results in rising prices and inflation.
4. 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
from urning worse. In short it is only a temporary measure and not
permanent remedy.
B. 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 reduce the demand for imported goods and at the same time
induce domestic producers to produce more of import substitutes. Non-
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FOREIGN TRADE
essential imports can be drastically reduced by imposing a very high rate of

tariff.
Drawbacks of Tariffs:
1. Tariffs bring equilibrium by reducing the volume of trade.
2. Tariffs obstruct the expansion of world trade and prosperity.
3. Tariffs need not necessarily reduce imports. Hence, the effects of

tariff on the balance of payment position are uncertain.
4. Tariffs seek to establish equilibrium without removing the root causes

of disequilibrium.
5. A new or a higher tariff may aggravate the disequilibrium in the

balance of payments of a country already having a surplus.
6. 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.
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.
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FOREIGN TRADE
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.
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 go against the
principle of comparative advantage.
! !31
FOREIGN TRADE
1.8 INCOTERMS: Foreign Contracts
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
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.
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 are
subdivided into two categories based only on method of delivery. The
larger group of seven rules applies regardless of the method of transport,
with the smaller group of four being applicable only to sales that solely
involve transportation over water.
1. 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
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FOREIGN TRADE
terms of payment of freight and insurance charges and the mode of

payment for the goods.
2. Mode of Delivery: Delivery may be actual or constructive. Where the

goods are physically delivered to the buyer, the 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.
3. 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
be prepaid, and whether the shipment should be cover by insurance,
and if so, who should bear the charges.
All the Incoterms 2010 are explained as under:
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.
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FOREIGN TRADE
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.
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.
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
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FOREIGN TRADE
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.
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 only freight.
(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.)
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FOREIGN TRADE
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 for 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 becomes responsible for
paying the duty and other customs clearing expenses).
To summarise, allocations of costs to buyer/seller according to Incoterms

2010 are as under:
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FOREIGN TRADE
1.9 International trade agreements / Institutions
The General Agreement on Tariffs and Trade (GATT) was a multilateral

agreement regulating international trade. It was created in 1948 and lasted
until 1993. World Trade Organisation (WTO) was formed as a replacement
for GATT in 1995 with the purpose of supervising and liberalising
international trade. WTO has a more permanent structure compared to
GATT. WTO also monitors trade in services and trade-related aspects of
intellectual property rights, in addition to trade in goods.
! !37
FOREIGN TRADE
!
There are various bodies or agreements that have been made around the
world in order to maintain peace and justice among the different countries.
The main purpose of such bodies is to regulate talks, trade and other rules
and regulations among the different countries of the world. The most
popular bodies are the United Nations and the World Trade Organisation.
Though there are a few similarities between the GATT and the WTO, they
are distinctly different from each other.
The General Agreement on Tariffs and Trade (GATT) was created in 1948
with a purpose of “substantial reduction of tariffs and other trade barriers
and the elimination of preferences, on a reciprocal and mutually
advantageous basis.” It was originally placed under the ITO (International
Trade Organisation), which was supported by the United Nations (UN).
When the ITO failed to ratify, GATT evolved into the World Trade
Organisation (WTO). There are few major flaws in the GATT structure such
as not enough enforcing power, which led to many disputes among the
members. Also, the rules and regulations that were created under GATT
were temporary in nature.
The World Trade Organisation (WTO)
WTO is an organisation that intends to supervize and liberalise

international trade. The organisation officially commenced on 1 January,
1995 under the Marrakech Agreement, replacing the General Agreement on
Tariffs and Trade (GATT), which commenced in 1948. The organisation
deals with regulation of trade between participating countries; it provides a
framework for negotiating and formalising trade agreements, and a dispute
resolution process aimed at enforcing participant’s adherence to WTO
agreements, which are signed by representatives of member governments
and ratified by their parliaments.
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FOREIGN TRADE
!
Most of the issues that the WTO focuses on derive from previous trade
negotiations, especially from the Uruguay Round (1986-1994). The
organisation is attempting to complete negotiations on the Doha
Development Round, which was launched in 2001 with an explicit focus on
addressing the needs of developing countries. As of June 2012[update],
the future of the Doha Round remained uncertain: the work programme
lists 21 subjects in which the original deadline of 1 January 2005 was
missed, and the round is still incomplete. The conflict between free trade
on industrial goods and services but retention of protectionism on farm
subsidies to domestic agricultural sector (requested by developed
countries) and the substantiation of the international liberalisation of fair
trade on agricultural products (requested by developing countries) remain
the major obstacles. These points of contention have hindered any
progress to launch new WTO negotiations beyond the Doha Development
Round. As a result of this impasse, there have been an increasing number
of bilateral free trade agreements signed. As of July 2012, there were
various negotiation groups in the WTO system for the current agricultural
trade negotiation which is in the condition of stalemate.
World Trade Organisation (WTO) was formed as a replacement for GATT in

1995 with the purpose of supervising and liberalising international trade.
The organisation deals with regulation of trade between participating
countries. It also provides a framework for negotiations and formalizations
of trade agreements. It is also responsible for enforcing trade laws,
agreements and resolving disputes. The WTO was created with the purpose
of being a stronger and having a more permanent framework compared to
the previous GATT. It also monitors trade in services and trade-related
aspects of intellectual property rights, in addition to trade in goods. The
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FOREIGN TRADE
WTO has a total of 157 member countries. Major difference in GATT and
WTO is summarised as under:
GATT WTO
Full form General Agreement on World Trade Organisation
Tariffs and Trade
Year of creation 1948 1995

Purpose To strengthen international To govern GATT and
trade. international trade practices.
Framework No permanent structure or Has a permanent structure with

framework. a permanent framework.
Scope Trade in goods. Trade in goods; trade in
services and trade-related
aspects of intellectual property
rights.
Dispute Has a permanent appellate Disputes are resolved faster as

resolution body to review findings and settlement system has a select
settle disputes. time frame.
GATT Rounds of Negotiations

The GATT was the only multilateral instrument governing international
trade from 1946 until the WTO was established on 1 January 1995.
Despite attempts in the mid-1950s and 1960s to create some form of
institutional mechanism for international trade, the GATT continued to
operate for almost half a century as a semi-institutionalised multilateral
treaty regime on a provisional basis.
Seven rounds of negotiations occurred under GATT. The first real GATT
trade rounds concentrated on further reducing tariffs. Then, the Kennedy
Round in the mid-sixties brought about a GATT anti-dumping agreement
and a section on development. The Tokyo Round during the seventies was
the first major attempt to tackle trade barriers that do not take the form of
tariffs, and to improve the system, adopting a series of agreements on
non-tariff barriers, which in some cases interpreted existing GATT rules,
and in others broke entirely new ground. Because these plurilateral
agreements were not accepted by the full GATT membership, they were
often informally called “codes”. Several of these codes were amended in
the Uruguay Round, and turned into multilateral commitments accepted by
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FOREIGN TRADE
all WTO members. Only four remained plurilateral (those on government

procurement, bovine meat, civil aircraft and dairy products), but in 1997
WTO members agreed to terminate the bovine meat and dairy agreements,
leaving only two.
Doha Round (Doha Agenda)

The WTO launched the current round of negotiations, the Doha
Development Round, at the fourth ministerial conference in Doha, Qatar in
November 2001. This was to be an ambitious effort to make globalisation
more inclusive and help the world’s poor, particularly by slashing barriers
and subsidies in farming. The initial agenda comprised both further trade
liberalisation and new rule-making, underpinned by commitments to
strengthen substantial assistance to developing countries.
The negotiations have been highly contentious. Disagreements still

continue over several key areas including agriculture subsidies, which
emerged as critical in July 2006. According to a European Union
Statement. “The 2008 Ministerial meeting broke down over a disagreement
between exporters of agricultural bulk commodities and countries with
large numbers of subsistence farmers on the precise terms of a ‘special
safeguard measure’ to protect farmers from surges in imports.” The
position of the European Commission is that “The successful conclusion of
the Doha negotiations would confirm the central role of multilateral
liberalisation and rule-making. It would confirm the WTO as a powerful
shield against protectionist backsliding.” An impasse remains and, as of
August 2013[update], agreement has not been reached, despite intense
negotiations at several ministerial conferences and at other sessions. On
27 March 2013, the Chairman of Agriculture Talks announced “a proposal
to loosen price support disciplines for developing countries’ public stocks
and domestic food aid.”
The GATT still exists as the WTO’s umbrella treaty for trade in goods,
updated as a result of the Uruguay Round negotiations (a distinction is
made between GATT 1994, the updated parts of GATT, and GATT 1947, the
original agreement which is still the heart of GATT 1994). GATT 1994 is not
however the only legally binding agreement included via the Final Act at
Marrakesh; a long list of about 60 agreements, annexes, decisions and
understandings was adopted. The agreements fall into a structure with six
main parts:
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FOREIGN TRADE
• The Agreement establishing the WTO
• Goods and investment – the Multilateral Agreements on Trade in Goods

including the GATT 1994 and the Trade Related Investment Measures
(TRIMS)
• Services – the General Agreement on Trade in Services
• Intellectual property – the Agreement on Trade-Related Aspects of

Intellectual Property Rights (TRIPS)
• Dispute settlement (DSU)
• Reviews of governments' trade policies (TPRM)
In terms of the WTO’s principle relating to tariff "ceiling binding" (No. 3),
the Uruguay Round has been successful in increasing binding commitments
by both developed and developing countries, as may be seen in the
percentages of tariffs bound before and after the 1986-1994 talks.
India as a member of signatory to the agreement, has received the

significant tariff concessions from several other member countries, and has
also been able to pursue a policy of quantitative import restrictions to
conserve her slender foreign exchange reserves.
I. The European Economic Community (EEC)
An economic organisation established in 1957 to reduce tariff barriers and

promote trade among the countries of Belgium, Luxembourg, the
Netherlands, France, Italy, and West Germany. These countries became the
original members of the European Community in 1965. The treaty provides
for free movement of goods persons, services and capital among the
member countries and has led to the establishment of a customs union
amongst them in order to correct the disequilibrium in the balance of
payments. The members have abandoned separate external tariffs
amongst themselves and the customers and economic union so created is
by implications a political association, block of non-communist countries of
Europe.
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FOREIGN TRADE
There was much speculation about the future of India’s trade with the
United Kingdom should the later prefer to join the common market since
the Indian exports entered the UK without any tariff or quota restrictions
by virtue of the Indo British trade agreement of 1939. However, UK joined
the community in January 1973, thus terminating the trade agreement
with India.
II.UNCTAD
The United Nations Conference on Trade and Development

(UNCTAD) was established in 1964 as a permanent inter-governmental
body. It is the principal organ of the United Nations General Assembly
dealing with trade, investment, and development issues. The organisation’s
goals are to “maximise the trade, investment and development
opportunities of developing countries and assist them in their efforts to
integrate into the world economy on an equitable basis. The creation of the
conference was based on concerns of developing countries over the
international market, multinational corporations, and great disparity
between developed nations and developing nations.
In the 1970s and 1980s, UNCTAD was closely associated with the idea of a
New International Economic Order (NIEO). The United Nations Conference
on Trade and Development was established in 1964 to provide a forum
where the developing countries could discuss the problems relating to their
economic development. UNCTAD grew from the view that existing
institutions like GATT (now replaced by the World Trade Organisation,
WTO), the International Monetary Fund (IMF), and World Bank were not
properly organised to handle the particular problems of developing
countries.
The primary objective of the UNCTAD is to formulate policies relating to all

aspects of development including trade, aid, transport, finance and
technology. The conference ordinarily meets once in four years. The first
conference took place in Geneva in 1964, second in New Delhi in 1968, the
third in Santiago in 1972, fourth in Nairobi in 1976, the fifth in Manila in
1979, the sixth in Belgrade in 1983, the seventh in Geneva in 1987, the
eighth in Cartagena in 1992 and the ninth at Johannesburg (South Africa)
in 1996. The permanent secretariat is in Geneva. Currently, UNCTAD has
194 member states and is headquartered in Geneva, Switzerland. UNCTAD
has 400 staff members and bi-annual (2010-2011) regular budget of $138
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million in core expenditures and $72 million in extra-budgetary technical

assistance funds. It is a member of the United Nations Development
Group.[2] There are non-governmental organisations participating in the
activities of UNCTAD.
III.OPEC
The letters stands for Organisation of Petroleum Exporting Countries. It is

an organisation consisting of the world’s major oil-exporting nation. The
Organisation of Petroleum Exporting Countries (OPEC) was founded in
1960 to coordinate the petroleum policies of its members, and to provide
member states with technical and economic aid. OPEC is a cartel that aims
to manage the supply of oil in an effort to set the price of oil on the world
market, in order to avoid fluctuations that might affect the economies of
both producing and purchasing countries.
OPEC membership is open to any country that is a substantial exporter of

oil and that shares the ideals of the organisation. As of 2011, OPEC had 12
member countries, viz., Iraq, Iran, Saudi Arabia, the UAR, Kuwait, Algiers,
Libya, Nigeria, Indonesia, Venezuela, Ecuador etc. OPEC’s influence on the
market has been widely criticised. Because its member countries hold the
vast majority of crude oil reserves (about 80 per cent) and nearly half of
natural gas reserves in the world, the organisation has considerable power
in these markets.
The prices of the oil have been changed several times and the price rise
has hit the importing countries very hard, particularly the developing
countries like India. The short-term effect of the pricing policy on India has
been the high cost of imported oil, which has resulted disequilibrium in her
balance of payment position. India has therefore been compelled to
intensify her oil exploration efforts, as she has done the Bombay High, with
view of minimising the need for import of oil.
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IV.Petrodollars
The money earned from the sale of oil. The term “petrodollars” was coined
when the price of oil rose sharply in the 1970s. It resurfaced in the new
millennium, when prices rose once again. Although petrodollars initially
referred primarily to money that Middle Eastern countries and members of
OPEC received, the definition has broadened in recent years.
Petrodollars are the primary source of government revenue in many Middle

Eastern countries. In fact, these funds represent a massive amount of
investment capital and, in fact, are often traded on the euro currency
market. They are also used for development purposes. In the 1970s and
1980s, Bahrain was able to improve its industrial capacity through the use
of petrodollars.
The petrodollars are used by USA to finance the development programmes

of the West Asia countries which in turn use them to make payment for
their imports from the USA, while the USA again uses these dollars in
purchasing oil. Thus, petrodollars are in circulation over and over again.
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 cooperation. 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
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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.
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 spillovers in either direction are
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.
Mechanism for Settlement through the Union
(i) The Reserve Bank has been undertaking to receive and pay US
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 US 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.
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(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 US 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 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 US Dollar and Euro amounts to the
Nostro Accounts of the AD Category-I banks. The AD Category-I
banks will credit the US 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 US 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 US
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;
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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.
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 Rashtra Bank
to make payments in foreign exchange. Such payments may be
settled through ACU mechanism.
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.
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
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 US Dollars.
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c. Elimination of the need for double conversion of currencies and

thereby savings in the cost of settlement.
d. Curtailment of the time needed before for settlement of transactions

by the elimination of the intermediary correspondents in London or
New York.
1.11 Most favoured Nation (mfn) 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.
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.
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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.
• 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.
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1.12 Euro Money
The euro is the single currency shared by (currently) 17 of the European

Union’s Member States, which together make up the euro area. The
introduction of the euro in 1999 was a major step in European integration.
It has also been one of its major successes: Around 330 million EU citizens
now use it as their currency and enjoy its benefits, which will spread even
more widely as other EU countries adopt the euro.
When the euro was launched on 1 January, 1999, it became the new
official currency of 11 Member States, replacing the old national currencies
– such as the Deutschmark and the French franc – in two stages. First, the
euro was introduced as an accounting currency for cashless payments and
accounting purposes, while the old currencies continued to be used for
cash payments. Since 1 January 2002, the euro has been circulating in
physical form, as bank notes and coins. The euro is not the currency of all
EU Member States. Two countries (Denmark and the United Kingdom) have
‘opt-out’ clauses in the Treaty exempting them from participation, while the
remainder (several of the more recently acceded EU members plus
Sweden) has yet to meet the conditions for adopting the single currency.
In 1999, Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg, the

Netherlands, Austria, Portugal and Finland joined for Euro as single
currency, thereafter Greece joined in 2001, Slovenia in 2007, Cyprus and
Malta in 2008, Slovakia in 2009 and lastly Estonia joined in 2011. With the
launch of the euro, monetary policy became the responsibility of the
independent European Central Bank (ECB), which was created for that
purpose, and the national central banks of the Member States having
adopted the euro. Together they compose the Euro system. Fiscal policy
(public revenue and expenditure) remains in the hands of individual
national authorities – although they undertake to adhere to commonly
agreed rules on public finances known as the Stability and Growth Pact.
Member States also retain overall responsibility for their structural policies
(i.e., labour markets, pension and capital markets), but agree to coordinate
them in order to achieve the common economic goals.
The euro is the currency of the people who live in the 17 euro area
countries. It is also used, either formally as legal tender or for practical
purposes, by other countries such as close neighbours and former colonies.
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It is therefore not surprising that the euro has rapidly become the second
most important international currency after the dollar.
Foreign trade may be carried on, that is, goods may be traded between the
exporter and importer in any of the following three ways:
1. On open account basis: This means that the goods may, where the
credit status of the importer is high, be sent direct to him in expectation
of payments in due course on presentation of relative documents
through a bank. Exports on this basis are not permissible in India.
2. Under Bill of Exchange: The exporter may draw bill of exchange on

importer for the value of exports and collects the bills through a bank.
3. Under Letter of Credit: The exporter may agree to export the goods
only against a letter of credit opened in his favour.
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 creditworthiness and the
ability to fulfil 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.
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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 L/C 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
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.
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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.
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/modernisation or upgradation 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 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
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improve competitiveness, thereby helping them in their globalization

efforts.
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;
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.
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.
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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 categorized as consultancy
projects. Typical examples of services contracts are: project
implementation services, management contracts, and supervision 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.
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 per cent of their equity

investment in overseas JV/WOS.
b. Term loans to Indian companies towards upto 80 per cent 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,
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iii. equity investment in another company,

iv. acquisition of brands/patents/rights/other IPR,
v. acquisition of another company,
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; and
e. Other suitable overseas entities.
The above-mentioned recipients of LOCs act as intermediaries and onlend

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
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• Competitive interest rate against host country's high cost of

borrowing:
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:
i. 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;
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• Equipments, tools, computer hardware/software, miscellaneous fixed

assets used in eligible R&D activities;
• 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.
ii. 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 of 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.
iii. 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
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projects including acquisition of equipment, technology etc.; export

marketing; export product development; setting up of Software
Technology Parks, etc.
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 and
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.
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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 internationalization 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 Grassroot 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 areas of support extended by the bank through its grassroots
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initiatives inter alia include capacity building, development of common

facility centres, and construction of raw material bank, technology
upgradation and creation of export capability.
1.16 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 belonging to any country may load
or unload cargo without having to pay customs or any other duties, barring
of 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.
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
residing in other places of the country get the benefit of cash assistance by
way of refund in part or in a whole of the imports duties paid for the raw
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FOREIGN TRADE
materials of export, but this involves initially a larger working capital and
there are also procedural delays in getting the refund.
Free Trade and 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
lakh 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.
Concept
FTWZ is a ‘Sanitised Zone’ designated as Foreign Territory for carrying on
business. FTWZs 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.
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FOREIGN TRADE
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.
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) destuffing 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.
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• Free foreign exchange transaction capability for the services rendered

including CY/Container Freight Station services.
• Value addition services can be provided like labelling, packing, kitting,

barcoding, palletisation and other authorised services.
All such activities are exempted from service tax as well as any purchases
of packaging material, labels and the like from DTA into the FTWZ would be
treated as exports from such suppliers.
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 labelling, packing, kitting,

barcoding, palletisation 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.
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Thus, FTWZs are comprehensive infrastructure required for improving

India’s container volumes and enabling importers and exporters efficiently
and cost-effectively carry warehousing, trading and value addition
activities.
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.
• Kandlar 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 trans-shipment terminal with
direct sailings to important markets of the world, which could position
it as Hub for South Asia.
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1.17 offshore Banking Operations
Offshore banking is an altogether new system of banking which has come

into vogue. This system is operated through the offshore banking unit of
overseas banks established in offshore banking zones, similar to free trade
zones in underdeveloped 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 into competition 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 is 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.
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.
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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. Anyways, 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.
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.
Scheme for Setting Up of 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.
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FOREIGN TRADE
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.
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.
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$ 10 million to its OBU.
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 BR Act,
1949.
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FOREIGN TRADE
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.
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.
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.
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.
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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.
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 ECD regulations.
Priority Sector Lending

The loans and advances of OBUs would not be reckoned as net bank credit
for computing priority sector lending obligations.
Deposit Insurance
Deposits of OBUs will not be covered by deposit insurance.
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1.18 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 inter-bank 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 inter-bank 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.
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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 a.m.?” The BBA throws out the highest 4 and
lowest 4 responses, and averages the remaining middle 10, yielding a 23
per cent 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.
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 (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
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FOREIGN TRADE
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.
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.
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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 inter-bank 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 US 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. 
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FOREIGN TRADE
1.20 Summary
The net difference between the value of the commodities imported and
exported is called Balance of Trade. The balance of payment of country is
systematic record of all trade transactions, visible and invisible imports and
exports and exports during a given period. Incoterms rules are a set of
international terms with definite and uniform meaning evolved by the
international Chamber of Commerce for the interpretation of most
commonly used terms in international trade and are accepted by
governments, legal authorities and practitioners worldwide. There are
various bodies, agreements or institutions that have been set up around
the world in order to maintain peace and justice among the different
countries of the world. Such as GATT and WTO. The euro is the currency
shared by 17 euro area countries used either formally as legal tender or for
practical purpose. It has become the second most important international
currency after the douar. Foreign trade may be carried on open account
basis, under Bill of 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. It is fully owned by the Government of India. 
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FOREIGN TRADE
Answer the Following Questions:
1. Name the factors/elements attached to international trade as compared

to inland trade.
2. What are the main types of Dumping? Explain in brief.
3. Explain the factors affecting Balance of Trade.
4. Explain the components used in calculating the Balance of Payment.
5. Explain Incoterms 2010. How many Incoterms are there in Incoterms

2010?
6. Explain the difference between GATT and WTO.
7. Write short notes on:

i. Asian Clearing Union (ACU)
ii. Most Favoured Nation (MFN)
8. Explain the role and major functions of Exim Bank.
9. Describe the role of Exim Bank in financing International Trade.
10.What is the purpose of establishing the Free Trade ZONES? Explain.
11.Explain the scheme of setting up of Offshore Banking Unit (OBU) in

SEZ.
12.Write short notes on:

i. LIBOR
ii. ECU
iii. UNCTAD
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FOREIGN TRADE
Multiple Choice Questions:
1. Foreign trade is broadly of two types which consists of:

a. Import and export
b. Invisible and visible
c. Visible import and export
d. Invisible import export
2. Balance of Trade means

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
3. What are the major corrective measures for unfavourable balance of

trade position along with other measures?
a. Export promotion
b. Import restrictions
c. Both of the above
d. None of the above
4. What is balance of payment?

a. Systematic record of all trade transactions, visible and 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
5. Solution for correcting deficit lies in

a. Monetary
b. Fiscal
c. General Agreement on Tariffs and Trade
d. Non-monetary
6. Incoterms 2010 consists of __________ rules terms

a. 11
b. 13
c. 10
d. 15
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FOREIGN TRADE
7. Expand UNCTAND.
a. United Nations Conference on Trade and Development
b. Union National Conference on Trade and Development
c. United Nations Conditions for Trade and Development
d. United Nations Conditions of Trade Department
8. What is offshore banking operations?

a. The system which is operated through offshore banking unit of
overseas bank in offshore banking zone
b. Banking unit of any bank established in offshore banking zone
c. Host country norms are applicable to banking unit in offshore banking
zone
d. Banking unit operating in offshore banking zone in competition with
local banks
9. Expand LIBOR.
a. London Inter-bank Offer Rate
b. Local Inter-bank Offer Rate
c. Local Interest Offer Rate
d. Local International Banks Offer Rate
10.Expand ECU.
a. European Currency Unit
b. European Currency Union
c. European Current Unit
d. Economic Currency Union
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FOREIGN TRADE
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
Video Lecture - Part 5 
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INSTRUMENTS OF FOREIGN TRADE
Chapter 2
Objectives
• Documents used in Foreign trade and their features

• Documents used in commercial documents and their features
• Important official documents and characteristic features of each
documents
• Insurance documents, their features and types
• Various transport documents used in foreign trade and their features
• Main documents used as financial and financing documents in foreign
trade and their features
Structure:
2.1 Documents Used in Foreign Trade

2.2 Commercial Documents
2.4 Insurance Documents
2.6 Financial and Financing Documents
2.7 Summary
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2.1 Documents used in Foreign Trade
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 required 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
A brief description of each set of the documents is described as under:
2.2 Commercial documents
Commercial documents consist of following documents:
i. Invoice
ii. Pro-forma Invoice
iii. Commercial Invoice
iv. Certified Invoice
v. Certificate of Origin
vi. Weight Notes or Certificates
vii. Packing List
viii. Quality or Inspection Certificate
Let us discuss 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 of time 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, different invoices in different names are drawn.
Under letter of credit, Invoice is drawn as per the terms of the credit.
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ii. 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. 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 VAT invoices, which means
that they should contain the phrase ’This is not a VAT 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 VAT
invoice within the given time-frame. The seller should not register a pro-
forma invoice as an accounts receivable, and conversely the buyer
should not register this type of invoice as an accounts payable.
iii. Commercial Invoice: A commercial invoice is a document used

in foreign trade. It is used as a customs declaration provided by the
person or corporation that is exporting an item across international
borders. Although there is no standard format, the document must
include a few specific pieces of 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.
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.
iv. 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
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authorities of the importing country. It facilitates entry of goods in the

importing country at preferential tariff rate.
v. 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 export 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.
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 per cent of the cost of producing the goods originates from one
country, the “national content” is more than 50 per cent, then, that
country is acceptable as the country of origin.
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.
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vi. Weight Note or Weight Certificate: Document issued commonly

by customs authorities of the exporting country, certifying the
correct gross weight of the goods being shipped.
vii. 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.
viii. 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,
Refractoriness, Ceramic Products, Pesticides, Light Engineering, Steel
Products, Jute Products, Coir and Coir Products, Footwear and
Footwear Products.
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Example of an Acceptable Commercial Invoice for Importation

Customer Clearance
SELLER (Sold-by entity the request/PO Invoice Number Invoice Date
was sent to:
supplier/vendor) INCOTERMS (Terms of Sale, based on
Company name Incoterms 2000)
Address Incoterms itself
City, Province/Region/state, Postal Named port, place, point or premises of risk
code, Country transfer
Freight Payment Terms collect or prepaid
Buyer (Kodak Sold-to entity that placed Payment Terms (for the product)
the request/Po, Importer)
Company name Shipment Number Container
Address Number If
City, Province/Region/state, Postal applicable for full
code, Country containers
Ship-to (first delivery address in arrival SEALS Mode of Transport

country) If applicable for full Examples air
Company name containers freight ocean FCL
C/O or attention of or ocean LCL
Address
City, Province/Region/state, Postal Bill of Lading Number
code, Country HWB
Contact name, phone number MWB
Vat Registration number
TOTAL PKGS TOTAL PIECES Total Gross Total Net Weight (Kg)
(Kartons) (Pallets) Weight (Kg).
(Kodak) Net Quantity Unit of Description Unit Total Amount and
material Wgt. Measur price Currency
Number (Kg.) e and
Currency
Precise product/material description package, qty,

serial number country of origin (where goods are
manufacturer country of import Harmonized tariff code
Kodak PO, RA Number or other Kodak reference
identitier
Statement for POC We Certify the value indicated on this invoice to be the exact value
to be paid by Eastman Kodak Sarl to the vendor at the time of transfer of title and
ownership.
Statement for ISPM 15: No sold Wood Packing Materials Used:
Continue on additional pages if needed SUB TOTAL BILLED VALUE
Page of TOTAL BILLED VALUE
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Certificate of Origin Template
Certificate of Origin
Exporter Named and Address Blanket Period: (DD/MM/
YYYY)
From:
Tax Identification Number To:
Producer Name and Address Importer Name and Address:
Tax Identification Number Tax Identification Number

Tarrif
Description Preference Net Country
Classification Producer
of Goods(s) Criterion Cost of Origin
Number
I CERTIFY THAT:
• Information provided in this certificate is based on facts and I assume the
responsibility for proving such representation. I understand that I am liable
for any false statement or material omission made on or in concern with this
document.
• I agree to maintain and present upon request documentation necessary to
support this certificate and to inform, in writing, al persons to whom this
certificate was given of any changes that would affect accuracy or validity of
this certificate.
• This certificate consists of ____________ pages including all attachments
Authorized Signature: Company:
Name: (Print or Type) TITLE

Date: DD/MM/YYYY Ph: Fax: Customer Form:
xxxxxxxxx xxxxxxxxx
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Pre-shipment inspection, also called pre-shipment inspection or PSI, 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 per cent 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.
Following are the major official documents used in international trade:
i. Consular Invoice
ii. Legalised Invoice
iii. Blacklisted 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-listed 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(ies) which are blacklisted.
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iv. Health, Veterinary and Sanitary Certificate, Certificate of

Analysis: Required for export of foodstuffs, marine products, hides,
livestock etc.
2.4 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.
• Minimum 110 per cent of CIF or CIP value, if LC 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
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reference to any exclusion clause indicate that cover is subject to franchise

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

2. Marine Hull Insurance
1. 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:
i. 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.
ii. 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.
iii. Open Policy: It is an Annual Cargo Insurance Contract expressed in

general terms and effected for a round sum sufficient to cover a number
of 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.
iv. 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.
v. 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:
a. SRCC – Strike, riot and civil commotion (including terrorist act)

b. 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 or 15 per cent 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:
i. Inform nearest office of the insurance company or claim settling

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

original invoice and other documents required to substantiate the
claim such as:
a. Bill of Lading/AWB/GR
b. Packing list
c. Copies of correspondence exchanged with carriers
d. Copy of notice served on carriers along with acknowledgment/
receipt
e. Shortage/Damage Certificate issued by carriers
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v. 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 final destination.
Cargo insurance — discussed here — 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

instead.
2. 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 shipowner

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.
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In addition to above, there are some main types of Marine Insurance

Policies depending upon 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 per cent to 15 per cent 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.
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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
• Unseaworthiness and unfitness of vessel craft conveyance, containers,
etc.
• War
• Strikes
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Following are the documents normally used as transport documents:
1. Airway Bill/Air Consignment Note

2. Mate’s Receipt
3. Bill of Lading
4. Railway Consignment Note/Railway Receipt/Roadway Bill
5. Post Parcel Documents
1. Airway Bill/Air Consignment Note
Air Waybill (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 air way
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.
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.
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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 this article, trans-shipment 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
trans-shipped, provided that the entire carriage is covered by one
and the same air transport document.
2. An air transport document indicating that trans-shipment will or may

take place is acceptable, even if the credit prohibits trans-shipment.
• The Air Waybill (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 air waybill is issued.
• Air Waybills 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:
1. 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.
2. The next seven digits are the running number/s – one number for
each consignment.
3. The last digit is what is called the check digit.
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Air Waybills 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.
Air Waybills 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 air waybill is:
• The proper shipper and consignee must be mentioned.

• The airport of departure and destination must be mentioned.
• 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.
There are several purposes that an air waybill serves, but its main
functions are:
• Contract of Carriage: Behind every original of the Air Waybill 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
! !99
air waybill is given to the shipper as evidence of the acceptance of

goods and as proof of contract of carriage.
• Freight Bill: The air waybill 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 air waybill is used for the carrier’s accounting
• Certificate of Insurance: The air waybill 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 air waybill
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 air
waybill 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 air waybill and the neutral air
waybill. Usually, airline air waybills are distributed to IATA cargo agents
by IATA airlines. The air waybills show:
i. the carrier's name

ii. its head office address
iii. its logo
iv. the preprinted eleven digit air waybill number
It is also possible to complete an air waybill 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 air
waybills. IATA cargo agents usually hold air waybills of several carriers.
However, it gradually became difficult to accommodate these pre-
numbered air waybills with the printed identification in the computer
system. Therefore, a neutral air waybill was created. Both types of air
waybills have the same format and layout. However, the neutral air waybill
does not bear any preprinted individual name, head office address, logo
and serial number.
The air waybill 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
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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 air
waybill 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 air waybill should be issued immediately upon receipt of the goods and
letter in instructions from the shipper.
As long as the air waybill 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
air waybill and thus the contract of carriage expire upon delivery of the
shipment to the consignee (or his authorised agent).
The air waybill is a contract – an agreement between the shipper and the
carrier. The agent only acts as an intermediary between the shipper and
carrier. The air waybill 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 air waybill, even if the air waybill 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.
Waybills are non-negotiable documents unlike bills of lading which are

negotiable. The words non-negotiable are printed clearly at the top of the
air waybill. This means that the air waybill is a contract for transportation
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 air
waybill executed according to the terms of a letter of credit allows the
shipper to present the original of the air waybill 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
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goods. At the destination the carrier will only handover 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 air waybill 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.
International air waybills that contain consolidated cargo are called master
air waybills (MAWB). MAWBs have additional papers called house air
waybills (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 air waybill 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 air waybill to the customer.
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2. Mate’s Receipt
It is a document signed by an officer of a vessel evidencing receipt of a
shipment on-board the vessel. It is not a document of title and is issued as
an interim measure until a proper bill of lading can be issued. This 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. In
modern days, the document known as the “Mate’s receipt” is not often
signed by the mate of the ship but by some person in the shore office of
the shipping company or its agents, although the name of the document
remains the same.
Mate’s 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 on to 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 fulfils
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,
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and must be signed by an authorised representative from the carrier,

shipper and receiver.
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 second officer.
3. Bill of Lading
Bill of Lading is a document given by the shipping agency for the goods
shipped for transportation from 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.)
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• 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.
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• 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 Landing.”
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.
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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 final
destination.
9. Stale Bill of Lading: Occasionally, in cases of short overseas 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
BOL 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 described as under:
I. As per UCP 600 Article 20, Bill of Lading is described as under:
1. A bill of lading, however named, must appear to:
i. 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.
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ii. Indicate that the goods have been shipped on-board a named vessel
at the port of loading stated in the credit by:
- preprinted 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.
iii. 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 preprinted wording on
the bill of lading.
iv. 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.
v. 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.
vi. Contain no indication that it is subject to a charter party. 
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2. For the purpose of this article, trans-shipment 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.
3. A bill of lading may indicate:
• That the goods will or may be trans-shipped provided that the entire
carriage is covered by one and the same bill of lading.
• A bill of lading indicating that trans-shipment will or may take place is

acceptable, even if the credit prohibits trans-shipment, if the goods
have been shipped in a container, trailer or LASH barge as evidenced
by the bill of lading.
4. 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 Sea Waybill as

under:
1. A non-negotiable sea waybill, however named, must appear to:
i. 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.
The date of issuance of the non-negotiable sea waybill will be

deemed to be the date of shipment unless the non-negotiable sea
waybill contains an on-board notation indicating the date of
! !109
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 sea waybill 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 sea waybill 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
preprinted wording on the non-negotiable sea waybill.
iv. Be the sole original non-negotiable sea waybill or, if issued in more
than one original, be the full set as indicated on the non-negotiable
sea waybill.
v. 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 sea waybill). Contents of terms
and conditions of carriage will not be examined.
vi. Contain no indication that it is subject to a charter party.

one vessel and reloading to another vessel during the carriage from the
port of loading to the port of discharge stated in the credit.
3. i. A non-negotiable sea waybill may indicate that the goods will or may
be trans-shipped provided that the entire carriage is covered by one and
the same non-negotiable sea waybill.
ii. A non-negotiable sea waybill indicating that trans-shipment will or

may take place is acceptable, even if the credit prohibits trans-
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shipment, if the goods have been shipped in a container, trailer or

LASH barge as evidenced by the non-negotiable sea waybill.
4. Clauses in a non-negotiable sea waybill stating that the carrier reserves

the right to tranship will be disregarded.
III.Article 22 describes Charter Party Bill of Lading as under:
1. 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:
i. 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.
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.
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.
! !111
iv. 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.
2. 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:
1. A road, rail or inland waterway transport document, however named,

must appear to:
i. 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.
ii. Indicate the date of shipment or the date the goods have been
received for shipment, dispatch or carriage at the place stated in the
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.
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iii. Indicate the place of shipment and the place of destination stated in
the credit.
2. i. 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.
ii. A rail transport document marked duplicate will be accepted as an

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

original whether marked as an original or not.
3. 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.

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.
5. i. A road, rail or inland waterway transport document may indicate that

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

trans-shipment will or may take place is acceptable, even if the credit
prohibits trans-shipment.
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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:
1. A courier receipt, however named, evidencing receipt of goods for

transport, must appear to:
i. 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
ii. 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.
2. 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.
3. 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.
2.6 Financial and financing documents
The following main documents are considered as Financial and Financing

documents in international trade:
1. Bill of Exchange
2. Promissory Note
3. Trust Receipt
The characteristic features and importance of each document in

international trade are as under:
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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 cheque and a binding contract.
Specimen of Bill of Exchange
• 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
! !115
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.
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 is as follows:
• “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.” 
! !116
!
• The bill of exchange is drawn on the letterhead 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.
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.
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Samples of the Promissory Note are as under
!
Or
Indian Currency Notes are also form of Promissory notes. The promise on
currency note (in circled area) reads as “I promise to pay the bearer the
sum of five hundred 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.
Similar to 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.
! !118
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 on which
payments should be made. Pre-formatted 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 is 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 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 a loan money to
an individual through an unsecured promissory note, it is a good idea
to never lend more than you can afford to lose. As an added precaution,
experts recommend hiring an attorney to draft a promissory note to ensure
it will hold up in court.
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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.
• 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:
For TR Financing
• Duly executed TR agreement;

• Bill of Exchange accepted by the buyer; and TR facility line of credit
granted by the bank.
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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
- 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
Other Documents
There are some other important documents used in International Trade.
These are as under:
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1. 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.
2. 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.
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.
3. 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.
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Not to be confused with delivery instructions document which pertain to

inland transportation.
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
delivery orders for special treatment. Until the delivery order is accepted
by the bailee, there is no basis for imposing obligations on the bailee.
4. 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 some kind of 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
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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.
There are two types of shipping bills:

• Shipping bill for export of duty-free goods. This shipping bill is white in
colour.
• Shipping bill for export of goods under claim for duty drawback. This
shipping bill is green in colour.
• Shipping bill for export of duty-free goods ex-bond, i.e., from bonded
warehouse. This shipping bill is pink in colour.
• Shipping bill for export of dutiable goods. This shipping bill is yellow in
colour.
• Shipping bill for export under DEPB scheme. This shipping bill is blue in
colour.
The Bills of Export are:

• Bill of export for goods under claim for duty drawback
• Bill of export for dutiable goods
• Bill of export for duty-free goods
• Bill of export for duty-free goods ex-bond
After the receipt of the goods in the dock, the exporter may contact the
Customs Officer designated for the purpose and present the checklist with
the endorsement of Port Authority and other declarations along with all
original documents. Customs Officer may verify the quantity of the goods
actually received and thereafter mark the Electronic Shipping Bill and also
handover all original documents to the Dock Appraiser, who may assign a
customs officer for the examination of the goods. If the Dock Appraiser is
satisfied that the particulars entered in the system conform to the
description given in the original documents, he may proceed to allow “let
export” for the shipment
Processing of Shipping Bill – Non-EDI: In case of Non-EDI, the

shipping bills or bills of export are required to be filled in the format as
prescribed in the Shipping Bill and Bill of Export (Form) Regulations, 1991.
An exporter need to apply different forms of shipping bill/ bill of export for
export of duty free goods, export of dutiable goods and export under
drawback etc.
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Processing of Shipping Bill – EDI: Under EDI System, declarations in

prescribed format are to be filled through the Service Centres of Customs.
A checklist is generated for verification of data by the exporter/CHA. After
verification, the data is submitted to the System by the Service Centre
operator and the System generates a Shipping Bill Number, which is
endorsed on the printed checklist and returned to the exporter/CHA. For
export items which are subject to export cess, the TR-6 challans for cess is
printed and given by the Service Centre to the exporter/CHA immediately
after submission of shipping bill. The cess can be paid on the strength of
the challan at the designated bank. No copy of shipping bill is made
available to exporter/CHA at this stage.
Sum up: 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 required in cross-border trade are
commercial invoice, bill of lading/Air waybill, Marine insurance policy, Bill of
Exchange, invoices, inspection certificate, packing list etc.
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, 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. Air waybill 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
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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 facilitate in that country clearance of goods at the
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.
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2.7 Summary
Documents are used to record a written evidence of having carried out a

transaction in both local and foreign trade. These documents require to
satisfy the regulatory and operational requirements of a trade.
Commercial, official, insurance, transport, and financial and financing
documents and many other documents are used in these documents are
their characteristic feature are discussed.
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 lading.
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. Mate’s receipt
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Multiple Choice Questions
1. The 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. Blacklisted certificate is required for _____.

a. Countries which have strained political relationship
b. Countries which are placed in the blacklist by exporting country
c. Countries blacklisted 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
6. What do you mean by “claused” bill of lading?

a. Bill of lading containing various Clauses
b. Notation on bill of lading written by hand
c. Bill of lading stating “improper packaging, missing quantities, for
cases damaged” and like
d. Bill of lading containing no clauses
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7. ABC Limited exported some cotton bales from India to Dubai by sea
instead of by air. Goods were carried from their factory to Dubai. The
appropriate transport documents submitted to bank is _____.
a. Clean bill of lading
b. Combined transport bill of lading
c. House Air waybill
d. Charter party bill of lading
8. Airway bill is_____.

a. Negotiable Instrument
b. Non-negotiable Document
c. Document which can be transferred by endorsement
d. Document issued by carrier
9. Bill of Exchange is _____.

a. Negotiable document April 30, 2013
b. Non-negotiable document
c. Document for claiming the payment
d. Document used to know amount of goods shipped
10.How many parties are involved in Promissory Notes?

a. 2
b. 3
c. 4
d. 1
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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IMPORT CONTROL
Chapter 3
IMPORT CONTROL
Objectives
• Authorities involved in the import control

• Meaning and types of Import licence
• Categories Where Import licence is not required
• Types of evidence of Import
• Common do’s and dont’s considered in opening of LC
• Deferred Payment LC
Structure:
3.1 Trade under Deficit

3.3 Import Licence
3.7 Import of Gold, Silver, Platinum, Jewellery, Foreign Exchange, Indian
Currency
3.8 Import of Bills/Receipt of Documents directly
3.11 Opening of LC
3.12 Restrictions
3.14 Summary
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IMPORT CONTROL
3.1 Trade Under Deficit
An economic measure of a negative balance of trade in which a country’s

imports exceeds its exports is called deficit trade. A trade deficit represents
an outflow of domestic currency to foreign markets. Economic theory
dictates that a trade deficit is not necessarily a bad situation because it
often corrects itself over time. India recorded a trade deficit of USD –
9219.90 million in November 2013. Balance of Trade in India is reported by
the Ministry of Commerce and Industry, India. Balance of Trade in India
averaged USD –1778.96 million from 1957 until 2013, reaching an all time
high of USD – 258.90 million in March 1977 and a record low of USD –
20210.90 million in October 2012. India had been recording sustained
trade deficits due to low exports base and high imports of coal and oil for
its energy needs. India is leading exporter of petroleum products, gems
and jewellery, textiles, engineering goods, chemicals and services.
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 though Customs.
Custom 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.
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IMPORT CONTROL
Import in India is governed by the certain rules and regulations, 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.
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.
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.
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IMPORT CONTROL
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 regulations in India.
Custom 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 Custom 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.
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IMPORT CONTROL
3.3 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 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 special conditions, if any, attached to such licence 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.
While the 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 Directorate General of Foreign
Trade. DGFT Delhi office is situated in Udyog Bhawan, New Delhi – 110011.
Validity of Import License

Import Licenses is valid for 24 months for capital goods and 18 months for
raw materials components, consumable 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.
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IMPORT CONTROL
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

importer 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.
• Canalised Items: There are certain canalised items that can only be
importer in India through specified channels or government agencies.
These include petroleum products (to be imported only by the Indian Oil
Corporation); nitrogenous phosphatic, potassic and complex chemical
fertilizers (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 fat, animal rennet, wild
animals and unprocessed ivory – are completely banned from
importation.
Category of Importer
On the basis of product to be imported and its target buyer, importer’s
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 are defined as those who have a valid registration

certificate issued by an export promotion council, commodity board or
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IMPORT CONTROL
other registered authority designated by the Government for purposes

of export promotion.
3. Others.
The two types of actual user license 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.
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 have right to
charge fines and penalties if any violation in the import license is found to
be done by the importer.
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 6
months from the date of shipment.
Import licence granted for capital goods and heavy electrical plants are
valid for 3 years 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.
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IMPORT CONTROL
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.
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 wildlife, 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 labelled as smuggling.
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IMPORT CONTROL
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, the 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.
Some of the categories where Import Licence is not required are:
1. Under Free Importability (Erstwhile OGL) Declaration

2. Private/Personal 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 in order 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 the purpose of personal use. Forms of Personal Import:
There are two forms of personal import:
i. Direct Personal Import: An importer himself/herself places orders

to foreign mail order companies, retailers or manufactures and
imports directly from them.
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IMPORT CONTROL
ii. 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.
3. Postal Import
The Rules prescribed for lading and clearing at notified Ports/Airports/Land
Customs Stations of parcels and packets forwarded by the foreign mails or
passenger vessels or air liners are as follows:
i. 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.
ii. On receipt of the parcel mail, the Postmaster hands over to the Customs
the following documents:
a. a memo showing the total number of parcels received from each

country of origin;
b. 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;
c. the relative Customs Declarations and dispatch notes (if any); and
d. any other information required in connection with the preparation of
the parcel bills which the Post Office is able to furnish.
iii. On receipt of the documents, the Customs Appraiser shall scrutinise the
particulars 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, as the case may be. For
this purpose, the Appraisers are generally guided by the particulars
given in the parcel bill or Customs declarations and dispatch notes (if
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IMPORT CONTROL
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.
iv. Whenever necessary, the values from the declarations are entered into
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.
v. 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.
vi. 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.
vii.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.
viii.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
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will likewise fill in these details on the assessment memos to be

forwarded along with each packet.
ix. All parcels or packets required to be opened for Customs examination

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

misdeclared 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.
xi. 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.
xii.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 3 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.
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4. 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
along with relevant documents required. The duties liable are assessed but
not required to be paid. A suitable bond has to 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 are 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 per cent 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 have to 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
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may reduce the one year’s period of warehousing to such shorter period as
he may deem fit.
5. 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 upto 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 prepaid 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.
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Physical Imports
i. In case of all imports, where value of foreign exchange remitted/paid for

import into India exceeds USD 100,000 or its equivalent, it is obligatory
on the part of the AD Category-I bank through whom the relative
remittance was made, to ensure that the importer submits:
a. The Exchange Control copy of the Bill of Entry for home consumption,
or
b. The Exchange Control copy of the Bill of Entry for warehousing, in
case of 100 per cent Export-oriented Units,
or
c. Customs Assessment Certificate or Postal Appraisal Form, as declared
by the importer to the Customs Authorities, where import has been
made by post, as evidence that the goods for which the payment was
made have actually been imported into India.
ii. In respect of imports on D/A basis, AD Category-I bank should insist on

production of evidence of import at the time of effecting remittance of
import bill. However, if importers fail to produce documentary evidence
due to genuine reasons such as non-arrival 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.
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,
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
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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.
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.
Issue of Acknowledgement
AD Category-I bank should acknowledge receipt of evidence of import,
e.g., Exchange Control copy of the Bill of Entry, Postal Appraisal Form or
Customs Assessment Certificate, etc., from importers by issuing
acknowledgement slips containing all relevant particulars relating to the
import transactions.
Verification and Preservation
i. Internal inspectors or auditors (including external auditors appointed by

AD Category-I bank) should carry out verification of the documents
evidencing import, e.g., Exchange Control copies of Bills of Entry or
Postal Appraisal Forms or Customs Assessment Certificates, etc.
ii. Documents evidencing import into India should be preserved by AD

Category-I bank for a period of one year from the date of its
verification. However, in respect of cases which are under investigation
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by investigating agencies, the documents may be destroyed only after

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

import, within 3 months from the date of remittance involving foreign
exchange exceeding USD 100,000, the AD Category-I bank should
rigorously follow up for the next 3 months, including issuing registered
letters to the importer.
ii. AD Category-I bank should forward a statement on half-yearly basis as

at the end of June and December of every year, in form BEF furnishing
details of import transactions, exceeding USD 100,000 in respect of
which importers have defaulted in submission of appropriate document
evidencing import within 6 months from the date of remittance, to the
Regional Office of Reserve Bank under whose jurisdiction the AD
Category-I bank is functioning, within 15 days from the close of the
half-year to which the statement relates.
iii. AD Category-I bank need not follow up submission of evidence of import

involving amount of USD 100,000 or less provided they are satisfied
about the genuineness of the transaction and the bonafides of the
remitter. A suitable policy may be framed by the bank’s Board of
Directors and AD Category-I bank may set their own internal guidelines
to deal with such cases.
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3.7 Import of Gold, silver, Platinum, Jewellery, Foreign

Exchange, Indian Currency
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
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.
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.
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
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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.
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.
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 bonafide 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.
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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 Gem 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 Gem 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.
Import of Gold on Loan Basis
i. Nominated agencies/authorized 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 Gem 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 2009-2014, 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 dated April 1,
2003. 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 Gem 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 Gem and Jewellery Export Promotion
Council.
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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 2009-14 or as notified by the Government of India from time to
time.
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).
Import of Gold in Any Form Including Jewellery Made of Gold/

Precious Metals or/and Studded with Diamonds/Semi/Precious/
Precious Stones
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 and only on 100 per cent cash margin basis.
Import of Platinum, Palladium, Rhodium, Silver, Precious and Semi-

precious Stones and Rough, Cut and Polished Diamonds
a. Suppliers’ and Buyers’ credit, including the usance period of Letters of

Credit opened for import of Platinum, Palladium, Rhodium and Silver,
precious and semi-precious stones and rough, cut and polished
diamonds should not exceed 90 days from the date of shipment.
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 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. All other
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instructions relating to import of these metals and rough, cut and

polished diamonds shall continue.
Import of Foreign Exchange

As per the current regulations under FEMA Notification No. FEMA.
258/2013-RB dated February 15, 2013, 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 notes up to an amount not
exceeding Rs. 10,000 (Rupees ten thousand only) per person; and 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 upto an amount not exceeding Rs. 10,000 (Rupees ten thousand
only) per person.
A person may send into India without limit foreign exchange in any form
other than currency notes, bank notes and travellers’ cheques. Bring into
India form any place outside India without limit foreign exchange (other
than unissued notes provided that bringing of foreign exchange into India
under clause (b) shall be subject to the condition that such person makes,
on arrival in India, a declaration to the Custom authorities in Currency
Declaration Form (CDF) 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 US $ 10,000 (US Dollars
ten thousands) or its equivalent and/or the aggregate value of foreign
currency notes brought in by such person at any one time does not exceed
US $ 5,000 (US Dollars five thousands) or its equivalent.
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.
Import of Indian Currency

Import of Indian Currency is prohibited. However, in the case of
passengers, normally resident in India who are returning from a visit
abroad, import of Indian currency upto Rs. 7,500 is allowed.
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Import of Securities
There are no restrictions on the import into 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.
3.8 Import of Bills/Receipt of Documents Directly
Receipt of Import Bills/Documents
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:
i. Where the value of import bill does not exceed USD 300,000.
ii. Import bills received by wholly-owned Indian subsidiaries of foreign

companies from their principals.
iii. 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.
iv. Import bills received by all limited companies, viz., public limited,
deemed public limited and private limited companies.
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 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
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documentary evidence for import is submitted by the importer at the time

of remittance. AD Category-I banks may undertake such transactions
subject to the following conditions:
i. The import would be subject to the prevailing Foreign Trade Policy.
ii. The transactions are based on their commercial judgement and they
are satisfied about the bonafides of the transactions.
iii. 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.
3. Receipt of import documents by the AD Category-I bank directly

from overseas suppliers
i. 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.
ii. 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.
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Trade Credits for Import into India

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. Depending on the source of finance, such trade credits include
suppliers’ credit or buyers’ credit. Suppliers’ credit relates to 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 a bank or financial institution outside India for maturity of less than
three years. 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.
a. Amount and Maturity
i. 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 the DGFT with a
maturity period up to one year (from the date of shipment). For
import of capital goods as 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
(from the date of shipment). No rollover/extension will be permitted
beyond the permissible period.
ii. The companies in the infrastructure sector, where “infrastructure” is

as defined under the extant guidelines on External Commercial
Borrowings (ECB) have been allowed to avail of trade credit up to a
maximum period of five years for import of capital goods as classified
by DGFT subject to conditions that the trade credit must be ab initio
contracted for a period not less than fifteen months and should not
be in the nature of short-term rollovers (as amended vide AP DIR
Circular No. 28 dated 11.9.2012). However, the condition of ‘ab initio’
buyers’ credit would be for 6 (six) months only for trade credits
availed of on or before December 14, 2012.(as amended vide AP DIR
Circular No. 59 dated 14.12.2012).
iii. AD banks shall not approve trade credit exceeding USD 20 million per
import transaction.
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b. All-in-cost Ceilings
The current all-in-cost ceilings are as under:
All-in-cost Ceilings over 6 Months

Maturity Period
LIBOR*
Up to one year
More than one year and upto three

years 350 basis points
More than three years and upto five

years
* For the respective currency of credit or applicable benchmark.
The all-in-cost ceilings include arranger fee, upfront fee, management fee,
handling/ processing charges, out-of-pocket and legal expenses, if any. The
existing all-in-cost ceiling is applicable upto March 31, 2013 this reviewed
from time to time.
As per extant guidelines on Trade Credit, the companies in the

infrastructure sector, where “infrastructure” is as defined under the extant
guidelines on External Commercial Borrowings (ECB) are allowed to avail of
trade credit up to a maximum period of five years for import of capital
goods as classified by DGFT subject to the that (i) the trade credit must be
ab initio contracted for a period not less than fifteen months and should
not be in the nature of short-term rollovers; and (ii) AD banks are not
permitted to issue Letters of Credit/guarantees/Letter of Undertaking
(LoU)/Letter of Comfort (LoC) in favour of overseas supplier, bank and
financial institution for the extended period beyond three years.
On review, w.e.f. December 14, 2013, it has been decided by RBI to

further relax the condition of ‘ab initio’ buyers' credit for 15 (fifteen)
months to 6 (six) months for existing trade credits. However, the condition
regarding ‘ab initio’ buyers' credit for 15 months shall continue for future
trade credit.
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Sale of Exchange
Authorised persons may release foreign exchange for travel purposes on

the basis of a declaration given by the traveller regarding the amount of
foreign exchange availed of during the financial year. In case of issue of
travellers’ cheques, the traveller should sign the cheques in the presence of
an authorised official and the purchaser’s acknowledgement for receipt of
the travellers’ cheques should be held on record.
Out of the overall foreign exchange being sold to a traveller, exchange in

the form of foreign currency notes and coins may be sold up to the limit
indicated below:
• Travellers proceeding to countries other than Iraq, Libya, Islamic

Republic of Iran, Russian Federation and other Republics of
Commonwealth of Independent States – not exceeding USD 3,000 or
its equivalent.
• Travellers proceeding to Iraq or Libya – not exceeding USD 5000 or its

equivalent.
• Travellers proceeding to Islamic Republic of Iran, Russian Federation

and other Republics of Commonwealth of Independent States - full
exchange may be released
The Form A2 relating to sale of foreign exchange should be retained for a

period of one year by the Authorised Persons, together with the related
documents, for the purpose of verification by their Internal Auditors.
However, in respect of remittance, applications for miscellaneous non-trade
current account transactions of amount not exceeding USD 25,000,
Authorised Dealers may obtain simplified Application-cum-Declaration form
(Form A2).
In cases where the remittances are allowed on the basis of self-declaration,

the onus of furnishing the correct details in the application will remain with
the applicant who has certified the details relating to the purpose of such
remittance.
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Period of Surrender of Foreign Exchange

In case the foreign exchange purchased for a specific purpose is not
utilized for that purpose, it could be utilised for any other eligible purpose
for which drawal of foreign exchange is permitted under the relevant Rules/
Regulation.
General permission is available to any resident individual to surrender

received/ realised/unspent/unused foreign exchange to an Authorised
Person within a period of 180 days from the date of receipt/realisation/
purchase/acquisition/date of return of the traveller, as the case may be.
The liberalised uniform time limit of 180 days is applicable only to resident
individuals and in areas other than export of goods and services.
Unspent Foreign Exchange

An unspent foreign exchange brought back to India by a resident individual
should be surrendered to an Authorised Person within 180 days from the
date of return of the traveller. Exchange so brought back can be utilised by
the individual for his/her subsequent visit abroad.
However, a returning traveller is permitted to retain with him, foreign

currency travellers’ cheques and currency notes up to an aggregate
amount of USD 2000 and foreign coins without any ceiling beyond 180
days. Foreign exchange so retained, can be utilised by the traveller for his
subsequent visit abroad.
A person resident in India can open, hold and maintain with an Authorised
Dealer in India, a Resident Foreign Currency (Domestic) Account, out
of foreign exchange acquired in the form of currency notes, bank notes and
travellers’ cheques from any of the sources like, payment for services
rendered abroad, as honorarium, gift, services rendered or in settlement of
any lawful obligation from any person not resident in India.
The account may also be opened/credited with foreign exchange earned

abroad, including proceeds of export of goods and/or services, royalty,
honorarium, etc., and/or gifts received from close relatives (as defined in
the Indian Companies Act 1956) and repatriated to India through normal
banking channels by resident individuals.
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The eligible credits to the Resident Foreign Currency (Domestic) Account,

out of foreign exchange acquired in the form of currency notes, bank notes
and traveller’s cheques, are as under:
i. Acquired by him from an Authorised Person for travel abroad and

represents the unspent amount thereof or
ii. acquired by him, while on a visit to any place outside India, by way of
payment for services not arising from any business in or anything
done in India and by way of honorarium or gift or
iii. Acquired by him, from any person not resident in India, and who is
on a visit to India, as honorarium, gift, for services rendered or in
settlement of any lawful obligation.
3.11 Opening of LC
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. Taking
into consideration all these aspects, there are certain common do’s and
don’ts need to be observed while opening the LC. These are as under:
Do’s
1. Open LC or import transactions only for customers and open only if the
party has got sanction limit.
2. Allow import of restricted items as per procedure laid down in the

Foreign Trade Policy.
3. Handover import documents only to drawee or his PA holder against

proper acknowledgement.
4. Allow payment for import by debit to customer’s account only.
5. Allow payment for the bills beyond six months and also allow payment
of overdue interest on sight bills for a period not exceeding six months.
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6. Allow payment to local agents on commission basis. In case of overseas

agent, allow commission as per FEMA guidelines.
7. Verify the imported items under the LC.
8. Issue amendments to LC only on the basis of written request.
9. Verify whether the payment method in Letter of Credit is done as per

FEMA guidelines or not.
10.In case of default payment, crystallise the sight bill on 10th day of the
month or 3th day from the date of it becomes due for payment or as per
the bank’s policy.
11.Allow import provided goods are consigned to bank account opener.
12.Insist for insurance cover at the time of opening the LC.
13.Allow opening of LC on DA basis provided the Usance does not exceed

more than 180 days.
14.Allow opening of Transferable LCs provided transfer is restricted to

specified second beneficiaries whose credit report is satisfactory.
15.Verify the Letter of Credit application form to ensure whether they are
properly filled and stamped.
16.Report to the RBI (Reserve Bank of India) if the bill of entry is not
received.
17.Sell the imported goods, only after getting permission from ITC
authorities.
18.Keep one copy of shipping documents, invoice and other papers for
future inspection by the custom inspector or the Reserve Bank of India.
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Don’ts
1. Issue the Letter of Credit if the customer doesn’t have IEC number.
2. Open LC without proper transport documents.
3. Allow advance payment without proper documentation.
4. Forward the documents to third party without permission from the

importer.
5. Import prohibited or restricted items without import license.
6. Allow direct remittance of import bills beyond the limit and without EC
copy of bill of entry.
7. Open revolving LC without safety clause.
8. Amendments to the Letter of Credit for import of those items which is

either restricted or prohibited.
9. Allow import documents received under collection paid without verifying

importer’s line of business and financial standing.
Import Regulatory Body

In India, all the activities related to import is handled by the Directorate
General of Foreign Trade (DGFT), a government organisation that also
controls the export business in India. DGFT and all its regional offices work
under the Ministry Commerce and Industries, Department of Commerce,
Government of India. All the procedure and policies in matter related to the
import is announced by the DGFT through its notification, appendices and
forms.
1. For customers only: A letter of credit may be opened by the bankers

on behalf of the customers who maintains an account with him and is
known to be participating in the particular trade.
2. For imports under free importability: Where the goods are to be

imported are covered under erstwhile Open general licence (OGL), a
letter of credit may be opened provided that:
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• Importer submits Exchange Control Form A1, stating there in that the
goods are freely importable, and quoting the number of licence,
together with serial number of the goods.
• The Banker on verification is satisfied as to the correctness of the

importer’s statement.
• The letter of credit should stipulate that the bill of lading should
indicate the name and address of the importer as well as the bank
opening the credit.
3. For import under licence:
a. Where the goods are to be imported against the specific import licence,
the letter of credit may be opened only on production of the “For
Exchange control purpose” copy of the import licence. This condition
does not apply to Imports from Bhutan. Any special instructions
endorsed on the import licence regarding the manner of payment etc.
should be strictly adhered to while opening the letter of credit.
b. Duplicate copy of the licence – The original exchange control copy of the
import licence must be produced. Duplicate exchange control copy of
the licence may, however be accepted for the purpose of opening the
letter of credit provided that the Authorised dealer is satisfied that the
original copy has not been lodged with him or with any other authorised
dealer or that no letter of credit has been opened against it through him
or through any other authorised dealer.
Note: The authorised dealer should endorse on the import licence under
his stamp and signature the details of the letter of credit opened (or for
that matter, forward contract if any booked or remittances are made in
foreign currency) as also the amount of insurance, freight and
commission paid by the importer locally in INR.
The authorised dealer should also endorse the value of the back-to-back
inland letters of credit opened on him on behalf of duty-free licence
holder (including transferee, if any) as required in terms of the relevant
provisions of Foreign Trade Policy.
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c. The importer must be holder of licence or a person must be authorised

by DGFT authorities to utilise the licence issued in the name of another
person. If, however, an actual user or a registered exporter desires to
import the goods against his licence through an export house holding an
export house certificate issued by the DGFT, it will not be necessary for
the licence holder to obtain a letter of authority for this purpose in
favour of the export house. The export house can act as the indenting
agency and import goods against the licence for raw material,
components and spares issued to the actual user or registered exporter
on behalf of the licence holder.
The term export house means as per the import policy booklet of the
Government of India, a registered exporter holding, a valid export house
certificate issued by DGFT. A registered export house means a person
holding a valid registration certificate issued by export promotion council,
commodity board or any other registering authority designated by the
government for the purpose of export promotion to recognise established
exporter as export house, star trading house and superstar trading house.
The scheme of export house has been modified a number of times and the
present scheme for recognition as export house, trading house, star
trading house, and superstar trading house is either FOB/NFE value of
export of the goods and services during the 3 preceding licensing at the
option of the exporter as given in the table below:
Status Category Export Performance

FOB/FOR Value
(Rupees in Crores)
Export House (EH) 20
Trading House (TH) 100
Star Export House (SEH) 500
Star Trading House (STH 2500
Premier Trading House (PTH) 7500
Merchant as well as Manufacturer Exporters, Service Providers, Export-

oriented Units (EOUs) and Units located in Special Economic Zones (SEZs),
Agri Export Zones (AEZs), Electronic Hardware Technology Parks (EHTPs),
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Software Technology Parks (STPs) and Biotechnology Parks (BTPs) shall be

eligible for recognition as a status holder.
Status recognition depends upon export performance. An applicant shall be

categorised as status holder upon achieving export performance indicated
in table above. The export performance will be counted on the basis of FOB
value of export proceeds realised during current plus previous three years
(taken together). For Export House (EH) Status, export performance is
necessary in at least two out of four years.
A Status Holder shall be eligible for privileges as under:
a. Authorisation and Customs Clearances for both imports and exports on

self-declaration basis;
b. Fixation of Input-Output norms on priority within 60 days;
c. Exemption from compulsory negotiation of documents through banks.

Remittance/ Receipts, however, would be received through banking
channels;
d. Exemption from furnishing of BG in schemes under FTP;
e. SEHs and above shall be permitted to establish Export Warehouses, as

per DoR guidelines.
f. For status holders, a decision on conferring of ACP Status shall be

communicated by Customs within 30 days from receipt of application
with Customs.
g. As an option, for Premier Trading House (PTH), the average level of

exports under EPCG Scheme shall be the arithmetic mean of export
performance in last 5 years, instead of 3 years.
h. Status Holders of specified sectors shall be eligible for Status Holder

Incentive Scrip.
i. Status Holders of Agri Sector (Chapter 1 to 24) shall be eligible for Agri
Infrastructure Incentive Scrip.
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Amount: The amount of letter of credit may be in excess of import licence

amount to the extent of expenses for war risk insurance, where necessary.
If the LC is for import of such goods as watch parts by post parcel, the
amount must not be more than USD 100,000 or its equivalent. An LC for
import of books by post parcel may be opened on account of booksellers/
publishers for any amount. However, remittances against import of books
may be allowed without restriction as to the time limit, provided, interest
payment, if any may be allowed 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.
Period: For import under free importability, the period of LC, i.e., date up
to which shipment will be permissible, must not be longer than the validity
period of relative free importability licence. For LCs opened under an
import licence, the date of expiry must not be later than 75 days (60 days
of grace for shipment plus 15 days for negotiation of documents) after the
final date of shipment as stated in the licence.
Payment: The letter of credit must provide for payment only against the
delivery of shipping documents. The opening of credit providing for
payment against documents other than shipping documents, such as
warehouse receipts, railway receipt, bill of lading etc. is subject to prior
approval of RBI. The approval is granted ordinarily in case of import under
CG or HEP licence.
Provision for Freight Bills: When under FOB Contract, freight paid by
exporter is recoverable along with the cost of the goods, the letter of credit
should stipulate the production of original freight bills or memo stipulated
by the steamship company for the amount charged together with the
shipping documents, unless the amount so paid is indicated in the bill of
lading itself.
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Where LC is established for import of goods from two or more countries

under the specific licence, the amount of credit available from each country
should be stated separately.
The opening of an LC for import into bond of goods for supply to foreign
going vessels or for sale to foreign diplomatic missions/personnel etc
require prior approval of Reserve Bank of India. The application for such
approval should be made by a letter in duplicate. No import licence is
required for such imports.
Letter of credit against an import licence issued for import of goods under
a foreign loan/credit may be opened without reference to the Reserve
Bank. When a licence is governed by the reimbursement method of
payment, the banker should see to it that the prescribed documents are
duly furnished by the LC opening customer.
Margin: The margin accepted against the letter of credit must be retained
in the rupees and not converted into any foreign currency until the bills
drawn under the credit are retired or actual disbursement of foreign
exchange takes place.
Purchase of ship: If the LC is for purchase of a ship from abroad, the

banker should, apart from the usual checkup, verify that the purchaser has
obtained the approval of Ministry of Transport, Government of India. This
applies also to giving a guarantee against such purchase.
3.12 Restrictions
1. Not to open LC during grace period: No letter of credit should be

opened during the grace period of the licence.
2. Revolving credit: The opening of revolving credit for import into India
is not permissible. However, a letter of credit proving for payment
against draft at any one time within a fixed limit, which is renewable on
the draft being honoured may be opened, providing that the aggregate
drawing to be specified on the credit is covered by the balance of import
licence. Form A1, duly filled in and signed by the importer, should be
obtained along with payment.
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3. Beneficiary: No letter of credit should be opened in favour of the

applicant, i.e., the local importer or his nominee. The LC may be opened
only in favour of the manufacturer, supplier or shipper of the goods.
A letter of credit may be opened in favour of overseas buying agent of a

importer when the importer has already obtained the RBI permission to
appoint such an agent and the conditions laid down by RBI are complied
with. The letter of credit should provide for submission of actual
suppliers’ invoice to show that the remuneration payable to the agent
confirms to the terms of RBI approval.
4. No ready exchange: The opening of cash letter of credit involving an

immediate sale of ready foreign exchange to the importer against the
shipment to be made at the future date not permissible.
5. Under contract with Gold clause: A letter of credit for import of

goods under a contract containing “Gold Clause” from any country in
former bilateral group other than Romania, Poland, Czech and Slovakia
may be opened only with the prior approval of RBI.
6. On expiry of licence: If an import licence expires before shipment is

made, a letter of credit should not be extended unless import licence is
revalidated.
7. Thirdparty guarantee/margin: No credit should be established

against an import licence on behalf of the holder of licence or letter of
authority, against the guarantee offered or a margin deposited by a
person or a firm other than a customer in whose name, or on whose
behalf the credit has to be opened.
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A letter of credit that is paid a fixed number of days after shipment or

presentation of prescribed documents. It is used where a buyer and a
seller have a close working relationship because, in effect, the seller is
financing the purchase by allowing the buyer a grace period for payment.
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.
A deferred payment credit against CG or HEP licence on deferred payment

basis, i.e., on condition that total payment authorised by the licence would
be spread over number of years, may be opened only with prior approval
of RBI. The application for such approval should be accompanied by:
• The exchange control copy of the Import Licence
• A statement in duplicate on prescribed form furnishing:

i. Name and address of the Importer
ii. Number and date of Import Licence
iii. The value (CIF) of the import licence, currency and amount
iv. Description of goods imported
v. Country of origin of goods
vi. The value of the goods as per the contract
vii. Country to which remittance is to be made
viii. The terms of payment (advance against shipping documents, rate of
interest etc.)
ix. Name and address of the bank through which remittance will be
effected
x. Certified copy of the contract/agreement between the importer and
overseas supplier
Subsequent Payment
Once the deferred payment arrangement has been approved by RBI, a
letter of credit may be opened and remittances effected in accordance with
approved schedule of payment. The code number allotted by RBI to the
arrangement should be cited in all references to Reserve Bank as well as
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Form A1. 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 in the Master Circular
for External Commercial Borrowings and Trade Credits may be followed.
Conclusion
As far as India is concerned, there are more imports than export thereby
deficit trade and adverse balance of payment position. So as to improve
this deficit position, Government of India has taken, and continue to take
more stringent measures to curb the import. More emphasis is given to
develop domestic industries so as to compete with imported goods.
Infrastructure development has paid more attention so as to develop more
industries.
The recent move of the Government of India to control the import of gold
is also one of the steps towards this direction.
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3.14 Summary
An economic measure of a negative balance of trade in which a country’s

imports exceeds its exports is called deficit trade. A trade deficit represents
on outflow of domestic currency to foreign markets. Custom 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. Import trade
in India is governed by the certain rules and regulations issued by the
import-export governing authorities namely, Ministry of Commerce and
industry, Directorate General of Foreign Trade (DGFT) and Central Board of
Excise Customs (CBEC). It is important for the importer to have an import
license issued by the issuing authorities of the Government of India.
Important License is Valid for 24 months for Capital goods and 18 months
for raw materials, components, consumable and spares, with the license
term renewable. Import Licence may be issued on cash basis or on
deferred paxment basis
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1. Name the authorities involved in the import trade control.
2. What is Import licence? Who is authority to issue the import licence?
3. Describe the different types of import licence.
4. What are the objectives of Custom Duties?
5. What is Open General Licensed Items?
6. Write a short note on Private/personal imports.
7. What are the types of evidences that need to be submitted to AD

Category-I bank for import of goods? Explain.
8. What is deferred payment letter of credit? Describe.
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1. The rules and policies observed in import trade control contained in

“Handbook of Import Export Procedure” is brought out by_____.
a. Ministry of Commerce
b. Directorate General of Foreign Trade
c. Ministry of Foreign Trade
d. Govt. of India, Department of customs
2. As per ITC(HS) classification, is there any terminology called Open

General License (OGL) exists now? (Yes/No).
a. Yes
b. No
3. Import Licenses is valid for ______ months for capital goods and
______ months for raw materials components, consumable and spares.
a. 18 months
b. 24 months
c. 36 months
d. 12 months
4. 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
5. In case an importer does not furnish any documentary evidence of

import within 3 months from the date of remittance involving foreign
exchange exceeding USD______ the AD Category-I bank should
rigorously follow-up for the next 3 month.
a. USD 100,000
b. USD 25,000
c. USD 10,000
d. USD 10,000,00
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6. The usance period of LCs opened for direct import of gold should not
exceed days and on 100 per cent cash margin basis.
a. 180 days
b. 120 days
c. 90 days
d. Sight
7. Non-submission of evidence of import is reported in form of BEF to

________.
a. Indian Banks Association
b. Customs Department at Airport/Sea Port
c. Reserve Bank of India
d. Foreign Exchange Dealers Association of India
8. 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
9. 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
10.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 
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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Chapter 4
EXPORT CONTROL
Objectives
• Overview of Export Control
• Methods of payment for receiving export realisation
• Various policy measures of Foreign Trade Policy 2009-14
• Objectives of RBI Credit Policies
Structure:
4.5 Prescribed Period for Realisation of Exports: Realisation and

Repatriation of Export Proceeds
4.8 Exempted Categories of Export Declaration Form
4.9 EDF/SDF Approval for Trade Fair/Exhibitions Abroad
4.10 EDF/SDF Approval for Export of Goods for Re-imports
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4.13 Countertrade Arrangement
4.19 Forfeiting
4.20 Exports to Neighbouring Countries by Road, Rail or River
4.23 Countertrade Arrangements with Romania
4.24 Mid-sea Trans-shipment of Catch by Deep Sea Fishing Vessels

(Effective from November 21, 2011)
4.29 Conclusion
4.30 Summary
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Like Import, 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 should 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. The
Reserve Bank has notified the Foreign Exchange Management (Export of
Goods and Services) Regulations, 2000 relating to export of goods and
services from India, referred to as ‘Export Regulations’. These Regulations
have been notified vide Notification No. FEMA 23/2000-RB dated May 3,
2000, and amended from time to time.
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, 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 2.40
of the Foreign Trade Policy (August 27, 2009 - March 31, 2014), “All export
contracts and invoices shall be denominated either in freely convertible
currency or in 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
member country of the ACU or Nepal or Bhutan”. Indian Rupee is not a
freely convertible currency, as 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
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different office of the Foreign Exchange Department, they may approach

the Regional Office of its jurisdiction for necessary approval.
“Financial Year” (April to March) is reckoned as the time base for all
transactions pertaining to trade-related issues.
Objectives:
• 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.
Declaration:
In terms of Regulation 6 of the Notification No. FEMA 23/2000-RB dated
May 3, 2000, viz., Foreign Exchange Management (Export of Goods and
Services) Regulations, 2000, as amended by the Notification No. FEMA
36/2001-RB dated February 27, 2001 and A.P. (DIR Series) Circular No. 80
dated February 15, 2012, in terms of which every exporter of goods or
softwares has to give declaration in one of the forms (GR/PP/SDF/SOFTEX/
Bulk SOFTEX) and submit it to the specified authority for certification.
In order to simplify the existing form used for declaration of exports of

Goods/Software, a common form called “Export Declaration Form” (EDF)
has been devised to declare all types of export of goods from Non-EDI
ports and a common “SOFTEX Form” to declare single as well as bulk
software exports. The EDF has now replaced the existing GR/PP form used
for declaration of export of goods. The procedure relating to the exports of
goods through EDI ports will remain the same and SDF form will be
applicable as hitherto.
Under the revised procedure, the exporters will have to declare all the
export transactions, including those less than US $ 25000, in the form as
applicable.
Reserve Bank of India has extended the facilities to exporters for online
generation of SOFTEX Form No. (single as well as bulk) for use in Off-site
Software exports) in addition to EDF Form No. (present web-based process
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of generation of GR Form No. gets replaced) through its website

www.rbi.org.in.
In order to generate the above number, the applicant has to fill in the
online form (Path www.rbi.org.in → Forms → FEMA → Forms Printing EDF/
SOFTEX Form No.), thereafter, the related EDF/SOFTEX Form No. would be
generated for each transaction by the applicant exporter. The present
facility of manual allotment of single as well bulk SOFTEX Form number by
Regional Offices of RBI would be dispensed with accordingly.
The Foreign Exchange Management Act (FEMA) requires exporters to

complete the EDF/SOFTEX Form using the number so allotted and submit
them to the specified authority first for certification and then to AD for
necessary action as hitherto.
These instructions are into force from October 1, 2013.
Grant of EDF/SDF Waiver

AD Category-I banks are considering requests for grant of EDF/SDF 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, the 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 higher.
Export of goods not involving any foreign exchange transaction directly or

indirectly requires the waiver of EDF/SDF procedure from the Reserve
Bank. In terms of Notification No. FEMA 23 /2000-RB dated 3rd May,
2000, Regulation 3, export of goods or services may be made without
furnishing the declaration in the following cases, namely:
1. Trade samples of goods and publicity material supplied free of

payment;
2. Pe r s o n a l e f f e c t s o f t ra v e l l e r s , w h e t h e r a c c o m p a n i e d o r
unaccompanied;
3. Ships stores, trans-shipment cargo and goods supplied under the

orders of Central Government or of such officers as may be appointed
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by the Central Government in this behalf or of the military, naval or

air force authorities in India for military, naval or air force
requirements;
4. Goods or software accompanied by a declaration by the exporter that

they are not more than twenty-five thousand rupees in value;
5. By way of gift of goods accompanied by a declaration by the exporter

that they are not more than one lakh rupees in value;
6. Aircrafts or aircraft engines and spare parts for overhauling and/or

repairs abroad subject to their re-import into India after overhauling/
repairs, within a period of six months from the date of their export;
7. Goods imported free of cost on re-export basis;
8. Goods not exceeding US $ 1000 or its equivalent in value per

transaction exported to Myanmar under the Barter Trade Agreement
between the Central Government and the Government of Myanmar;
9. The following goods which are permitted by the Development

Commissioner of the Export Processing Zones or Free Trade Zones to
be re-exported, namely;
• Imported goods found defective, for the purpose of their replacement

by the foreign suppliers/collaborators;
• Goods imported from foreign suppliers/collaborators on loan basis;
• Goods imported from foreign suppliers/collaborators free of cost,

found surplus after production operations.
10.Replacement goods exported free of charge in accordance with the

provisions of Exim Policy in force, for the time being.
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Exporters’ Caution List
1. Reserve Bank may subject exports of certain exporters who have come
to its adverse notice in regard to realisation of export value, in order to
ensure that the full export value of further exports to be made by them
will be realised in proper time or without delay as required under the
law. In such cases, Reserve Bank will issue caution-listing order
directing that the exporter should submit GR/PP Form through an
authorised dealer to Reserve Bank for its prior approval, supported by
documentary evidence to show that the exporter has received advance
payment or an irrevocable letter of credit in his favour covering the full
value of goods to be exported. Copies of the caution-listing order will be
furnished, among others, to all Customs authorities in India, for the
purpose of ensuring that the conditions of the order are fulfilled.
Authorised dealers will also be advised whenever exporters are caution-
listed. Authorised dealers should not accept for negotiation/collection
shipping documents covering exports declared on GR forms completed
by such exporters nor countersign PP forms completed by them unless
the GR/PP forms bear approval of Reserve Bank. If a caution-listed
exporter presents documents to an authorised dealer together with the
GR form which does not bear the approval of Reserve Bank, authorised
dealer should withhold the documents and not handle them in any
manner without prior approval of Reserve Bank.
2. Ordinarily, Reserve Bank will include in the caution-listing order, not only
the names of the exporters (including proprietor/partners in case of
firms) but also their associate concerns. If authorised dealers come to
know of other associate firms of a caution-listed exporter who are in the
export field, they should bring the matter to the notice of Reserve Bank
promptly.
3. When firms and companies included in the caution-list are removed

from the list by Reserve Bank, the relative de-caution-listing order will
also be forwarded to Customs authorities and authorised dealers will
also be advised. Shipping documents etc. submitted by de-caution-listed
exporters may be dealt with by authorised dealers according to normal
regulations.
4. AD Category-I banks are advised by RBI that whenever exporters are

cautioned in terms of provisions contained in Regulation 17 of “Export
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Regulations”, may approve EDF/SDF forms of exporters who have been

placed on caution list if the exporters concerned produce evidence of
having received an advance payment or an irrevocable letter of credit in
their favour covering the full value of the proposed exports.
5. Such approval may be given even in cases where usance bills are to be
drawn for the shipment provided the relative letter of credit covers the
full export value and also permits such drawings and the usance bill
mature within twelve months from the date of shipment.
6. Banks should obtain prior approval of the Reserve Bank for issuing
guarantees for caution-listed exporters.
A. Gold and Securities

The export of gold from India to any destination, or taking or sending of
securities to any place outside India (including transfer of securities to non-
resident) requires permission of Reserve Bank of India. There is, however,
a general permission of Reserve Bank of India for any person permanently
resident in India to take out the country personal gold/jewellery and for a
foreigner to take out the gold/jewellery purchased in India up to a
prescribed limit. The export of silver bullion and manufacturers is regulated
by DGFT whose permission is necessary for export of silver and silverware.
B. Currency Notes/Foreign Exchange:

As per Regulation (2) of Foreign Exchange Management (Export and
Import of Currency) (Amendment) Regulations, 2009, notified vide
Notification No. FEMA 195/RB-2009 dated July 7, 2009, in terms of which,
any person resident in India may take outside India or having gone out of
India on a temporary visit, may bring into India (other than to and from
Nepal and Bhutan) currency notes of Government of India and Reserve
Bank of India notes up to an amount not exceeding Rs. 10,000 per
person.
As part of providing greater flexibility to the resident individuals travelling
abroad, the existing limit, mentioned above, has been enhanced to Rs.
10,000 per person. Accordingly, any person resident in India:
i. May take outside India (other than to Nepal and Bhutan) currency
notes of Government of India and Reserve Bank of India notes up to
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an amount not exceeding Rs. 10,000 (Rupees ten thousand only) per
person; and
ii. 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.
10,000 (Rupees ten thousand only) per person.
C. Units of UTI
The Unit Trust of India has been granted general permission by RBI to
export the certificates covering the units purchased by non-resident
investors out of foreign exchange remittances from abroad or out of funds
held in their non-resident’s accounts in India.
D. Export of Computer Software

Computer software may be exported either in physical form, i.e., software
prepared on magnetic tapes and paper media or in non-physical form, i.e.,
direct data transmission abroad through dedicated earth stations/satellite
links. The procedure of export of computer software in physical form or
non-physical form is the same as that of goods and required to be declared
in EDF/PP form. The export of computer software in non-physical form can
be made only against advance payment of, or an irrevocable LC for, full
value of export.
E. Export of Goods under Lease, Hire etc.

Certain goods such as machinery, equipment etc. are sometimes required
to be exported on lease, hire etc. basis under the agreement with overseas
lease/hirer etc against the collection of hire charges and ultimate re-import
of goods exported. Exporters desirous of export of goods on such terms
should approach through an AD Bank to the concerned office of RBI giving
full particulars.
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IEC Code is unique 10 digit code issued by Directorate General of Foreign

Trade (DGFT), Ministry of Commerce, Government of India to Indian
companies.
An application for grant of IEC number shall be made by the Registered/

Head Office of the applicant and apply to the nearest Regional Authority of
Directorate General Foreign Trade, the Registered Office in case of
company and Head Office in case of others, falls in the ‘Aayaat Niryaat
Form – ANF2A’ and shall be accompanied by documents prescribed therein.
In case of STPI/EHTP/BTP units, the Regional Offices of the DGFT having
jurisdiction over the district in which the Registered/Head Office of the STPI
unit is located shall issue or amend the IECs.
Only one IEC would be issued against a single PAN number. Any proprietor
can have only one IEC number and in case there are more than one IEC
allotted to a proprietor, the same may be surrendered to the Regional
Office for cancellation.
The application can be download form in PDF or Word. This is called

“Aayaat Niryaat Form – ANF2A”. Along with IEC Code Number Application
Form it is necessary to submit Appendix-18B attested by Applicant’s
Banker in his letterhead with two passport size photo.
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1. Manner of Receipt and Payment

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,
2000 notified vide Notification No. FEMA 14/2000-RB dated May 3, 2000 in
the following manner:
a. Bank draft, pay order, banker’s or personal cheques.

b. Foreign currency notes/foreign currency travellers’ cheques from the
buyer during his visit to India.
c. Payment out of funds held in the FCNR/NRE account maintained by
the buyer.
d. International Credit Cards of the buyer.
Note: When payment for goods sold to overseas buyers during their visits
is received in this manner, EDF/SDF (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/organization will be
received in foreign exchange.
2. Trade Transactions can also be Settled in the Following Manner
a. All transactions between a person resident in India and a person

resident in Nepal or Bhutan may be settled in Indian Rupees.
However, in case of export of goods to Nepal, where the importer has
been permitted by the Nepal Rashtra Bank to make payment in free
foreign exchange, such payments shall be routed through the ACU
mechanism.
b. In precious metals, i.e., Gold/Silver/Platinum by the Gem and

Jewellery units in SEZs and EOUs, equivalent to value of jewellery
exported on the condition that the sale contract provides for the
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same and the approximate value of the precious metals is indicated

in the relevant EDF/SDF Forms.
3. Processing of Export Related Receipts through Online Payment

Gateway Service Providers (OPGSPs)
Authorized 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) (effective
from June 11, 2013).
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,
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. The following debits will only be permitted to the NOSTRO collection

account opened under this arrangement:
• 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;
• Charge back to the importer where the exporter has failed in
discharging his obligations under the sale contract.
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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 bonafides 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. OPGSPs who are already providing such services as per the specific
holding on approvals issued by the Reserve Bank shall open a liaison
office in India within three months from November 16, 2010, after
duly finalising their arrangement with the AD Category-I banks and
obtaining approval from the Reserve Bank for this purpose. In respect
of all new arrangements, the OPGSP shall open a liaison office with
the approval of the Reserve Bank before operationaliing the
arrangement. AD Category-I banks desirous of entering into such an
arrangement/s should approach the Reserve Bank for obtaining one-
time permission in this regard and thereafter report the details of
each such arrangement as and when entered into.
4. Settlement System under ACU Mechanism
a. 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.
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b. 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.
c. 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.
d. 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.
5. Third Party Payments for Export/Import Transactions
With a view to further liberalising the procedure relating to payments for

exports/imports and taking into account evolving international trade
practices, it has been decided by RBI to permit third party payments for
export/import transactions subject to conditions as under:
a. Firm irrevocable order backed by a tripartite agreement should be in

place;
b. Third party payment should come from a Financial Action Task Force
(FATF) compliant country and through the banking channel only;
c. The exporter should declare the third party remittance in the Export
Declaration Form;
d. It would be responsibility of the exporter to realise and repatriate the
export proceeds from such third party named in the EDF;
e. 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; and 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.
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4.5 Prescribed period for Realisation of Exports:Realisation

and Repatriation of export proceeds
It is obligatory on the part of the exporter to realise and repatriate the full
value of goods or software to India within a stipulated period from the date
of export, as under:
1. Units located in SEZs shall realise and repatriate full value of goods/
software/services, to India within a period of twelve months from the
date of export. Any extension of time beyond the above stipulated
period may be granted by Reserve Bank of India, on case-to-case basis.
2. By Status Holder Exporters as defined in the Foreign Trade Policy:

Within a period of twelve months from the date of export;
3. By 100 per cent Export-oriented Units (EOUs) and units set up under
Electronic Hardware Technology Parks (EHTPs), Software Technology
Parks (STPs) and Biotechnology Parks (BTPs) schemes: Within a period
of twelve months from the date of export on or after September 1,
2004;
4. Goods exported to a warehouse established outside India: As soon as it

is realised and in any case within fifteen months from the date of
shipment of goods; and
5. In all other cases: With effect from April 01, 2013, this period of
realisation and repatriation to India has been brought down to nine
months from the date of export, till September 30, 2013.
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1. 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
agent’s 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.
c. Documents in respect of goods or software are accompanied with a

declaration by the exporter that they are not more than Rs. 25,000/-
in value and not declared on EDF/SDF Form.
2. 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:
a. The export proceeds are repatriated through the AD banks named in

the EDF/SDF Form.
b. The duplicate copy of the EDF/SDF form is submitted to the AD banks

for monitoring purposes, by the exporters within 21 days from the
date of shipment of export.
3. AD Category-I banks may regularise 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:
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a. The export proceeds have been realised 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 bonafides of the

transaction.
In case of doubt, the AD Category-I bank may consider filing Suspicious

Transaction Report (STR) with FIU_IND (Financial Intelligence Unit in
India).
AD Category-I banks may consider the applications received from

exporters and grant permission for opening/hiring warehouses abroad
1. Applicant’s export outstanding does not exceed 5 per cent of exports

made during the previous financial year.
2. Applicant has a minimum export turnover of USD 100,000/- during the

last financial year.
3. Period of realisation should be as applicable.
4. All transactions should be routed through the designated branch of the

AD Banks.
5. 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.
6. AD Category-I banks granting such permission/approvals should

maintain a proper record of the approvals granted.
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4.8 Exempted categories of Export Declaration Form
The following categories of importers or exporters are exempted from

obtaining Importer Exporter Code (IEC) number:
• Importers covered by clause 3(1) [except sub-clauses (e) and (l)] and
exporters covered by clause 3(2) [except sub-clauses (i) and (k)] of the
Foreign Trade (Exemption from Application of Rules in Certain Cases)
Order, 1993.
• Ministries/Departments of the Central or State Government.
• Persons importing or exporting goods for personal use not connected

with trade or manufacture or agriculture.
• Persons importing/exporting goods from/to Nepal provided the CIF value

of a single consignment does not exceed Indian Rs. 25,000.
• Persons importing/exporting goods from/to Myanmar through Indo-

Myanmar border areas provided the CIF value of a single consignment
does not exceed Indian Rs. 25,000.
However, the exemption from obtaining Importer Exporter Code (IEC)

number shall not be applicable for the export of Special Chemicals,
Organisms, Materials, Equipments and Technologies (SCOMET) as listed in
Appendix 3, Schedule 2 of the ITC(HS) except in the case of exports by
category (ii) above.
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4.9 EDF/SDF Approval for Trade Fairs/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 5,000 per
exporter, per exhibition/trade fair. AD Category-I banks may approve EDF/
SDF Form of export items for display or display-cum-sale in trade fairs/
exhibitions outside India subject to the following:
1. The exporter shall produce relative Bill of Entry within one month of re-
import into India of the unsold items.
2. The sale proceeds of the items sold are repatriated to India in

accordance with the Foreign Exchange Management (Realisation,
Repatriation, and Surrender of Foreign Exchange) Regulations, 2000.
3. 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.
4. Such transactions approved by the AD Category-I banks will be subject

to 100 per cent audit by their internal inspectors/auditors.
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4.10 EDF/SDF approval for Export of Goods for Re-Imports
1. AD Category-I banks may consider request from exporters for granting

EDF/SDF approval in cases where goods are being exported for re-
import after repairs/maint-enance/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.
2. 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.
1. 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.
2. Contracts involving only ‘one-shot operation’, the invoice/bill should be

raised within 15 days from the date of transmission.
3. 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.
4. The invoices raised on overseas clients as at (i) and (ii) 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.
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1. When part of a shipment covered by an EDF/SDF form 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.
2. Where a shipment has been entirely shut out and there is delay in
making arrangements to reship, the exporter will give notice in duplicate
to the Customs in the form and manner prescribed, attaching thereto
the unused duplicate copy of EDF/SDF form 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/SDF form. In this case,
the original EDF/SDF form received earlier from Customs will be
cancelled. If the shipment is made subsequently, a fresh set of EDF/SDF
form should be completed.
4.13 Counter Trade Arrangement
Counter trade 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:
1. 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.
2. 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.
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3. No fund-based/or non-fund-based facilities would be permitted against

the balances in the Escrow Account.
4. 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.
1. 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.
b. An undertaking is obtained from the exporter on the duplicate of

EDF/SDF forms that he will surrender/account for the balance
proceeds of the shipment within the period prescribed for realisation.
2. 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 bonafides 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/SDF form, whichever is more and a period
of one year has elapsed from the date of shipment.
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1. 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.
2. The agents/consignees may deduct from sale proceeds of the goods

expenses normally incurred towards receipt, storage and sale of the
goods, such as lading charges, warehouse rent, handling charges, etc.
and remit the net proceeds to the exporter.
3. 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.
4. In case of goods 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.
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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.
1. Units in SEZs are permitted to undertake job work abroad and export
goods from that country itself subject to the conditions that:
i. Processing/manufacturing charges are suitably loaded in the export

price and are borne by the ultimate buyer.
ii. The exporter has made satisfactory arrangements for realisation of

full export proceeds subject to the usual EDF/SDF 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.
Export of Services by Special Economic Zones (SEZs) to DTA Unit
Authorised Dealer Banks are permitted to sell foreign exchange to a unit in

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.
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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 offering deferred payment
terms to overseas buyers and those participating in global tenders for
undertaking turnkey/civil construction contracts abroad are required to
obtain the approval of the AD Category-I banks/Exim Bank/Working Group
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 – October 2003 as amended from time to time) issued by Reserve
Bank of India.
In order to provide greater flexibility to project exporters and exporters of

services in conducting their overseas transactions, certain guidelines
stipulated in PEM have been modified. These changed guidelines are as
under. Project/Service exporters have also been extended the facility of
deployment of temporary cash balances.
1. 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/Working Group and also
subject to the reporting requirement and would be monitored by the AD
Category-I bank(s)/Exim Bank/Working Group.
2. Inter-Project Transfer of Funds: AD Category-I bank(s)/Exim Bank/

Working Group may permit exporters to open, maintain and operate one
or more foreign currency account/s in a currency (ies) 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/Working Group.
3. Deployment of Temporary Cash Surpluses: Project/Service

exporters may deploy their temporary cash surpluses, generated outside
India, in the following instruments/products, subject to monitoring by
the AD Category-I Bank(s)/Exim Bank/Working Group:
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a. 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.,
b. Deposits with branches/subsidiaries outside India of AD Category-I

banks in India.
4. 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.
4.19 Forfeiting
Export-Import Bank of India (Exim Bank) and AD Category-I banks have

been permitted to undertake forfeiting, 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.
4.20 Exports to Neighbouring Countries by Road, Rail or

River
The following procedure should be adopted by exporters for filing original
copies of EDF/SDF forms where exports are made to neighbouring
countries by road, rail or river transport:
1. 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.
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2. 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/SDF forms 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/SDF forms
to the Customs Officer at the Border Land Customs Station where
Customs formalities are completed.
This is governed by the Agreement on Border Trade between India and

Myanmar. People living along both sides of the India-Myanmar border are
permitted to exchange certain specified locally produced commodities
under the barter trade arrangement. They can also trade in freely
convertible currency. AD banks should follow the guidelines stipulated in
A.P. (DIR Series) Circular No. 17 dated October 16, 2000 as under:
1. The barter trade shall be restricted to land route as per the Border Trade
Agreement between the two countries. Such barter trade transactions
shall take place only by way of head load or non-motorised transport
system.
2. Imports from Myanmar to India shall precede export from India to

Myanmar.
3. The border trade will be restricted to items agreed to as per the Border
Trade Agreement between India and Myanmar as listed in above said
circular of RBI.
4. The consignments of imports and exports should be invoiced in US

dollars.
5. The value of goods exported under barter trade should not exceed US
$20,000 per transaction.
6. Exports from India to Myanmar under barter trade of the value not
exceeding US $ 1,000 per transaction are exempt from declaration on
the prescribed form, viz., EDF/SDF form, in terms of Reserve Bank
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Notification No. FEMA 23/2000-RB dated 3rd May, 2000. However, such
transactions should be completed in one or two days. Customs
authorities at the Indo-Myanmar border will report import/export
transactions of the value not exceeding US $1,000 to the Foreign
Exchange Department, Reserve Bank of India, Guwahati, on monthly
basis.
7. On import of goods, the party should submit documentary evidence

such as Bill of Entry to the designated bank, where the value exceeds
US $ 5,000.
8. The export of goods from India to Myanmar against import of goods

from Myanmar to India should be completed within a period of six
months from the date of import.
9. The exporters should get the EDF/SDF forms countersigned by one of

the designated banks, viz., United Bank of India, Moreh Branch, Manipur
and State Bank of India, Champai Branch, Mizoram before submitting
them to the Custom authorities. A copy of the contract for import and
export with Myanmar parties should also be submitted along with the
EDF/SDF forms.
10.On completion of export, the exporter should submit duplicate copy of

EDF/SDF form along with all commercial documents, viz., copy of
invoice certified by Customs, etc. within 21 days from the date of
export, to the concerned designated bank.
11.The designated banks’ branches should only handle proposals for barter
trade and documents relating to imports and exports thereunder.
12.The designated banks’ branches should countersign EDF/SDF forms,

original and duplicate, submitted to them by the exporters (before
submitting to the Customs authorities) after satisfying themselves that
the EDF/SDF forms are supported by a Bill of Entry for import of goods
from Myanmar to India. Both original and duplicate copies of the forms
should be returned to the exporter. The EDF/SDF forms may be
superscribed as under:
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13.“Exports under barter arrangement with Myanmar. The payments have

been received in the form of goods/commodities of the equivalent
value”.
14.The designated banks should maintain a record of the transactions

under the barter trade arrangement on the basis of EDF/SDF forms
countersigned by them, in a register as per proforma prescribed.
15.The designated banks should forward a monthly statement as per the

above form to the Foreign Exchange Department, Reserve Bank of
India, Guwahati, within 15 days from the close of the month.
16.On completion of export against receipt of payment in the form of

import of goods/commodities from Myanmar, the concerned designated
bank should surrender the duplicate copy of EDF/SDF form and evidence
of import to the Exchange Control Department, Reserve Bank of India,
Guwahati along with the monthly statement, duly certified as under:
17.“Value of goods exported adjusted against value of goods imported

under barter trade arrangement as per Contract dated ………………..”
Before certifying the EDF/SDF forms, the designated banks should verify
documentary evidence for import of goods/commodities of
corresponding value and ensure that the commodities exchanged.
18.The transactions relating to barter trade should not be reported in R-

Returns.
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.
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4.23 COUNTERTRADE Arrangements with Romania
The Reserve Bank 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.
4.24 Mid-Sea Trans-shipment of catch by Deep Sea Fishing

Vessels (effective from November 21, 2011)
Since deep sea fishing involves continuous sailing outside the territorial
limit, trans-shipment 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 23/2000/RB dated
May 3, 2000 issued by RBI.
For mid-sea trans-shipment of catches by Indian owned vessels, as per the

norms prescribed by the Ministry of Agriculture, Government of India. The
EDF/SDF 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 23/2000-RB dated May 3, 2000.
1. The exporters may submit the EDF/SDF form, duly signed by the Master
of the Vessel in lieu of Custom Certification, indicating the composition
of the catch, quantity, export value, date of transfer of catch, etc.
2. The date of transfer of catch may be indicated in the column for ‘Date of
Shipment’ with suitable remarks.
3. In SDF form, Bill of Lading Number and date shall be mentioned in lieu
of the Shipping Bill Number and date.
4. Bill of Lading/Receipt of Trans-shipment issued by the carrier vessel

should include the EDF/SDF Form Number.
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5. The EDF/SDF Forms should be duly supported by a certificate from an

international cargo surveyor.
6. 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.
7. The EDF/SDF Form, both original and duplicate, should indicate the
number and date of Letter of Permit issued by Ministry of Agriculture for
operation of the vessel.
8. The exporter will complete the EDF/SDF Form 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/
SDF (Original) will be retained by the Customs for capturing of data in
Customs’ Electronic Data Interchange.
9. Customs will give their running serial number on both the copies of EDF/
SDF Form and will return the duplicate copy to the exporter as the value
certification of the export has already been done as mentioned above.
10.Rules, Regulations and Directions issued in respect of the procedure for

submission of the EDF/SDF form 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.
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In terms of Regulation 6 of Foreign Exchange Management (Export of

Goods and Services) Regulations, 2000 notified vide Notification No. FEMA
23/2000-RB dated 3rd May, 2000, as amended from time to time, export
declaration forms should be disposed of as under:
EDF Form (Erstwhile GR and PP Form)
Erstwhile GR Form
1. The EDF will replace the existing GR form used for declaration of export
of Goods at Non-EDI ports. The procedure relating to the exports of
goods through EDI ports will remain the same and SDF form will be
applicable as hitherto.
2. EDF forms should be completed by the exporter in duplicate and both

the copies submitted to the Customs at the port of shipment along with
the shipping bill.
3. Customs will give their running serial number on both the copies after
admitting the corresponding shipping bill. The Customs serial number
will have ten numerals denoting the code number of the port of
shipment, the calendar year and a six-digit running serial number.
4. Customs will certify the value declared by the exporter on both the
copies of the EDF form at the space earmarked and will also record the
assessed value.
5. They will then return the duplicate copy of the form to the exporter and
retain the original for transmission to the Reserve Bank.
6. Exporters should submit the duplicate copy of the EDF form again to
Customs along with the cargo to be shipped.
7. After examination of the goods and certifying the quantity passed for
shipment on the duplicate copy, Customs will return it to the exporter
for submission to the AD Category-I banks for negotiation or collection
of export bills.
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8. Within 21 days from the date of export, exporter should lodge the
duplicate copy together with relative shipping documents and an extra
copy of the invoice with the AD Category-I banks named in the EDF
form.
9. After the documents have been negotiated/sent for collection, the AD

Category-I banks should report the transaction to the Reserve Bank in
statement ENC under cover of appropriate R-Supplementary Return.
10.The duplicate copy of the form together with a copy of invoice etc. shall
be retained by the AD Category-I banks and may not be submitted to
the Reserve Bank.
11.In the 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 should be recorded at the
appropriate place on the EDF form.
12.Where duplicate copy of EDF form is misplaced or lost, AD Category-I

banks may accept another copy of duplicate EDF form duly certified by
Customs.
Note: EDF Form numbers are now made available on-line on the Reserve
Bank’s website www.rbi.org.in.
Erstwhile PP Form
Postal Authorities will allow export of goods by post only if the original copy
of the form has been countersigned by an AD Category-I bank. Therefore,
EDF forms which involve sending goods by post should be first presented
by the exporter to an AD Category-I bank for countersignature.
1. The AD Category-I banks will countersign the forms after ensuring that
the parcel is being addressed to their branch or correspondent bank in
the country of import and return the original copy to the exporter, who
should submit the form to the post office with the parcel.
2. The duplicate copy of the EDF form will be retained by the AD banks to
whom the exporter should submit relevant documents together with an
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extra copy of invoice for negotiation/collection, within the prescribed

period of 21 days.
3. The concerned overseas branch or correspondent should be instructed

to deliver the parcel to consignee against payment or acceptance of
relative bill.
4. AD Category-I banks may, however, countersign EDF forms covering

parcels addressed direct to the consignees, provided:
a. An irrevocable letter of credit for the full value of the export has been
opened in favour of the exporter and has been advised through the
AD Category-I banks concerned.
Or
b. The full value of the shipment has been received in advance by the
exporter through an AD Category-I banks.
Or
c. The AD Category-I bank is satisfied, on the basis of the standing and

track record of the exporter and the arrangements made for
realization of the export proceeds, that he could do so.
In such cases, particulars of advance payment/letter of credit/AD

Category-I bank’s certification of standing, etc., of the exporter should be
furnished on the form under proper authentication.
5. Any alteration in the name and address of consignee on the EDF form
should also be authenticated by the AD Category-I banks under his
stamp and signature.
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SDF
The following system may be followed in case of SDF:
1. The SDF should be submitted in duplicate (to be annexed to the relative

shipping bill) to the Commissioner of Customs concerned.
2. After verifying and authenticating the declaration in SDF, the

Commissioner of Customs will handover to the exporter, one copy of the
shipping bill marked ‘Exchange Control Copy’ to which form SDF has
been appended for being submitted to the AD Category-I banks within
21 days from the date of export.
3. The AD Category-I banks should accept the Exchange Control (EC) copy
of the shipping bill and SDF appended thereto, submitted by the
exporter for collection/negotiation of shipping documents.
4. The manner of disposal of EC copy of Shipping Bill (and form SDF

appended thereto) is the same as that for EDF/SDF forms. The duplicate
copy of the form together with a copy of invoice etc. shall be retained
by the AD Category-I banks and may not be submitted to the Reserve
Bank.
In cases where ECGC and private insurance companies regulated by

Insurance Regulatory and Development Authority (IRDA) initially settles
the claims of exporters in respect of exports insured with them and
subsequently receives the export proceeds from the buyer/buyer’s country
through the efforts made by them, the share of exporters in the amount so
received is disbursed through the bank which had handled the shipping
documents. In such cases, ECGC and private insurance companies
regulated by IRDA will issue a certificate to the bank, which had handled
the relevant shipping documents after full proceeds have been received.
The certificate will indicate the number of declaration form, name of the
exporter, name of the AD Category-I banks, date of negotiation, bill
number, invoice value and the amount actually received by ECGC and
private insurance companies regulated by IRDA.
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SOFTEX Forms
A software exporter, whose annual turnover is at least Rs. 1,000 crore or
who files at least 600 SOFTEX forms annually, will be eligible to submit a
statement in prescribed excel format, giving all particulars along with
quadruplicate set of SOFTEX form to the nearest STPI. STPI will then verify
the details and decide on a percentage sample check of the documents in
details. Software companies will submit all the documents on demand to
STPI within 30 days of their advice or any reasonable/extended time at the
discretion of the Director, STPI, at the request from the exporter. STPI will
thus certify the statement and SOFTEX forms in bulk on the “Top Sheet”
regarding the values etc. and will thereafter forward the first copy of the
revised SOFTEX format to the concerned Regional Office of RBI, the
duplicate copy along with bulk statement in excel format to Authorised
Dealers for negotiation/collection/settlement, the third copy to the
exporter and the last copy will be retained by STPI for its own record.
Under the revised procedure, the exporters, however, will have to provide
information about all the invoices including the ones lesser than US$25000,
in the bulk statement in Excel format.
The new procedure has been made effective at all STPIs and SEZs/EPZs/
100 per cent EOU/DTA since 1.1.2013. A common “SOFTEX Form” has
been devised to declare single as well as bulk software exports.
Reserve Bank of India will be extending the facilities to exporters for online
generation of SOFTEX Form No. (single as well as bulk) for use in off-site
software export, in addition to EDF form numbers. The present facility of
manual allotment of single as well bulk SOFTEX form number by Regional
Offices of RBI would be dispensed with accordingly.
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-realization or short realisation allowed, if any, is within the powers
delegated to them or has been duly approved by the Reserve Bank,
wherever necessary.
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Where a part of the export proceeds are credited to an EEFC account, the
export declaration (duplicate) form may be certified as under:
“Proceeds amounting to …… representing ….. per cent of the export

realisation credited to the EEFC account maintained by the exporter
with……”
The Government of India, Ministry of Commerce and Industry announced

New Foreign Trade Policy on 27th August 2009 for the period 2009-2014,
earlier this policy known as Export Import (Exim) Policy. After five years,
foreign trade policy needs amendments in general, aims at developing
export potential, improving export performance, encouraging foreign trade
and creating favourable balance of payments position. The Export Import
Policy (Exim Policy) or Foreign Trade Policy is updated every year on the
31st of March and the modifications, improvements and new schemes
becomes effective from April month of each year.
Exim Policy or Foreign Trade Policy 2009-2014: Highlights of the policy is

as under:
• DEPB Scheme upto December 2010.
• To encourage value addition in our manufactured exports and towards

this end, have stipulated a minimum 15 per cent.
• 100 per cent export-oriented units for one additional year till 31st March,
2011.
• The Government seeks to promote Brand India through six or more

‘Made in India’ shows to be organised across the world every year.
• Foreign Trade Policy is to help exporters for technological upgradation

export sector infrastructure; ‘Towns of Export Excellence’ and units
located therein would be granted additional focused support and
incentives.
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• To encourage production and export of ‘green products’ through

measures such as phased manufacturing programme for green vehicles,
zero duty EPCG scheme and incentives for exports.
• E-Trade project would be implemented in a time-bound manner to bring

all stakeholders on a common platform. Additional ports/locations would
be enabled on the Electronic Data Interchange over the next few years.
• Incentive available under Focus Market Scheme (FMS) has been raised
from 2.5% to 3 per cent.
• Incentive available under Focus Product Scheme (FPS) has been raised
from 1.25 per cent to 2 per cent.
• 26 new markets have been added under Focus Market Scheme. These
include 16 new markets in Latin America and 10 in Asia-Oceania.
• 153 ITC(HS) Codes at 4 digit level product classified for Market Linked
Focus Product Scheme (MLFPS).
• Focus Product Scheme benefit extended for export of ‘green products’;

and for exports of some products originating from the North East.
• To accelerate exports and encourage technological upgradation,

additional Duty Credit Scrips shall be given to Status Holders @ 1 per
cent of the FOB value of past exports.
• Income Tax exemption to 100 per cent EOUs and to STPI units under
Section 10B and 10A of Income Tax Act, has been extended for the
financial year 2010-11 in the Budget 2009-10.
• In Tea Sector, minimum value addition under advance authorisation

scheme for export of tea has been reduced from the existing 100 per
cent to 50 per cent.
• DTA sale limit of instant tea by EOU units has been increased from the
existing 30 per cent to 50 per cent.
• EOUs will now be allowed CENVAT Credit facility for the component of
SAD and Education Cess on DTA sale.
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• Time limit of 60 days for re-import of exported gems and jewellery items,
for participation in exhibitions has been extended to 90 days in case of
USA.
• Duty Free Import of samples by exporters, number of samples/pieces

has been increased from the existing 15 to 50.
• Exemption for up to two stages from payment of excise duty in lieu of

refund, in case of supply to an advance authorisation holder (against
invalidation letter) by the domestic intermediate manufacturer.
• Reduce transaction costs, dispatch of imported goods directly from the

port to the site has been allowed under Advance Authorisation scheme
for deemed supplies.
• Free Sale Certificate has been simplified and the validity of the Certificate
has been increased from 1 year to 2 years.
Monetary policy is the process by which monetary authority of a country,

generally a central bank (i.e., Reserve Bank of India) controls the supply of
money in the economy by exercising its control over interest rates in order
to maintain price stability and achieve high economic growth. In India, the
central monetary authority, i.e., the Reserve Bank of India (RBI) is so
designed as to maintain the price stability in the economy.
Objective:
The objectives of the monetary policy of India, as stated by RBI, are:
Price Stability: Price Stability implies promoting economic development

with considerable emphasis on price stability. The centre of focus is to
facilitate the environment which is favourable to the architecture that
enables the developmental projects to run swiftly while also maintaining
reasonable price stability.
Controlled Expansion of Bank Credit: One of the important functions

of RBI is the controlled expansion of bank credit and money supply with
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special attention to seasonal requirement for credit without affecting the

output.
Promotion of Fixed Investment: The aim here is to increase the

productivity of investment by restraining non-essential fixed investment.
Restriction of Inventories: Overfilling of stocks and products

becoming outdated due to excess of stock often results is sickness of the
unit. To avoid this problem, the central monetary authority carries out
this essential function of restricting the inventories. The main objective
of this policy is to avoid overstocking and idle money in the organisation.
Promotion of Exports and Food Procurement Operations: Monetary

policy pays special attention in order to boost exports and facilitate the
trade. It is an independent objective of monetary policy.
Desired Distribution of Credit: Monetary authority has control over

the decisions regarding the allocation of credit to priority sector and
small borrowers. This policy decides over the specified percentage of
credit that is to be allocated to priority sector and small borrowers.
Equitable Distribution of Credit: The policy of Reserve Bank aims

equitable distribution to all sectors of the economy and all social and
economic class of people.
To Promote Efficiency: It is another essential aspect where the central

banks pay a lot of attention. It tries to increase the efficiency in the
financial system and tries to incorporate structural changes such as
deregulating interest rates, ease operational constraints in the credit
delivery system, to introduce new money market instruments etc.
Reducing the Rigidity: RBI tries to bring about the flexibilities in the
operations which provide a considerable autonomy. It encourages more
competitive environment and diversification. It maintains its control over
financial system whenever and wherever necessary to maintain the
discipline and prudence in operations of the financial system.
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Major Operations
Open Market Operations: An open market operation is an instrument of

monetary policy which involves buying or selling of government securities
from or to the public and banks. This mechanism influences the reserve
position of the banks, yield on government securities and cost of bank
credit. The RBI sells government securities to contract the flow of credit
and buys government securities to increase credit flow. Open market
operation makes bank rate policy effective and maintains stability in
government securities market.
Cash Reserve Ratio: Cash Reserve Ratio is a certain percentage of bank

deposits which banks are required to keep with RBI in the form of reserves
or balances. Higher the CRR with the RBI lower will be the liquidity in the
system and vice versa. RBI is empowered to vary CRR between 15 per cent
and 3 per cent. But as per the suggestion by the Narasimham Committee
Report, the CRR was reduced from 15 per cent in the 1990 to 5 per cent in
2002. As of October 2013, the CRR is 4.00 per cent.
Statutory Liquidity Ratio: Every financial institution has to maintain a

certain quantity of liquid assets with themselves at any point of time of
their total time and demand liabilities. These assets can be cash, precious
metals, approved securities like bonds etc. The ratio of the liquid assets to
time and demand liabilities is termed as the statutory liquidity ratio. There
was a reduction of SLR from 38.5 per cent to 25 per cent because of the
suggestion by Narasimham Committee. The current SLR is 23 per cent.
Bank Rate Policy: The bank rate, also known as the discount rate, is the
rate of interest charged by the RBI for providing funds or loans to the
banking system. This banking system involves commercial and cooperative
banks, Industrial Development Bank of India, IFC, Exim Bank, and other
approved financial institutes. Funds are provided either through lending
directly or rediscounting or buying money market instruments like
commercial bills and treasury bills. Increase in Bank Rate increases the
cost of borrowing by commercial banks which results into the reduction in
credit volume to the banks and hence declines the supply of money.
Increase in the bank rate is the symbol of tightening of RBI monetary
policy. As of 1 January, 2013, the bank rate was 8.75 per cent and as on
29 October, 2013 bank rate is 8.75 per cent.
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Credit Ceiling: In this operation, RBI issues prior information or direction

that loans to the commercial banks will be given up to a certain limit. In
this case, commercial bank will be tight in advancing loans to the public.
They will allocate loans to limited sectors. Few example of ceiling are
agriculture sector advances, priority sector lending etc.
Credit Authorisation Scheme: Credit Authorisation Scheme was

introduced in November, 1965 when P.C. Bhattacharya was the chairman of
RBI. Under this instrument of credit regulation, RBI as per the guideline,
authorises the banks to advance loans to desired sectors.
Moral Suasion: Moral Suasion is just as a request by the RBI to the

commercial banks to take so and so action and measures in so and so
trend of the economy. RBI may request commercial banks not to give loans
for unproductive purpose which does not add to economic growth but
increases inflation.
Repo Rate and Reverse Repo Rate: Repo rate is the rate at which RBI
lends to commercial banks generally against government securities.
Reduction in Repo rate helps the commercial banks to get money at a
cheaper rate and increase in Repo rate discourages the commercial banks
to get money as the rate increases and becomes expensive. Reverse Repo
rate is the rate at which RBI borrows money from the commercial banks.
The increase in the Repo rate will increase the cost of borrowing and
lending of the banks which will discourage the public to borrow money and
will encourage them to deposit. As the rates are high the availability of
credit and demand decreases resulting to decrease in inflation. This
increase in Repo Rate and Reverse Repo Rate is a symbol of tightening of
the policy. As of October 2013, the repo rate is 7.75 per cent and reverse
repo rate is 6.75 per cent.
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4.29 Conclusion
There are various measures taken by Government of India to boost the

export than putting restrictions on export. Various concession in taxes,
duties paid licensing norms etc. are relaxed. Various policy measures are
also undertaken in annual review of Foreign Trade Policy. Export plays
crucial role in developing economy. Therefore, in recognition of this,
Government of India has also given subsidy directly to the exporters
through the AD category banks. This has also made exporter to
concentrate more on the goods manufactured by them to export at
internationally competitive or commutative prices.
4.30 Summary
Export trade is regulated by the DGFT and its regional offices, functioning
under 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. Exim
Bank and AD Category-I banks have been permitted to undertake forfeiting
for financing of exports receivables. Foreign Trade Policy 2009-14 or Exim
Policy and Various credit policies are offered by RBI to control the export.
Open market operations, Cash Reserve Ratio, Statutory liquidity ratio, bank
rate policy, credit ceiling, credit authorisation scheme, moral suasion, repo
rate and reverse repo rate are the operation carried out by the RBI to
control the supply of money in economy by exercising its control over
interest rates in order to maintain price stability and achieve high economic
growth.
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1. What is exporters’ caution list?
2. What are the permitted methods of payments to receive export

realisation?
3. What are export declaration forms? Which one is now commonly used
replacing erstwhile GR?
4. What is Forfeiting? Explain.
5. What is netting off? Describe.
6. What are exchange control regulations for export to Nepal and Bhutan?
7. Write short notes on “Foreign trade policy”.
8. What is the objective of RBI Credit policy?
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1. In order to simplify the existing form used for declaration of exports of

Goods/Software, a common form called________.
a. SDF
b. GR
c. EDF
d. SOFTEX
2. Under the revised procedure, the exporters will have to declare all the
export transactions, including those less than US$, in the form as
applicable.
a. 5000
b. 10000
c. 15000
d. 25000
3. Processing of export-related receipts through Online Payment Gateway

Service Providers (OPGSPs) is permitted up to USD ______.
a. 5000
b. 10000
c. 25000
4. What is the period of realisation of Export bills w.e.f. April 01, 2013?
a. 6 months
b. 9 months
c. 12 months
d. 18 months
5. What is the limit prescribed for write off of unrealised export by

Authorised Dealer?
a. 5 per cent of the total export proceeds realised during the previous
calendar year
b. 10 per cent of the total export proceeds realised during the previous
calendar year
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6. Export of software in non-physical form is declared on_______.

a. GR form
b. PP form
c. SOFTEX form
d. All the three above
7. Netting off of export receivable against import payable is permitted to

______.
a. All exporters
b. Export by Units in SEZ
c. 100% EOUs
8. Who is the authority who allots IE Code to every person, firm or

company engaged in export trade?
a. RBI
b. DGFT
c. Customs
d. IBA
9. Export documents should be submitted to AD Bank within days

_________ from the date of shipment.
a. 7 days
b. 21 days
c. 30 days
d. Any time after export
10.Periodicity of Foreign trade policy is .

a. 1 year
b. 3 years
c. 5 years
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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EXCHANGE CONTROL IN INDIA
Chapter 5
Objectives
• Meaning, objectives and methods of Exchange Control

• Functions and responsibilities of Authorised Dealer
• Meaning and forms of countertrade and reasons for its growth.
• Meaning, merits and demerits of barter trade
Structure:
5.1 Introduction
5.3 Transactions Subject to Control
5.5 Approved/Permitted Method of Receipt and Payments
5.7 Choice of Currency in International Transaction
5.10 FEDAI
5.11 Correspondent
5.13 Countertrade
5.14 Escrow Account
5.15 Barter Trade
5.16 Summary
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5.1 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 liberalized 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 liberalization. Still in some of the cases, specific approvals is
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.
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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.
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 centralize 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.
Objectives
1. 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 and certain active measures have to
be adopted. In normal times, the adverse balance of payments caused
value of country’s currency to fall 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.
2. 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
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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.
3. 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.
4. 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.
5. 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
and the country are necessary.
6. 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 regular the exports and
imports in the light of plans.
7. 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 Governments to ensure that suitable foreign exchange
controls are imposed and operated for the achievement of the desired
objectives. Foreign exchange control was introduced in India in 1939 at
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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 of 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.
Administration
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.
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 drawal of
foreign exchange has been prohibited by Central Government, such as
remittance out of lottery winnings, remittance of income from racing/
riding, etc., or any other hobby, remittance for purchase of lottery tickets,
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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 per cent 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 than 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

authorized 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
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.
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6. Any resident individual, if he so desires, may remit the entire limit of

USD 75,000 in one financial year under LRS as gift to a person residing
outside India or as donation to a charitable/educational/religious/
cultural organization outside India. Remittances exceeding the limit of
USD 75,000 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.
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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.
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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 need 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 1,
1974. It gave wide powers to RBI to administer exchange control
mechanism properly.
In 1992, RBI introduced LERMS (Liberalised Exchange Rate Management

System) Under LERMS, a dual exchange rate was fixed. The 1993-94
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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 minimize 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.
5.3 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 and 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.
9. Maintenance of balances at certain centres
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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

agent 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 w.e.f. August 14, 2013, it is 100 per cent
of net worth of parent/Indian company)
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 US 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. 
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Freely Convertible Currencies of the

Sr. No.
World
1 Australian Dollar
2 Bahrain Dinar
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
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5.5 Approved/permitted method of Receipt and Payments
A. Manner of Receipt of Foreign Exchange

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, shall
be as mentioned below:
Manner of Receipt of Foreign

Group
Exchange
1. Member countries in the Asian a. payment for all eligible current

Clearing Union (except Nepal) transactions by debit to the Asian
namely, Bangladesh. Islamic Clearing Union dollar account in
Republic of Iran, Myanmar, Pakistan India of a bank of the member
and Sri Lanka country in which the other party to
the transaction is resident or by
credit to the Asian Clearing Union
dollar account of the authorised
dealer maintained with the
correspondent bank in the member
country; and
b. payment in any permitted currency

in all other cases.
2. all countries other than those a. Payment in rupees from the account
mentioned in (1). of a bank situated in any country
other than a member country of
Asian Clearing Union or Nepal or
Bhutan; or
b. Payment in any permitted currency

In respect of an export from India, payment shall be received 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.
Payment for Export in Certain Cases

Notwithstanding anything contained in Regulation 3, payment for export
may also be received by the exporter as under, namely:
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• 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;
• 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 Rs. 5 lakh rupees per
export transaction (revised w.e.f. March 2014);
• 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.
B. Manner of Payment in Foreign Exchange
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 (other than Nepal and Bhutan) against
payment for import into India, or against any other payment, shall be as
mentioned below: 
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Group Manner of Payment
1. Member countries of Asian Clearing a. Payment for all eligible current

Union (except Nepal) namely, transactions by credit to the Asian
Bangladesh, Islamic Republic of Clearing Union dollar account in
Iran, Myanmar, Pakistan and Sri India of a bank of the member
Lanka country in which the other party to
the transaction is resident or by
debit to the Asian Clearing Union
dollar account of an authorised
dealer with the correspondent bank
in the other member country; and
b. payment in any permitted currency

in other cases.
2. All countries other than those a. Payment in rupees to the account of

mentioned in (1) a resident of any country other than
a member country of Asian Clearing
Union or Nepal or Bhutan; or
b. payment in any permitted currency.
In respect of import into India,
• where the goods are shipped from a member country of Asian Clearing
Union (other than Nepal) but the supplier is resident of a country other
than a member country of Asian Clearing Union, payment may be made
in a manner specified for countries in Group (2) of Regulation 5;
• in all other cases, payment shall be made in a currency appropriate to

the country of shipment of goods.
Manner of Payment in Certain Cases
• where an import is covered by the special arrangement between the

Central Government and the Government of a foreign state, the payment
for import shall be made in accordance with the directions issued by the
Reserve Bank to authorised dealer;
• subject to the provisions of sub-regulation (1), a person resident in India

may make payment in foreign exchange through an international card
held by him:
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Provided that –
• the transaction for which the payment is so made is in conformity with

the provisions of the Act, rules and regulations made thereunder; and
• in the case of import for which the payment is so made, the import is
also in conformity with the provisions of the Export-Import Policy for
the time being in force.
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.
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 nowadays, 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.
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5.7 Choice of currency in International Transaction
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. 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.
‘Authorised dealer’ means a person authorised as an authorised dealer

under sub-section (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.
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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 cooperative banks. There are also 9 financial holding 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 authorized 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:
1. Deal in foreign currencies and, for that purpose, open and maintain
accounts abroad in such currencies;
2. Approve application from residents for the purchase of foreign

currencies; and
3. 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;
1. Purchase TTs, MTs, drafts, bills, etc. drawn in any permitted foreign
currency freely against rupees from banks and the public in India;
2. Purchase any permitted foreign currency from his overseas branch/

correspondent of the purpose of keeping in funds the latter’s non-
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resident rupee account in India and/or making payments to residents in

India;
3. 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;
4. 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;
5. Collect the import and export bills of customers;
6. Open letters of credit or issue travellers’ cheques, etc. subject to

Exchange Control regulations;
7. Purchase, discount, or negotiate export bills;
8. 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 US dollars, Deutschmarks and yen for both spot and
forward deliveries;
9. 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 inter-bank market in India and in
certain cases from foreign markets, and for the same purpose, do
“swaps”;
10.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
11.Open and maintain non-resident rupee accounts of foreign banks or

branches and of persons, firms or companies stationed outside India.
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• Authorised dealers have recourse to Reserve Bank to sell/buy US 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 US 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 and 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 US 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 US 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 US

dollars purchased from their overseas branches/corresponds for
funding the latter’s rupee accounts in India to meet their bonafide
needs.
c. Currencies Dealt in by Reserve Bank: The Reserve Bank buys

spot only of US dollars, and does not ordinarily buy either spot or
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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, Bangalore
Calcutta, 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 US dollars will be made by the Reserve Bank in multiples of
US dollars 500,000 with a minimum of US $ 1million.
f. Forms to be Used: Confirmation of the sale and purchase of US

dollar to/from the Reserve Bank may be sent immediately in the
Form RBM 1 and RBM 2 respectively to the Back-up 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
authorized dealer on the value date.
! !242
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.
! !243
5.10 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. Its 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 deregulation, 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 coordination 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 2013, there are 101 members of FEDAI which constitutes 26

public sector banks, 42 foreign banks operating in India, 29 private sectors
and cooperative banks and 4 financial institutions.
! !244
5.11 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:
1. Advising and, where necessary, confirming letters of credit opened by

the domestic bank to the beneficiaries;
2. Negotiating bills drawn under letters of credit;
3. Collecting export bills purchased, discounted or negotiated or accepted

for collection by the domestic bank;
4. Honouring drafts, MTs, TTs, traveller’s cheques, travellers’ circular

letters of credit issued by the domestic bank;
5. Making payments on behalf of the domestic bank, etc.
6. Granting/guaranteeing of loans and overdrafts.
7. Furnishing of credit information such as report on business houses.
! !245
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. Proforma/Mirror Account:
i. The transactions routed through a Nostro account are recorded in a
Proforma 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
Proforma 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 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 Proforma account.
ii. The Proforma 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.
c. 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).
! !246
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.
d. 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.
Foreign Currency Accounts
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 authorized 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.
! !247
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.
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.
! !248
5.13 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 service 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, 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: It 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
! !249
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 –
i. the imports and exports takes place at the international prices and
ii. the transactions are routed through an Escrow account in conformity

with the Indian Trade and Exchange Control Regulations.
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
! !250
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).
5.14 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 finalize 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.
! !251
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.
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
i. Receipt of foreign inward remittance as consideration towards issue or

transfer of shares through normal banking channels; or
ii. 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
i. 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
ii. 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
! !252
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 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.
! !253
5.15 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.
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.
! !254
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).
Under the Border Trade Agreement between the Government of Myanmar

and Government of India, imports from Myanmar preceded exports from
India. The guidelines laid down by RBI are as under:
a. The Border Trade is restricted to land route and such transactions

should take place only by way of head load or non-motorised transport
system.
b. The items for border trade is restricted to: (i) Mustard/Rape seed, (ii)
Pulses and Beans, (iii) Fresh vegetables, (iv) Fruits, (v) Garlic, (vi)
Onions, (vii) Chillies, (viii) Spices excluding nutmeg, mace, clause,
cassia, (ix) Bamboo, (x) Minor forest products (excluding Teak), (xi)
Betal nuts and Leaves, (xii) Food items, (xiii) Tobacco, (xiv) Tomato,
(xv) Reed Broom, (xvi) Sesame, (xvii) Resin, (xviii) Coriander Seeds,
(xix) Soyabean, (xx) Roasted sunflower seeds, (xxi) Katha and
(xxii) Ginger.
c. There will be no monetary transactions under the trade.
d. Transactions should be invoiced only in US Dollar.
e. The value of goods exported should not exceed US$20,000 per

transaction.
f. Exports of the value not exceeding US$1000 per transaction are

exempted from declaring on shipment declaration form, namely, GR
form. However, such transactions to be completed within 2 days.
g. On import, party should submit documentary evidence to the nominated

bank, where value exceeds US$5000.
! !255
h. Exports of goods against imports should be completed within 6 months

from the date of import.
i. GR forms to be countersigned by one of the designated bank, namely,

United Bank of India, Moreh branch, Manipur or State Bank of India,
Champai branch, Mizoram before submitting them to customs
authorities.
j. The transaction relating to Barter Trade should not be reported in ‘R’

Returns.
! !256
5.16 Summary
The exchange control regulations in India are governed by the FEMA and
regulated by RBI. The objectives of Exchange Control are protection of
BOP, reducing burden of trade, raising the level of prices, elimination of
short-term fluctuations in exchange rates, prevention of export of capital,
encouragement of certain economic activities and economic planning.
Freely convertible currencies or permitted curriences are those that any
one can convert into another foreign currency without any restrictions or
intervention by government of the original country. A convertible currency
can be converted into gold or any other currency with the prior permission
of the monetary authorities of the country concerned. Authorised dealer is
a person authorised to deal in foreign exchange on behalf of RBI.
Countertrade means exchange of goods or services with other goods and
services. Barter, switch trading, counter purchases, buy pack, offset and
compensation are the forms of countertrade. Barter is a system of
exchange by which goods or services are directly exchanged for other
goods and services without using a medium of exchange, i.e., money. It
has several merits and demerits.
! !257
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.

a. Nostro account
b. Vostro account
c. Correspondent Banks
6. Explain the functions of FEDAI.
! !258
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 the 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. Directorate 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
6. Permitted method for receipts 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
! !259
7. In respect of Import bill payment, when it is made in rupees should be

made by means of .
a. Cash
b. Transfer from account
c. Foreign Currency
d. Debit to Account
8. What is meant by “convertible currency”?

a. Currencies which can be converted into INR
b. Currency which can be converted into US Dollar
c. Currency which can be converted into gold or any other currency
freely
9. Who is Authorized Dealer?

a. Person authorised to deal in foreign exchange
b. Banks authorised to deal in foreign exchange
c. Any authority dealing in foreign exchange
d. Reserve Bank of India
10.The transaction relating to Barter Trade should not be reported in ‘R’

Returns. (True/False)
a. True
b. False
! !260
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !261
IMPORT FINANCE (DOCUMENTARY CREDIT)
Chapter 6
Objectives
• Needs of Imports
• Barriers to International Trade
• Important Policy Provisions
• Various methods for Financing of imports by an importer
• Merchanting trade
Structure:
6.1 Need of Imports

6.4 Various Methods for Financing of Imports by an Importer
6.11 Accounting
6.12 Amendment
6.13 Insurance
6.15 Import Bills
6.16 Recording etc.
6.17 Discrepant/Irregular Documents
! !262
6.23 Form A1
6.25 Trust Receipt
6.28 Remittances against the Direct and Post Parcel Imports
6.29 Remittance against the Replacement of Import
6.31 Import of Equipment by Business Process Outsourcing (BPO)
Companies for their Overseas Sites
6.32 Advance Remittance against Imports
6.37 Summary
! !263
6.1 Need of Imports
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.
! !264
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, consumable 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.
Trade barriers are government-induced restrictions on international trade.

The barriers can take many forms, including the following:
Tariffs: A tariff is a tax 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 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
! !265
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.
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
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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 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/custom 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/custom 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
The imports can mainly be categorized 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.
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• Advance Licence: An advance licence is granted to a merchant or

manufacturer exporter for the manufacture of export goods without
paying the basic custom 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 2009-2014).
• 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 custom duty, surcharge etc.
6.4 Various Methods for Financing of Imports by an

Importer
Various methods for financing of imports by an importer are as under
• Import Letter of Credit

• Buyers’ Credit/Suppliers’ Credit
• Forfeiting
• Countertrade
• International Leasing
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.
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.
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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) upto 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.
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:
1. 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
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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 stipulate 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.
2. Documentation
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.
3. 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.
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4. 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
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.
5. 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:
i. Import Trade Control

ii. Exchange Control
iii. Credit Norms of RBI
iv. FEDAI and UCP Provisions
v. Banking Internal Procedure and Practices.
i. 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
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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.
ii. 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.
iii. 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
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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 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.
iv. 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 Authorized Dealers (AD).
v. Bank’s Internal Procedures and 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.
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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
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.
Let us now understand various parties to an import LC and some important

kinds of LCs generally used in international trade.
a. Parties to Import Letter of Credit:
i. Applicant, i.e., the importer (the buyer of goods), who has to make
payment to the beneficiary.
ii. Beneficiary, i.e., the seller of goods, the party in whose favour the
letter of credit is opened.
iii. Issuing Bank, i.e., the banker of the importers/buyers, which

established the ILC.
iv. The Advising Bank, i.e., the bank situated in beneficiary country,
which advises the LC to the beneficiary (Art. 9).
v. 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).
! !274
vi. 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).
vii.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.
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. Buyer’s 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 into between him and the
! !275
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”
means the party on whose request the credit is issued. The applicant’s
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
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 beneficiary’s role is to:
• 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.
! !276
• Request for LC amendment from buyer.
• Provide copy of the credit to dispatch department and cargo agent to

ensure correct documentation.
Bankers
Parties to the documentary credit may be issuing bank, an advising bank,

confirming bank, nominated bank and 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 the credit provides for acceptance and to pay without
recourse to the drawer and/or bonafide holders if the credit provides for
negotiations. As per UCP 600, the 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 authorized 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
! !277
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
upon the issuing bank’s request or authorisation”.
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 (i) issuing bank
which acts for and on behalf of buyer and is located in the buyer’s country
and (ii) the advising bank which has been chosen to advise the
documentary credit to the beneficiary and usually located in the seller’s
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.
! !278
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.
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 is specified in the credit articles 19-25 and 26 of UCP 600.
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:
1. 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 Revocable Letter of
Credit, the bank issuing the Letter of Credit can amend or cancel the same
without the consent/without notice to other parties. Revocable 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 revocable 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).
! !279
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
2. Irrevocable LC
In this type of LC, any changes (amendment) or cancellation of the LC
(except it is 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 amend a credit without the agreement of the issuing
bank, the confirming bank, and the beneficiary. Form 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.
3. 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 LC 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 LC 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.
4. Unconfirmed LC
This type of letter of credit does not acquire the other bank’s confirmation.
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5. 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 to the buyer. The intermediary transfers its right to the
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.
! !281
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.
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 one of the suppliers and acquire the
difference as his profit in transferable letter of credit mechanism.
6. 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 un-transferable.
7. Deferred/Usance LC
It is a 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, the seller will give an opportunity to the buyer to pay the required
money after taking the related goods and selling them.
8. 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.
9. 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 pre-shipment
! !282
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
submit the documents or to repay the advances with interest. There are
two types of anticipatory credits, namely:
• Red Clause LC: In this kind of credit assignment, the seller before
sending the products can take the prepaid 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.
• 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.
10.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 LC is a type of LC issued in case of intermediary trade.

Intermediate companies such as trading houses are sometimes required to
open LCs by supplier and receive Export LCs from buyer. Bank will issue a
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LC for the intermediary company which is secured by the Export LC (Master

LC). This LC is called “Back-to-back LC”.
Back-to-back Letter of Credit is also termed as Countervailing Credit. A

credit is known as back-to-back credit when a LC is opened with security of
another LC.
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.
The parties to a Back-to-back Letter of Credit are:
1. The buyer and his bank as the issuer of the original Letter of Credit.
2. The seller/manufacturer and his bank.
3. The manufacturer’s subcontractor and his bank.
The practical use of this credit is seen when LC 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 LC.
The need for such credits arise mainly when:
a. The ultimate buyer is 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 the funds.
From banker's 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.
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11. 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 reuse by
beneficiary”. There are two types of revolving credits:
• 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.
12. Standby Letter of Credit

As trade and finance develop, it is seen that there are some other areas
existing 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 fulfil 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.
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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
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 and 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 fulfils 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 upto
the beneficiary to decide whether he may accept a standby.
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 must also 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.
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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 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.
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.
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7. Counter Standby: This instrument supports the issuance of a separate

standby or other undertaking by the beneficiary of the counter standby.
1. Buyer’s 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 Supplier’s 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.
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.
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4. If pricing is acceptable to importer, overseas bank issues offer letter in

the name of the Importer.
5. Importer approaches his existing bank to get letter of undertaking/

comfort (LOU/ LOC) issued in favour of overseas bank via Swift.
6. On receipt of LOU/LOC, Overseas Bank as per instruction provided in

LOU, 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.
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, & bps is Basis Points (a unit that is equal to 1/100th of 1 per
cent). To put is simply: 3M L + 3.50 per cent. 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 per cent and 6 month
LIBOR is 0.50161 per cent.
• Letter of Comfort/Undertaking: Your existing bank would charge this

cost for issuing letter of comfort/undertaking.
• Forward/Hedging Cost
• Arrangement fee: Charged by Buyer’s Credit Agents/Brokers how is

arranging buyer’s credit for you.
• Other charges: A2 payment on maturity, for 15CA and 15CB on

maturity, Intermediary bank charges etc.
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• 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, Letter of Undertaking format and Swift
Address
• 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)
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 Circular on External Commercial Borrowing (ECB) and Trade
Credit issued in July 2013 and amended from time to time.
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
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• 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 (Upto 31st March 2014)

• 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.
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 where as 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 supplier’s requirement of payment at sight
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For Supplier
• Realise at-sight payment
• Avoid the risk of importer’s credit by making settlement with LC
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. Suppliers ships the goods and submits documents at his bank counters.
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 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 per cent)
• Postage and Swift Charges
• Reimbursement Charges
• Cost for the usance (credit) tenure (Indian Bank Cost)
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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 into additional cost.
RBI Regulations
Suppliers’ credit is governed by RBI Circular “Master Circular on External
Commercial Borrowings and Trade Credits” dated 01-07-2013
A. Amount and Maturity

• Maximum amount per transaction : $20 million
• Maximum maturity in case of import of non-capital goods: Upto 1 year
• 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
• 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.
C. Guarantee
AD banks are permitted to issue Letters of Credit/guarantees/Letter of
Undertaking (LOU)/Letter of Comfort (LoC) in favour of overseas supplier,
bank and financial institution, up to USD 20 million per transaction for a
period upto one year for import of all non-capital goods permissible under
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Foreign Trade Policy (except gold, palladium, platinum, rodium, silver etc.)
and upto three years for import of capital goods, subject to prudential
guidelines issued by Reserve Bank from time to time. The period of such
Letters of credit/guarantees/LOU/LOC has to be co-terminus with the
period of credit, reckoned from the date of shipment.
3. Forfeiting
Term “forfeiting” is derived from French word “a Forfeit” meaning to
surrender or relinquish the right to something. In return for cash payment
from forfeiters, an exporter agree 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 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 for 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 three types of risks – Sovereign, Commercial Banks

and Prime corporate.
Most forfeiting transactions involve the forfeit purchasing at the 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
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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 into 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 into cash transactions, improving

liquidity.
• Frees the exporter from cross-border political or commercial risks

associated in the export receivables.
• Finance upto 100 per cent 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.
• Exporter saves on insurance costs as forfeiting obviates the need for

export credit insurance.
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• Simplicity of documentation enables rapid conclusion of the forfeiting

arrangement.
4. 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 service for
something of equal value”.
There are six main variants of countertrade and they are as under:
• 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 2
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.
• 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.
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• Buyback: It 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.
Due to balance of payment difficulties, many countries encourages counter

trade as means of financing imports. Under this, imports 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 from 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 the following conditions:
i. 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.
ii. 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 upto 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.
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iii. No fund-based/or non-fund-based facilities would be permitted against

the balances in the Escrow Account.
iv. 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.
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.
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
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to sell her receivable at a discount, she retains immediate cash, which

may help her service her 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.
• Small-Business Loan for Import Businesses: Importers can apply for

financing through the Export Working Capital Program (EWCP). The
EWCP is a joint programme 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.
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.
Import finance by way of import LC facility involves various stages such as

sanction of limits, documentation, formalities, making application by
importer in the prescribed format furnishing full details, scrutiny of
applications, and details of the bank such etc. The bank can open the LC
after compliance of instructions/guidelines contained in the import trade
control, Exchange control, FEDAI and UCP 600 provisions, credit norms of
RBI and banks internal procedure and practices. The letter of credit is
advised to the exporter, usually through the another bank known as
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advising bank and exporter ships the goods and presents the required
documents to the confirming correspondent or issuing bank as the case
may be. Upon checking the documents for accuracy, the bank passes the
documents to importer and makes payment against the draft to the
exporter. In case of delay in payment of the amount of documents by the
importer, bank pay the amount by allowing import advance in the name of
importer in the form of advance bill or import loans (buyer’s credit) and
usual precautions are applicable for domestic advances are taken for
monitoring follow-up of such import loans.
There are various forms of letters of credit, classified into various

categories depending upon the nature and functions of letters of credit.
Some of these are Revocable LC, irrevocable LC, Confirmed LC, Revolving
LC, Back-to-back LC, Transferable LC, Standby LC etc and they are
operative as per their characteristic features. The provisions of UCP 600
play a very important role in operations of LCs. There are various other
methods for financing of imports such as suppliers credit, forfeiting,
countertrade, international leasing etc. but the most popular way of import
finance by banks is by way of opening LC and grant import loans.
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.
! !300
------------------ Instance Type and Transmission ----------------------
Original received from SWIFT
Priority/Delivery : Normal
Message Output Reference : 1225 121016XXXXXXXXX5657939061
Correspondent Input Reference : 1225 121016XXXXXXXXX1178375172
----------------------- Message Header ---------------------------------
Swift OUTPUT FIN 700 Issue of a Documentary Credit
Sender : RATNINBBXXX
RATNAKAR BANK
(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

IRREVOCABLE
20: Documentary Credit Number

2012AML201203366
31C: Date of Issue

121016
40E: Applicable Rules

UCP URR LATEST VERSION
! !301
31D: Date and Place of Expiry

130106-NEW YORK
50: Applicant
ABC COMPANY LIMITED
NARIMAN POINT
MUMBAI
59: Beneficiary – Name & 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: Trans-shipment
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
! !302
CRUSHING PLANT. AS PER PROFORMA INVOICE NO.:P-111-7 R02

DATED 03/07/2012
CFR, BAHRAIN.
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.
! !303
4. ALL REQUIRED DOCUMENTS INCLUDING DRAFTS – IF ANY – MUST

INDICATE OUR CREDIT NUMBER.
5. F U L L BENEFICIARYS NAME AND ADDRESS:

XXXXXXXXXXXXXXXXXXXXX,
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
! !304
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
W I T H J P M O R G A N C X X S E B A N K N . A ., N E W YO R K U N D E R
ATHENTICATED SWIFT ADVICE TO US.
57D: ‘Advise Through’ Bank –Name & Address
IRVTUS3NXXX
----------------------- Message Trailer ------------------------------
{MAC: 00000000}
{CHK: XXXXXXXX}
a. Application: A documentary credit is opened against the application

usually on the bank’s printed format made by the importer. The
application should contain the importer’s 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 storage of goods, i.e., on deck or under deck.
! !305
v. The mode of shipment, i.e., whether the part shipment or trans-

shipment 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. Check up: 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.
c. Advising the credit:
i. If the banker decides to open the credit, the letter of credit is made
out in quadruplicate, usually on the bank’s 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 trans-shipment will be allowable
• The last date of shipment and that for presentation of the documents
for negotiation
• The mode of despatch 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
the issuing bank, and that payment should be made only on
presentation of shipping documents.
! !306
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).
a. Margin: Where necessary, the banker should hold the margin varying
the creditworthiness 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.
! !307
6.11 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: Customer’s 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.
6.12 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, of 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).
! !308
6.13 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.

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 in to 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.
6.15 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
Check up
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 banker’s 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:
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.
! !309
• 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.
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 LC.
4. All documents required in the LC 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.
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.
! !310
10.This process, known as retirement of documents, needs the importer

to apply to authorized 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
importers account.
14.For any overdue period, a penal interest will be charged.
Checklist for Document (Received under L/C) Scrutiny
General Check
• Whether all documents in full sets as per LC 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 LC
• Cancellation/overwriting in all documents are authenticated
• Bills of Exchange – check whether drawn on the person indicated in the
LC and duly signed up by the beneficiary of the credit
• Drawing is within LC amount and in the same currency as per the LC
• The amounts in words and figures are the same and identical with the
amount stated in the invoice
• Superscription, regarding drawing under LC has been made and the Bill
must have been issued stamped.
! !311
Invoice Checks Whether Invoices

• Is made out in the name of the person who had opened the LC
• Quantity, unit price and value are quoted as per LC
• Whether unit price and value are quoted as per LC
• The description of the merchandise corresponds to the description in the
LC. The arithmetical calculations are correct
• Import license/OGL/Contract No./Order No./Indent No. mentioned as per
LC. No charge other than stipulated in L/C in included
• Additional copy for Exchange Control purposes is submitted. The date
and number. 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 LC
• The date of shipment is between the date of issue and expiry of LC
• 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 LC
• Bill of lading shows 'on board shipment'
• Parties are notified as per LC terms
• Carrying vessel's name has been mentioned in Bill of Lading
• The beneficiary's name is shown as consignor, unless LC terms permits
third party bill of lading
• The consignee’s name is as per LC
• The B/L is manually signed
• The description of goods is consistent with LC
• The ports of loading/destination are mentioned as per LC
• Marks, numbers, quantity and weight agree with the invoice
• The carrying vessel belongs to any particular line as per LC
• 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.
! !312
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 LC terms
• Whether drawn in the same currency as the LC
• Description of goods agree with B/L
• Risks as per LC are covered
• The place where claims are payable is as per LC 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 LC
• 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 LC
• The description of goods agrees with that in the invoice
Checking Other Documents

• All other documents stipulated in the LC are verified
• They are issued by the authorities specified in the LC
• They contain the details as required by the LC
• 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.
! !313
6.16 Recording Etc
A. 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 5 banking day’s acceptance or rejection is required to convey to

Remitting Bank.
• On 10th day, bill should be delinked.
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 LC.
B. 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 proforma 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.
C. Presentation of the Documents to Drawee

The documents should then be presented to the drawee importer either
physically or by intimation in the bank’s 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.
! !314
6.17 Discrepant/Irregular documents
a. If check up 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
communicated to the drawee-importer. If 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
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 reshipment 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.
! !315
The notice must state:
i. that the bank is refusing to honour or negotiate; and
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
c. that the bank is returning the documents; or
d. that the bank is acting in accordance with instructions previously
received from the presenter.
iv. 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.
v. 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.
vi. 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.
vii.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.
! !316
(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.
(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 into 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).
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.
Authorized dealers should make remittances from India or provide

reimbursement to their overseas branches and correspondents in foreign
! !317
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:
Group Permitted methods
i. All countries other than those listed a. Payment in rupees to the account of
under (ii) below a resident of any country in this
Group.
b. Payment in any permitted
currency.*
ii. Member countries in the Asian a. Payment for all eligible current
Clearing Union (expect 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 authorized
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 US 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 authorized dealers have been advised about such
! !318
arrangements, the method of payment specified therein will have to be

followed in such cases.
• 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
organizations 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.
Authorized 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:
i. 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.
ii. 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.
iii. 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.
! !319
In either of the last two cases, suitable remark should be made, under his
stamp and signature, by authorized dealer on the licence, 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 authorized dealer may make such
remittances provided that:
i. Further excess does not exceed 5 per cent of the value of the licence
value or Rs. 5,000 whichever is lower.
ii. The imported goods have already allowed clearance by customs

authorities.
iii. The relative exchange control copy of the customs bill of entry or
post parcel wrapper as the case may be is produced before the
authorized 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 customer’s account.
1. 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. Interest in respect of
delayed payments, usance bills or overdue interest for a period of
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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.
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 bank’s internal auditors as well as RBI Inspectors
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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.
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

utilized, or when the balance not yet utilized is so significant that the
licence cannot be further utilized, the exchange control copy, duly
endorsed, should be surrendered to the Reserve Bank of India/
authorized dealer bank, together with formal application (Form A1) for
remittance made against it.
c. Returning to the Importer: Pending full utilization, the exchange

control copy may be returned to importer only if:
i. The licence has been partially availed of further utilization is to be

made through another bank, and/or
ii. the licence is to be resubmitted to the office of the Directorate

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
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the 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.
6.23 Form A1
a. Use: The application by person form or a company for making payment

towards import in to India should be made on form A1. The variant of
this form have been devised in different colours to be used for:
• Remittance in foreign currency
• Transfer of Rupee to non-resident bank account and
• Remittance through ACU
b. For import under FREE importability (OGL): The Form A1 received

at the time of opening the credit for import of goods covered under free
importability should be retained. On receipt of payment or on
adjustment of the bills drawn under LC, earlier it was surrendered to
RBI but now it is also retained by the bank while submitting the R-
Return. The undertaking to produce the customs bill of entry contained
in the declaration on the reverse of the form should be deleted and the
certificate over the banker’s stamp and signature added as under:
“The bill of exchange and/or shipping documents for the above goods
received by us and by drawee/consignee.”
c. For import by post parcel: While surrendering to Reserve Bank/or

retaining by AD Bank the Form A1 received in connection with the
remittance made against the import by post parcel, the banker should
see to it that the form is accompanied by relative parcel receipt or
wrapper, except where the post parcel is consigned to the banker for
delivery to the importer against payment and certificate that the parcel
was received and delivered by him is given by the banker in the form.
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a. Occasion: 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 –
i. Import are raw materials for end products for export
ii. 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 bank’s due; and
iii. 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.
b. Risk involved: The risk inherent in such a transaction are:
• Breach of trust on the part of importer.
• Failure on his part to complete the manufacture and consequently to

execute the export order.
• If the goods imported are specifically intended for particular

manufacture, these will be limited use and if not used for manufacture,
will not be readily saleable, involving lock up of the bank,s funds.
• Destructions of the goods, while in the process of manufacture, by fire
etc.
c. 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.
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6.25 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.
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 godowns 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.
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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 be 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.
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,
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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.
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.
“Specimen Content of Trust Receipt”

“In consideration of your handing to me/us Shipping Documents
representing the goods specified therein as per particulars at foot,
hypothecated to you as collateral security for the due payment of the
under mentioned bill(s)/draft(s) payable to you drawn upon me/us
by………………………. and accepted by me/us. I/We………………. hereby engage
to utilise the same promptly without expense to you for no other purpose
other than landing clearing from customs, storing and holding the said
! !327
goods as Trustee for you and on your behalf and keep the said goods
separate and capable of identification from other goods in my/our
possession advising you of its location, and in the event of the goods or
any portion thereof being sold and delivered before full payment of the said
bill(s)/draft(s), the proceeds of such sale shall be received by me/us as
Trustee for you, and paid to you when and as received notwithstanding
prior to its due date. I/We at the same time will advise you the account on
which such payment is made. I/We shall obtain your approval prior to sell
the said goods on credit or against any Bill of Exchange or Promissory Note
and shall deliver to you such undertaking to pay by buyer thereof or deliver
to you such Bill of Exchange or Promissory Note properly endorsed.
I/We also undertake to keep the goods fully insured at my/our expense
specifying your name as beneficiary against loss by fire, theft and any
other risk to which said goods may be subject to and to deliver any and all
policies to you upon demand. I/We allow you and anyone authorised by
you in writing to enter my/our warehouses and premises or any place
where the said goods may be stored at any time for viewing, inspecting,
identifying and/or taking possession of the goods for any other purpose
relating to this TRUST RECEIPT.
You may at any time cancel this TRUST RECEIPT and take possession of the
said goods and in doing so will in no way impair or lessen your rights to
receive payment of the full amount of the bill(s)/draft(s) and/or release
my/our liability to pay same.
It is agreed that you assume no responsibility for the correctness, validity

or genuineness of the documents released to me/us hereunder or for the
existence character quantity, quality, conditions, value or delivery of any
goods purported to be represented by any of such documents.
It is also agreed that the undermentioned bill(s)/draft(s) will be paid by

me/us in full at maturity irrespective of the sale of the said goods. I/We
agree to pay you interest on the outstanding amount of bill(s)/draft(s) at
the rate of % (per cent) per annum. The payment of interest shall be
made on the 26th day of each calendar month (“Interest Payment Date”)
commencing from the date of this Trust Receipt. If the Interest Payment
Date of any calendar month falls on a day which is not a banking day, the
Interest Payment Date shall be shortened to the preceding banking day.
The last payment of interest shall be due on the maturity date of such
! !328
bill(s)/draft(s). If I/We default in any due performance under this Trust

Receipt or fail to pay any amount when due, I/We shall pay you default
interest on the outstanding amount in Thai Baht currency of bill(s)/draft(s)
at the default rate announced by you from time to time which is presently
% (per cent) per annum. If the outstanding amount of bill(s)/draft(s) is in
currency other than Thai Baht currency, I/We allow you to convert the
outstanding amount of bill(s)/draft(s) in such other currency into …………….
currency by using exchange rate which you deem appropriate and I/We
shall pay you default interest on that amount at the rate mentioned above.
I/We understand that you may change the default rate without any prior
notice to me/us. The calculation of default interest shall commence from
the date that I/We default in performance and/or payment up until I/We
have paid all obligation to you in full.
I/We agree that the foreign exchange rate be fixed by you using spot on
maturity of the relative bill(s)/draft(s) unless otherwise agreed upon.
Should the documents subsequently received appear to have any

discrepancy, I/we undertake to take up the documents and authorise you
to release the Guarantee/Reserve and pay. I/We hereby confirm that on
the date hereof, I/We have received from you the amount of the bill/draft
referred to in the below table and such amount be considered as loan
advanced by you to me/us in connection with the trust receipt facility
pursuant to the terms thereof.
Particulars of Documents
Draft Goods Purpose
Sr. Shipping
Date Amount Drawer Documents Description
No. mark, if any
6
Yours faithfully,
Authorized Signature
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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 banker’s 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.
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.
The Operating Procedure is aimed at checking the incidence of fraudulent

Import Bills, i.e., bills which are drawn against non-existent imports and
almost all documents notably Invoice(s), Bills of Lading/Air Waybills and
Bills of Entry are fake. From the Exchange Control perspective, the risk of
fraudulent import bills is highest in the case of bills received on collection
basis, particularly those relating to new/relatively new customers or
customers who do not avail of any credit facilities from the authorised
dealer or customers whose business-relationship with the bank is by and
large restricted only to the retiring of import bills. Having regard to this,
the business bonafides of Importer-customers have to be carefully verified.
! !330
Instructions on the disposal/payment of import bills should be given at a

sufficiently senior level Officer.
Banker should be fully satisfied about the financial status/standing of the

importer by virtue of long-established track record, should arrange to
obtain a Banker’s Report on the overseas seller. The Report from overseas
bankers/reputed credit agency (like, Dun and Bradstreet) should, inter alia,
specifically comment on whether the seller-firm is ordinarily engaged in
purchase/sale of goods sought to be exported to India and whether the
seller is good for ordinary business engagements.
As a general rule, import bills and documents should be received from the
banker of the seller by the banker of the buyer in India. Authorised dealers
should not, therefore, make remittances where import bills received
directly by the importers from the overseas seller, except in the following
cases:
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:
i. Where the value of import bill does not exceed USD 300,000.
ii. Import bills received by wholly-owned Indian subsidiaries of foreign

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

Foreign Trade Policy, 100 per cent Export-oriented Units/Units in
Special Economic Zones, Public Sector Undertakings and Limited
Companies.
iv. Import bills received by all limited companies, viz., public limited,
deemed public limited and private limited companies.
! !331
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 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. AD Category-I banks may undertake such transactions
i. The import would be subject to the prevailing Foreign Trade Policy.
ii. The transactions are based on their commercial judgment and they
are satisfied about the bonafides of the transactions.
iii. 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.
3. Receipt of Import Documents by the AD Category-I Bank Directly

from Overseas Suppliers
i. 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.
ii. 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.
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6.28 Remittances against the direct and Post Parcel

Imports
a. For Direct import, i.e., when the bill of exchange and/or shipping
documents are not collected through the medium of bank but are
received directly by the importer and the goods imported are taken
delivery of by him against such documents, remittance to the foreign
supplier in payment of such imports may at the request of the importer,
be made by the banker, provided the exchange control copy of the
customs bill of entry is produced by the importer along with Form A1
and reported under relevant R-Return. This process is applied to the bills
received for collection.
b. The remittance may also be effected even when the goods have not
arrived in India provided that:
i. The importer completes the undertaking on the reverse of the Form

A1 to produce the relative customs assessment certificate within 3
months and
ii. The banker collects the assessment certificate from importer within 3
months from the date of remittances.
Where importer fails to produce the customs assessment within the

prescribed period, an explanation should be obtained from importer.
c. The remittance against the bills received for collection in respect of an

import by post parcel of goods normally shipped by post parcel, may be
made, provided the relative receipt is produced.
d. The remittance against bill covering import of books by post parcel by a

bookseller or publisher for any amount and received for collection is
permissible, even if the date of relative import licence is subsequent to
that of import.
e. Postal/courier receipt should appear on its face to have been stamped

and time marked (Art. 25 of UCP 600).
! !333
6.29 Remittance Against the Replacement of Import
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.
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 judgement.
i. 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.
ii. 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.
! !334
6.31 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:
i. 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.
ii. The remittance should be allowed based on the AD Category-I banks'

commercial judgement, the bonafides of the transactions and strictly in
terms of the contract.
iii. The remittance is made directly to the account of the overseas supplier.
iv. 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.
6.32 Advance Remittance Against Imports
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
! !335
Government/s) is unable to obtain bank guarantee from overseas

suppliers and the AD Category-I bank is satisfied about the track
record and bonafides 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 Government/s 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.
2. Advance Remittance for Import of Rough Diamonds
i. AD Category-I bank are permitted to allow advance remittance without

any limit and without bank guarantee or standby Letter of Credit, by an
importer (other than a Public Sector Company or a Department/
Undertaking of the Government of India/State Government/s), for
import of rough diamonds into India from the undernoted mining
companies, viz.,
a. De Beers UK Ltd.,
b. RIO TINTO, UK,
c. BHP Billiton, Australia,
d. ENDIAMA, E.P. Angola,
e. ALROSA, Russia,
f. GOKHARAN, Russia,
g. Rio Tinto, Belgium,
h. BHP Billiton, Belgium and
i. Namibia Diamond Trading Company (PTY) Ltd. (NDTC).
ii. While allowing the advance remittance, AD bank may ensure the
following:
! !336
a. The importer should be a recognised processor of rough diamonds as

per the list to be approved by Gems and Jewellery Export Promotion
Council (GJEPC) in this regard and should have a good track record of
export realisation;
b. AD Category-I bank should undertake the transaction based on their

commercial judgement and after being satisfied about the bonafides
of the transaction;
c. 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. Further, due caution may
be exercised to ensure that remittance is not permitted for import of
conflict diamonds;
d. KYC and due diligence exercise should be done by the AD Category-I

bank for the Indian importer entity and the overseas company; and
e. AD Category-I bank should follow up submission of the Bill of Entry/
documents evidencing import of rough diamonds into the country by
the importer, in terms of FEMA/Rules/Regulations/Directions issued in
this regard.
iii. 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 bank may permit 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.
iv. AD Category-I banks are required to submit a report in the prescribed

format of all such advance remittances made without a bank guarantee
or Standby Letter of Credit, where the amount of advance payment is
equivalent to or exceeds USD 5,000,000 on a half-yearly basis as at the
end of September and March every year.
! !337
3. Advance Remittance for Import of Aircrafts/Helicopters and

Other Aviation Related Purchases
As a sector-specific measure, airline companies which have been permitted

by the Directorate General of Civil Aviation to operate as a schedule air
transport service, can make advance remittance without bank guarantee,
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. The
remittances for the above transactions 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 are made directly to the account of the manufacturer
(supplier) concerned.
iii. AD Category-I bank 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.
! !338
vi. Prior to making the remittance, the AD Category-I bank may ensure
that the requisite approval of the Ministry of Civil Aviation/DGCA/other
agencies in terms of the extant Foreign Trade Policy has been obtained
by the company, for import.
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 Regional Office concerned of the Reserve Bank will be
required in case of any deviation from the above stipulations.
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.
! !339
1. Physical Imports
i. In case of all imports, where value of foreign exchange remitted/paid for

import into India exceeds USD 100,000 or its equivalent, it is obligatory
on the part of the AD Category-I bank through whom the relative
remittance was made, to ensure that the importer submits:
a. The Exchange Control copy of the Bill of Entry for home consumption,
Or
b. The Exchange Control copy of the Bill of Entry for warehousing, in
case of 100 per cent Export-oriented Units,
Or
c. Customs Assessment Certificate or Postal Appraisal Form, as declared
by the importer to the Customs Authorities, where import has been
made by post, as evidence that the goods for which the payment was
made have actually been imported into India.
ii. In respect of imports on D/A basis, AD Category-I bank should insist on

production of evidence of import at the time of effecting remittance of
import bill. However, if importers fail to produce documentary evidence
due to genuine reasons such as non-arrival 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.
2. 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,
b. The importer is a company listed on a stock exchange in India and

whose net worth is not less than Rs. 100 crores as on the date of its
! !340
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.
3. Non-physical Imports
i. Where imports are made in non-physical form, i.e., software or data

through internet/data com 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.
• Issue of Acknowledgement
AD Category-I bank should acknowledge receipt of evidence of import,
e.g., Exchange Control copy of the Bill of Entry, Postal Appraisal Form
or Customs Assessment Certificate, etc., from importers by issuing
acknowledgement slips containing all relevant particulars relating to
the import transactions.
• Verification and Preservation
i. Internal inspectors or auditors (including external auditors appointed

by AD Category-I bank) should carry out verification of the
documents evidencing import, e.g., Exchange Control copies of Bills
of Entry or Postal Appraisal Forms or Customs Assessment
Certificates, etc.
ii. Documents evidencing import into India should be preserved by AD

Category-I bank for a period of one year from the date of its
verification. However, in respect of cases which are under
! !341
investigation by investigating agencies, the documents may be

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

import, within 3 months from the date of remittance involving foreign
exchange exceeding USD 100,000, the AD Category-I bank should
rigorously follow up for the next 3 months, including issuing
registered letters to the importer.
ii. AD Category-I bank should forward a statement on half-yearly basis

as at the end of June and December of every year, in form BEF
furnishing details of import transactions, exceeding USD 100,000 in
respect of which importers have defaulted in submission of
appropriate document evidencing import within 6 months from the
date of remittance, to the Regional Office of Reserve Bank under
whose jurisdiction the AD Category-I bank is functioning, within 15
days from the close of the half-year to which the statement relates.
iii. AD Category-I bank need not follow up submission of evidence of

import involving amount of USD 100,000 or less provided they are
satisfied about the genuineness of the transaction and the bonafides
of the remitter. A suitable policy may be framed by the bank's Board
of Directors and AD Category-I bank may set their own internal
guidelines to deal with such cases.

AD Category-I banks are permitted to issue guarantee on behalf of their
importer customers in terms of Notification No. FEMA. 8/2000-RB dated
May 3, 2000, as amended from time to time.
! !342
i. 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.
ii. 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.
The Reserve Bank of India while liberalising and simplifying the procedure
and the existing guidelines for merchanting or intermediary trade
transactions in supersession of all earlier guidelines, issued following
revised guidelines which came into effect from January 17, 2014. These
guidelines further revised by RBI on March 28, 2014 and revised guidelines
are as under:
1. For a trade to be classified as merchanting trade, the 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;
2. Goods involved in the merchanting trade transactions would be the ones

that are permitted for exports/imports under the prevailing Foreign
Trade Policy (FTP) of India, as on the date of shipment and all the rules,
regulations and directions applicable to exports (except Export
Declaration Form) and imports (except Bill of Entry), are complied with
for the export leg and import leg respectively;
3. AD bank should be satisfied with the bonafides of the transactions.

Further, KYC and AML Guidelines should be observed by the AD bank
while handling such transactions;
4. 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
! !343
handling documents may be taken) and satisfy itself about the

genuineness of the trade;
5. 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;
6. 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;
7. 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;
8. 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;
9. 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, the same should be
paid 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;
10.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;
! !344
11.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;
12.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 in
the format prescribed by RBI within 15 days from the close of each half
year, i.e., June and December;
13.The names of defaulting merchanting traders, where outstanding reach

5 per cent of their annual export earnings, would be caution-listed.
It is important to note that the merchanting traders have to be genuine

traders of goods and not mere financial intermediaries. Confirmed orders
have to 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.
! !345
6.37 Summary
It is necessary for a country to restructure the level of imports to the level

of foreign exchange and bring the economy of the country in the line with
global economy. Trade barriers are government – induced restrictions an
international trade and can take many forms. Import letter is an
instrument of settling trade payment and forms an integral part of foreign
trade. There are various parties associated with import letter of credit and
some important kinds of LCs generally used in foreign trade.
! !346
1. What are the barriers to international trade? Explain.
2. What are the various methods of financing the 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
6. Write a short note on Merchanting trade.
7. What do you mean by evidence of Import? What are the types of

evidences of Imports?
! !347
1. As per Exchange Control Guidelines, banks are expected to open import

letters of credit for their own clients. (True or False)
a. True
b. False
2. Red clause LC and Green clause LC are forming the part of _______.
a. Back-to-back LC
b. Anticipatory Credit
c. Confirmed LC
d. Revolving LC
3. International leasing has become an important source of international

finance for acquiring the Goods.
a. Merchandise to increase the export turnover
b. Capital
c. Agri products
d. Industrial inputs
4. To finance the import, bankers are generally allowing facility to

importers .
a. Buyers’ credit
b. Suppliers’ credit
c. Import letters of credit
d. Forfeiting
5. 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
6. Letter of credit application-cum-agreement is devised by______.

a. RBI
b. DGFT
c. FEDAI
d. ICC
! !348
7. Along with Letter of credit, importer must give .

a. Underlying sales contract
b. Import licence
c. Insurance policy
d. All above
8. Guidelines for opening the letter of credit are involving compliance of

following .
a. Import Trade and Exchange Control
b. FEDAI and UCPDC Guidelines
c. Banks’ Internal Procedure and Practices
d. All the above
9. 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. Both above
10.Define in short: Forfeiting

a. It is purchase of 100 per cent claim of exporter on foreign buyer
without recourse
b. It is purchase of 100 per cent claim on importer with recourse
c. It is purchase of 100 per cent claim of exporter on foreign buyer with
recourse to exporter
d. It is purchase of all receivables of exporter
11.In case of import of services, advance remittances is permitted up to

.beyond which guarantee from international Bank of repute is required
to be obtained.
a. 100,000
b. 300,000
c. 500,000
d. 10,00,000
12.What is countertrade?
a. This is means of financing of imports due to balance of payment
difficulties in the countries
b. Where imports are paid in permitted currency
c. Where exports are getting realised only in INR
! !349
d. It does not have bearing on balance of payment of country
13.What document is required for making the payment of goods imported

by post parcel?
a. Bill of entry
b. Courier receipt
c. Relative Post Parcel Receipt
d. Simple declaration
14.What document is required as evidence for sending the advance

remittance for import?
a. Demand letter of overseas supplier
b. Document evidencing cost of goods with copy of licence, if any
c. Copy of invoice having imported goods from the same supplier in
past
d. Declaration from importer
15.Merchanting trade should be completed within .

a. 90 days
b. 6 months
c. 9 months
d. 12 months 
! !350
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !351
CROSS-BORDER FINANCING: EXPORT FINANCE – PRE-SHIPMENT
Chapter 7
CROSS-BORDER FINANCING: EXPORT
FINANCE – PRE-SHIPMENT
Objectives
After reading this chapter, the reader should be able to understand and
describe:
• What is Cross-border Banking?

• The Concept of Finance in International Trade
• Methods of Export Finance
• Buyer’s credit scheme of Exim Bank
• Export of Services
• Methods of Import Finance
• Import Letter of Credit as a Method of Import Finance by Banks
• Sources of External Funds Mobilisation by Banks
• Basics of Risks in International Banking
Structure:
7.2 Cross-border Trade Finance
7.3 Export Finance
7.5 Rupee Pre-shipment Credit to Specific Sectors/Segments
7.6 ECGC Cover
7.9 Export under Deferred Payment Arrangement and Turnkey Contract
7.13 Summary
! !352
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.
7.2 Cross-Border Trade Finance
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.
! !353
7.3 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 realization 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.
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).
! !354
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/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 judgement of export orders or letter of credit with the bank has
been waived.
Eligibility
An exporter to be eligible for packing credit finance must have an Importer
Exporter Code number (IEC) allotted by Directorate 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.
! !355
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.
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. At the time of appraising, all export
credit proposals as prudent lending norms will recon the following special
features:
! !356
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 into 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
counterparties in the final stages of export.
14. Last, not certainly least, integrity of the exporter.
! !357
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.
Period of Advance
The packing credit advance being the need-based and short-term finance
should be allowed for the period as may be actually justified on case-to-
case basis.
i. 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.
ii. 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.
iii. RBI would provide refinance only for a period not exceeding 180 days as
per instructions issued by RBI.
! !358
In the cases of sharing of PCL with the supporting manufacturers/suppliers,

care must be taken to ensure that the aggregate period for which PCL is
allowed does not exceed the prescribed period.
Maintenance of Accounts
Ordinarily, separate loan account for each packing credit loan allowed
against particular export order/s should be maintained for the purpose of
monitoring the period of sanction and end-use of the funds. Banks may
release the packing credit in one lump sum or in stages as per the
requirement for executing the order. Banks may also maintain different
accounts at various stages of processing, manufacturing, pledge etc.,
accounts and should ensure that the outstanding balance in accounts are
adjusted by transfer from one account to the other and finally by proceeds
of relative export bills on purchase, discount etc.
Since packing credit is allowed at concessional rate of interest, bank should

keep close watch on the end-use of the funds to ensure that the credit
allowed at lower rate of interest is used for genuine requirement of
exports. Bank should also monitor the progress made by the exporter in
timely fulfillment of export orders.
‘Running Account’ Facility

As sated earlier, pre-shipment credit to exporters is normally provided on
judgement 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
judgement 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
following conditions:
a. Banks may extend the ‘Running Account’ facility only to those exporters
whose track record has been good as also to Export-oriented Units
! !359
(EOUs)/Units in Free Trade Zones/Export Processing Zones (EPZs) and

Special Economic Zones (SEZs).
b. 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.
c. 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.
d. Packing credit can also be marked off with proceeds of export

documents against which no packing credit has been drawn by the
exporter.
i. If it is noticed that the exporter is found to be abusing the facility, the

facility should be withdrawn forthwith.
ii. In cases where exporters have not complied with the terms and
conditions, the advance will attract commercial lending rate ab initio.
In such cases, banks will be required to pay higher rate of interest on
the portion of refinance availed of by them from the RBI in respect of
the relative pre-shipment credit. All such cases should be reported to
the Monetary Policy Department, Reserve Bank of India, Central
Office, Mumbai 400 001 which will decide the rate of interest to be
charged on the refinance amount.
iii. Running account facility should not be granted to sub-suppliers.
Disbursement of Packing Credit

Packing credit, being the concessional finance, is duty of the officials
handling this portfolio to ensure that the loan is utilised for the purpose for
which it is lent. In other words, proper end-use of the funds should always
be ensured. Therefore, PCL should not be disbursed in lump sum amounts;
instead the amount should be disbursed in a phased manner taking into
account the production cycle, requirement of funds and shipment schedule.
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As far as possible, loans should be disbursed by making direct payment to

the suppliers of raw material/goods after taking, necessary instructions
from exporter. In case it is not possible to disburse by making direct
payment to the supplier for any reason, the loan can be disbursed by
crediting the amount to the exporter’s current account and drawings from
these accounts should be supervised. Securities held by the bank should
also be periodically inspected and steps should be taken to safeguard the
bank’s interest.
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.
Bank should obtain monthly stock statement from exporters reporting the
stocks which are under the pledge/hypothecation lying with subcontractor/
in transit/held with clearing agents/advance lying with sub-suppliers/
unutilized 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.
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., and 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.
If not so liquidated/ repaid, banks are free to decide the rate of interest
from the date of advance.
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i. 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 commercial rate of interest
applicable to the domestic advance from the date of advance of
packing credit and that portion of the packing credit would not be
eligible for any refinance from RBI.
c. Export of de-oiled/defatted cakes: Banks are permitted to grant

packing credit advance to exporters of HPS groundnut and de-oiled/
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 to be eligible for
concessional rate of interest.
ii. 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
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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.
Interest on Packing Credit

For the period upto June 30, 2010, a ceiling rate had been prescribed for
rupee export credit linked to Benchmark Prime Lending Rates (BPLRs) of
individual banks available to their domestic borrowers. Banks had,
therefore, freedom to decide the actual rates to be charged within the
specified ceilings. Further, the ceiling interest rates for different time
buckets under any category of export credit should be on the basis of the
BPLR relevant for the entire tenor of export credit.
The Base Rate System is applicable with effect from July 1, 2010.
Accordingly, interest rates applicable for all tenors of rupee export credit
advances are at or above Base Rate.
ECNOS: ECNOS means Export Credit Not Otherwise Specified in the

Interest Rate structure for which banks are free to decide the rate of
interest keeping in view the Base rate and spread guidelines. Banks should
not charge penal interest in respect of ECNOS.
As stated above, the Base Rate System is applicable with effect from July
1, 2010. Accordingly, interest rates applicable for all tenors of rupee export
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credit advances sanctioned on or after July 01, 2010 are at or above Base
Rate.
Interest Rates under the BPLR system effective upto June 30, 2010 were
‘not exceeding BPLR minus 2.5 percentage points per annum’ for the
following categories of Export Credit:
Categories of Export Credit
1. Pre-shipment Credit (from the date of advance)
a. Up to 270 days
b. Against incentives receivable from Government covered by ECGC

Guarantee up to 90 days
BPLR: Benchmark Prime Lending Rate.
Note:
1. Since these are ceiling rates, banks would be free to charge any rate
below the ceiling rates.
2. Interest rates for the above-mentioned categories of export credit

beyond the tenors as prescribed above are deregulated and banks are
free to decide the rate of interest, keeping in view the BPLR and spread
guidelines.
Interest on Pre-shipment Credit
i. Banks should charge interest on pre-shipment credit up to 270 days at

the rate to be decided by the bank within the ceiling rate arrived at on
the basis of BPLR relevant for the entire tenor of the export credit under
the category. The period of credit is to be reckoned from the date of
advance. This guideline is applicable upto June 30, 2010. 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.
! !364
ii. 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
iii. In cases where packing credit is not extended beyond the original period
of sanction and exports take place after the expiry of sanctioned period
but within a period of 360 days from the date of advance, exporter
would be eligible for concessional credit only up to the sanctioned
period. For the balance period, interest rate prescribed for ‘ECNOS’ at
the pre-shipment stage will apply. Further, the reasons for non-
extension of the period need to be advised by banks to the exporter.
iv. In cases where exports do not take place within 360 days from the date
of pre-shipment advance, such credits will be termed as ‘ECNOS’ and
banks may charge interest rate prescribed for ‘ECNOS’ pre-shipment
from the very first day of the advance.
v. 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.
Export Credit against Proceeds of Cheques, Drafts, etc.

Representing Advance Payment for Exports
i. Where exporters receive direct remittances from abroad by means of

cheques, drafts etc. in payment for exports, banks may grant export
credit to exporters of good track record till the realisation of proceeds of
the cheque, draft etc. received from abroad, after satisfying themselves
that it is against an export order, is as per trade practices in respect of
the goods in question and is an approved method of realisation of
export proceeds as per extant rules.
ii. If, pending compliance with the above conditions, an exporter has been
granted accommodation at normal commercial interest rate, banks may
give effect to prescribed rate for export credit rate retrospectively once
the aforesaid conditions have been complied with and refund the
difference to the exporter.
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7.5 Rupee Pre-shipment Credit to specific sectors/

segments
1. 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.
ii. Such advances will be eligible for refinance, provided the following
requirements are complied with apart from the usual stipulations:
a. Banks should obtain from the export house a letter setting out the
details of the export order and the portion thereof to be executed by
the supplier and also certifying that the export house has not
obtained and will not ask for packing credit in respect of such portion
of the order as is to be executed by the supplier.
b. Banks should, after mutual consultations and taking into account the
export requirements of the two parties, apportion between the two,
i.e., the Export House and the Supplier, the period of packing credit
for which the concessionary rate of interest is to be charged. The
concessionary rates of interest on the pre-shipment credit will be
available upto the stipulated periods in respect of the export house/
agency and the supplier put together.
c. The export house should open inland LCs in favour of the supplier
giving relevant particulars of the export LCs or orders and the
outstandings in the packing credit account should be extinguished by
negotiation of bills under such inland LCs. If it is inconvenient for the
export house to open such inland LCs in favour of the supplier, the
latter should draw bills on the export house in respect of the goods
supplied for export and adjust packing credit advances from the
proceeds of such bills. In case the bills drawn under such
arrangement are not accompanied by bills of lading or other export
documents, the bank should obtain through the supplier a certificate
from the export house at the end of every quarter that the goods
supplied under this arrangement have in fact been exported. The
! !366
certificate should give particulars of the relative bills such as date,

amount and the name of the bank through which the bills have been
negotiated.
d. Banks should obtain an undertaking from the supplier that the

advance payment, if any, received from the export house against the
export order would be credited to the packing credit account.
2. 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:
a. 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.
b. 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.
c. 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
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one of the sub-suppliers to the date of submission of export documents

by EOH.
d. 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.
e. The scheme is an additional window besides the existing system of

sharing of packing credit between EOH and manufacturer in respect of
exported goods as detailed in above paragraph. 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.
f. 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.
g. 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 and will be eligible for refinance from RBI by the
respective banks for the appropriate periods. It has to be ensured that
no double financing of the same leg of the transaction is involved.
h. Banks may approach the ECGC for availing suitable cover in respect of
such advances.
! !368
i. 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.
3. 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 365 days of 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 on such advance.
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.
4. 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
2009-14. 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 counterparty while
sanctioning the export credit. The statement of export receivables from
! !369
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.
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.
! !370
• 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.
5. 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 concessional
credit for working capital purposes in respect of export-related activities
of all agro-based products including purchase of fertilizers, 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.
6. 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, micronutrients 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
! !371
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.
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.
7.6 ECGC Cover

Banks are covering all pre-shipment advances granted by them under
Whole Turnover Packing Credit Guarantee (WTPCG) policy from ECGC.
Exporter has to bear the guarantee fee on outstanding in his export
packing credit account.
! !372

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:
1. 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:
a. 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.
b. to avail of pre-shipment credit in foreign currency and discounting/

rediscounting of the export bills in foreign currency under EBR
Scheme.
c. to avail of pre-shipment credit in rupees and then convert drawal into

PCFC at the discretion of the bank.
iii. Choice of currency
a. The facility may be extended in one of the convertible currencies,

viz., US Dollars, Pound Sterling, Japanese Yen, Euro, etc.
b. 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.
! !373
c. Banks are permitted to extend PCFC for exports to ACU countries.
d. 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.
2. 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
a. 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,
provided the rate of interest on the borrowing does not exceed 250
basis points from November 15, 2011 (100 basis points upto
November 14, 2011) over six months LIBOR/EURO LIBOR/EURIBOR.
b. 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 drawal 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.
! !374
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, 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, 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.
d. Banks are free to determine the interest rates on export credit in

foreign currency with effect from May 5, 2012.
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).
3. 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.
! !375
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.
4. 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 and it will also have
additional interest cost of 200 basis points above the rate for the initial
period of 180 days prevailing at the time of extension.
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 TT 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 permitted to extend
on a fixed rollover basis of the principal amount at the applicable LIBOR/
EURO LIBOR/EURIBOR rate for extended period plus permitted margin
of 350 basis points from November 15, 2011 to May 4, 2012 (200 basis
points upto November 14, 2011) above LIBOR/ EURO LIBOR/EURIBOR.
5. 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. However, upto May 4, 2012, banks may fix the rates of interest
with reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever
applicable, as under: 
! !376
Type of Credit Interest Rate (% p.a.)
(i) Pre-shipment Credit
(a) Upto 180 days Not exceeding 350 basis points from
November 15, 2011 to May 4, 2012
(200 basis points upto November 14,
2011) over LIBOR/EUROLIBOR/
EURIBOR
(b) Beyond 180 days and upto 360 Rate for initial period of 180 days
days prevailing at the time of extension plus
200 basis points, i.e., (i) (a) above
plus 200 basis points.
Notes:
i. Bank should not levy any other charges over and above the interest rate
under any name, viz., service charge, management charge etc. The practice
of IBA fixing out-of-pocket expenses has been done away with effect from
August 2012 and the decision to recover out-of-pocket expenses is left to
individual banks. While recovering out of pocket expenses, banks should
ensure that the charges are reasonable and on an actual cost basis.
ii. Banks are free to decide the rate of interest, being the rupee credit rate, for
pre-shipment and post-shipment credit beyond the tenors prescribed above,
keeping in view the guidelines on Base Rate.
6. Disbursement of PCFC
i. In case full amount of PCFC or part thereof is utilised to finance

domestic input, banks may apply appropriate spot rate for the
transaction.
ii. 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.
iii. 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.
! !377
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 FOB Value: In certain cases, (viz., agro-

based products like HPS groundnut, defatted 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.
8. Cancellation/Non-execution of Export Order
i. 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.
! !378
ii. 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.
iii. Banks may extend PCFC to such exporters subsequently, after ensuring
that the earlier cancellation of PCFC was due to genuine reasons.
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.
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 pre-payment by the exporter under
PCFC scheme within their foreign exchange position and Aggregate Gap
Limit (AGL) as indicated in paragraph 5.1.3(iii)(b) above. 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
! !379
exporters the funding cost, if any, involved in absorbing mismatches in

respect of the pre-payment beyond one month period.
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.
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
! !380
mutual agreement between the export order holder and the

manufacturer.
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
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.
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.
! !381
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.
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.
Under the Foreign Trade Policy 2009-2014, firms/companies dealing in

purchase/sale of rough or cut and polished diamonds, diamond studded
jewellery, with good track record of at least two years in import or export
of diamonds with an annual average turnover of Rs. 3 crore or above
during the preceding three licensing years (from April to March) are
permitted to carry out their business through designated Diamond Dollar
Accounts (DDAs).
Under the DDA Scheme, it would be in order for banks to liquidate PCFC
granted to a DDA holder by dollar proceeds from sale of rough, cut and
polished diamonds by him to another DDA holder.
! !382
7.9 Export under Deferred Payment Arrangement and

Turnkey Contract
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’. 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
various institutions such as Authorised Dealer/Exim Bank/Working Group/
Reserve Bank of India as the case may be for credit terms to be offered,
third country imports etc.
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.
Nature of Credit
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
! !383
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
extension of such long-term credits and ways and means of protecting
themselves against these risks
Eligible Goods
Engineering goods and high priced capital goods to which commercial
export credit is offered by exporters to prospective buyers abroad 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. The discretion to include new goods in list
or exclude the existing goods from the list is vested in the Working Group
on Project Exports functioning with Exim Bank as the nodal agency.
Period of Deferred Credit

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 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.
Procedure for Clearance of Proposals
• All applications to the Working Group are required to be submitted by the

exporters through their bankers (who must be authorised dealers in
foreign exchange) in the prescribed form in the required number of
copies sufficiently in advance to enable the Working Group to hold a
meeting of its members for consideration of the proposal. When a
proposal is approved by the Working Group, a package clearance is
granted by Exim Bank, on behalf of all the members of the Working
Group and conveyed to the exporters’ bankers through whom the
proposal was received. The Working Group’s clearance will ordinarily be
given within a period of seven days from the date of receipt of the
application, provided it is complete in all respects.
! !384
• 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 the authorised dealer/Exim Bank/Working Group.
However, exporters in such cases are required to ensure that the
conditions as laid down in the Memo PEM are complied with.
• On the basis of experience gained over the years and in order to enable
the exporters to expeditiously obtain clearance for contracts for supply of
engineering goods on deferred payment terms, turnkey contracts and
civil construction contracts, powers have been delegated to authorised
dealers and Exim Bank to grant post-award clearances in cases where
the contract value does not exceed US Dollar 100 Million. Proposals for
undertaking such export contracts up to the value of US Dollar 100
million will, therefore, be cleared by authorised dealers/Exim Bank.
Proposals for undertaking such contracts exceeding US Dollar 100 million
in value will need to be cleared by the Working Group.
• In the case of contracts for export of services on cash payment terms

requiring fund-based and/or non-fund-based facilities, as also those
involving deferred payment terms, authorised dealers and Exim Bank
have been empowered to grant clearance upto the value of US Dollar 100
million. Proposals for undertaking such export contracts will, therefore,
be cleared by authorised dealers/Exim Bank upto the value of US Dollar
100 million. Proposals for undertaking such contracts exceeding US
Dollar 100 million in value will need to be cleared by the Working Group.
• Proposals for deferred payment export or turnkey projects against

Buyers’ Credits as well as for export of managerial/technical consultancy
services on deferred payment terms as also those on cash payment
terms involving grant of any fund-based and/or non-fund-based facilities
in excess of the monetary limits will need the prior approval of the
Working Group.
! !385
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:
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.
! !386
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/
Working Group may clear proposals involving bridge finance in excess of
25 per cent of contract value also wherever they are satisfied that such
finance is necessary.
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.
Cases where exporters desire to offer, due to local conditions, commercial

credit not exceeding one year may be considered by the authorised
dealers/Exim Bank as per powers delegated to them.
Post-award Clearance of Proposals
i. Within fifteen days of 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 Para B.5 of PEM. Copies of the approval letter
along with copies of the application and the contract may be forwarded
by the authorised dealer to the office of the Reserve Bank of India
(Exchange Control Department) within whose jurisdiction the Head
Office of the exporter is situated, as also to ECGC, Mumbai and Exim
Bank where their participatory interest by way of funded/non-funded
facilities, insurance/risk cover, etc. is involved.
! !387
ii. Authorised Dealers/Exim Bank may grant post-award clearance to the

project proposal provided the value of the contract does not exceed U.S.
Dollar 100 million. 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,
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.
iii. In all cases mentioned 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 re-import basis and the extent of ECGC cover guarantee.
v. If there are any Indian sub contractors, 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 sub contractor. The institution which will consider the
application of the prime contractor at the post-award stage will also
clear applications of all the sub contractors.
vi. In cases where the value of the contract proposal exceeds US Dollar 100
million, the authorised dealer should immediately forward copies of the
application together with copies of the contract and Banker’s comments
! !388
in Form DPX 2/PEX 2 as the case may be, to various institutions listed in
above paragraph (1) as also to Central Office of Reserve Bank of India,
Exchange Control Department, Mumbai. Exim Bank will convene a
meeting of the Working Group within a week of the receipt of the
application to consider the final terms and conditions of the contract and
to grant a package post-award clearance for the contract. Copies of the
letter of approval issued by Exim Bank will be forwarded to all members
of the Working Group, concerned Regional Office of Reserve Bank of
India and exporter’s bankers for necessary action.
vii.Payment terms approval to be conveyed will form part of package of

approval granted for the proposal by authorised dealer/Exim Bank/
Working Group as the case may be.
Appointment of Sub contractors

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.
Follow-up of Turnkey/Construction Contracts

Exporters and all their Indian sub-contractors executing turnkey contracts
or civil construction contracts abroad should furnish progress reports in
Form DPX 3 on a half-yearly basis (June and December) to concerned
approving authority, viz., authorised dealer/Exim Bank/Working Group as
the case may be, and the concerned Regional Office of the Reserve Bank
through their bankers within one month from the date of expiry of the
! !389
relative half-year. Copy of the report may however invariably be sent to

ECGC/Exim Bank in all cases where their risk/guarantee cover participation
in the funded/non-funded facilities has been obtained. However, in the case
of project export proposals approved at the level of the Working Group,
report in Form DPX 3 may be sent to Exim Bank/ECGC and the concerned
Regional Office of the Reserve Bank.
Requirements Relating to Completed Projects
i. Exporters executing turnkey/construction contracts abroad should take

the following steps after completion of the contracts:
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]
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
! !390
be sent to Exim Bank/ECGC where their participation in funded/non-

funded facilities, risk sharing is involved. Where the project export
proposal was approved at the level of the Working Group, the report
may be sent to Exim Bank and ECGC. The following documents should
also be forwarded along with such report:
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.
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/Working Group.
Exim Bank has been authorised to extend Buyer’s Credit under the
Scheme upto the limit of US Dollar 20 million and proposals exceeding
this limit will be considered by the Working Group. Exporters should not
ordinarily negotiate with overseas buyers credit terms requiring
financing against buyer’s credits without prior consultation with their
banker’s and Exim Bank. To assist Indian exporters in carrying out
negotiations with importers, Exim Bank will be prepared to indicate its
! !391
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:
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 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 by the Working Group. 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,
! !392
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.
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 where 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.
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 or the
Working Group 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.
iii. Individuals/firms/companies executing service contract in computer

software should, however, repatriate to India income equivalent to at
least 30 per cent of contract value and the balance income upto 70 per
! !393
cent of contract value could be retained for meeting contract-related

expenses abroad. 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/Working Group at the post-award stage.
iv. 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 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 per cent of the contract value.
Service Contracts Requiring Authorised Dealers’/ Exim Bank’s/

Working Group’s Approval
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 Exchange Control approvals. Such contracts are treated on par
with turnkey/construction projects and therefore require clearance at post-
award stage of authorised dealers/Exim Bank/Working Group depending on
the value of contracts. All Service contracts involving deferred payment
(DP) terms also require post-award clearance of authorised dealers/Exim
Bank/Working Group depending on the value of the contract.
! !394
Pre-requisites for Consideration of Proposals of Service Contracts

Involving Cash Payment Terms
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
materials/machinery/equipments 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.
Pre-requisites for Consideration of Proposals of Service Contracts

on DP Terms
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/Working Group 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
the conditions mentioned above.
! !395
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.
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 Working Group.
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.
Clearance of Proposals at Post-award Stages
i. Within 15 days of 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
along with six copies of contract for necessary post-award clearance.
Where value of the contract is US Dollar 100 million or less 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.
! !396
ii. Exim Bank may also receive directly applications for export of services
of the value upto US Dollar 100 million, without being routed through an
authorised dealer provided (i) all facilities required for execution of the
contract are being extended by Exim Bank, (ii) Exim Bank makes
necessary arrangement with an authorised dealer to handle exchange
control matters like GR formality, etc. in connection with execution of
the contract and the details of the arrangement made in this regard are
advised to the concerned Regional Office of Exchange Control
Department and (iii) Exim Bank monitors such contracts cleared by
them till their completion and ensures compliance with the requirements
of completed contracts. In approved cases, Exim Bank will forward a
copy of its approval to the Regional Office of Exchange Control
Department under whose jurisdiction the applicant is functioning.
iii. Proposals for values in excess of US Dollar 100 million are required to
be referred to the Working Group for clearance. In the case of proposals
exceeding the value of US Dollar 100 million, detailed comments and
recommendations on the proposals may be communicated by authorised
dealers in Form TCS 2 to Exim Bank.
Follow-up of Service Contracts

Exporters executing service contracts abroad should furnish progress
reports at half-yearly intervals ending June and December of each year to
institutions concerned.
Foreign Currency Accounts/Site Offices Abroad/ Agency

Commission/Financial Requirements
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 by the Exim Bank on behalf of the
Working Group on project exports or Exim Bank/authorised dealer under
the powers delegated to them. 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
! !397
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 issued by them/Exim Bank at the post-
award stage subject to certain conditions.
ii. 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/Working Group. 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, i.e.,
Authorised Dealer/Exim Bank/Working Group as the case may be, to
approve, the proposal of exporter, to open, hold and maintain foreign
currency account in India subject to terms and conditions.
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.
! !398
b. Indian supplier of goods/services should comply with export

procedure as per provisions/requirements of Foreign Exchange
Management Act, 1999.
iii. 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/Working Group 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/Working Group.
Third Country Purchases
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 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.
! !399
Inter-project Transfer of Funds

Requests from the project exporters executing turnkey/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
repatriable to India as soon as the project is completed and provisional
completion certificate is issued.
Construction etc Equipment
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/Working Group and enclosing a set of
GR forms duly completed for the export together with an undertaking in
Form PEX-3 regarding re-import of such equipment into India. Requisite
GR/SDF Form 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 etc. 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
! !400
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.
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.
Import of Equipment/Machinery/Motor Vehicles Purchased Abroad

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

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/Working Group, 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.
! !401
Bid Bonds and Guarantees against Project Exports
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
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 above paragraphs.
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 or on behalf of the Working Group.
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 per cent 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 (ECD) as also to the concerned authorised
dealer/Exim Bank who had cleared the proposal and to all the members
of the Working Group, where the proposal was cleared by Working
Group, within 15 days from the issue of such guarantee/s.
! !402
Guarantees for Borrowings Abroad

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.
Project Exports to Nepal/Bhutan

All project export proposals to Nepal and Bhutan require the clearance of
the concerned authorities like the authorised dealer/Exim Bank/Working
Group on Project Exports depending upon the value and other terms and
conditions of the contract at post-award stage. 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.
In terms of the extant provisions under the Foreign Exchange Management

Act, 1999 (FEMA, 1999) on overseas direct investments, the total overseas
direct investment (ODI) of an Indian Party in all its Joint Ventures (JVs)
and/or Wholly Owned Subsidiaries (WOSs) abroad engaged in any bonafide
business activity should not exceed 400 per cent of the net worth of the
Indian Party as on the date of the last audited balance sheet under the
Automatic Route.
With effect from August 13, 2013, Reserve Bank has decided:
a. To reduce the limit of 400 per cent of the net worth of the Indian Party
to 100 per cent of its net worth under the Automatic Route. Accordingly,
AD Category-I banks may allow overseas direct investments under the
Automatic Route up to 100 per cent of the net worth of the Indian party,
as on the date of the last audited balance sheet;
b. To reduce the limit of 400 per cent of the net worth of the Indian
company, investing in the overseas unincorporated entities in the
energy and natural resources sectors, under the automatic route, to 100
per cent of the net worth of the Indian company investing in the
! !403
overseas unincorporated entities in the energy and natural resources

sectors, as on the date of last audited balance sheet; and
c. Any ODI in excess of 100% of the net worth shall be considered under
the Approval Route by the Reserve Bank of India.
In respect of the Navaratna Public Sector Undertakings (PSUs), ONGC

Videsh Limited (OVL) and Oil India Ltd. (OIL), the extant provision for
investing in overseas unincorporated entities and the overseas incorporated
entities in the oil sector (i.e., for exploration and drilling for oil and natural
gas, etc.), which are duly approved by the Government of India, without
any limits under the automatic route, would however continue as hitherto.
! !404
7.13 Summary
Cross-border Trade Finance refers to financing the movement of goods and

services across the borders or financing of trade and includes export
finance and import finance. Various facets of Cross-border Financing is
discussed in this chapter Export Finance is Short-term working capital
finance allowed to an exporter and classified into pre-shipment finance and
post-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. The purpose of advance or loan to
enable the exporter to purchases raw material. Manufactures, processing,
packing, transporting, warehousing of goods of goods meant for expert.
! !405
1. What are the types of Pre-shipment Finance? Explain.

a. Cross-border finance
b. PCFC
c. Running account facility
3. Explain the basic criteria for allowing the packing credit.
4. Explain service export.
5. How packing credit is liquidated?
6. What is deferred payment export and turnkey projects? Explain.

a. Buyer’s credit.
b. Joint venture abroad
8. Explain in brief Project export.
9. What is inter-project transfer of funds?
! !406
1. What is Cross-border finance?

a. Export finance
b. Import finance
d. None of above
2. Pre-shipment export finance can be granted prior to shipment of

goods_____.
a. From the date of LC
b. From the date of confirmed order
c. From the date of receipt of export order/LC till the date of shipment
d. From the date of receipt of export order till the date of realisation of
export proceeds
3. What are the types of pre-shipment finance?

a. Packing Credit in INR
b. Advance against cheque/DD received as advance export
c. Pre-shipment credit in foreign currency
d. All of the above
e. None of the above
4. Pre-shipment credit in INR is granted for .

a. To export the goods ready for export
b. To purchase raw material, manufacture and process and packing for
export
c. Purchase of raw material as foreign currency is not available
d. Helping exporter and making available cheap credit for export
purpose
5. Pre-shipment finance is granted in INR against .

a. LC opened in favour of exporter
b. Confirmed and irrevocable order
c. Any other documentary evidence sating terms and conditions
d. All of the above
 
! !407
6. 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 of the above
7. Under deferred payment arrangement for long term contract, payment

along with interest is generally paid .
a. At the end of the contracted term
b. At yearly intervals
c. Yearly or half-yearly instalment
d. On demand
8. What is composition of working group?

a. RBI, Exim bank, ECGC
b. RBI, Authorised dealer, ECGC
c. Exim Bank, AD, RBI
d. RBI and Exim Bank
9. Maximum amount of investment in overseas JV/WOS permitted is

_______.
a. 400 per cent net worth of Indian company
b. 100 per cent net worth of Indian company
10.Third country purchases permitted under Project Export. (True/False)

a. True
b. False
! !408
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !409
CROSS-BORDER BANKING: EXPORT FINANCE – POST-SHIPMENT
Chapter 8
CROSS-BORDER BANKING: EXPORT
FINANCE – POST-SHIPMENT
Objectives
describe:
• Meaning and types of Post-shipment Finance

• Meaning and discrepancies commonly found in negotiation of bills
• Guidelines for exports
Structure:
8.1 Post-shipment Finance

8.4 Advance against Export Bills Sent for Collection
8.7 ECGC Whole Turnover Post-shipment Guarantee Scheme
8.8 Deemed Exports – Rupee Export Credit at Prescribed Rates
8.10 Export Credit in Foreign Currency
8.11 Interest Rate Structure on Export Credit in Foreign Currency
8.13 Sanction of Export Credit proposals
8.14 Simplification of Procedure for Delivery of Export Credit in Foreign
Currency and in Rupees
8.16 Setting Up of Offices Abroad and Acquisition of Immovable Property
for Overseas Offices
8.19 Summary
! !410
8.1 Post-Shipment Finance
Definition: ‘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
realization 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.
Introduction: 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 Government.
• 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.
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.
Modalities
Post-shipment finance is always extended against the shipping documents,
evidencing of shipment of goods. In all cases of post-shipment finance,
! !411
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 per cent. But in order to keep some stake
of the exporter and also to recover overdue interest and other charges
usually some margin is kept.
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.
1. At present, Normal Transit period for purpose of all bills in foreign

currency is 25 days.
2. Export to Iraq: In respect of Export to Iraq under United Nations

Guidelines where payment under letter of credit is made on arrival of
goods upon 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.
3. Normal Transit period for the bills drawn in Rupees:  
! !412
A In case of bills drawn under letter of credit where reimbursement 3 days

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 reimbursement 7 days

is provided at a centre in India other than the centre of
negotiation
C In case of bills drawn under letter of credit where reimbursement 20 days

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
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).
! !413
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 Air Waybill is not signed in terms of UCP 600 or 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 trans-shipment effect, whereas LC does not
permits
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 any 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 pre-
shipment should be converted to post-shipment finance to comply with the
ECGC Guidelines.
! !414
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 arise, 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/air waybill/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.
8.4 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 financer several days
after the date of shipment/date of collection should be avoided, as once
the shipment takes place, packing credit/pre-shipment advance loses its
characteristic. The proceeds of advance should be utilised to liquidate
outstanding packing credit.
Interest at concessional rate is recovered from the date of advance to due

date. The exchange rate for the advance is notional rate. Upon realisation
of the bills, the post-shipment credit is liquidated by applying TT Buying
rate as on the date of conversion.
! !415
Interest on all post-shipment advance will cease on date of credit to Nostro

account of the bank, which has handled the bill.

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.

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
Foreign Exchange Department, Reserve Bank of India. Balance in the
special (post-shipment) account will not be eligible for refinance from RBI.
! !416
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
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.
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).
! !417
iii. 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.
iv. 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.
v. 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.
! !418
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.
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
! !419
iv. 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.
8.7 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.
! !420
8.8 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.
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.
! !421
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 Rates under the BPLR system effective upto June 30, 2010 will be
‘not exceeding BPLR minus 2.5 percentage points per annum’ for the
following categories of Export Credit:
Categories of Export Credit
1. Post-shipment Credit (from the date of advance)
a. On demand bills for transit period (as specified by FEDAI)
b. Usance bills (for total period comprising usance period of export bills,
transit period as specified by FEDAI, and grace period, wherever
applicable)
(i) Upto 180 days

(ii) Upto 365 days for exporters under the Gold Card Scheme.
c. Against incentives receivable from Govt. (covered by ECGC Guarantee)

upto 90 days
d. Against undrawn balances (upto 90 days)
e. Against retention money (for supplies portion only) payable within one
year from the date of shipment (upto 90 days)
BPLR: Benchmark Prime Lending Rate.
Notes:
1. Since these are ceiling rates, banks would be free to charge any rate below
the ceiling rates.
2. Interest rates for the above-mentioned categories of export credit beyond
the tenors as prescribed above are deregulated and banks are free to decide
the rate of interest, keeping in view the BPLR and spread guidelines.
! !422
Interest on Post-shipment Credit
Early Payment of Export Bills
1. 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.
2. 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 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.
3. 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.
Overdue Export Bills under the BPLR System
1. 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).
2. 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.
! !423
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:
a. 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 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.
b. 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.
Change of Tenor of Bill
i. 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.
! !424
ii. 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.
8.10 EXPORT CREDIT IN FOREIGN CURRENCY
Post-shipment Export Credit in Foreign Currency
1. Rediscounting of Export Bills Abroad Scheme (EBR): 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.
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 “Banker’s 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:
! !425
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
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.
3. Eligibility Criteria:
i. 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.
ii. 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.
iii. The facility under the Scheme of Rediscounting may be offered in any
convertible currency.
iv. Banks are permitted to extend the EBR facility for exports to ACU
countries.
v. 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.
! !426
4. Source of On-shore Funds:
i. 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.
ii. To facilitate the growth of local market for rediscounting export bills,
establishment and development of an active inter-bank 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.
iii. 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.
iv. 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).
! !427
5. 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.
6. 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.
7. 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
! !428
of exporter’s limits and availability of export benefits may be given

effect immediately on rediscounting.
8. 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.
9. 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.
10.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.
! !429
8.11 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. However, upto May 4, 2012, banks may fix the rates of interest
with reference to ruling LIBOR, EURO LIBOR or EURIBOR, wherever
applicable, as under:
Type of Credit Interest Rate (% p.a)
1. Post-shipment Credit
a. On demand bills for transit period Not exceeding 350 basis points from
(as specified by FEDAI) November 15, 2011 to May 4, 2012
(200 basis points upto November 14,
2011) over LIBOR/EUROLIBOR/
EURIBOR
b. Against usance bills (credit for total Not exceeding 350 basis points from
period comprising usance period of November 15, 2011 to May 4, 2012
export bills, transit period as (200 basis points upto November 14,
specified by FEDAI and grace period 2011) over LIBOR/EUROLIBOR/
wherever applicable) upto 6 months EURIBOR
c. Export Bills (Demand or Usance) Rate for (ii) (b) above plus 200 basis
realised after due date but upto points
date of crystallisation
Notes:
i. Bank should not levy any other charges over and above the interest rate
under any name viz. service charge, management charge etc. The practice
of IBA fixing out-of-pocket expenses has been done away with effect from
August 2012 and the decision to recover out-of-pocket expenses is left to
individual banks. While recovering out-of-pocket expenses, banks should
ensure that the charges are reasonable and on an actual cost basis.
ii. Banks are free to decide the rate of interest, being the rupee credit rate, for
pre-shipment and post-shipment credit beyond the tenors prescribed above,
keeping in view the guidelines on Base Rate.
! !430
Gold Card Scheme for Exporters
The Government (Ministry of Commerce and Industry), in consultation with

RBI had indicated in the Foreign Trade Policy 2003-04 that a Gold Card
Scheme would be worked out by RBI for creditworthy exporters with good
track record for easy availability of export credit on best terms.
Accordingly, in consultation with select banks and exporters, a Gold Card
Scheme was drawn up. The Scheme envisages certain additional benefits
based on the record of performance of the exporters. The Gold Card holder
would enjoy simpler and more efficient credit delivery mechanism in
recognition of his good track record. The salient features of the Scheme
are:
1. All creditworthy exporters, including those in small and medium

sectors, with good track record would be eligible for issue of Gold Card
by individual banks as per the criteria to be laid down by the latter.
2. Gold Card under the Scheme may be issued to all eligible exporters
including those in the small and medium sectors who satisfy the laid
down conditions.
3. The scheme will not be applicable for exporters blacklisted by ECGC or

having overdue bills in excess of 10 per cent of the previous year’s
turnover.
4. Gold Card holder exporters, depending on their track record and

creditworthiness, will be granted better terms of credit including rates
of interest than those extended to other exporters by the banks.
5. Applications for credit will be processed at norms simpler and under a

process faster than for other exporters.
6. Banks would clearly specify the benefits they would be offering to Gold
Card holders.
7. The charges schedule and fee structure in respect of services provided

by banks to exporters under the Scheme will be relatively lower than
those provided to other exporters.
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8. The sanction and renewal of the limits under the Scheme will be based
on a simplified procedure to be decided by the banks. Taking into
account the anticipated export turnover and track record of the
exporter, the banks may determine need-based finance with a liberal
approach.
9. ‘In-principle’ limits will be sanctioned for a period of 3 years with a

provision for automatic renewal subject to fulfilment of the terms and
conditions of sanction.
10. A standby limit of not less than 20 per cent of the assessed limit may
be additionally made available to facilitate urgent credit needs for
executing sudden orders. In the case of exporters of seasonal
commodities, the peak and off-peak levels may be appropriately
specified.
11. In case of unanticipated export orders, norms for inventory may be

relaxed, taking into account the size and nature of the export order.
12. Requests from card holders would be processed quickly by banks

within 25 days/15 days and 7 days for fresh applications/renewal of
limits and ad hoc limits, respectively.
13. Gold Card holders would be given preference in the matter of granting
of packing credit in foreign currency.
14. Banks would consider waiver of collaterals and exemption from ECGC
guarantee schemes on the basis of card holder’s creditworthiness and
track record.
15. The facility of further value addition to their cards through

supplementary services like ATM, Internet banking, International
debit/credit cards may be decided by the issuing banks.
16. The applicable rate of interest to be charged under the Gold Card
Scheme will not be more than the general rate for export credit in the
respective bank and within the ceiling prescribed by RBI. In keeping
with the spirit of the Scheme, banks will endeavour to provide the best
rates possible to Gold Card holders on the basis of their rating and
past performance.
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17. In respect of the Gold Card holders, the prescribed rate of interest on
post-shipment rupee export credit may be extended for a maximum
period upto 365 days.
18. Gold Card holders, on the basis of their track record of timely
realisation of export bills, will be considered for issuance of foreign
currency credit cards for meeting urgent payment obligations, etc.
19. Banks may ensure that the PCFC requirements of the Gold Card
holders are met by giving them priority over non-export borrowers
with regard to granting loans out of their FCNR(B) funds, etc.
20. Banks will consider granting term loans in foreign currency in

deserving cases out of their FCNR(B), RFC, etc. funds. (Banks may not
grant such loans from their overseas borrowings under the 25 per cent
window of overseas borrowings.)
Delay in Crediting the Proceeds of Export Bills Drawn in Foreign

Currency
Delays are observed in passing on the credit of export bills drawn in foreign
currency to the exporters after the foreign currency amounts are credited
to the ‘Nostro’ accounts of the banks.
Although there are instructions that the prescribed post-shipment interest

rate will cease from the date of credit to the ‘Nostro’ account, the credit
limits enjoyed by the exporters remain frozen till the actual date of credit
of rupee equivalent to the account of the customer. There is, therefore,
need to promptly restore the limit of the exporters on realisation of bills
and pass on the rupee credit to the customer.
Payment of Compensation to Exporters for Delayed Credit of Export

Bills
1. In respect of the delay in affording credit in respect of credit advices

complete in all respects, the compensation stipulated by FEDAI should
be paid to the exporter client, without waiting for a demand from the
exporter.
! !433
2. Banks should devise a system to monitor timely credit of the export

proceeds to the exporter’s account and payment of compensation as per
FEDAI rules.
3. The internal audit and inspection teams of the banks should specifically
comment on these aspects in the reports.
8.13 Sanction of export credit proposals
1. Time Limit for Sanction

The sanction of fresh/enhanced export credit limits should be made within
45 days from the date of receipt of credit limit application with the required
details/information supported by requisite financial/operating statements.
In case of renewal of limits and sanction of ad hoc credit facilities, the time
taken by banks should not exceed 30 days and 15 days respectively, other
than for Gold Card holders.
2. Ad hoc Limit
At times, exporters require ad hoc limits to take care of large export orders
which were not foreseen earlier. Banks should respond to such situations
promptly. Apart from this, banks should adopt a flexible approach in
respect of exporters, who for genuine reasons are unable to bring in
corresponding additional contribution in respect of higher credit limits
sought for specific orders. No additional interest is to be charged in respect
of ad hoc limits granted by way of pre-shipment/post-shipment export
credit.
In cases where the export credit limits are utilised fully, banks may adopt a
flexible approach in negotiating the bills drawn against LCs and consider in
such cases delegating discretionary/higher sanctioning powers to branch
managers to meet the credit requirements of the exporters. Similarly
branches may also be authorised to disburse a certain percentage of the
enhanced/ad hoc limits, pending sanction by the higher authorities/board/
committee who had originally accorded sanctions to enable the exporters
to execute urgent export orders in time.
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3. Other Requirements
1. All rejections of export credit proposals should be brought to the

notice of the Chief Executive of the bank explaining the reasons for
rejection.
2. The internal audit and inspection teams of the banks should comment
specifically on the timely sanction of export credit limits within the
time schedule prescribed by RBI.
3. The export credit limits should be excluded for bifurcation of the

working capital limit into loan and cash credit components.
4. Banks should nominate suitable officers as compliance officers in

their foreign departments/specialised branches to ensure prompt and
timely disposal of cases pertaining to exporters.
5. It is necessary to submit a review note at quarterly intervals to the

Board on the position of sanction of credit limits to exporters. The
note may cover among other things, number of applications (with
quantum of credit) sanctioned within the prescribed time-frame,
number of cases sanctioned with delay and pending sanction
explaining reasons therefor.
! !435
8.14 Simplification of Procedure for Delivery of Export

Credit in Foreign Currency and in Rupees
With a view to ensuring timely delivery of credit to exporters and removing

procedural hassles, the following guidelines, applicable to rupee export
credit as well as export credit in foreign currency, may be brought into
effect.
i. Simplification of Procedures
a. Banks should simplify the application form and reduce data

requirements from exporters for assessment of their credit needs, so
that exporters do not have to seek outside professional help to fill in the
application form or to furnish data required by the banks.
b. Banks should adopt any of the methods, viz. Projected Balance Sheet
method, Turnover method or Cash Budget method, for assessment of
working capital requirements of their exporter-customers, whichever is
most suitable and appropriate to their business operations.
c. In the case of consortium finance, once the consortium has approved

the assessment, member banks should simultaneously initiate their
respective sanction processes.
ii. ‘Online’ Credit to Exporters
a. Banks provide ‘Line of Credit’ normally for one year which is reviewed
annually. In case of delay in renewal, the sanctioned limits should be
allowed to continue uninterrupted and urgent requirements of exporters
should be met on ad hoc basis.
b. In case of established exporters having satisfactory track record, banks

should consider sanctioning a ‘Line of Credit’ for a longer period, say, 3
years, with in-built flexibility to step-up/step-down the quantum of
limits within the overall outer limits assessed. The step-up limits will
become operative on attainment of predetermined performance
parameters by the exporters. Banks should obtain security documents
covering the outer limit sanctioned to the exporters for such longer
period.
! !436
c. In case of export of seasonal commodities, agro-based products, etc.,

banks should sanction Peak/Non-peak credit facilities to exporters.
d. Banks should permit interchangeability of pre-shipment and post-

shipment credit limits.
e. Term Loan requirements for expansion of capacity, modernization of

machinery and upgradation of technology should also be met by banks
at their normal rate of interest.
f. Assessment of export credit limits should be ‘need-based’ and not

directly linked to the availability of collateral security. As long as the
requirement of credit limit is justified on the basis of the exporter’s
performance and track record, the credit should not be denied merely
on the grounds of non-availability of collateral security.
iii. Waiver of Submission of Orders or LCs for Availing Pre-shipment

Credit
a. Banks should not insist on submission of export order or LC for every

disbursement of pre-shipment credit, from exporters with consistently
good track record. Instead, a system of periodical submission of a
statement of LCs or export orders in hand should be introduced.
b. Banks may waive, ab initio, submission of order/LC in respect of

exporters with good track record and put in place the system of
obtaining periodical statement of outstanding orders/LCs on hand. The
same may be incorporated in the sanction proposals as well as in the
sanction letters issued to exporters and appropriately brought to the
notice of ECGC. Further, if such waivers are permitted at a time
subsequent to sanction of export credit limits with the approval of the
appropriate authority, the same may be incorporated in the terms of
sanction by way of amendments and communicated to ECGC.
! !437
iv. Handling of Export Documents

Banks are required to obtain, among others, original sale contract/
confirmed order/proforma invoice countersigned by overseas buyer/indent
from authorised agent of overseas buyer for handling the export
documents as per Foreign Exchange Management regulations. Submission
of such documents need not be insisted upon at the time of handling the
export documents, since the goods have already been valued and cleared
by the Customs authorities, except in the case of transactions with Letters
of Credit (LC) where the terms of LC require submission of the sale
contract/other alternative documents.
v. Fast track Clearance of Export Credit
a. At specialised branches and branches having sizeable export business, a

facilitation mechanism for assisting exporter-customers should be put in
place for quick initial scrutiny of credit application and for discussions for
seeking additional information or clarifications.
b. Banks should streamline their internal systems and procedures to

comply with the stipulated time limits for disposal of export credit
proposals and also endeavour to dispose of export credit proposals
ahead of the prescribed time schedule. A flow chart indicating
chronological movement of credit application from the date of receipt till
the date of sanction should also accompany credit proposals.
c. Banks should delegate higher sanctioning powers to their branches for

export credit.
d. Banks should consider reducing at least some of the intervening layers

in the sanctioning process. It would be desirable to ensure that the total
number of layers involved in decision-making in regard to export finance
does not exceed three.
e. Banks should introduce a system of ‘Joint Appraisal’ by officials at

branches and administrative offices, to facilitate quicker processing of
export credit proposals.
f. Where feasible, banks should set up a ‘Credit Committee’ at specialized

branches and at administrative offices, for sanctioning working capital
! !438
facilities to exporters. The ‘Credit Committee’ should have sufficiently

higher sanctioning powers.
vi. Publicity and Training
a. Generally, export credit at internationally competitive rates is made

available in foreign currency at select branches of banks. In order to
make the scheme more popular and considering the competitive interest
rate on foreign currency loans and to mitigate any possible exchange
risk, exporters need to be encouraged to make maximum use of export
credit in foreign currency. Banks located in areas with concentration of
exporters should, therefore, give wide publicity to this important facility
and make it easily accessible to all exporters including small exporters
and ensure that more number of branches are designated for making
available export credit in foreign currency.
b. Banks may also arrange to publicise widely the facility of prescribed

interest rates being available for deemed exports and ensure that
operating staff are adequately sensitised in this regard.
c. Officers at operating level should be provided with adequate training. In

the matter of transfer of officials from critical branches dealing in export
credit, banks should ensure that the new incumbents posted possess
adequate knowledge/exposure in the areas of forex as well as export
credit to avoid delays in processing/sanctioning of export credit limits
and thereby subjecting exporters to the risk of cancellation of export
orders.
vii.Customer Education
a. Banks should bring out a Handbook containing salient features of the

simplified procedures for sanction of export credit in Foreign Currency at
internationally competitive rates as well as in Rupees for the benefit of
their exporter-clients.
b. To facilitate interaction between banks and exporters, banks should

periodically organise Exporters’ Meet at centres with concentration of
exporters.
! !439
viii.Monitoring Implementation of Guidelines
a. Banks should ensure that exporters’ credit requirements are met in full
and promptly at competitive rates. The above referred guidelines must
be implemented, both in letter and spirit, so as to bring about a
perceptible improvement in credit delivery and related banking services
to export sector. Banks should also address the deficiencies, if any, in
the mechanism of deployment of staff in their organisations to eliminate
the bottlenecks in the flow of credit to the export sector.
b. Banks should set up an internal team to visit branches periodically, say,

once in two months to gauge the extent of implementation of the
Guidelines.
1. Simplification and Revision of Declaration Form for Exports of

Goods/Software
With effect from October 01, 2013, in order to simplify the existing form
used for declaration of exports of Goods/Software, a common form called
“Export Declaration Form” (EDF) has been devised to declare all types of
export of goods from Non-EDI ports and a common “SOFTEX Form” to
declare single as well as bulk software exports. The EDF will replace the
existing GR/PP form used for declaration of export of goods. The procedure
relating to the exports of goods through EDI ports will remain the same
and SDF form will be applicable as hitherto. The EDF and SOFTEX Form
have been given in Annex I and Annex II respectively.
Under the revised procedure, the exporters will have to declare all
the export transactions, including those less than US$25000, in the
form as applicable.
Reserve Bank of India will be extending the facilities to exporters for online
generation of SOFTEX Form No. (single as well as bulk) for use in Off-site
Software exports, in addition to EDF Form No. (present web-based process
of generation of GR Form No. gets replaced) through its website
www.rbi.org.in In order to generate the above number, the applicant has
to fill in the online form (Path www.rbi.org.in Forms FEMA Forms Printing
EDF/SOFTEX Form No.), thereafter, the related EDF/SOFTEX Form No.
would be generated for each transaction by the applicant exporter. The
! !440
present facility of manual allotment of single as well bulk SOFTEX form

number by Regional Offices of RBI would be dispensed with accordingly.
The Foreign Exchange Management Act (FEMA) requires exporters to

complete the EDF/SOFTEX Form using the number so allotted and submit
them to the specified authority first for certification and then to AD for
necessary action as hitherto.
Citing of Specific Identification Numbers
i. In all applications/correspondence with the Reserve Bank, the specific

identification number as available on the EDF/SDF and SOFTEX forms
should invariably be cited.
ii. In the case of declarations made on SDF form, the port code number
and shipping bill number should be cited.
2. Realisation and Repatriation of Export Proceeds
It is obligatory on the part of the exporter to realise and repatriate the full
value of goods or software to India within a stipulated period from the date
of export, as under:
i. Units located in SEZs shall realise and repatriate full value of goods/
software/services, to India within a period of twelve months from the
date of export. Any extension of time beyond the above stipulated
period may be granted by Reserve Bank of India, on case-to-case basis.
ii. By Status Holder Exporters as defined in the Foreign Trade Policy:

Within a period of twelve months from the date of export;
iii. By 100 per cent Export-oriented Units (EOUs) and units set up under
Electronic Hardware Technology Parks (EHTPs), Software Technology
Parks (STPs) and Biotechnology Parks (BTPs) schemes: Within a period
of twelve months from the date of export on or after September 1,
2004;
iv. Goods exported to a warehouse established outside India. As soon as it

is realised and in any case within fifteen months from the date of
shipment of goods; and
! !441
v. In all other cases: With effect from April 01, 2013, this period of
realisation and repatriation to India has been brought down to nine
months from the date of export, till September 30, 2013.
vi. After September 2013, period of realisation will be as per the sunset
clause, i.e., within 6 months from the date of shipment, unless it is
changed by RBI with specific notification.
3. Foreign Currency Account
i. Participants in international exhibition/trade fair have been granted

general permission vide Regulation 7(7) of the Foreign Exchange
Management (Foreign Currency Account by a Person Resident in India)
Regulations, 2000 notified vide Notification No. FEMA 10/2000-RB dated
May 3, 2000 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 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.
ii. Reserve Bank may consider applications in Form EFC (Annex 6) from
exporters having good track record for opening a foreign currency
account with 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.
iii. 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 7 of Notification No. FEMA 10/2000-
RB dated May 3, 2000 and as amended from time to time.
iv. 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
! !442
India subject to conditions stipulated in Regulation 6(A) of Notification

No. FEMA 10/2000-RB dated May 3, 2000 and as amended from time to
time.
v. 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.
Diamond Dollar Account (DDA)
i. 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 2 years in import/export of
diamonds/coloured gemstones/diamond and coloured 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.
ii. They may be allowed to open not more than five Diamond Dollar
Accounts with their banks.
iii. Eligible firms and companies may apply for permission to their AD
Category-I banks in the format prescribed.
iv. AD Category-I banks are required to submit quarterly reports to the

Foreign Exchange Department, Reserve Bank of India, Central Office,
Trade Division, Mumbai, giving details of name and address of the firm/
company in whose name the Diamond Dollar Account is opened, along
with the date of opening/closing the Diamond Dollar Account, by the
10th of the month following the quarter to which it relates.
v. AD Category-I banks are required to submit a statement giving the data

on the DDA balances maintained by them on a fortnightly basis within
seven days of close of the fortnight to which it relates, to the Foreign
Exchange Department, Reserve Bank of India, Central Office, Trade
Division, Mumbai.
! !443
Exchange Earners’ Foreign Currency (EEFC) Account
i. 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 of the
Foreign Exchange Management (Foreign Currency Account by a Person
Resident in India) Regulations, 2000 notified under Notification No.
FEMA 10/2000-RB dated May 3, 2000 as amended from time to time.
Resident individuals are permitted to include resident close relative(s) as

defined in the Companies Act 1956 as a joint holder(s) in their EEFC
bank accounts on former or survivor basis. However, such resident
Indian close relative, being made eligible to become joint account holder,
shall not be eligible to operate the account during the lifetime of the
resident account holder.
ii. 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.
iii. All categories of foreign exchange earners are allowed to credit 100 per
cent of their foreign exchange earnings to their EEFC Accounts subject
to the condition that:
a. 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. Further, in
case of requirements, EEFC account holders are permitted to access
the forex market for purchasing foreign exchange.
b. 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 maintain assets in foreign currency, as India is still not fully
convertible on Capital Account.
iv. It may be noted that the provisions at paragraph (iii) (a) and (iii) (b)
above will apply, mutatis mutandis, also to holder of either a Resident
! !444
Foreign Currency Account (Domestic) or a Diamond Dollar Account

(DDA).
v. The eligible credits represent:
a. 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.
b. Payments received in foreign exchange by a unit in Domestic Tariff

Area (DTA) for supplying goods to a unit in Special Economic Zone
out of its foreign currency account.
vi. 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.
vii. 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.
! !445
8.16 Setting up of Offices Abroad and Acquisition of

Immovable Property for Overseas Offices
i. At the time of setting up of the office, AD Category-I banks may allow

remittances towards initial expenses upto fifteen per cent of the average
annual sales/income or turnover during the last two financial years or
upto twenty-five per cent of the net worth, whichever is higher.
ii. For recurring expenses, remittances upto 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:
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.
iii. The details of bank accounts opened in the overseas country should be
promptly reported to the AD Bank.
iv. 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.
v. 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.
! !446
vi. 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.
vii.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.
1. In terms of Regulation 16 of Notification No. FEMA 23/2000-RB dated

May 3, 2000, 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:
a. the shipment of goods is made within one year from the date of
receipt of advance payment;
b. the rate of interest, if any, payable on the advance payment does not
exceed London Inter-Bank Offered Rate (LIBOR) + 100 basis points;
and
c. 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, shall be made after
the expiry of the said period of one year, without the prior approval of
the Reserve Bank.
2. ‘AD Category-I banks may allow exporters to receive advance payment

for export of goods which would take more than one year to
manufacture 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;
! !447
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 bonafide 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 per cent 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 unutilized portion of advance
payment or towards payment of interest should be made without the
prior approval of the Reserve Bank.’
3. AD Category-I banks may allow the purchase of foreign exchange from

the market for refunding advance payment credited to EEFC account
only after utilizing the entire balances held in the exporter’s EEFC
accounts maintained at different branches/banks.
Note: AD Category-I banks may also be guided by the Master Circular on

Guarantees and Co-acceptances issued by DBOD.
! !448
1. Consolidation of Air Cargo/Sea Cargo
a. Consolidation of Air Cargo
i. Where air cargo is shipped under consolidation, the airline

company’s Master Air Waybill will be issued to the Consolidating
Cargo Agent. The Cargo agent in turn will issue his own House Air
way-bills (HAWBs) to individual shippers.
ii. D Category-I banks may negotiate HAWBs only if the relative letter
of credit specifically provides for negotiation of these documents in
lieu of Air Waybills issued by the airline company.
b. Consolidation of Sea Cargo
i. 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 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.
ii. 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.
! !449
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.
3. Checklist for Scrutiny of Forms
AD Category-I banks may ensure:
i. The number on the duplicate copy of a EDF/SDF form presented to them

is the same as that of the original which is usually recorded on the Bill
of Lading/Shipping Bill and the duplicate has been duly verified and
authenticated by appropriate Customs authorities.
ii. The Shipping Bill No. on the SDF form should be the same as that
appearing on the Bill of Lading.
iii. In the case of CIF, C&F etc. contracts where the freight is sought to be
paid at destination, that the deduction made is only to the extent of
freight declared on EDF/SDF form or the actual amount of freight
indicated on the Bill of Lading/Air Waybill, whichever is less.
iv. The documents submitted do not reveal any material inter se

discrepancies in regard to description of goods exported; export value
or country of destination.
v. Where the marine insurance is taken by the exporters on buyer’s

account to verify, that the actual amount paid is received from the buyer
through invoice and the bill.
vi. To accept the Bill of Lading/Air Waybill issued on ‘freight prepaid’ basis
where the sale contract is on FOB, FAS etc. basis provided the amount
of freight has been included in the invoice and the bill.
vii.To negotiate the documents, in cases where the documents are being
negotiated by a person other than the exporter who has signed EDF/
SDF/SOFTEX Form for the export consignment concerned, after
ensuring compliance with Regulation 12 of Foreign Exchange
Management (Export of Goods and Services) Regulations, 2000.
! !450
viii.To accept the variations in the value declared to the Customs

authorities and that is reflected on the export documents which stem
from the terms of contract, on production of documentary evidence
after verifying the arithmetical accuracy of the calculations and on
conforming the terms of underlying contracts. Some such instances
(where the values declared to the Customs authorities and that shown
on the documents may differ) are enumerated hereunder:
a. The export realisable value may be more than what was originally
declared to/accepted by the Customs on the EDF/SDF form in certain
circumstances such as where in CIF or C&F contracts, part or whole
of any freight increase taking place after the contract was concluded
is agreed to be borne by buyers or where as a result of subsequent
devaluation of the currency of the contract, buyers have agreed to an
increase in price.
b. In certain lines of export trade, the final settlement of price may be

dependent on the results of quality analysis of samples drawn at the
time of shipment; but the results of such analysis will become
available only after the shipment has been made. Sometimes,
contracts may provide for payment of penalty for late shipment of
goods in conformity with trade practice concerning the commodity. In
these cases, while exporters declare to the Customs the full export
value based on the contract price, invoices submitted along with
shipping documents for negotiation/collection may reflect a different
value arrived at after taking into account the results of analysis of
samples or late shipment penalty, as the case may be.
c. To accept for negotiation or collection the bills for exports by sea or

air which fall short of the value declared on EDF/SDF forms on
account of trade, only if the discount has been declared by the
exporter on relative EDF/SDF form at the time of shipment and
accepted by Customs.
! !451
4. Return of Documents to Exporters

The duplicate copies of EDF/SDF forms 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.
5. Handing over Negotiable Copy of Bill of Lading to Master of

Vessel/Trade Representative
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.
6. Export Bills Register
i. AD Category-I banks should maintain Export Bills Register, in physical or

electronic form. Details of EDF/SDF/SOFTEX form number, due date of
payment, the fortnightly period of R-Supplementary Return with which
the ENC statement covering the transaction was sent to the Reserve
Bank, should be available.
ii. AD Category-I banks should ensure that all types of export transactions
are entered in the Export Bills Register and are given bill numbers on a
financial year basis (i.e., April to March).
iii. The bill numbers should be recorded in ENC statement and other
relevant returns submitted to the Reserve Bank.
7. Follow-up of Overdue Bills
i. AD Category-I banks should closely watch realisation of bills and in

cases where bills remain outstanding, beyond the due date for payment
or 12 months 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 12 months or seek extension of time
beyond 12 months, the matter should be reported to the Regional Office
concerned of the Reserve Bank stating, where possible, the reason for
the delay in realising the proceeds.
! !452
ii. The duplicate copies of EDF/SDF/SOFTEX Forms should, continue to be

held by AD Category-I banks until the full proceeds are realised, except
in case of undrawn balances.
iii. 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.
iv. The stipulation of twelve months or extended period thereof for

realisation of export proceeds is not applicable for units located in
Special Economic Zones (SEZs). The units in SEZs will however continue
to follow the GR/SDF/PP/SOFTEX export procedure outlined above.
v. With effect from the half-year ending December 2013, half-yearly XOS
submission should be made online and Bank-wide instead of the present
system of branch-wise submission through the respective Regional
Offices of Reserve Bank of India
8. 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.
! !453
9. Reduction in Invoice Value in Other Cases
i. 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,
and
d. The exporter is advised to surrender proportionate export incentives

availed of, if any.
ii. 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 outstandings do
not exceed 5 per cent of the average annual export realisation during
the preceding three financial years.
iii. 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.
10.Export Claims
i. 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.
ii. In all such cases of remittances, the exporter should be advised to

surrender proportionate export incentives, if any, received by him.
! !454
11.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
realization of export proceeds is not delayed beyond the period of 12
months from the date of export.
12.Extension of Time and Self Write-off by the Exporters
i. For export proceeds due within the prescribed period during a financial
year, all exporters (including Status Holder exporters) have been
allowed to write-off (including reduction in invoice value) outstanding
export dues and extend the prescribed period of realisation beyond 12
months or further period as applicable, provided
a. The aggregate value of such export bills written-off (including

reduction in invoice value) and bills extended for realisation does not
exceed 10 per cent of the export proceeds due during the financial
year; and
b. Such export bills are not a subject to investigation by Directorate of

Enforcement/Central Bureau of Investigation or any other
Investigating Agencies.
ii. Exporters dealing with more than one AD Category-I banks can avail of
this facility through each AD Category-I bank, i.e., the limit of 10 per
cent for self write-off (including reduction in invoice value) and
extension of time for realisation of export proceeds would be applicable
for export bills lodged for realisation with that AD Category-I banks.
iii. Exporters operating under a consortium of banks or with multiple banks

will also have the option of computing the 10 per cent limit on an
aggregate basis with all the banks, provided the lead bank of the
consortium or in case of multiple banking, a nodal bank, undertakes to
verify the exporters’ annual performance on behalf of all the banks.
iv. Within a month from the close of the financial year, exporters should
submit a statement (Annex 4), giving details of export proceeds due,
realised and not realised to the AD Category-I banks concerned.
! !455
v. The AD Category-I banks will be required to verify the statement with

their records and review the export performance of the exporter during
the financial year to ascertain that in cases where the 10 per cent limit
of self extension, write-off (including reduction in invoice value) and
non-realisation has been breached, the exporter has sought necessary
approval for write-off, reduction in invoice value or extension of time, as
the case may be, for the excess over the 10 per cent limit before the
end of the financial year. Export bills due in the financial year for which
the exporter has extended the period of realisation on his own (within
the 10 per cent limit) or sought extension of time from the AD
Category-I banks but unrealised as at the end of financial year will be
computed for export proceeds due in the following financial year.
vi. In cases where exporters have failed to comply with the above
requirement, AD Category-I banks may promptly advise the exporter
concerned to seek extension of time/reduction in invoice value/write-off
in respect of non-realisation in excess of the 10 per cent limit, failing
which, the AD Category-I banks may inform the exporter about the
withdrawal of this facility of self write-off/extension of time, within a
month, under advice to the Regional Office concerned of the Reserve
Bank.
13.Extension of Time
i. The Reserve Bank of India has permitted the AD Category-I banks to

extend the period of realisation of export proceeds beyond 12 months
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 following
conditions:
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.
! !456
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 realizations during the
preceding three financial years, whichever is higher.
e. All the export bills outstanding beyond six months from the date of
export may be reported in XOS statement. However, 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.
f. In cases where the exporter has filed suits abroad against the buyer,
extension may be granted irrespective of the amount involved/
outstanding.
ii. In cases where an exporter has not been able to realise proceeds of a
shipment made within the extended period for reasons beyond his
control, but expects to be able to realise proceeds if further extension of
the period is allowed to him, as well as in respect of cases not covered
under Para (i) above necessary application (in duplicate) should be
made to the Regional Office concerned of the Reserve Bank in Form ETX
through his AD Category-I bank with appropriate documentary
evidence.
14.Write-off by AD Category-I Banks
i. 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 with a request for
write-off of the unrealised portion subject to the fulfilment of
stipulations regarding surrender of incentives prior to “write-off”
adduced in the A.P. (DIR Series) Circular No. 03 dated 22 July, 2010.
After liberalising and simplifying the procedure, limits prescribed for
“write-offs” of unrealised export bills are as under:
a. Self “write-off” by an exporter 

(Other than Status Holder Exporter) 5%*
b. Self “write-off” by Status Holder Exporters 10%*
c. “Write-off” by Authorised Dealer Bank 10%*
! !457
*of the total export proceeds realised during the previous calendar year.
ii. The above limits will be related to total export proceeds realised during
the previous calendar year and will be cumulatively available in a year.
iii. 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:
a. 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.
b. The overseas buyer is not traceable over a reasonably long period of

time.
c. The goods exported have been auctioned or destroyed by the Port/

Customs/ Health authorities in the importing country.
d. 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.
e. The unrealised amount represents the undrawn balance of an export

bill (not exceeding 10 per cent of the invoice value) remaining
outstanding and turned out to be unrealisable despite all efforts
made by the exporter.
f. The cost of resorting to legal action would be disproportionate to the

unrealised amount of the export bill or where the exporter even after
winning the Court case against the overseas buyer could not execute
the Court decree due to reasons beyond his control.
g. 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 amount has remained unrealised consequent
! !458
on dishonour of the bills by the overseas buyer and there are no

prospects of realisation.
iv. The exporter has surrendered proportionate export incentives (for the
cases not covered under A.P. (DIR. Series) Circular No. 03 dated July
22, 2010), 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.
v. 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/SDF Nos.
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.
vi. 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/SDF forms 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.
vii. The respective AD banks may forward a statement in Form EBW, in the
enclosed format, to the Regional Office of Reserve Bank under whose
jurisdiction they are functioning, indicating details of write-offs allowed
under this circular.
viii. AD banks are advised to put in place a system under which their
internal inspectors or auditors (including external auditors appointed
by authorised dealers) should carry out random sample check/
percentage check of “write-off” outstanding export bills.
! !459
ix. Cases not covered by the above instructions/beyond the above limits,
may be referred to the concerned Regional Office of Reserve Bank of
India. [Ref: A.P. (DIR Series) Circular No. 88 dtd 12-03-2013]
15.Write-off in cases of Payment of Claims by ECGC and Private

Insurance Companies Regulated by Insurance Regulatory and
Development Authority (IRDA)
i. 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 and delete them from the XOS
statement.
ii. Such write-off will not be restricted to the limit of 10 per cent
indicated above.
iii. Surrender of incentives, if any, in such cases will be as provided in

the Foreign Trade Policy.
iv. The claims settled in rupees by ECGC and private insurance

companies regulated by IRDA should not be construed as export
realisation in foreign exchange.
16.Write-off in Other Cases

Cases which are not covered by the above instructions will require prior
approval from the Regional Office concerned of the Reserve Bank.
17.Write-off – Relaxation
As announced in the Foreign Trade Policy (FTP), 2009-14, 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:
i. 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;
! !460
ii. The exporter produces a certificate from the Foreign Mission of India
concerned, about the fact of non-recovery of export proceeds from the
buyer; and
iii. This would not be applicable in self write-off cases.
The above relaxation is applicable for the exports made with effect from
August 27, 2009.
The AD Category-I banks are advised not to insist on the surrender of

proportionate export incentives, other than under the Duty Drawback
Scheme, if availed of, by the exporter under any of the Export Promotion
Schemes under FTP 2009-14, subject to fulfillment of conditions as stated
above. The drawback amount has to be recovered even if the claim is
settled by the Export Credit Guarantee Corporation of India Limited (ECGC)
or the write-off is allowed by the Reserve Bank.
18.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/SDF form 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.
! !461
19.(A) ‘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/SDF(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/SDF
forms 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 FET-ERS
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.
20.(B) Set-off of Export Receivables against Import Payables

(effective from November 17, 2011)
AD Category-I banks may deal with the cases of set-off of export

receivables against import payables, subject to following terms and
conditions:
a. The import is as per the Foreign Trade Policy in force.
b. 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.
! !462
c. Payment for the import is still outstanding in the books of the importer.
d. Both the transactions of sale and purchase may be reported separately

in ‘R’-Returns.
e. The relative EDF/SDF forms will be released by the AD bank only after
the entire export proceeds are adjusted/received.
f. 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.
g. The export/import transactions with ACU countries should be kept

outside the arrangement.
h. All the relevant documents are submitted to the concerned AD bank who
should comply with all the regulatory requirements relating to the
transactions.
21.Agency Commission on Exports
i. 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
a. Amount of commission has been declared on EDF/SDF/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/SDF/
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.
ii. AD Category-I banks may allow payment of commission by Indian

exporters, in respect of their exports covered under countertrade
! !463
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.
iii. 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 upto 10 per cent of invoice value of exports of tea and
tobacco.
22.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:
i. Exercise due diligence regarding the track record of the exporter
ii. Verify the bonafides of the transactions
iii. 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
iv. Obtain an undertaking from the exporter that the goods will be re-
imported within three months from the date of remittance and
v. Ensure that all procedures as applicable to normal imports are

adhered to.
! !464
23.Exporters’ Caution List
i. AD Category-I banks will also be advised whenever exporters are

cautioned in terms of provisions contained in Regulation 17 of “Export
Regulations” (Annex 2). They may approve EDF/SDF forms of exporters
who have been placed on caution list if the exporters concerned produce
evidence of having received an advance payment or an irrevocable
letter of credit in their favour covering the full value of the proposed
exports.
ii. Such approval may be given even in cases where usance bills are to be
drawn for the shipment provided the relative letter of credit covers the
full export value and also permits such drawings and the usance bill
mature within twelve months from the date of shipment.
iii. AD Category-I banks should obtain prior approval of the Reserve Bank
for issuing guarantees for caution-listed exporters.
! !465
8.19 Summary
The credit facility extended to an exporter from the date of shipment of

goods till the realisation of export proceeds is know as post-shipment
credit. Post-shipment finance is divided into various types. It is a working
capital finance provided to the exporter against shipping documents. While
pre-shipment finance. In this chapter various aspects related to post-
shipment expert finance is discussed.
! !466
1. What are the methods of permitting the Post-shipment Finance?
2. What do you mean by Negotiation? Explain.
3. What are principal documents in Export trade?
4. Explain deferred payment export.
5. What do you mean by Consignment Exports?
6. Explain Deemed Export.
7. Write short notes On:

a. Form EDF
b. Normal Transit Period
c. Export on Consignment basis
d. ECGC policy and guarantee
! !467
1. On what basis, period of post-shipment finance is determined?

a. As per the request of the exporter
b. As per the terms of contract and type of export
c. As assessed by bank
d. As advised by Reserve Bank of India from time to time
2. In case of demand bills, post-shipment advance is granted by taking

into consideration .
a. Date of shipment
b. NTP as specified by FEDAI
c. Date of realisation as informed by exporter
d. Expected date of payment as communicated by overseas buyer
3. What is negotiation of bills?

a. It refers to documents presented under freely negotiable LC
b. Making payment to exporter
c. To communicate with overseas buyer
d. Handling the export documents
4. What is governing rule for Letter of credit?

a. URC 522
b. UCPDC 600
c. ISP 98
5. ECGC offers _____to banks.

a. Policies
b. Guarantees
c. Risk cover
d. Risk of non-payment of export bill
6. When export document is sent of collection and packing credit advance

granted is outstanding, what immediate action that Bank should take?
a. Follow up collection bills for early realisation
b. Extend the due date of PC Loan till maturity of collection bill
c. Grant advance/loan against collection document and liquidate PC loan
d. Act as per the request of exporter
 
! !468
7. What is consignment export?

a. Normal export
b. Export on outright sale basis
c. Export made to agent
d. Export made to third party
8. What is the maximum period of advance granted to exporters against

the duty drawback receivable?
a. 90 days
b. 120 days
c. 180 days
d. 360 days
9. What is the period within which exporters are required to submit the
export document along with relevant shipping bills/GR/PP etc. to the
bank?
a. 7 days
b. 15 days
c. 21 days
d. 30 days
10.What is the period within which exporter has to ship the goods or return
the advance remittance received for export?
a. 6 months
b. 12 months
c. 18 months
d. 24 months 
! !469
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !470
CROSS-BORDER BANKING: EXTERNAL FUNDS MOBILISATION
Chapter 9
CROSS-BORDER BANKING: EXTERNAL
FUNDS MOBILISATION
Objectives
describe:
• Need for external funds mobilisation

• Various sources of raising the money in overseas market
• Procedure for mobilising external funds
Structure:
9.4 Foreign Currency Convertible Bonds (FCCBs)
9.6 Miscellaneous
9.7 Trade Credits (TC) for Imports into India
9.8 Syndicated Loan
9.10 Raising Equity Through ADRs/GDRs/IDRs
9.11 Foreign Investments under Portfolio Investment Scheme (PIS)
9.14 Purchase of Other Securities by FIIs, QFIs and Long-term Investors
9.15 Qualified Foreign Investors (QFIs) Investment in the Units of
Domestic Mutual Funds
9.17 Purchase of Other Securities by QFIs
9.20 Investment by Non-residents Other than NRIs/PIO
9.22 Non-resident Accounts
9.24 Summary
! !471
Countries need to mobilise external funds to meet the gaps between their
current external receipts and payments. Countries are required to make
payments to other countries and external agencies against their imports
and repayments of existing liabilities and interest on such existing
outstanding liabilities. When a country imports more goods and services
than it can export, the resultant gap is financed by external sources.
Similarly, if country has to repay its existing outstanding liabilities/interest
and if it does not have sufficient sources for payment, then the gap is
financed by mobilisation of external funds. Another aspect of this gap is
that it represents the difference between domestic savings and investment.
A deficit arises if savings are in sufficient to meet the investment needs.
The developing countries suffer from vicious circle of poverty resulting in
low income, low savings, low investments, low productivity and continued
poverty. To come out of this vicious circle and reach the path of sustained
growth, they need to use the savings of other countries since internal
savings are not sufficient to finance the investment needed for improving
the GDP growth rate and the productivity.
In India, the need for external funds mobilisation has increased

substantially the initiation of liberalisation process. In the pre-liberalised
period, the need of the global funds was not much and the country was
meeting its requirements out of domestic source more than the external
funds. In the post-liberalisation period, the situation has changed due to
increase in financing needs of the country to develop infrastructure,
upgrade the technology and other priority segments requiring huge
investments. The high cost of the domestic funds, coupled with a threat of
competition increased the need to look out for external sources of funds.
Opening up of the economy has opened various windows for external funds
which include External Commercial Borrowing (ECB), Foreign Direct
Investment (FDI), and raising equity through ADR/GDRs etc., foreign
currency deposits, foreign currency loans etc.
We shall discuss in this chapter to get basic idea about the sources of the
external funds mobilisation and sources for raising money in overseas
market.
! !472
Foreign Direct Investment (FDI) in India is undertaken in accordance with

the FDI Policy which is formulated and announced by the Government of
India. The Department of Industrial Policy and Promotion, Ministry of
Commerce and Industry, Government of India issues a “Consolidated FDI
Policy Circular” on an yearly basis on March 31 of each year (since 2010)
elaborating the policy and the process in respect of FDI in India.
• FDI Policy governed by the provisions of the Foreign Exchange

Management Act (FEMA), 1999. FEMA Regulations which prescribe
amongst other things the mode of investments, i.e., issue or acquisition
of shares/convertible debentures and preference shares, manner of
receipt of funds, pricing guidelines and reporting of the investments to
the Reserve Bank. The Reserve Bank has issued Notification No. FEMA
20/2000-RB dated May 3, 2000 which contains the Regulations in this
regard. This Notification has been amended from time to time.
1. Entry routes for Investments in India
Under the Foreign Direct Investments (FDI) Scheme, investments can be

made in shares, mandatorily and fully convertible debentures and
mandatorily and fully convertible preference shares of an Indian company
by non-residents through two routes:
• Automatic Route: Under the Automatic Route, the foreign investor or

the Indian company does not require any approval from the Reserve
Bank or Government of India for the investment.
• Government Route: Under the Government Route, the foreign investor

or the Indian company should obtain prior approval of the Government of
India (Foreign Investment Promotion Board (FIPB), Department of
Economic Affairs (DEA), Ministry of Finance or Department of Industrial
Policy and Promotion, as the case may be) for the investment.
! !473
2. Eligibility for Investment in India
i. A person resident outside India or an entity incorporated outside India,

can invest in India, subject to the FDI Policy of the Government of India.
A person who is a citizen of Bangladesh or an entity incorporated in
Bangladesh can invest in India under the FDI Scheme, with the prior
approval of the FIPB. Further, a person who is a citizen of Pakistan or an
entity incorporated in Pakistan, may, with the prior approval of the FIPB,
invest in an Indian company under FDI Scheme, subject to the
prohibitions applicable to all foreign investors and the Indian company,
receiving such foreign direct investment, should not be engaged in
sectors/activities pertaining to defence, space and atomic energy.
ii. NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and
Bhutan are permitted to invest in shares and convertible debentures of
Indian companies under FDI Scheme on repatriation basis, subject to
the condition that the amount of consideration for such investment shall
be paid only by way of inward remittance in free foreign exchange
through normal banking channels.
iii. Overseas Corporate Bodies (OCBs) have been de-recognised as a class

of investors in India with effect from September 16, 2003. Erstwhile
OCBs which are incorporated outside India and are not under adverse
notice of the Reserve Bank can make fresh investments under the FDI
Scheme as incorporated non-resident entities, with the prior approval of
the Government of India, if the investment is through the Government
Route; and with the prior approval of the Reserve Bank, if the
investment is through the Automatic Route. However, before making
any fresh FDI under the FDI scheme, an erstwhile OCB should through
their AD bank, take a one-time certification from RBI that it is not in the
adverse list being maintained with the Reserve Bank of India.
3. Type of Instruments
i. Indian companies can issue equity shares, fully and mandatorily

convertible debentures and fully and mandatorily convertible preference
shares subject to the pricing guidelines/valuation norms and reporting
requirements amongst other requirements as prescribed under FEMA
Regulations.
! !474
ii. Issue of other types of preference shares such as non-convertible,

optionally convertible or partially convertible, has to be in accordance
with the guidelines applicable for External Commercial Borrowings
(ECBs).
iii. As far as debentures are concerned, only those which are fully and
mandatorily convertible into equity, within a specified time, would be
reckoned as part of equity under the FDI Policy.
4. Pricing Guidelines
Fresh issue of shares: Price of fresh shares issued to persons resident

outside India under the FDI Scheme, shall be:
• on the basis of SEBI guidelines in case of listed companies.
• not less than fair value of shares determined by a SEBI registered

Merchant Banker or a Chartered Accountant as per the Discounted Free
Cash Flow Method (DCF) in case of unlisted companies.
Preferential allotment: In case of issue of shares on preferential

allotment, the issue price shall not be less than the price as applicable to
transfer of shares from resident to non-resident.
Issue of shares by SEZs against import of capital goods: In this case,

the share valuation has to be done by a Committee consisting of
Development Commissioner and the appropriate Customs officials.
Right Shares: The price of shares offered on rights basis by the Indian
company to non-resident shareholders shall be:
i. In the case of shares of a company listed on a recognised stock

exchange in India, at a price as determined by the company.
ii. In the case of shares of a company not listed on a recognised stock

exchange in India, at a price which is not less than the price at which
the offer on right basis is made to the resident shareholders.
! !475
Acquisition/transfer of existing shares (private arrangement): The

acquisition of existing shares from Resident to Non-resident (i.e., to
incorporated non-resident entity other than erstwhile OCB, foreign
national, NRI, FII) would be at a:
a. Negotiated price for shares of companies listed on a recognised stock

exchange in India which shall not be less than the price at which the
preferential allotment of shares can be made under the SEBI
guidelines, as applicable, provided the same is determined for such
duration as specified therein, preceding the relevant date, which shall
be the date of purchase or sale of shares. The price per share arrived
at should be certified by a SEBI registered Merchant Banker or a
Chartered Accountant.
b. Negotiated price for shares of companies which are not listed on a

recognised stock exchange in India which shall not be less than the
fair value to be determined by a SEBI registered Merchant Banker or
a Chartered Accountant as per the Discounted Free Cash Flow (DCF)
method.
Further, transfer of existing shares by Non-resident (i.e., by incorporated

non-resident entity, erstwhile OCB, foreign national, NRI, FII) to Resident
shall not be more than the minimum price at which the transfer of shares
can be made from a resident to a non-resident as given above.
The pricing of shares/convertible debentures/preference shares should be

decided/ determined upfront at the time of issue of the instruments. The
price for the convertible instruments can also be a determined based on
the conversion formula which has to be determined/fixed upfront. However,
the price at the time of conversion should not be less than the fair value
worked out, at the time of issuance of these instruments, in accordance
with the extant FEMA regulations.
! !476
5. Mode of Payment
An Indian company issuing shares/convertible debentures under FDI
Scheme to a person resident outside India shall receive the amount of
consideration required to be paid for such shares/convertible debentures
by:
i. Inward remittance through normal banking channels.
ii. Debit to NRE/FCNR account of a person concerned maintained with

an AD Category-I bank.
iii. Conversion of royalty/lump sum/technical know-how fee due for

payment/import of capital goods by units in SEZ or conversion of
ECB, shall be treated as consideration for issue of shares.
iv. Conversion of import payables/pre-incorporation expenses/share

swap can be treated as consideration for issue of shares with the
approval of FIPB.
v. debit to non-interest-bearing Escrow account in Indian Rupees in

India which is opened with the approval from AD Category-I bank and
is maintained with the AD Category-I bank on behalf of residents and
non-residents towards payment of share purchase consideration.
If the shares or convertible debentures are not issued within 180 days from
the date of receipt of the inward remittance or date of debit to NRE/
FCNR(B)/Escrow account, the amount of consideration shall be refunded.
Further, the Reserve Bank may on an application made to it and for
sufficient reasons, permit an Indian company to refund/allot shares for the
amount of consideration received towards issue of security if such amount
is outstanding beyond the period of 180 days from the date of receipt.
6. Foreign Investment Limits, Prohibited Sectors and Investment in

MSEs
a. Foreign Investment Limits

The details of the entry route applicable and the maximum permissible
foreign investment/sectoral cap in an Indian company are determined by
the sector in which it is operating.
! !477
b. Investments in Micro and Small Enterprise (MSE)

A company which is reckoned as Micro and Small Enterprise (MSE) (earlier
Small-scale Industrial Unit) in terms of the Micro, Small and Medium
Enterprises Development (MSMED) Act, 2006, including an Export-oriented
Unit or a Unit in Free Trade Zone or in Export Processing Zone or in a
Software Technology Park or in an Electronic Hardware Technology Park,
and which is not engaged in any activity/sector mentioned in Annex 2 may
issue shares or convertible debentures to a person resident outside India
(other than a resident of Pakistan and to a resident of Bangladesh under
approval route), subject to the prescribed limits as per FDI Policy, in
accordance with the Entry Routes and the provision of Foreign Direct
Investment Policy, as notified by the Ministry of Commerce and Industry,
Government of India, from time to time.
c. Prohibition on Foreign Investment in India
i. Foreign investment in any form is prohibited in a company or a

partnership firm or a proprietary concern or any entity, whether
incorporated or not (such as, Trusts) which is engaged or proposes to
engage in the following activities:
a. Business of chit fund, or

b. Nidhi company, or
c. Agricultural or plantation activities, or
d. Real estate business, or construction of farm houses, or
e. Trading in Transferable Development Rights (TDRs).
ii. It is clarified that “real estate business” means dealing in land and
immovable property with a view to earning profit or earning income
therefrom and does not include development of townships, construction
of residential/commercial premises, roads or bridges, educational
institutions, recreational facilities, city and regional level infrastructure,
townships.
It is further clarified that partnership firms/proprietorship concerns

having investments as per FEMA regulations are not allowed to engage in
print media sector.
iii. In addition to the above, Foreign investment in the form of FDI is also
prohibited in certain sectors such as:
! !478
a. Lottery Business including Government/private lottery, online

lotteries, etc.
b. Gambling and Betting including casinos etc.
c. Business of Chit funds
d. Nidhi company
e. Trading in Transferable Development Rights (TDRs)
f. Real Estate Business or Construction of Farm Houses
g. Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of

tobacco or of tobacco substitutes
h. Activities/sectors not open to private sector investment, e.g., Atomic

Energy and Railway Transport (other than Mass Rapid Transport
Systems).
Note: Foreign technology collaboration in any form including licensing for

franchise, trademark, brand name, management contract is also prohibited
for Lottery Business and Gambling and Betting activities.
7. Modes of Investment under Foreign Direct Investment Scheme
A. Issuance of fresh shares by the company: An Indian company

may issue fresh shares/convertible debentures under the FDI Scheme
to a person resident outside India (who is eligible for investment in
India) subject to compliance with the extant FDI policy and the FEMA
Regulation.
B. Acquisition by way of transfer of existing shares by person

resident in or outside India: Foreign investors can also invest in
Indian companies by purchasing/ acquiring existing shares from
Indian shareholders or from other non-resident shareholders. General
permission has been granted to non-residents/NRIs for acquisition of
shares by way of transfer in the following manner:
! !479
8. Transfer of Shares by a Person Resident outside India
a. Non-resident to Non-resident (Sale/Gift): A person resident outside

India (other than NRI and OCB) may transfer by way of sale or gift,
shares or convertible debentures to any person resident outside India
(including NRIs but excluding OCBs).
b. NRI to NRI (Sale/Gift): NRIs may transfer by way of sale or gift the
shares or convertible debentures held by them to another NRI.
c. Non-resident to Resident (Sale/Gift):
i. Gift: A person resident outside India can transfer any security to a

person resident in India by way of gift.
ii. Sale under private arrangement: General permission is also available

for transfer of shares/convertible debentures, by way of sale under
private arrangement by a person resident outside India to a person
resident in India in case where transfer of shares are under SEBI
regulations and where the FEMA pricing guidelines are not met, subject
to the following
a. The original and resultant investment comply with the extant FDI
policy/FEMA regulations;
b. The pricing complies with the relevant SEBI regulations (such as IPO,
Book building, block deals, delisting, exit, open offer/substantial
acquisition/SEBI (SAST) and buyback);
c. CA certificate to the effect that compliance with relevant SEBI

regulations as indicated above is attached to the Form FC-TRS to be
filed with the AD bank.
d. Compliance with reporting and other guidelines as prescribed under

regulations.
Note: Transfer of shares from a Non Resident to Resident other than under
SEBI regulations and where the FEMA pricing guidelines are not met would
require the prior approval of the Reserve Bank of India.
! !480
1. Sale of shares/convertible debentures on the Stock Exchange by

person resident outside India: A person resident outside India can
sell the shares and convertible debentures of an Indian company on a
recognised Stock Exchange in India through a stock broker registered
with stock exchange or a merchant banker registered with SEBI.
AD Category-I bank may issue bank guarantee, without prior approval of

the Reserve Bank, on behalf of a non-resident acquiring shares or
convertible debentures of an Indian company through open offers/
delisting/exit offers, provided:
the transaction is in compliance with the provisions of the Securities and

Exchange Board of India (Substantial Acquisition of Shares and
Takeover) [SEBI(SAST)] Regulations;
the guarantee given by the AD Category-I bank is covered by a counter-

guarantee of a bank of international repute.
It may be noted that the guarantee shall be valid for a tenure co-
terminus with the offer period as required under the SEBI (SAST)
Regulations. In case of invocation of the guarantee, the AD Category-I
bank is required to submit to the Chief General Manager-in-Charge,
Foreign Exchange Department, Reserve Bank of India, Central Office,
Mumbai 400 001, a report on the circumstances leading to the
invocation of the guarantee.
2. Transfer of shares/convertible debentures from Resident to

Person Resident outside India
A person resident in India can transfer by way of sale, shares/

convertible debentures (including transfer of subscriber's shares), of an
Indian company under private arrangement to a person resident outside
India, subject to the following along with pricing, reporting and other
guidelines:
a. Where the transfer of shares requires the prior approval of the FIPB as
per extant FDI policy provided that;
i. The requisite FIPB approval has been obtained; and
! !481
ii. The transfer of share adheres with the pricing guidelines and
documentation requirements as specified by the Reserve Bank of
India from time to time.
b. Where SEBI (SAST) guidelines are attracted, subject to adherence with

the pricing guidelines and documentation requirements as specified by
the Reserve Bank of India from time to time.
c. Where the pricing guidelines under FEMA,1999 are not met provided
that:
i. the resultant FDI is in compliance with the extant FDI policy and
FEMA regulations in terms of sectoral caps, conditionality (such as
minimum capitalisation etc.), reporting requirements, documentation,
etc.;
ii. The pricing for the transaction is compliant with specific/explicit,

extant and relevant SEBI regulations (such as IPO, book building,
block deals, delisting, open/ exit offer, substantial acquisition/SEBI
(SAST); and
iii. CA Certificate to the effect that compliance with relevant SEBI

regulations as indicated above is attached to the Form FC-TRS to be
filed with the AD bank.
d. Where the investee company is in the financial services sector provided

that:
i. No Objection Certificates (NOCs) are obtained from the respective

regulators/regulators of the investee company as well as the
transferor and transferee entities and such NOCs are filed along with
the Form FC-TRS with the AD bank; and
ii. The FDI policy and FEMA Regulations in terms of sectoral caps,
conditionality (such as minimum capitalisation, etc.), reporting
requirements, documentation etc., are complied with.
Note: The above general permission also covers transfer by a resident to a

non-resident of shares/convertible debentures of an Indian company,
engaged in an activity earlier covered under the Government Route but
! !482
now falling under Automatic Route of the Reserve Bank, as well as transfer
of shares by a non-resident to an Indian company under buyback and/or
capital reduction scheme of the company. However, this general permission
would not be available for the above transactions if they are not meeting
the pricing guidelines or in case of transfer of shares/debentures by way of
gift from a Resident to a Non-resident/Non-resident Indian.
3. Transfer of Shares by Resident Which Requires Government

Approval
The following instances of transfer of shares from residents to non-

residents by way of sale or otherwise requires Government approval:
i. Transfer of shares of companies engaged in sector falling under the

Government Route.
ii. Transfer of shares resulting in foreign investments in the Indian

company, breaching the sectoral cap applicable.
4. Prior permission of the Reserve Bank in certain cases for

acquisition/transfer of security
i. Transfer of shares or convertible debentures from residents to non-

residents by way of sale requires prior approval of Reserve Bank in case
where the non-resident acquirer proposes deferment of payment of the
amount of consideration. Further, in case approval is granted for the
transaction, the same should be reported in Form FC-TRS to the AD
Category-I bank, within 60 days from the date of receipt of the full and
final amount of consideration.
ii. A person resident in India, who intends to transfer any security, by way
of gift to a person resident outside India, has to obtain prior approval
from the Reserve Bank. while forwarding the application to the Reserve
Bank for approval for transfer of shares by way of gift. The Reserve
Bank considers the following factors while processing such applications:
a. The proposed transferee is eligible to hold such security under

Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated May
3, 2000, as amended from time to time.
! !483
b. The gift does not exceed 5 per cent of the paid-up capital of the
Indian company/each series of debentures/each mutual fund scheme.
c. The applicable sectoral cap limit in the Indian company is not

breached.
d. The transferor (donor) and the proposed transferee (donee) are close
relatives as defined in Section 6 of the Companies Act, 1956, as
amended from time to time. The current list is reproduced in
Annex-5.
e. The value of security to be transferred together with any security

already transferred by the transferor, as gift, to any person residing
outside India does not exceed the rupee equivalent of USD 50,000
per financial year.
f. Such other conditions as stipulated by the Reserve Bank in public

interest from time to time.
iii. Transfer of shares from NRI to NR requires the prior approval of the
Reserve Bank of India.
5. Escrow account for transfer of shares

AD Category-I banks have been given general permission to open and
maintain non-interest-bearing Escrow account in Indian Rupees in India on
behalf of residents and non-residents, towards payment of share purchase
consideration and/or provide Escrow facilities for keeping securities to
facilitate FDI transactions relating to transfer of shares. It has also been
decided to permit SEBI authorised Depository Participant, to open and
maintain, without approval of the Reserve Bank.
6. Acquisition of shares under the FDI scheme by a non-resident on

a recognised Stock Exchange
A non-resident including a Non-resident Indian may acquire shares of a

listed Indian company on the stock exchange through a registered broker
under FDI scheme provided that:
! !484
i. The non-resident investor has already acquired and continues to hold

the control in accordance with SEBI (Substantial Acquisition of Shares
and Takeover) Regulations;
ii. The amount of consideration for transfer of shares to non-resident

consequent to purchase on the stock exchange may be paid as below:
a. by way of inward remittance through normal banking channels, or
b. by way of debit to the NRE/FCNR account of the person concerned

maintained with an authorised dealer/bank;
c. by debit to non-interest-bearing Escrow account (in Indian Rupees)

maintained in India with the AD bank in accordance with Foreign
Exchange Management (Deposit) Regulations, 2000;
d. the consideration amount may also be paid out of the dividend

payable by Indian investee company, in which the said non-resident
holds control as (i) above, provided the right to receive dividend is
established and the dividend amount has been credited to specially
designated non-interest bearing rupee account for acquisition of
shares on the floor of stock exchange.
iii. The pricing for subsequent transfer of shares shall be in accordance with
the pricing guidelines under FEMA.
Indian companies are allowed to access funds from abroad in the following
methods:
i. External Commercial Borrowings (ECB): ECBs refer to commercial

loans in the form of bank loans, securitised instruments (e.g., floating
rate notes and fixed rate bonds, non-convertible, optionally convertible
or partially convertible preference shares), buyers’ credit, suppliers’
credit availed of from non-resident lenders with a minimum average
maturity of 3 years.
ii. Foreign Currency Convertible Bonds (FCCBs): FCCBs mean a bond

issued by an Indian company expressed in foreign currency, and the
! !485
principal and interest in respect of which is payable in foreign currency.

The bonds are required to be issued in accordance with the scheme,
viz., “Issue of Foreign Currency Convertible Bonds and Ordinary Shares
(Through Depositary Receipt Mechanism) Scheme, 1993”, and
subscribed by a non-resident in foreign currency and convertible into
ordinary shares of the issuing company in any manner, either in whole,
or in part, on the basis of any equity related warrants attached to debt
instruments.
iii. Preference shares: Preferences Shares (i.e., non-convertible,

optionally convertible or partially convertible) for issue of which, funds
have been received on or after May 1, 2007 would be considered as
debt and should conform to the ECB policy. Accordingly, all the norms
applicable for ECB, viz., eligible borrowers, recognised lenders, amount
and maturity, enduse stipulations, etc. shall apply. Since these
instruments would be denominated in Rupees, the rupee interest rate
will be based on the swap equivalent of LIBOR plus the spread as
permissible for ECBs of corresponding maturity.
iv. Foreign Currency Exchangeable Bonds (FCEBs): FCEBs means a

bond expressed in foreign currency, the principal and interest in respect
of which is payable in foreign currency, issued by an Issuing Company
and subscribed to by a person who is a resident outside India, in foreign
currency and exchangeable into equity share of another company, to be
called the Offered Company, in any manner, either wholly, or partly or
on the basis of any equity related warrants attached to debt
instruments. The FCEBs must comply with the “Issue of Foreign
Currency Exchangeable Bonds (FCEB) Scheme, 2008”, notified by the
Government of India, Ministry of Finance, Department of Economic
Affairs vide Notification G.S.R.89(E) dated February 15, 2008. The
guidelines, rules, etc. governing ECBs are also applicable to FCEBs.
ECB can be accessed under two routes, viz., (i) Automatic Route outlined
in paragraph I(A) and (ii) Approval Route outlined in paragraph I(B).
ECB for investment in real sector – industrial sector, infrastructure sector

and specified service sectors in India as indicated under para I(A)(i)(a)
are under the Automatic Route, i.e., do not require Reserve Bank/
Government of India approval.
! !486
A. Automatic Route
The following types of proposals for ECBs are covered under the Automatic
Route.
i. Eligible Borrowers
a. Corporate, including those in the hotel, hospital, software sectors

(registered under the Companies Act, 1956), Non-banking Finance
Companies (NBFCs) – Infrastructure Finance Companies (IFCs),
NBFCs – Asset Finance companies (AFCs), Small Industries
Development Bank of India (SIDBI) except financial intermediaries,
such as banks, financial institutions (FIs), Housing Finance
Companies (HFCs) and Non-banking Financial Companies (NBFCs),
other than those specifically allowed by Reserve Bank, are eligible to
raise ECB. Individuals, Trusts (other than those engaged in
Microfinance activities) and Non-profit making organisations are not
eligible to raise ECB.
b. Units in Special Economic Zones (SEZ).
c. NBFCs-IFCs are permitted to avail of ECBs for on-lending to the

infrastructure sector.
d. NBFCs-AFCs are permitted to avail of ECBs for financing the import of

infrastructure equipments for leasing to infrastructure projects.
e. Non-government Organisations (NGOs) engaged in microfinance
activities are eligible to avail of ECB.
f. Microfinance Institutions (MFIs) engaged in microfinance activities.
g. NGOs engaged in microfinance and MFIs
h. Small Industries Development Bank of India (SIDBI) can avail of ECB

for on-lending to MSME sector.
! !487
ii. Recognised Lenders
1. Borrowers can raise ECB from internationally recognised sources,

such as (a) international banks, (b) international capital markets, (c)
multilateral financial institutions (such as IFC, ADB, CDC, etc.)/
regional financial institutions and Government-owned development
financial institutions, (d) export credit agencies, (e) suppliers of
equipments, (f) foreign collaborators and (g) foreign equity holders
[other than erstwhile Overseas Corporate Bodies (OCBs)].
2. NGOs and MFIs: from (a) international banks, (b) multilateral

financial institutions, (c) export credit agencies, (d)
overseas organisations and (e) individuals.
3. NBFC-MFIs: from multilateral institutions, such as IFC, ADB etc./

regional financial institutions/international banks/foreign equity
holders and overseas organisations.
4. Companies registered under Section 25 of the Companies Act,1956:

from international banks, multilateral financial institutions, export
credit agencies, foreign equity holders, overseas organisations and
individuals.
5. A “foreign equity holder”
Overseas organisations and individuals providing ECB need to comply

with the following safeguards:
i) Overseas Organizations proposing to lend ECB would have to

furnish to the AD bank of the borrower a certificate of due
diligence from an overseas bank, which, in turn, is subject to
regulation of host-country regulator and adheres to the Financial
Action Task Force (FATF) guidelines. The certificate of due diligence
should comprise the following (i) that the lender maintains an
account with the bank for at least a period of two years, (ii) that
the lending entity is organised as per the local laws and held in
good esteem by the business/local community and (iii) that there
is no criminal action pending against it.
! !488
ii) Individual Lender has to obtain a certificate of due diligence from

an overseas bank indicating that the lender maintains an account
with the bank for at least a period of two years. Other evidence/
documents such as audited statement of account and income tax
return which the overseas lender may furnish need to be certified
and forwarded by the overseas bank. Individual lenders from
countries wherein banks are not required to adhere to Know Your
Customer (KYC) guidelines are not eligible to extend ECB.
iii. Amount and Maturity
1. The maximum amount of ECB which can be raised by a corporate

other than those in the hotel, hospital and software sectors is USD
750 million or its equivalent during a financial year.
2. Corporate in the services sector, viz., hotels, hospitals and software

sector are allowed to avail of ECB up to USD 200 million or its
equivalent in a financial year.
3. NGOs engaged in microfinance activities and Microfinance

Institutions (MFIs) can raise ECB up to USD 10 million.
4. NBFC-IFCs can avail of ECB upto 75 per cent of their owned funds
(ECB including outstanding ECBs) subject to a maximum of USD 200
million or its equivalent per financial year with a minimum maturity of
5 years.
5. SIDBI can avail of ECB to the extent of 50 per cent of their owned
funds including the outstanding ECB, subject to a ceiling of USD 500
million per financial year.
6. ECB upto USD 20 million or its equivalent in a financial year with

minimum average maturity of three years. ECB above USD 20 million
or equivalent and up to USD 750 million or its equivalent with a
minimum average maturity of five years.
7. ECB upto USD 20 million or equivalent can have call/put option

provided the minimum average maturity of three years is complied
with before exercising call/put option.
! !489
iv. All-in-Cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign
currency except commitment fee, pre-payment fee, and fees payable in
Indian Rupees. The payment of withholding tax in Indian Rupees is
excluded for calculating the all-in-cost. The existing all-in-cost ceilings for
ECB are as under:
All-in-cost Ceilings over 6 month

Average Maturity Period
LIBOR*
Three years and up to five years 350 basis points
More than five years 500 basis points
* for the respective currency of borrowing or applicable benchmark
v. End-use
a. ECB can be raised for investment such as import of capital goods (as
classified by DGFT in the Foreign Trade Policy), new projects,
modernisation/expansion of existing production units in real sector –
industrial sector including small and medium enterprises (SME),
infrastructure sector and specified service sectors, namely, hotel,
hospital and software in India. Infrastructure sector is defined as (i)
power, (ii) telecommunication, (iii) railways, (iv) roads including bridges,
(v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure
(water supply, sanitation and sewage projects), (viii) mining,
exploration and refining and (ix) cold storage or cold room facility,
including for farm level pre-cooling, for preservation or storage of
agricultural and allied produce, marine products and meat.
b. Overseas Direct Investment in Joint Ventures (JV)/Wholly Owned

Subsidiaries (WOS) subject to the existing guidelines on Indian Direct
Investment in JV/WOS abroad.
c. Utilisation of ECB proceeds is permitted for first stage acquisition of

shares in the disinvestment process and also in the mandatory second
stage offer to the public under the Government’s disinvestment
programme of PSU shares.
! !490
d. Interest During Construction (IDC) for Indian companies which are in

the infrastructure sector, where “infrastructure” is defined as per the
extant ECB guidelines, subject to IDC being capitalised and forming part
of the project cost.
e. For lending to self-help groups or for micro-credit or for bonafide

microfinance activity including capacity building by NGOs engaged in
microfinance activities.
f. NBFC-IFCs can avail of ECBs only for on-lending to the infrastructure

sector as defined under the ECB policy.
g. NBFC-AFCs can avail of ECBs only for financing the import of

infrastructure equipments for leasing to infrastructure projects.
h. Maintenance and operations of toll systems for roads and highways for
capital expenditure provided they form part of the original project.
i. SIDBI can onlend to the borrowers in the MSME sector for permissible
enduses, having natural hedge by way of foreign exchange earnings.
SIDBI may on-lend either in INR or in foreign currency (FCY). In case of
on-lending in INR, the foreign currency risk shall be fully hedged by
SIDBI.
j. Refinancing of Bridge Finance (including buyers’/suppliers’ credit)

availed of for import of capital goods by companies in Infrastructure
Sector.
k. ECB is allowed for import of services, technical know-how and payment
of license fees. The companies in the manufacturing and infrastructure
sectors may import services, technical know-how and payment of
license fees as part of import of capital goods subject to certain
conditions.
vi. Security
The choice of security to be provided to the lender/supplier is left to the

borrower. However, creation of charge over immoveable assets and
financial securities, such as shares, in favour of the overseas lender is
subject to guidelines issued by RBI and as amended from time to time.
! !491
a. AD Category-I banks have been delegated powers to convey ‘no

objection’ under the Foreign Exchange Management Act (FEMA), 1999
for creation of charge on immovable assets, financial securities and
issue of corporate or personal guarantees in favour of overseas lender/
security trustee, to secure the ECB to be raised by the borrower.
b. AD Category-I banks may convey their ‘no objection’ under FEMA, 1999
to the resident ECB borrower for pledge of shares of the borrowing
company held by promoters as well as in domestic associate companies
of the borrower to secure the ECB subject to the following conditions:
i. The period of such pledge shall be co-terminus with the maturity of

the underlying ECB.
ii. In case of invocation of pledge, transfer shall be in accordance with

the extant FDI policy.
iii. A certificate from the Statutory Auditor of the company that the ECB
proceeds have been/will be utilised for the permitted end-use/s.
c. The ‘no objection’ to the resident ECB borrower for issue of corporate or
personal guarantee under FEMA, 1999 may be conveyed after obtaining:
i. Board Resolution for issue of corporate guarantee from the company

issuing such guarantees, specifying names of the officials authorised
to execute such guarantees on behalf of the company or in individual
capacity.
ii. Specific requests from individuals to issue personal guarantee

indicating details of the ECB.
iii. Ensuring that the period of such corporate or personal guarantee is

co-terminus with the maturity of the underlying ECB.
AD Category-I banks may invariably specify that the ‘no objection’ is issued
from the foreign exchange angle under the provisions of FEMA, 1999 and
should not be construed as an approval by any other statutory authority or
Government under any other law/regulation. If further approval or
permission is required from any other regulatory/statutory authority or
Government under the relevant laws/regulations, the applicant should take
! !492
the approval of the authority concerned before undertaking the transaction.

Further, the ‘no objection’ should not be construed as regularising or
validating any irregularities, contravention or other lapses, if any, under
the provisions of FEMA or any other laws or regulations.
vii.Parking of ECB proceeds

Borrowers are permitted to either keep ECB proceeds abroad or to remit
these funds to India, pending utilisation for permissible end-uses. ECB
proceeds meant only for foreign currency expenditure can be retained
abroad pending utilisation. The rupee funds, however, will not be permitted
to be used for investment in capital markets, real estate or for inter-
corporate lending.
The primary responsibility to ensure that the ECB proceeds meant for
Rupee expenditure in India are repatriated to India for credit to their Rupee
accounts with AD Category-I banks in India is that of the borrower
concerned and any contravention of the ECB guidelines will be viewed
seriously and will invite penal action under the Foreign Exchange
Management Act (FEMA), 1999. The designated AD bank is also required to
ensure that the ECB proceeds meant for Rupee expenditure are repatriated
to India immediately after drawdown.
viii.Prepayment
Prepayment of ECB up to USD 500 million may be allowed by AD banks
without prior approval of Reserve Bank subject to compliance with the
stipulated minimum average maturity period as applicable to the loan.
ix. Corporate under Investigation

All entities against which investigations/adjudications/appeals by the law
enforcing agencies are pending may avail of ECBs as per the current
norms, if they are otherwise eligible, notwithstanding the pending
investigations/adjudications/appeals, without prejudice to the outcome of
such investigations/adjudications/appeals. Accordingly, in case of all
applications where the borrowing entity has indicated about the pending
investigations/adjudications/appeals, Authorised Dealers while approving
the proposal shall intimate the concerned agencies by endorsing the copy
of the approval letter.
! !493
B. Approval Route
i. Eligible Borrowers
The following types of proposals for ECB are covered under the Approval
Route:
a. On-lending by the Exim Bank for specific purposes will be considered

on a case by case basis.
b. Banks and financial institutions which had participated in the textile

or steel sector restructuring package as approved by the Government
are also permitted to the extent of their investment in the package
and assessment by the Reserve Bank based on prudential norms. Any
ECB availed for this purpose so far will be deducted from their
entitlement.
c. ECB with minimum average maturity of 5 years by Non-banking

Financial Companies (NBFCs) from multilateral financial institutions,
reputable regional financial institutions, official export credit agencies
and international banks to finance import of infrastructure equipment
for leasing to infrastructure projects.
d. NBFCs-IFCs are permitted to avail of ECB, beyond 75 per cent of their

owned funds (including the outstanding ECBs) for on-lending to the
infrastructure sector as defined under the ECB policy.
e. NBFCs-AFCs are permitted to avail of ECB, beyond 75 per cent of

their owned funds (including outstanding ECBs) to finance the import
of infrastructure equipment for leasing to infrastructure projects.
f. Foreign Currency Convertible Bonds (FCCBs) by Housing Finance

Companies satisfying the following minimum criteria: (i) the
minimum net worth of the financial intermediary during the previous
three years shall not be less than Rs. 500 crore, (ii) a listing on the
BSE or NSE, (iii) minimum size of FCCB is USD 100 million and (iv)
the applicant should submit the purpose/plan of utilisation of funds.
g. Special Purpose Vehicles, or any other entity notified by the Reserve

Bank, set up to finance infrastructure companies/projects exclusively,
! !494
will be treated as Financial Institutions and ECB by such entities will

be considered under the Approval Route.
h. Multi-state Cooperative Societies engaged in manufacturing activity

and satisfying the following criteria (i) the Cooperative Society is
financially solvent and: (ii) the Co-operative Society submits its up-
to-date audited balance sheet.
i. SEZ developers can avail of ECBs for providing infrastructure facilities

within SEZ, as defined in the extant ECB policy like (i) power, (ii)
telecommunication, (iii) railways, (iv) roads including bridges, (v)
sea port and airport, (vi) industrial parks, (vii) urban infrastructure
j. Developers of National Manufacturing Investment Zones (NMIZs) can

avail of ECB for providing infrastructure facilities within SEZ, as
d e f i n e d i n t h e e x t a n t E C B p o l i c y l i k e ( i ) p o w e r, ( i i )
telecommunication, (iii) railways, (iv) roads including bridges, (v) sea
port and airport, (vi) industrial parks, (vii) urban infrastructure
k. Eligible borrowers under the automatic route other than corporate in

the services sector, viz., hotel, hospital and software can avail of ECB
beyond USD 750 million or equivalent per financial year.
l. Corporates in the services sector viz. hotels, hospitals and software

sector can avail of ECB beyond USD 200 million or equivalent per
financial year.
m. Service sector units, other than those in hotels, hospitals and
software, subject to the condition that the loan is obtained from
foreign equity holders. This would facilitate borrowing by training
institutions, R & D, miscellaneous service companies, etc.
! !495
n. Small Industries Development Bank of India (SIDBI) is eligible to

avail of ECB for on-lending to MSME sector, as defined under the
Micro, Small and Medium Enterprises Development (MSMED) Act,
2006, beyond 50 per cent of their owned funds, subject to a ceiling of
USD 500 million per financial year provided such on-lending by SIDBI
shall be to the borrowers for permissible end-use and having natural
hedge by way of foreign exchange earnings. SIDBI may on-lend
either in INR or in foreign currency (FCY). In case of on-lending in
INR, the foreign currency risk shall be fully hedged by SIDBI.
o. Low Cost Affordable Housing Projects: Developers/Builders/Housing

Finance Companies (HFCs)/National Housing Bank (NHB) may avail of
ECB for low cost affordable housing projects [refer to para IB(vii)
ibid].
p. Corporates under Investigation: All entities against which

investigations/adjudications/appeals by the law enforcing agencies
are pending, may avail of ECBs as per the current norms, if they are
otherwise eligible, notwithstanding the pending investigations/
adjudications/appeals, without prejudice to the outcome of such
investigations/adjudications/appeals. Accordingly, in case of all
applications where the borrowing entity has indicated about the
pending investigations/adjudications/appeals, the Reserve Bank of
India while approving the proposal shall intimate the concerned
agencies by endorsing the copy of the approval letter.
q. Cases falling outside the purview of the automatic route limits and
maturity period are indicated at paragraph IA(iii).
ii. Recognised Lenders
a. Borrowers can raise ECB from internationally recognised sources, such

as: (i) international banks, (ii) international capital markets, (iii)
multilateral financial institutions (such as IFC, ADB, CDC, etc.)/regional
financial institutions and Government-owned development financial
institutions, (iv) export credit agencies, (v) suppliers of equipment, (vi)
foreign collaborators and (vii) foreign equity holders (other than
erstwhile OCBs).
! !496
b. A “foreign equity holder”
i. For ECB up to USD 5 million – minimum paid-up equity of 25 per cent

held directly by the lender;
ii. For ECB more than USD 5 million – minimum paid-up equity of 25
per cent held directly by the lender and ECB liability-equity ratio not
exceeding 7 : 1;
c. ECB from indirect equity holders provided the indirect equity holding by
the lender in the Indian company is at least 51 per cent;
d. ECB from a group company provided both the borrower and the foreign
lender are subsidiaries of the same parent.
iii. Amount and Maturity

Eligible borrowers under the automatic route other than corporate in the
services sector, viz., hotel, hospital and software can avail of ECB beyond
USD 750 million or equivalent per financial year. Corporate in the services
sector, viz., hotels, hospitals and software sector are allowed to avail of
ECB beyond USD 200 million or its equivalent in a financial year for
meeting foreign currency and/or Rupee capital expenditure for permissible
end-uses. The proceeds of the ECBs should not be used for acquisition of
land.
iv. All-in-cost ceilings

All-in-cost includes rate of interest, other fees and expenses in foreign
currency except commitment fee, pre-payment fee and fees payable in
Indian Rupees. The payment of withholding tax in Indian Rupees is
excluded for calculating the all-in-cost. The existing all-in-cost ceilings for
ECB are as under:

LIBOR*
! !497
v. End-use
ECB can be raised only for investment [such as import of capital goods (as
classified by DGFT in the Foreign Trade Policy), implementation of new
projects, modernisation/expansion of existing production units] in the real
sector – industrial sector including small and medium enterprises (SME)
and infrastructure sector – in India. Infrastructure sector is defined as (i)
power, (ii) telecommunication, (iii) railways, (iv) roads including bridges,
(v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure
(water supply, sanitation and sewage projects), (viii) mining, exploration
and refining and (ix) cold storage or cold room facility, including for farm
level pre-cooling, for preservation or storage of agricultural and allied
produce, marine products and meat.
vi. End-uses not permitted

Other than the purposes specified hereinabove, the borrowings shall not be
utilised for any other purpose including the following purposes, namely:
a. For on-lending or investment in capital market or acquiring a

company (or a part thereof) in India by a corporate except
Infrastructure Finance Companies (IFCs).
b. For real estate.
c. For and general corporate purpose which includes working capital

(with some exceptions)
vii.Guarantee
Issuance of guarantee, standby letter of credit, letter of undertaking or
letter of comfort by banks, financial institutions and NBFCs relating to ECB
is not normally permitted. Applications for providing guarantee/standby
letter of credit or letter of comfort by banks, financial institutions relating
to ECB in the case of SME will be considered on merit subject to prudential
norms.
With a view to facilitating capacity expansion and technological upgradation

in Indian textile industry, issue of guarantees, standby letters of credit,
letters of undertaking and letters of comfort by banks in respect of ECB by
textile companies for modernization or expansion of textile units will be
considered under the Approval Route subject to prudential norms.
! !498
viii.Pre-payment
a. Pre-payment of ECB up to USD 500 million may be allowed by the AD

bank without prior approval of the Reserve Bank subject to compliance
with the stipulated minimum average maturity period as applicable to
the loan.
b. Pre-payment of ECB for amounts exceeding USD 500 million would be

considered by the Reserve Bank under the Approval Route.
9.4 Foreign Currency Convertible Bonds (FCCBS)
FCCBs are governed by the ‘Issue of Foreign Currency Convertible Bonds

and Ordinary Shares (through Depositary Receipt Mechanism) Scheme,
1993’ as amended from time to time and FEMA Notification No. 120/
RB-2004 dated July 7, 2004. The issuance of FCCBs was brought under the
ECB Guidelines in August 2005 and FCCBs are also subject to all the
regulations which are applicable to ECBs.
A. Redemption of FCCBs
Keeping in view the need to provide a window to facilitate refinancing of
FCCBs by the Indian companies which may be facing difficulty in meeting
the redemption obligations, Designated AD Category-I banks have been
permitted to allow Indian companies to refinance the outstanding FCCBs,
under the automatic route, subject to compliance with the terms and
conditions set out hereunder:
i. Fresh ECBs/FCCBs shall be raised with the stipulated average maturity

period and applicable all-in-cost being as per the extant ECB guidelines;
ii. The amount of fresh ECB/FCCB shall not exceed the outstanding
redemption value at maturity of the outstanding FCCBs;
iii. The fresh ECB/FCCB shall not be raised six months prior to the maturity
date of the outstanding FCCBs;
iv. The purpose of ECB/FCCB shall be clearly mentioned as ‘Redemption of

Outstanding FCCBs’ in Form 83 at the time of obtaining Loan
Registration Number from the Reserve Bank;
! !499
v. The designated AD Category-I bank should monitor the end-use of

funds;
vi. ECB/FCCB beyond USD 500 million for the purpose of redemption of the
existing FCCB will be considered under the approval route; and
vii.ECB/FCCB availed of for the purpose of refinancing the existing

outstanding FCCB will be reckoned as part of the limit of USD 750
million available under the automatic route as per the extant norms.
Restructuring of FCCBs involving change in the existing conversion price is

not permissible. Proposals for restructuring of FCCBs not involving change
in conversion price will, however, be considered under the approval route
depending on the merits of the proposal.
B. Buyback/Pre-payment of FCCBs
The proposal of buyback/pre-payment of FCCBs from Indian companies
may be considered subject to condition that the buyback value of the
FCCBs shall be at a minimum discount of five per cent on the accreted
value. In case the Indian company is planning to raise a foreign currency
borrowing for buyback of the FCCBs, all FEMA rules/regulations relating to
foreign currency borrowing shall be complied with. The entire process of
buyback should be completed by December 31, 2013 after which the
scheme will stand discontinued.
Foreign Currency Exchangeable Bond (FCEB) means a bond expressed in

foreign currency, the principal and interest in respect of which is payable in
foreign currency, issued by an Issuing Company and subscribed to by a
person who is a resident outside India, in foreign currency and
exchangeable into equity share of another company, to be called the
Offered Company, in any manner, either wholly, or partly or on the basis of
any equity related warrants attached to debt instruments. The FCEB may
be denominated in any freely convertible foreign currency.
The Issuing Company shall be part of the promoter group of the Offered
Company and shall hold the equity share/s being offered at the time of
issuance of FCEB. The Offered Company shall be a listed company, which is
engaged in a sector eligible to receive Foreign Direct Investment and
! !500
eligible to issue or avail of Foreign Currency Convertible Bond (FCCB) or

External Commercial Borrowings (ECBs).
An Indian company, which is not eligible to raise funds from the Indian
securities market, including a company which has been restrained from
accessing the securities market by the SEBI shall not be eligible to issue
FCEB.
Eligible subscriber: Entities complying with the Foreign Direct Investment

policy and adhering to the sectoral caps at the time of issue of FCEB can
subscribe to FCEB. Prior approval of the Foreign Investment Promotion
Board, wherever required under the Foreign Direct Investment policy,
should be obtained.
Entities not eligible to subscribe to FCEB: Entities prohibited to buy,

sell or deal in securities by the SEBI will not be eligible to subscribe to
FCEB.
End-use of FCEB Proceeds:
Issuing Company:
i. The proceeds of FCEB may be invested by the issuing company overseas

by way of direct investment including in Joint Ventures or Wholly Owned
Subsidiaries abroad, subject to the existing guidelines on overseas
investment in Joint Ventures/Wholly Owned Subsidiaries.
ii. The proceeds of FCEB may be invested by the issuing company in the
promoter group companies.
Promoter Group Companies: Promoter group companies receiving

investments out of the FCEB proceeds may utilise the amount in
accordance with end-uses prescribed under the ECB policy.
End-uses not permitted: The promoter group company receiving such

investments will not be permitted to utilise the proceeds for investments in
the capital market or in real estate in India.
! !501
All-in-cost: The rate of interest payable on FCEB, and the issue expenses
incurred in foreign currency shall be within the all-in-cost ceiling as
specified by Reserve Bank under the ECB policy.
Pricing of FCEB: At the time of issuance of FCEB the exchange price of

the offered listed equity shares shall not be less than the higher of the
following two:
i. The average of the weekly high and low of the closing prices of the
shares of the offered company quoted on the stock exchange during
the six months preceding the relevant date; and
ii. The average of the weekly high and low of the closing prices of the
shares of the offered company quoted on a stock exchange during
the two week preceding the relevant date.
Average Maturity: Minimum maturity of FCEB shall be five years. The

exchange option can be exercised at any time before redemption. While
exercising the exchange option, the holder of the FCEB shall take delivery
of the offered shares. Cash (Net) settlement of FCEB shall not be
permissible.
Parking of FCEB Proceeds Abroad: The proceeds of FCEB may be

retained and/or deployed overseas by the issuing/promoter group
companies in accordance with the policy for the ECB or repatriated to India
for credit to the borrowers’ Rupee accounts with AD Category-I banks in
India pending utilization for permissible end-uses. It shall be the
responsibility of the issuing company to ensure that the proceeds of FCEB
are used by the promoter group company only for the permitted end-uses
prescribed under the ECB policy. The issuing company should also submit
audit trail of the end-use of the proceeds by the issuing company/promoter
group companies to the Reserve Bank duly certified by the designated AD
bank.
Operational Procedure: Issuance of FCEB shall require prior approval of

the Reserve Bank under the Approval Route for raising ECB. The Reporting
arrangement for FCEB shall be as per the extant ECB policy.
! !502
9.6 Miscellaneous
Structured Obligation
Borrowing and lending in Indian Rupees between two residents does not
attract any provisions of the Foreign Exchange Management Act, 1999. In
cases where a Rupee loan [fund-based as well as non-fund-based such as
Letter of Credit/Guarantee/Letter of Undertaking (LoU)/Letter of Comfort]
is granted against the guarantee provided by a non-resident, there is no
transaction involving foreign exchange until the guarantee is invoked and
the non-resident guarantor is required to meet the liability under the
guarantee. The non-resident guarantor may discharge the liability by (i)
payment out of rupee balances held in India or (ii) by remitting the funds
to India or (iii) by debit to his FCNR(B)/NRE account maintained with an AD
bank in India. In such cases, the non-resident guarantor may enforce his
claim against the resident borrower to recover the amount and on recovery
he may seek repatriation of the amount if the liability is discharged either
by inward remittance or by debit to FCNR(B)/NRE account. However, in
case the liability is discharged by payment out of Rupee balances, the
amount recovered can be credited to the NRO account of the non-resident
guarantor.
The Reserve Bank vide its Notification No. FEMA. 29/ RB-2000 dated
September 26, 2000 has granted general permission to a resident, being a
principal debtor to make payment to a person resident outside India, who
has met the liability under a guarantee. Accordingly, in cases where the
liability is met by the non-resident out of funds remitted to India or by
debit to his FCNR(B)/NRE account, the repayment may be made by credit
to the FCNR(B)/NRE/NRO account of the guarantor provided, the amount
remitted/credited shall not exceed the rupee equivalent of the amount paid
by the non-resident guarantor against the invoked guarantee.
The facility of credit enhancement by eligible non-resident entities to

domestic debt raised through issue of capital market instruments, such as
Rupee denominated bonds and debentures, is available to all borrowers
eligible to raise ECB under automatic route subject to the following
conditions:
i. Credit enhancement should be provided by eligible non-resident entities

(multilateral institutions);
! !503
ii. The underlying debt instrument should have a minimum average

maturity of three years;
iii. Pre-payment and call/put options are not permissible for such capital
market instruments upto an average maturity period of 3 years;
iv. Guarantee fee and other costs in connection with credit enhancement
will be restricted to a maximum 2 per cent of the principal amount
involved;
v. On invocation of the credit enhancement, if the guarantor meets the

liability and if the same is permissible to be repaid in foreign currency to
the eligible non-resident entity, the all-in-cost ceilings, as applicable to
the relevant maturity period of the Trade Credit/ECBs, as per the extant
guidelines, is applicable to the novated loan.
vi. In case of default and if the loan is serviced in Indian Rupees, the
applicable rate of interest would be the coupon of the bonds or 250 bps
over the prevailing secondary market yield of 5 years Government of
India Security, as on the date of novation, whichever is higher;
vii.IFCs proposing to avail of the credit enhancement facility should comply

with the eligibility criteria and prudential norms laid down in the circular
DNBS.PD.CC No. 168/03.02.089/2009-10 dated February 12, 2010 and
in case the novated loan is designated in foreign currency, the IFC
should hedge the entire foreign currency exposure; and
viii.The reporting arrangements as applicable to the ECBs would be

applicable to the novated loans.
Take-out Finance
Keeping in view the special funding needs of the infrastructure sector, a
scheme of take-out finance has been put in place. Accordingly, take-out
financing arrangement through ECB, under the approval route, has been
permitted for refinancing of Rupee loans availed of from the domestic
banks by eligible borrowers in the sea port and airport, roads including
bridges and power sectors for the development of new projects, subject to
the following conditions:
! !504
i. The corporate developing the infrastructure project should have a

tripartite agreement with domestic banks and overseas recognised
lenders for either a conditional or unconditional take-out of the loan
within three years of the scheduled Commercial Operation Date (COD).
The scheduled date of occurrence of the take-out should be clearly
mentioned in the agreement.
ii. The loan should have a minimum average maturity period of seven
years.
iii. The domestic bank financing the infrastructure project should comply
with the extant prudential norms relating to take-out financing.
iv. The fee payable, if any, to the overseas lender until the take-out shall
not exceed 100 bps per annum.
v. On take-out, the residual loan agreed to be taken-out by the overseas

lender would be considered as ECB and the loan should be designated in
a convertible foreign currency and all the extant norms relating to ECB
should be complied with.
vi. Domestic banks/Financial Institutions will not be permitted to guarantee

the take-out finance.
vii.The domestic bank will not be allowed to carry any obligation on its
balance sheet after the occurrence of the take-out event.
viii.Reporting arrangement as prescribed under the ECB policy should be

adhered to.
Conversion of ECB into Equity
i. Conversion of ECB into equity is permitted subject to the following

conditions:
a. The activity of the company is covered under the Automatic Route for
Foreign Direct Investment or Government (FIPB) approval for foreign
equity participation has been obtained by the company, wherever
applicable.
! !505
b. The foreign equity holding after such conversion of debt into equity is
within the sectoral cap, if any.
c. Pricing of shares is as per the pricing guidelines issued under FEMA,

1999 in the case of listed/unlisted companies.
Crystallisation of ECB
AD banks desiring to crystallise their foreign exchange liability arising out
of guarantees provided for ECB raised by corporates in India into Rupees,
may make an application to the Chief General Manager-in-Charge, Foreign
Exchange Department, External Commercial Borrowings Division, Reserve
Bank of India, Central Office, Mumbai 400 001, giving full details, viz.,
name of the borrower, amount raised, maturity, circumstances leading to
invocation of guarantee/letter of comfort, date of default, its impact on the
liabilities of the overseas branch of the AD bank concerned and other
relevant factors.
Reporting Arrangement and Dissemination of Information
i. Reporting Arrangements
a. With a view to simplifying the procedure, submission of copy of loan

agreement is dispensed with.
b. For allotment of Loan Registration Number (LRN), borrowers are

required to submit Form 83, in duplicate, certified by the Company
Secretary (CS) or Chartered Accountant (CA) to the designated AD
bank. One copy is to be forwarded by the designated AD bank to the
Director, Balance of Payments Statistics Division, Department of
Statistics and Information Management (DSIM), Reserve Bank of India,
Bandra-Kurla Complex, Mumbai – 400 051. 
(Note: copies of loan agreement and offer documents for FCCB are not
required to be submitted with Form 83).
c. The borrower can draw-down the loan only after obtaining the LRN from
DSIM, Reserve Bank.
d. Borrowers are required to submit ECB-2 Return certified by the

designated AD bank on monthly basis so as to reach DSIM, Reserve
! !506
Bank within seven working days from the close of month to which it
relates.
9.7 TRADE CREDITS (TC) FOR IMPORTS INTO INDIA
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. Depending on the source of finance, such trade credits include
suppliers’ credit or buyers’ credit. Suppliers’ credit relates to 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 a bank or financial institution outside India for maturity of less than
three years. It may be noted that buyers’ credit and suppliers’ credit for
three years and above come under the category of External Commercial
Borrowings (ECBs) which are governed by ECB guidelines.
a. Amount and Maturity

i. 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 the DGFT with a maturity
period up to one year (from the date of shipment). For import of capital
goods as 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 (from the date of shipment). No
rollover/extension will be permitted beyond the permissible period.
ii. The companies in the infrastructure sector, where “infrastructure” is as

defined under the extant guidelines on External Commercial Borrowings
(ECBs) have been allowed to avail of trade credit up to a maximum
period of five years for import of capital goods as classified by DGFT
subject to conditions that the trade credit must be abinitio contracted
for a period not less than fifteen months and should not be in the nature
of short-term rollovers. However, the condition of ‘ab initio’ buyers
credit would be for 6 (six) months only for trade credits availed of on or
before December 14, 2012. AD banks shall not approve trade credit
exceeding USD 20 million per import transaction.
iii. The period of trade credit should be linked to the operating cycle and
trade transaction. AD Category-I banks may ensure that these
instructions are strictly complied with.
! !507
b. All-in-cost Ceilings
The existing all-in-cost ceilings are as under

LIBOR*
c. Guarantee
AD banks are permitted to issue Letters of Credit/guarantees/Letter of
Undertaking (LoU)/Letter of Comfort (LoC) 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, rodium, 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
Letters of credit/guarantees/LoU/LoC has to be co-terminus with the period
of credit, reckoned from the date of shipment.
In respect of companies in the infrastructure sector as mentioned at para

(a)(ii) above, AD banks are not permitted to issue Letters of Credit/
guarantees/Letter of Undertaking (LoU)/Letter of Comfort (LoC) in favour
of overseas supplier, bank and financial institution for the extended period
beyond three years. (as amended vide AP DIR Circular No.28 dated
11.9.2012)
d. Reporting Arrangements
AD banks are required to furnish details of approvals, drawal, utilisation,
and repayment of trade credit granted by all its branches, in a consolidated
statement, during the month, in form TC (format in Annex IV) from April
2004 onwards to the Director, Division of International Finance,
Department of Economic Policy and Research, Reserve Bank of India,
Central Office Building, 8th floor, Fort, Mumbai – 400 001 (and in MS-Excel
file through e-mail) so as to reach not later than 10th of the following
month. Each trade credit may be given a unique identification number by
the AD bank.
AD banks are required to furnish data on issuance of LCs/Guarantees/LoU/

LoC by all its branches, in a consolidated statement, at quarterly intervals
! !508
(format in Annex V) 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 (and in MS-Excel file through
e-mail) from December 2004 onwards so as to reach the Department not
later than 10th of the following month.
9.8 Syndicated Loan
A syndicated loan is one that is provided by a group of lenders and is

structured, arranged, and administered by one or several commercial
banks known as arrangers.
The syndicated loan market is the dominant way for corporations to tap
banks and other institutional financial capital providers for loans.
At the most basic level, arrangers serve the investment banking role of
raising investor funding for an issuer in need of capital. The issuer pays the
arranger a fee for this service, and this fee increases with the complexity
and risk factors of the loan. As a result, the most profitable loans are those
to leveraged borrowers—issuers whose credit ratings are speculative grade
and who are paying spreads (premiums or margins above the relevant
LIBOR in the US and UK, Euribor in Europe or another base rate) sufficient
to attract the interest of non-bank term loan investors. Though, this
threshold moves up and down depending on market conditions.
As the size of the loan increases, individuals and banks find it difficult to
bear the risk independently. The regulatory authorities of the countries also
put a limit on the size of the individual exposure. Hence, it becomes
necessary to invite other banks to participate in the loan, i.e., form a
syndicate.
Following is the process involved in syndication of loan:
• The borrower decides about the size and currency of the loan and invites
bid from banks for granting the finance. Depending upon the reputation
of the borrower, several banks or the groups of the banks, come forward
with offers for arranging the loans indicating the broad terms and
conditions. These banks are called the lead managers or arrangers. The
lead managers have to indicate the frontend fees, commitment and other
! !509
charges and spread over the LIBOR rate for arranging, the loan. In some
cases, alternative options are also indicated to the borrower.
• The borrower selects the best offer after comparing the bids in terms of
total cost of package, other terms and the relationship with the lead
managers. The mandate is then issued to the lead managers to arrange
the loan.
• An information memorandum giving financial and other details of the

borrower is prepared in consultation with the lead managers, which form
the basis for lead managers to seek participation from the lenders. Each
lead manager would underwrite a portion of the total loan amount and
send invitation to other banks that may be likely to participate.
• The invitation would specify the basis for splitting the front-end fees
between lead managers and other participants depending upon the
assessment of likely response. Since the lead managers do not generally
pass on the entire fees to the participants, their return varies to the
extent to which they are able to sell the participation to other banks.
Once the response is known, the lead managers would be required to
take up the balance themselves. If the offer is made on the basis of “best
effort” and the response for participation retains remains poor, the lead
managers could back out. However, this rarely happens to borrowers with
good standing.
• The terms and conditions have to be so drafted so as to make the

syndication successful.
• On finalisation of names of the participants, the lead managers and the

borrowers together with the guarantors wherever required will finalise
the loan agreement.
Syndicated loan carry the advantage of attractive pricing, low transaction

cost, assurance of execution and flexibility, which is generally committed
by the lead managers. However, the disadvantages are the limited tenure
on maturity, limited investor base and the fact that they are generally at
floating rate linked to a base rate.
! !510
FRN is debt instrument with a variable interest rate. It is also known as a

“floater” or “FRN,” a floating rate notes interest rate is tied to a benchmark
such as the US Treasury bill rate, LIBOR, the fed funds or the prime rate.
Floaters are mainly issued by financial institutions and governments, and
they typically have a two to five year term to maturity.
Floating rate notes (FRNs) make up a significant component of the US

investment-grade bond market, and they tend to become more popular
when interest rates are expected to increase. Compared to fixed-rate debt
instruments, floaters protect investors against a rise in interest rates.
Because interest rates have an inverse relationship with bond prices, a
fixed rate note’s market price will drop if interest rates increase. FRNs,
however, carry lower yields than fixed notes of the same maturity. They
also have unpredictable coupon payments, though if the note has a cap
and/or a floor, the investor will know the maximum and/or minimum
interest rate the note might pay.
An FRNs interest rate can change as often or as frequently as the issuer

chooses, from once a day to once a year. The “reset period” tells the
investor how often the rate adjusts. The issuer may pay interest monthly,
quarterly, semi-annually or annually. FRNs may be issued with or without a
call option.
One major FRN issuer is Fannie Mae. Its FRNs have different reference
rates, including three-month T-bills, the prime rate, the fed funds rate,
one-month LIBOR and three-month LIBOR. Commercial banks, state and
local governments, corporations and money market funds purchase these
notes, which offer a variety of terms to maturity and may be callable or
non-callable.
Fixed Rate Bond: In finance, a fixed rate bond is a type of debt

instrument bond with a fixed coupon (interest) rate, as opposed to a
floating rate note. A fixed rate bond is a long-term debt paper that carries
a predetermined interest rate. The interest rate is known as coupon rate
and interest is payable at specified dates before bond maturity. Due to the
fixed coupon, the market value of a fixed rate bond is susceptible to
fluctuations in interest rates, and therefore has a significant amount of
interest rate risk. That being said, the fixed rate bond, although a
! !511
conservative investment, is highly susceptible to a loss in value due to

inflation. The fixed rate bond’s long maturity schedule and predetermined
coupon rate offers an investor a solidified return, while leaving the
individual exposed to a rise in the consumer price index and overall
decrease in their purchasing power.
The coupon rate attached to the fixed-rate bond is payable at specified

dates before the bond reaches maturity; the coupon rate and the fixed
payments are delivered periodically to the investor at a percentage rate of
the bond’s face value. Due to a fixed rate bond’s lengthy maturity date,
these payments are typically small and as stated before are not tied into
interest rates.
Difference between Fixed and Floating Rate Bonds

Unlike a fixed rate bond, a floating rate note is a type of bond that contains
a variable coupon that is equal to a money market reference rate, or a
federal funds rate plus a specified spread. Although the spread remains
constant, the majority of floating rate notes contains quarterly coupons
that pay out interest every 3 months with variable percentage returns. At
the beginning of each coupon period, the rate is calculated by adding the
spread with the reference rate. This structure differs from the fixed bond
rate which locks in a coupon rate and delivers it to the holder semi-
annually over a course of multiple years.
Returns: Bonds generally provide higher rates of interest than other bank
accounts. So, fixed rate bond accounts are ideal for people who have spare
money that they can afford to lock away for a fixed period of time.
There are a number of factors that you need to be aware of before

choosing your account, for example, some accounts offer interest that it
adds onto your balance monthly, which then accumulates more interest
throughout the year based on the total balance. Other accounts pay the
interest owed when the term ends, or pay the interest into a separate
savings account on a monthly basis, so you will only be paid interest on the
opening balance.
Purchasing a fixed rate bond, knowingly from the very start, what to
expect out of the investment, as such, beginners in the investment world,
as well as more experienced but conservative ones see this as a good and
stable option. Those who are not very well-versed in investments also
! !512
stand to benefit, because it no longer becomes necessary to monitor every

single change in the economy that have a detrimental effect to the
expected return of the bond.
9.10 Raising Equity through ADRs/GDRs/IDRS
Issue of Shares by Indian Companies under ADR/GDR
Depository Receipts (DRs) are negotiable securities issued outside India by

a Depository bank, on behalf of an Indian company, which represent the
local Rupee denominated equity shares of the company held as deposit by
a Custodian bank in India. DRs are traded on Stock Exchanges in the US,
Singapore, Luxembourg, London, etc. DRs listed and traded in the US
markets are known as American Depository Receipts (ADRs) and those
listed and traded elsewhere are known as Global Depository Receipts
(GDRs). In the Indian context, DRs are treated as FDI.
i. Indian companies can raise foreign currency resources abroad through

the issue of ADRs/GDRs, in accordance with the Scheme for issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through
Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by
the Government of India thereunder from time to time.
ii. A company can issue ADRs/GDRs, if it is eligible to issue shares to

person resident outside India under the FDI Scheme. However, an
Indian listed company, which is not eligible to raise funds from the
Indian Capital Market including a company which has been restrained
from accessing the securities market by the Securities and Exchange
Board of India (SEBI) will not be eligible to issue ADRs/GDRs.
iii. Unlisted companies, which have not yet accessed the ADR/GDR route
for raising capital in the international market, would require prior or
simultaneous listing in the domestic market, while seeking to issue such
overseas instruments. Unlisted 22 companies, which have already
issued ADRs/GDRs in the international market, have to list in the
domestic market on making profit or within three years of such issue of
ADRs/GDRs, whichever is earlier.
iv. ADRs/GDRs are issued on the basis of the ratio worked out by the
Indian company in consultation with the Lead Manager to the issue. The
! !513
proceeds so raised have to be kept abroad till actually required in India.

Pending repatriation or utilisation of the proceeds, the Indian company
can invest the funds in:
a. Deposits with or Certificate of Deposit or other instruments offered by

banks who have been rated by Standard and Poor, Fitch or Moody's,
etc. and such rating not being less than the rating stipulated by the
Reserve Bank from time to time for the purpose;
b. Deposits with branch/es of Indian Authorised Dealers outside India;

and
c. Treasury bills and other monetary instruments with a maturity or

unexpired maturity of one year or less.
v. There are no end-use restrictions except for a ban on deployment/

investment of such funds in real estate or the stock market. There is no
monetary limit up to which an Indian company can raise ADRs/GDRs.
vi. The ADR/GDR proceeds can be utilised for first stage acquisition of
shares in the disinvestment process of Public Sector Undertakings/
Enterprises and also in the mandatory second stage offer to the public
in view of their strategic importance.
vii.Voting rights on shares issued under the Scheme shall be as per the
provisions of Companies Act, 1956 and in a manner in which restrictions
on voting rights imposed on ADR/GDR issues shall be consistent with
the Company Law provisions. Voting rights in the case of banking
companies will continue to be in terms of the provisions of the Banking
Regulation Act, 1949 and the instructions issued by the Reserve Bank
from time to time, as applicable to all shareholders exercising voting
rights.
viii.Erstwhile OCBs which are not eligible to invest in India and entities
prohibited to A buy/sell or deal in securities by SEBI will not be eligible
to subscribe to ADRs/ GDRs issued by Indian companies.
ix. The pricing of ADR/GDR issues including sponsored ADRs/GDRs should

be made at a price determined under the provisions of the Scheme of
issue of Foreign Currency Convertible Bonds and Ordinary Shares
! !514
(through Depository Receipt Mechanism) Scheme, 1993 and guidelines

issued by the Government of India and directions issued by the Reserve
Bank, from time to time.
x. A limited two-way fungibility scheme has been put in place by the

Government of India for ADRs/GDRs. Under this Scheme, a stock broker
in India, registered with SEBI, can purchase shares of an Indian
company from the market for conversion into ADRs/GDRs based on
instructions received from overseas investors. Re-issuance of ADRs/
GDRs would be permitted to the extent of ADRs/GDRs which have been
redeemed into underlying shares and sold in the Indian market.
xi. Sponsored ADR/GDR issue: An Indian company can also sponsor an

issue of ADR/GDR. Under this mechanism, the company offers its
resident shareholders a choice to submit their shares back to the
company so that on the basis of such shares, ADRs/GDRs can be issued
abroad. The proceeds of the ADR/GDR issue is remitted back to India
and distributed among the resident investors who had offered their
Rupee denominated shares for conversion. These proceeds can be kept
in Resident Foreign Currency (Domestic) accounts in India by the
resident shareholders who have tendered such shares for conversion
into ADRs/GDRs.
9.11 Foreign Investments under Portfolio Investment

Scheme (PIS)
1. NRI Entities
i. Foreign Institutional Investors (FIIs) registered with SEBI are eligible to

purchase shares and convertible debentures issued by Indian companies
under the Portfolio Investment Scheme (PIS).
ii. NRIs are eligible to purchase shares and convertible debentures issued
by Indian companies under PIS, if they have been permitted by the
designated branch of any AD Category-I bank. RBI will allot Unique
Code number only to the Link Office of the AD Category-I bank. AD
Category-I bank shall be free to permit its branches to administer the
Portfolio Investment Scheme for NRIs, in accordance with Board
approved policy subject to the following:
! !515
a. The AD Category-I bank while granting permission to NRI for

investment under PIS shall allow them to operate the scheme as per
the terms and conditions as mentioned below:
Salient features of Portfolio Investment Scheme (PIS) for

investments by a Non Resident Indian (NRI)
a. An NRI intending to buy and sell shares/convertible debentures of an

Indian company through a registered broker on a recognised stock
exchange in India will apply in prescribed form to the designated branch
of AD bank for participating in the Scheme on repatriation and/or non-
repatriation basis.
b. While applying, the NRI should also undertake that:
i. the particulars furnished are true and correct;
ii. he has no dealing with/he will not deal with any other designated
branch/bank under PIS;
iii. he will ensure that total holding in shares/convertible debentures,

both on repatriation and non-repatriation basis in any one Indian
company at no time shall exceed 5 per cent of the paid-up capital/
paid-up value of each series of convertible debentures of that
company.
c. The designated branch of the AD bank will grant one-time permission to

the NRI applicant for purchase and sale of shares/convertible
debentures of an Indian company. Two distinct permission letters (for
repatriation basis and non-repatriation basis) shall be issued as per the
prescribed format.
d. Designated branch shall open a separate sub-account of NRE/NRO

account (opened and maintained by an NRI in terms of the Foreign
Exchange Management (Deposit) Regulations, 2000) for the exclusive
purpose of routing the transactions under PIS on behalf of an NRI.
NRE(PIS) account for investment made by the NRI on repatriation basis
and NRO(PIS) account for investment made on non-repatriation basis
under the Scheme. The designated branch shall ensure that amounts
due to sale proceeds of shares/convertible debentures which have been
! !516
acquired by modes other than PIS, such as underlying shares acquired

on conversion of ADRs/GDRs, shares/convertible debentures acquired
under FDI Scheme, shares/convertible debentures purchased outside
India from other NRIs, shares/convertible debentures acquired under
private arrangement from residents/non-residents, shares/convertible
debentures purchased while resident in India, do not get credited/
debited in the accounts opened exclusively for routing the PIS
transactions.
e. The permissible credits and debits in the NRE (PIS) account for routing
PIS transactions will be as under:
Permissible Credits
i. Inward remittances in foreign exchange though normal banking

channels;
ii. Transfer from applicant’s other NRE accounts or FCNR (B) accounts
maintained with AD bank in India;
iii. Net sale proceeds (after payment of applicable taxes) of shares

and convertible debentures which were acquired on repatriation
basis under PIS and sold on stock exchange through registered
broker;
iv. Dividend or income earned on investments under PIS.
Permissible Debits
i. Outward remittances of dividend or income earned;
ii. Amounts paid on account of purchase of shares and convertible

debentures on repatriation basis on stock exchanges through
registered broker under PIS; and
iii. Any charges on account of sale/purchase of shares or convertible

debentures under PIS.
! !517
f. The permissible credits and debits in the NRO(PIS) account for routing
PIS transactions will be as under:
Permissible Credits
i. Inward remittances in foreign exchange though normal banking

channels;
ii. Transfer from applicant’s other NRE accounts or FCNR(B) accounts

or NRO accounts maintained with AD bank in India;
iii. Net sale proceeds (after payment of applicable taxes) of shares

and convertible debentures which were acquired on repatriation
(at the NRI’s option) and non-repatriation basis under PIS and sold
on stock exchange through registered broker; and
iv. Dividend or income earned on investments under PIS.
Permissible debits
i. Outward remittances of dividend or income earned;
ii. Amounts paid on account of purchase of shares and convertible

debentures on non-repatriation basis on stock exchanges through
registered broker under PIS.
iii. Any charges on account of sale/purchase of shares or convertible

debentures under PIS.
g. The purchase of equity shares in an Indian company, both repatriation

and non-repatriation basis by each NRI shall not exceed 5 per cent of
the paid-up capital of the company subject to an overall ceiling of 10 per
cent of the total paid-up capital of the company concerned by all NRIs
both on repatriation and non-repatriation basis taken together.
h. The purchase of convertible debentures of each series of an Indian

company both repatriation and non-repatriation basis by each NRI shall
not exceed 5 per cent of the total paid-up value of convertible
debentures subject to an overall ceiling of 10 per cent of the total paid-
up value of each series of the convertible debentures issued by the
! !518
Indian company concerned by all NRIs both on repatriation and non-

repatriation basis taken together.
i. Shares/convertible debentures purchased shall be held and registered in

the name of the NRI.
j. Shares /convertible debentures acquired by the NRI under this

permission can be sold on recognised stock exchange in India through
registered broker without any lock-in period. NRI shall not engage in
short selling and shall take delivery of the shares and convertible
debentures purchased and give the delivery of the shares and
debentures sold.
k. Shares/convertible debentures acquired by the NRI under the Scheme

shall not be transferred out of his name by way of gift except to his
close relatives as defined in Section 6 of the Companies Act, 1956, as
amended from time to time or Charitable Trust duly registered under
the laws in India with prior approval of AD bank. Shares/convertible
debentures acquired by the NRI under the Scheme shall not be
transferred out of his name by way of sale under private arrangement
without prior approval of the Reserve Bank.
l. Shares/convertible debentures acquired by the NRI under the Scheme

shall not be pledged for giving loan to a third party without prior
permission of the Reserve Bank.
m. NRI is permitted to buy or sale shares/convertible debentures through

his own broker who is an authorised member of a recognised stock
exchange. Both purchase and sale contract notes, in original, should be
submitted by the NRI within 24/48 hours of execution of the contract to
his designated branch with whom his PIS account is maintained. The
onus is on the NRI for submission of contract notes to the designated
branch of the AD bank.
n. NRI is at a liberty to change the designated branch/AD bank. The

designated branch/AD bank from whom the PIS account is being
transferred should:
i. issue no objection certificate to the new designated branch/AD bank:
! !519
ii. furnish the list of all the existing holding as also the dates of
reporting the transaction in LEC(NRI) to the Reserve Bank to that
designated branch/AD bank to whom the PIS account is being
transferred.
o. In cases, where an NRI is eligible to make investment in India, his
resident Power of Attorney holder can be permitted by AD bank to
operate NRE(PIS)/NRO(PIS) account to facilitate investment under the
Scheme.
2. Investment in listed Indian Companies
A. FIIs
a. An Individual FII/SEBI approved sub accounts of FIIs can invest up to a

maximum of 10 per cent of the total paid-up capital or 10 per cent of
the paid-up value of each series of convertible debentures issued by the
Indian company. The 10 per cent limit would include shares held by
SEBI registered FII/SEBI approved sub accounts of FII under the PIS
(by way of purchases made through a registered broker on a recognised
stock exchange in India or by way of offer/private placement) as well as
shares acquired by SEBI registered FII under the FDI scheme.
b. Total holdings of all FIIs/SEBI approved sub-accounts of FIIs put

together shall not exceed 24 per cent of the paid-up capital or paid-up
value of each series of convertible debentures. This limit of 24 per cent
can be increased to the sectoral cap/statutory limit, as applicable to the
Indian company concerned, by passing of a resolution by its Board of
Directors, followed by a special resolution to that effect by its General
Body which should necessarily be intimated to the Reserve Bank of India
immediately as hitherto, along with certificate from the Company
Secretary stating that all the relevant provisions of the extant Foreign
Exchange Management Act, 1999 regulations and the Foreign Direct
Investment Policy, as amended from time to to time have been complied
with.
! !520
B. NRIs
a. NRIs are allowed to invest in shares of listed Indian companies in

recognised Stock Exchanges under the PIS.
b. NRIs can invest through designated ADs, on repatriation and non-

repatriation basis under PIS route up to 5 per cent of the paid-up
capital/paid-up value of each series of debentures of listed Indian
companies.
c. The aggregate paid-up value of shares/convertible debentures

purchased by all NRIs cannot exceed 10 per cent of the paid-up capital
of the company/paid-up value of each series of debentures of the
company. The aggregate ceiling of 10 per cent can be raised to 24 per
cent by passing of a resolution by its Board of Directors followed by a
special resolution to that effect by its General Body which should
necessarily be intimated to the Reserve Bank of India immediately as
hitherto, along with Certificate from the Company Secretary stating that
all the relevant provisions of the extant Foreign Exchange Management
Act, 1999 regulations and the Foreign Direct Investment Policy, as
amended from time to time have been complied with.
C. Prohibition on investments by FIIs and NRIs
FIIs are not permitted to invest in the capital of a company in Defence

Industry subject to Industrial license under the Industries (Development
and Regulation) Act, 1951.
Both FIIs and NRIs are not allowed to invest in any company which is
engaged or proposes to engage in the following activities:
i. Business of chit fund, or

ii. Nidhi company, or
iii. Agricultural or plantation activities, or
iv. Real estate business* or construction of farm houses, or
v. Trading in Transferable Development Rights (TDRs).
*”Real estate business” does not include construction of housing/

commercial premises, educational institutions, recreational facilities, city
and regional level infrastructure, townships.
! !521
1. Investments by Foreign Venture Capital Investor
i. A SEBI registered Foreign Venture Capital Investor (FVCI) with specific

approval from the Reserve Bank can invest in Indian Venture Capital
Undertaking (IVCU) or Venture Capital Fund (VCF) or in a scheme
floated by such VCFs subject to the condition that the domestic VCF is
registered with SEBI. These investments by SEBI registered FVCI, would
be subject to the respective SEBI regulations and FEMA regulations and
sector specific caps of FDI.
ii. An IVCU is defined as a company incorporated in India whose shares are

not listed on a recognised stock exchange in India and which is not
engaged in an activity under the negative list specified by SEBI. A VCF
is defined as a fund established in the form of a trust, a company
including a body corporate and registered under the Securities and
Exchange Board of India (Venture Capital Fund) Regulations, 1996
which has a dedicated pool of capital raised in a manner specified under
the said Regulations and which invests in Venture Capital Undertakings
in accordance with the said Regulations.
iii. FVCIs can purchase equity/equity linked instruments/debt/debt

instruments, debentures of an IVCU or of a VCF or in units of schemes/
funds set up by a VCF through initial public offer or private placement or
by way of private arrangement or purchase from third party. Further,
FVCIs would also be allowed to invest in securities on a recognised stock
exchange subject to the provisions of the SEBI (FVCI) Regulations,
2000, as amended from time to time.
iv. At the time of granting approval, the Reserve Bank permits the FVCI to
open a non-interest-bearing Foreign Currency Account and/or a non-
interest-bearing Special Non-Resident Rupee Account with a designated
branch of an AD Category-I bank, subject to certain terms and
conditions.
v. A SEBI registered FVCI can acquire/sale securities (as given in (iii)

above) by way of public offer or private placement by the issuer of such
securities and/or by way of private arrangement with a third party at a
price that is mutually acceptable to the buyer and the seller.
! !522
vi. AD Category-I banks can offer forward cover to FVCIs to the extent of
total inward remittance. In case the FVCI has made any remittance by
liquidating some investments, original cost of the investments has to be
deducted from the eligible cover to arrive at the actual cover that can be
offered.
vii.The investments made by FVCI under Schedule I of Notification No.

FEMA 20/2000- RB dated May 3, 2000, as amended from time to time,
would be governed by the norms as stated therein.
Indian Depository Receipts (IDRs) can be issued by non resident

companies in India subject to and under the terms and conditions of
Companies (Issue of Depository Receipts) Rules, 2004 and subsequent
amendment made thereto and the SEBI (ICDR) Regulations, 2000, as
amended from time to time. These IDRs can be issued in India through
Domestic Depository to residents in India as well as SEBI registered FIIs
and NRIs. In case of raising of funds through issuances of IDRs by
financial/banking companies having presence in India, either through a
branch or subsidiary, the approval of the sectoral regulator(s) should be
obtained before the issuance of IDRs.
a. The FEMA Regulations shall not be applicable to persons resident in

India as defined under Section 2(v) of FEMA,1999, for investing in IDRs
and subsequent transfer arising out of transaction on a recognised stock
exchange in India.
b. Foreign Institutional Investors (FIIs) including SEBI approved sub-

accounts of the FIIs, registered with SEBI and Non-Resident Indians
(NRIs) may invest, purchase, hold and transfer IDRs of eligible
companies resident outside India and issued in the Indian capital
market, subject to the Foreign Exchange Management (Transfer or Issue
of Security by a Person Resident Outside India) Regulations, 2000
notified vide Notification No. FEMA 20/2000-RB dated May 3, 2000, as
amended from time to time. Further, NRIs are allowed to invest in the
IDRs out of funds held in their NRE/FCNR(B) account, maintained with
an Authorised Dealer/Authorised bank.
! !523
c. A limited two way fungibility for IDRs (similar to the limited two way
fungibility facility available for ADRs/GDRs) has been introduced which
would be subject to the certain terms and conditions. Further, the
issuance, redemption and fungibility of IDRs would also be subject to
the SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2009, as amended from time to time as well as other relevant
guidelines issued in this regard by the Government, the SEBI and the
RBI from time to time.
d. IDRs shall not be redeemable into underlying equity shares before the
expiry of one year period from the date of issue of the IDRs.
e. At the time of redemption/conversion of IDRs into underlying shares,

the Indian holders (persons resident in India) of IDRs shall comply with
the provisions of the Foreign Exchange Management (Transfer or Issue
of Any Foreign Security) Regulations, 2004 notified vide Notification No.
FEMA 120/RB-2004 dated July 7 2004, as amended from time to time.
9.14 Purchase of other securities by FIIs, QFIs and Long-

Term Investors
FIIs, QFIs and Long-term Investors can buy on repatriation basis dated
Government securities/treasury bills, listed non-convertible debentures/
bonds, commercial papers issued by Indian companies and units of
domestic mutual funds, to be listed NCDs/bonds only if listing of such
NCDs/bonds is committed to be done within 15 days of such investment,
Security receipts issued by Asset Reconstruction Companies and Perpetual
Debt Instruments eligible for inclusion in as Tier I capital (as defined by
DBOD, RBI) and Debt capital instruments as upper Tier II Capital (as
defined by DBOD, RBI) issued by banks in India to augment their capital
either directly from the issuer of such securities or through a registered
stock broker on a recognised stock exchange in India subject to the
following terms and conditions:
a. The total holding by a single FII in each tranche of scheme of Security

Receipts shall not exceed 10 per cent of the issue and total holdings of
all FIIs put together shall not exceed 49 per cent of the paid-up value of
each tranche of scheme/issue of Security Receipts issued by the ARCs.
Further, Sub-account of FIIs are not allowed to invest in the Security
Receipts issued by ARCs.
! !524
b. The total holding by a single FII/sub-account in each issue of Perpetual

Debt Instruments (Tier I) shall not exceed 10 per cent of the issue and
total holdings of all FIIs/sub-account put together shall not exceed 49
per cent of the paid-up value of each issue of Perpetual Debt
Instruments.
c. Purchase of debt instruments including Upper Tier II instruments by FIIs

are subject to limits notified by SEBI and the Reserve Bank from time to
time.
The present limit for investment in Corporate Debt Instruments like non-
convertible debentures/bonds by FIIs, QFIs and Long-term Investors
registered with SEBI comprising Sovereign Wealth Funds (SWFs),
Multilateral Agencies, Pension/Insurance/Endowment Funds and Foreign
Central Banks is USD 51 billion. The eligible investors may invest in
Commercial Paper upto a limit of USD 3.50 billion within the overall limit of
USD 51 billion.
The present limit for investment by SEBI registered FIIs, QFIs and long
term investors in Government securities including Treasury Bills is USD 25
billion. An additional limit of USD 5 billion is available for investment in
dated Government securities for long term investors registered with SEBI,
comprising Sovereign Wealth Finds (SWFs), Multilateral Agencies, Pension/
Insurance/Endowment Funds and Foreign Central Banks. Eligible investors
may invest in Treasury Bills upto a limit of USD 5.50 billion, within the
above overall limits.
! !525
9.15 Qualified Foreign Investors (QFIs) investment in the

units of Domestic Mutual funds
Non-resident investors (other than SEBI registered FIIs/FVCIs) who meet

the KYC requirements of SEBI, were permitted to purchase on repatriation
basis rupee denominated units of equity schemes of SEBI registered
domestic MFs as Qualified Foreign Investors’ (QFIs), in accordance with the
terms and conditions as stipulated by the SEBI and the RBI from time to
time in this regard.
QFIs may invest in rupee denominated units of equity schemes of SEBI

registered domestic MFs under the two routes, namely:
i. Direct Route – SEBI registered Qualified Depository Participant (QDP)

route:
• The QDP route will be operated through single non-interest-bearing

Rupee account to be maintained with an AD Category-I Bank in India.
The foreign inward remittances in to the single non-interest-bearing
Rupee account shall be received only in permissible currency.
ii. Indirect Route – Unit Confirmation Receipt (UCR) route – Domestic MFs
would be allowed to open foreign currency accounts outside India for
the limited purpose of receiving subscriptions from the QFIs as well as
for redeeming the UCRs. The UCR will be issued against units of
domestic MF equity schemes.
iii. Investments by the QFIs under both the routes would be subject to a
ceiling of USD 10 billion for investment in units of equity based domestic
MF and USD 3 billion for investment in units of debt based domestic MF.
QFIs can also invest in those MF schemes that hold at least 25 per cent
of their assets (either in debt or equity or both) in the infrastructure
sector under the USD 3 billion sub-limit for investment in mutual funds
related to infrastructure.
! !526
In order to accelerate and enhance the flow of long-term funds to

infrastructure projects for undertaking the Government’s ambitious
programme of infrastructure development, Union Finance Minister in his
budget speech for 2011-12 had announced setting up of Infrastructure
Debt Funds (IDFs). Government vide press release dated June 24, 2011
notified the broad structure of the proposed IDFs. The summarised position
is given as under:
i. SWFs, Multilateral Agencies, Pension Funds, Insurance Funds and

Endowment Funds registered with SEBI, FIIs, NRIs would be the eligible
class non-resident investors which will be investing in IDFs.
ii. Eligible non-resident investors are allowed to invest on repatriation basis

in (i) Rupee and Foreign currency denominated bonds issued by the
IDFs set up as an Indian company and registered as Non-banking
Financial Companies (NBFCs) with the Reserve Bank of India and in (ii)
Rupee denominated units issued by IDFs set up as SEBI registered
domestic Mutual Funds (MFs), in accordance with the terms and
conditions stipulated by the SEBI and the Reserve Bank of India from
time to time.
iii. The eligible instruments are Foreign Currency and Rupee-denominated

Bonds and Rupee denominated Units;
iv. The facility of Foreign exchange hedging would be available to non-

resident IDF investors, IDFs as well as infrastructure project companies
exposed to the foreign exchange/ currency risk.
! !527
9.17 Purchase of other Securities by QFIs
QFIs can invest through SEBI registered Qualified Depository Participants

(QDPs) (defined as per the extant SEBI regulations) in eligible corporate
debt instruments, viz., listed Non-convertible Debentures (NCDs), listed
bonds of Indian companies, listed units of Mutual Fund debt Schemes and
“to be listed” corporate bonds (hereinafter referred to as ‘eligible debt
securities’) directly from the issuer or through a registered stock broker on
a recognised stock exchange in India. However, in case of non-listing of “to
be listed” corporate bonds, the provisions relating to FIIs would be
applicable. Further, QFIs shall also be permitted to sell ‘eligible debt
securities’ so acquired by way of sale through registered stock broker on a
recognised stock exchange in India or by way of buyback or redemption by
the issuer.
A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident

outside India can invest by way of contribution to the capital of a firm or a
proprietary concern in India on non-repatriation basis provided:
i. Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO

account maintained with Authorised Dealers/Authorised banks.
ii. The firm or proprietary concern is not engaged in any agricultural/

plantation or real estate business (i.e., dealing in land and immovable
property with a view to earning profit or earning income there from) or
print media sector.
iii. Amount invested shall not be eligible for repatriation outside India.

NRIs/PIO may seek prior permission of Reserve Bank for investment in sole
proprietorship concerns/partnership firms with repatriation benefits. The
application will be decided in consultation with the Government of India.
! !528
9.20 Investment by Non-Residents other than NRIs/PIO

A person resident outside India other than NRIs/PIO may make an
application and seek prior approval of Reserve Bank, for making
investment by way of contribution to the capital of a firm or a
proprietorship concern or any association of persons in India. The
application will be decided in consultation with the Government of India.
1. Reporting of FDI for Fresh Issuance of Shares
i. Reporting of inflow
a. The actual inflows on account of such issuance of shares shall be

reported by the AD branch in the R-returns in the normal course.
b. An Indian company receiving investment from outside India for

issuing shares/convertible debentures/preference shares under the
FDI Scheme, should report the details of the amount of consideration
to the Regional Office concerned of the Reserve Bank through its AD
Category-I bank, not later than 30 days from the date of receipt in
the Advance Reporting Form enclosed in Annex-6. Non- compliance
with the above provision would be reckoned as a contravention under
FEMA, 1999 and could attract penal provisions.
c. Indian companies are required to report the details of the receipt of

the amount of consideration for issue of shares/convertible
debentures, through an AD Category-I bank, together with a copy/ies
of the FIRC/s evidencing the receipt of the remittance along with the
KYC report (enclosed as Annex-7) on the non-resident investor from
the overseas bank remitting the amount. The report would be
acknowledged by the Regional Office concerned, which will allot a
Unique Identification Number (UIN) for the amount reported.
! !529
ii. Time frame within which shares have to be issued

The equity instruments should be issued within 180 days from the date of
receipt of the inward remittance or by debit to the NRE/FCNR(B)/Escrow
account of the non-resident investor. In case, the equity instruments are
not issued within 180 days from the date of receipt of the inward
remittance or date of debit to the NRE/FCNR(B) account, the amount of
consideration so received should be refunded immediately to the non-
resident investor by outward remittance through normal banking channels
or by credit to the NRE/FCNR(B)/Escrow account, as the case may be. Non-
compliance with the above provision would be reckoned as a contravention
under FEMA and could attract penal provisions. In exceptional cases,
refund/allotment of shares for the amount of consideration outstanding
beyond a period of 180 days from the date of receipt may be considered by
the Reserve Bank, on the merits of the case.
iii. Reporting of issue of shares
a. After issue of shares (including bonus and shares issued on rights

basis and shares issued on conversion of stock option under ESOP
scheme)/convertible debentures/convertible preference shares, the
Indian company has to file Form FC-GPR, not later than 30 days from
the date of issue of shares. Non-compliance with the above provision
would be reckoned as a contravention under FEMA and could attract
penal provisions.
b. Form FC-GPR has to be duly filled up and signed by Managing

Director/Director/Secretary of the Company and submitted to the
Authorised Dealer of the company, who will forward it to the
concerned Regional Office of the Reserve Bank. The following
documents have to be submitted along with Form FC-GPR:
i) A certificate from the Company Secretary of the company

certifying that:
a. all the requirements of the Companies Act, 1956 have been

complied with;
b. terms and conditions of the Government’s approval, if any, have

been complied with;
! !530
c. the company is eligible to issue shares under these Regulations;

and
d. the company has all original certificates issued by AD banks in

India evidencing receipt of amount of consideration.
ii) A certificate from SEBI registered Merchant Banker or Chartered

Accountant indicating the manner of arriving at the price of the
shares issued to the persons resident outside India.
c. The report of receipt of consideration as well as Form FC-GPR have to be

submitted by the AD bank to the Regional Office concerned of the
Reserve Bank under whose jurisdiction the registered office of the
company is situated.
d. Issue of bonus/rights shares or shares on conversion of stock options

issued under ESOP to persons resident outside India directly or on
amalgamation/merger with an existing Indian company, as well as issue
of shares on conversion of ECB/royalty/lump sum technical know-how
fee/import of capital goods by units in SEZs has to be reported in Form
FC-GPR.
2. Reporting of FDI for Transfer of shares route
i. The actual inflows and outflows on account of such transfer of shares

shall be reported by the AD branch in the R-returns in the normal
course.
ii. Reporting of transfer of shares between residents and non-residents and

vice versa is to be made in Form FC-TRS. The Form FC-TRS should be
submitted to the AD Category-I bank, within 60 days from the date of
receipt of the amount of consideration. The onus of submission of the
Form FC-TRS within the given timeframe would be on the transferor/
transferee, resident in India.
iii. The sale consideration in respect of equity instruments purchased by a

person resident outside India, remitted into India through normal
banking channels, shall be subjected to a KYC check by the remittance
receiving AD Category-I bank at the time of receipt of funds. In case,
the remittance receiving AD Category-I bank is different from the AD
! !531
Category-I bank handling the transfer transaction, the KYC check should
be carried out by the remittance receiving bank and the KYC report be
submitted by the customer to the AD Category-I bank carrying out the
transaction along with the Form FC-TRS.
iv. The AD bank should scrutinise the transactions and on being satisfied
about the transactions should certify the form FC-TRS as being in order.
v. The AD bank branch should submit two copies of the Form FC-TRS
received from their constituents/customers together with the statement
of inflows/outflows on account of remittances received/made in
connection with transfer of shares, by way of sale, to IBD/FED/or the
nodal office designated for the purpose by the bank in the enclosed
proforma (which is to be prepared in MS-Excel format). The IBD/FED or
the nodal office of the bank will consolidate reporting in respect of all
the transactions reported by their branches into two statements inflow
and outflow statement. These statements (inflow and outflow) should be
forwarded on a monthly basis to Foreign Exchange Department, Reserve
Bank, Foreign Investment Division, Central Office, Mumbai in soft copy
(in MS-Excel) by e-mail. The bank should maintain the FC-TRS forms
with it and should not forward the same to the Reserve Bank of India.
vi. The transferee/his duly appointed agent should approach the investee
company to record the transfer in their books along with the certificate
in the Form FC-TRS from the AD branch that the remittances have been
received by the transferor/payment has been made by the transferee.
On receipt of the certificate from the AD, the company may record the
transfer in its books.
vii.On receipt of statements from the AD bank, the Reserve Bank may call
for such additional details or give such directions as required from the
transferor/transferee or their agents, if need be.
! !532
3. Reporting of Conversion of ECB into Equity
A detail of issue of shares against conversion of ECB has to be reported to

the Regional Office concerned of the Reserve Bank, as indicated below:
a. In case of full conversion of ECB into equity, the company shall report
the conversion in Form FC-GPR to the Regional Office concerned of
the Reserve Bank as well as in Form ECB-2 to the Department of
Statistics and Information Management (DSIM), Reserve Bank of
India, Bandra-Kurla Complex, Mumbai – 400 051, within seven
working days from the close of month to which it relates. The words
"ECB wholly converted to equity" shall be clearly indicated on top of
the Form ECB-2. Once reported, filing of Form ECB-2 in the
subsequent months is not necessary.
b. In case of partial conversion of ECB, the company shall report the

converted portion in Form FC-GPR to the Regional Office concerned
as well as in Form ECB-2 clearly differentiating the converted portion
from the non-converted portion. The words “ECB partially converted
to equity” shall be indicated on top of the Form ECB-2. In the
subsequent months, the outstanding balance of ECB shall be reported
in Form ECB-2 to DSIM.
c. The SEZ unit issuing equity as mentioned in para (iii) above, should
report the particulars of the shares issued in the Form FC-GPR.
4. Reporting of ESOPs for Allotment of Equity Shares

The issuing company is required to report the details of issuance of ESOPs
to its employees to the Regional Office concerned of the Reserve Bank, in
plain paper reporting, within 30 days from the date of issue of ESOPs.
Further, at the time of conversion of options into shares the Indian
company has to ensure reporting to the Regional Office concerned of the
Reserve Bank in form FC-GPR, within 30 days of allotment of such shares.
! !533
5. Reporting of ADR/GDR Issues

The Indian company issuing ADRs/GDRs has to furnish to the Reserve
Bank, full details of such issue within 30 days from the date of closing of
the issue. The company should also furnish a quarterly return to the
Reserve Bank within 15 days of the close of the calendar quarter. The
quarterly return has to be submitted till the entire amount raised through
ADR/GDR mechanism is either repatriated to India or utilised abroad as per
the extant Reserve Bank guidelines.
6. Reporting of FII Investments under PIS Scheme
i. FII reporting: The AD Category-I banks have to ensure that the FIIs
registered with SEBI who are purchasing various securities (except
derivative and IDRs) by debit to the Special Non-Resident Rupee
Account should report all such transactions details (except derivative
and IDRs) in the Form LEC(FII) to Foreign Exchange Department,
Reserve Bank of India, Central Office by uploading the same to the
ORFS website (https://secweb.rbi.org.in/ORFSMainWeb/Login.jsp). It
would be the bank’s responsibility to ensure that the data submitted to
RBI is reconciled by periodically taking a FII holding report for their
bank.
ii. The Indian company which has issued shares to FIIs under the FDI
Scheme (for which the payment has been received directly into
company’s account) and the Portfolio Investment Scheme (for which the
payment has been received from FIIs' account maintained with an AD
Category-I bank in India) should report these figures separately under
item no. 5 of Form FC-GPR (Post-issue pattern of shareholding) so that
the details could be suitably reconciled for statistical/monitoring
purposes.
7. Reporting of NRI Investments under PIS Scheme

The designated link office of the AD Category-I bank shall furnish to the
Reserve Bank, a report on a daily basis on PIS transactions undertaken on
behalf of NRIs for their entire bank. This report can be uploaded directly on
the OFRS website (https://secweb.rbi.org.in/ORFS MainWeb/ Login.jsp). It
would be the banks responsibility to ensure that the data submitted to RBI
is reconciled by periodically taking a NRI holding report for their bank.
! !534
8. Reporting of foreign investment by way of issue/transfer of

‘participating interest/right’ in oil fields
Foreign investment by way of issue/transfer of ‘participating interest/right’
in oil fields by Indian companies to a non-resident would be treated as an
FDI transaction under the extant FDI policy and the FEMA regulations.
Accordingly, transfer of ‘participating interest/rights’ will be reported as
‘other’ category under Para 7 of revised Form FC-TRS as given in the
Annex-8 and issuance of ‘participating interest/rights’ will be reported as
‘other’ category of instruments under Para 4 of Form FC-GPR.
9.22 Non-Resident Accounts
In terms of the Foreign Exchange Management Act (FEMA), 1999 a person

resident outside India means a person who is not resident in India.
Types of Accounts
If a person is NRI or PIO, she/he can, without the permission from the
Reserve Bank, open, hold and maintain the different types of accounts
given below with an Authorised Dealer in India, i.e., a bank authorised to
deal in foreign exchange. NRO Savings accounts can also be
maintained with the Post Offices in India. However, individuals/entities
of Bangladesh and Pakistan require prior approval of the Reserve Bank.
Following Types of accounts which can be maintained by an NRI/

PIO in India.
A. Non-resident Ordinary Rupee Account (NRO Account)
NRO accounts may be opened/maintained in the form of current, savings,

recurring or fixed deposit accounts.
• Savings Account: Normally maintained for crediting legitimate dues/

earnings/income such as dividends, interest etc. Banks are free to
determine the interest rates.
• Term Deposits: Banks are free to determine the interest rates. Interest
rates offered by banks on NRO deposits cannot be higher than those
offered by them on comparable domestic rupee deposits.
• Account should be denominated in Indian Rupees.
! !535
• Permissible credits to NRO account are transfers from rupee accounts of

non-resident banks, remittances received in permitted currency from
outside India through normal banking channels, permitted currency
tendered by account holder during his temporary visit to India, legitimate
dues in India of the account holder like current income like rent,
dividend, pension, interest, etc., sale proceeds of assets including
immovable property acquired out of rupee/foreign currency funds or by
way of legacy/ inheritance.
• Eligible debits such as all local payments in rupees including payments

for investments as specified by the Reserve Bank and remittance outside
India of current income like rent, dividend, pension, interest, etc., net of
applicable taxes, of the account holder.
• NRI/PIO may remit from the balances held in NRO account an amount
not exceeding USD one million per financial year, subject to payment of
applicable taxes.
• The limit of USD 1 million per financial year includes sale proceeds of
immovable properties held by NRIs/PIOs.
• The accounts may be held jointly with residents and/or with non-resident
Indian.
• The NRO account holder may opt for nomination facility.
• NRO (current/savings) account can also be opened by a foreign national

of non-Indian origin visiting India, with funds remitted from outside India
through banking channel or by sale of foreign exchange brought by him
to India. The details of this facility are given in the FAQs on “Accounts
opened by Foreign Nationals and Foreign Tourists” available on the RBI
website.
• Loans to non-resident account holders and to third parties may be

granted in Rupees by Authorised Dealer/bank against the security of
fixed deposits subject to certain terms and conditions.
! !536
B. Non-resident (External) Rupee Account (NRE Account)
• NRE account may be in the form of savings, current, recurring or fixed

deposit accounts. Such accounts can be opened only by the non-resident
himself and not through the holder of the power of attorney.
• NRIs as defined in Notification No. FEMA 5/2000-RB dated May 3, 2000

may be permitted to open NRE account with their resident close relatives
(relative as defined in Section 6 of the Companies Act, 1956) on ‘former
or survivor’ basis. The resident close relative shall be eligible to operate
the account as a Power of Attorney holder in accordance with the extant
instructions during the lifetime of the NRI/PIO account holder.
• Account will be maintained in Indian Rupees.
• Balances held in the NRE account are freely repatriable.
• Accrued interest income and balances held in NRE accounts are exempt
from Income tax and Wealth tax, respectively.
• Authorised dealers/authorised banks may at their discretion/commercial

judgement allow for a period of not more than two weeks, overdrawing in
NRE savings bank accounts, up to a limit of Rs. 50,000 subject to the
condition that such overdrawing together with the interest payable
thereon are cleared/repaid within a period of two weeks, out of inward
remittances through normal banking channels or by transfer of funds
from other NRE/FCNR accounts.
• Savings – Banks are free to determine the interest rates.
• Term deposits – Banks are free to determine the interest rates of term
deposits of maturity of one year and above. Interest rates offered by
banks on NRE deposits cannot be higher than those offered by them on
comparable domestic rupee deposits.
• Permissible credits to NRE account are inward remittance to India in

permitted currency, proceeds of account payee cheques, demand drafts/
bankers’ cheques, issued against encashment of foreign currency, where
the instruments issued to the NRE account holder are supported by
encashment certificate issued by AD Category-I/Category-II, transfers
! !537
from other NRE/FCNR accounts, sale proceeds of FDI investments,

interest accruing on the funds held in such accounts, interest on
Government securities/dividends on units of mutual funds purchased by
debit to the NRE/FCNR(B) account of the holder, certain types of refunds,
etc.
• Eligible debits are local disbursements, transfer to other NRE/FCNR

accounts of person eligible to open such accounts, remittance outside
India, investments in shares/securities/commercial paper of an Indian
company, etc.
• Loans up to Rs. 100 lakh can be extended against security of funds held
in NRE Account either to the depositors or third parties.
• Such accounts can be operated through power of attorney in favour of

residents for the limited purpose of withdrawal of local payments or
remittances through normal banking channels to the account holder
himself.
C. Foreign Currency Non-resident (Bank) Account – FCNR(B)

Account
• FCNR (B) accounts are only in the form of term deposits of 1 to 5 years.
• All debits/credits permissible in respect of NRE accounts, including credit

of sale proceeds of FDI investments, are permissible in FCNR(B) accounts
also.
• Account can be in any freely convertible currency.
• Loans up to Rs. 100 lakh can be extended against security of funds held
in FCNR(B) deposit either to the depositors or third parties.
• The interest rates are stipulated by the Department of Banking

Operations and Development, Reserve Bank of India. In respect of
FCNR(B) deposits of all maturities contracted effective from the close of
business in India as on November 23, 2011, interest shall be paid within
the ceiling rate of LIBOR/SWAP rates plus 125 basis points for the
respective currency/corresponding maturities (as against LIBOR/SWAP
rates plus 100 basis points effective from close of business on November
! !538
15, 2008). On floating rate deposits, interest shall be paid within the
ceiling of SWAP rates for the respective currency/maturity plus 125 basis
points. For floating rate deposits, the interest reset period shall be six
months.
• When an account holder becomes a person resident in India, deposits

may be allowed to continue till maturity at the contracted rate of
interest, if so desired by him.
• Terms and conditions as applicable to NRE accounts in respect of joint

accounts, repatriation of funds, opening account during temporary visit,
operation by power of attorney, loans/overdrafts against security of funds
held in accounts, shall apply mutatis mutandis to FCNR(B). NRI can open
joint account with a resident close relative (relative as defined in Section
6 of the Companies Act, 1956) on former or survivor basis. The resident
close relative will be eligible to operate the account as a Power of
Attorney holder in accordance with extant instructions during the life
time of the NRI/ PIO account holder.
Note: Opening of accounts by individuals/entities of Bangladesh/Pakistan

nationality requires prior approval of the Reserve Bank. All such requests
may be referred to the Chief General Manager-in-Charge, Foreign
Exchange Department, Foreign Investment Division, Reserve Bank of India,
Central Office, Mumbai - 400 001.
Facilities Available to NRIs/PIO
A. Investment facilities for NRIs
NRI may, without limit, purchase on repatriation basis:
• Government dated securities/Treasury bills
• Units of domestic mutual funds;
• Bonds issued by a public sector undertaking (PSU) in India.
• Non-convertible debentures of a company incorporated in India.
! !539
• Perpetual debt instruments and debt capital instruments issued by banks

in India.
• Shares in Public Sector Enterprises being dis-invested by the Government

of India, provided the purchase is in accordance with the terms and
conditions stipulated in the notice inviting bids.
• Shares and convertible debentures of Indian companies under the FDI

scheme (including automatic route and FIPB), subject to the terms and
conditions specified in Schedule 1 to the FEMA Notification No. 20/2000 –
RB dated May 3, 2000, as amended from time to time.
• Shares and convertible debentures of Indian companies through stock

exchange under Portfolio Investment Scheme, subject to the terms and
conditions specified in Schedule 3 to the FEMA Notification No. 20/2000 –
RB dated May 3, 2000, as amended from time to time.
NRI may, without limit, purchase on non-repatriation basis:
• Government dated securities/Treasury bills
• Units of domestic mutual funds
• Units of Money Market Mutual Funds
• National Plan/Savings Certificates

• Non-convertible debentures of a company incorporated in India
• Shares and convertible debentures of Indian companies through stock

exchange under Portfolio Investment Scheme, subject to the terms and
conditions specified in Schedules 3 and 4 to the FEMA Notification No.
20/2000 – RB dated May 3, 2000, as amended from time to time.
• Exchange traded derivative contracts approved by the SEBI, from time to

time, out of INR funds held in India on non-repatriable basis subject to
the limits prescribed by the SEBI.
Note: NRIs are not permitted to invest in small savings or Public Provident
Fund (PPF).
! !540
B. Investment in Immovable Property)
• NRI/PIO4/Foreign National who is a person resident in India (citizen of

Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and
Bhutan would require prior approval of the Reserve Bank) may acquire
immovable property in India other than agricultural land/ plantation
property or a farm house out of repatriable and/or non-repatriable funds.
• The payment of purchase price, if any, should be made out of:
i. funds received in India through normal banking channels by way of

inward remittance from any place outside India or
ii. funds held in any non-resident account maintained in accordance

with the provisions of the Act and the regulations made by the
Reserve Bank.
Note: No payment of purchase price for acquisition of immovable

property shall be made either by travellers’ cheque or by foreign
currency notes or by other mode other than those specifically
permitted as above.
• NRI may acquire any immovable property in India other than agricultural
land/farm house plantation property, by way of gift from a person
resident in India or from a person resident outside India who is a citizen
of India or from a person of Indian origin resident outside India.
• NRI may acquire any immovable property in India by way of inheritance

from a person resident outside India who had acquired such property in
accordance with the provisions of the foreign exchange law in force at
the time of acquisition by him or the provisions of these Regulations or
from a person resident in India.
• An NRI may transfer any immovable property in India to a person

resident in India.
• NRI may transfer any immovable property other than agricultural or

plantation property or farm house to a person resident outside India who
is a citizen of India or to a person of Indian origin resident outside India.
! !541
In respect of such investments, NRIs are eligible to repatriate:
• The sale proceeds of immovable property in India if the property was

acquired out of foreign exchange sources, i.e., remitted through normal
banking channels/by debit to NRE/FCNR(B) account.
• The amount to be repatriated should not exceed the amount paid for the
property in foreign exchange received through normal banking channel
or by debit to NRE account (foreign currency equivalent, as on the date
of payment) or debit to FCNR(B) account.
• In the event of sale of immovable property, other than agricultural land/

farm house/plantation property in India, by a person resident outside
India who is a citizen of India /PIO, the repatriation of sale proceeds is
restricted to not more than two residential properties subject to certain
conditions.
• If the property was acquired out of Rupee sources, NRI or PIO may remit
an amount up to USD one million per financial year out of the balances
held in the NRO account (inclusive of sale proceeds of assets acquired by
way of inheritance or settlement), for all the bonafide purposes to the
satisfaction of the Authorised Dealer bank and subject to tax compliance.
• Refund of (a) application/earnest money/purchase consideration made by

house-building agencies/seller on account of non-allotment of flats/plots
and (b) cancellation of booking/deals for purchase of residential/
commercial properties, together with interest, net of taxes, provided
original payment is made out of NRE/FCNR(B) account/inward
remittances.
C. Facilities to Returning NRIs/PIOs
• Returning NRIs/PIOs may continue to hold, own, transfer or invest in

foreign currency, foreign security or any immovable property situated
outside India, if such currency, security or property was acquired, held or
owned when resident outside India.
• The income and sale proceeds of assets held abroad need not be
repatriated.
! !542
D. Foreign Currency Account
• A person resident in India who has gone abroad for studies or who is on
a visit to a foreign country may open, hold and maintain a Foreign
Currency Account with a bank outside India during his stay outside India,
provided that on his return to India, the balance in the account is
repatriated to India. However, short visits to India by the student who
has gone abroad for studies, before completion of his studies, shall not
be treated as his return to India.
• A person resident in India who has gone out of India to participate in an

exhibition/trade fair outside India may open, hold and maintain a Foreign
Currency Account with a bank outside India for crediting the sale
proceeds of goods on display in the exhibition/trade fair. However, the
balance in the account is repatriated to India through normal banking
channels within a period of one month from the date of closure of the
exhibition/trade fair.
E. Resident Foreign Currency Account
• Returning NRIs/PIOs may open, hold and maintain with an authorised

dealer in India a Resident Foreign Currency (RFC) Account to transfer
balances held in NRE/FCNR(B) accounts.
• Proceeds of assets held outside India at the time of return can be

credited to RFC account.
• The funds in RFC accounts are free from all restrictions regarding
utilisation of foreign currency balances including any restriction on
investment in any form outside India.
• RFC accounts can be maintained in the form of current or savings or

term deposit accounts, where the account holder is an individual and in
the form of current or term deposits in all other cases.
RFC accounts are permitted to be held jointly with the resident close
relative(s) as defined in the Companies Act, 1956 as joint holder(s) in their
RFC bank account on ‘former or survivor basis’. However, such resident
Indian close relative, now being made eligible to become joint account
! !543
holder shall not be eligible to operate the account during the lifetime of the
resident account holder.
Another source for external funds mobilisation is by way of receipt of

bilateral/multilateral assistance such as:
• Bilateral Overseas development assistance such as official development

assistance given by Organisation for Economic cooperation and
development (OECD) to developing countries, the developed countries
are members of this organisation and adopt a common approach
• Multilateral assistance from agencies such as World Bank, IMF, Asian

Development Bank, IFC etc. provide long-term loans for specific projects.
These all are important sources for external funds mobilisation by the
country and play very important role in development of economy of the
country in present era of liberalisation and globalisation.
! !544
9.24 Summary
The country needs to mobilise external funds to meet the gaps between
their current external receipts and payments. The opening up of the
economy has opened various sources of the external funds which include
external commercial borrowing (ECB), foreign direct investment (FDI) and
raising equity through ADRs/GDRs/IDRs etc., foreign currency deposits,
foreign currency loans etc. This chapter describes the sources of the
external funds mobilisation and sources for raising money in overseas
market.
! !545
1. Why the country deeds to mobilise the external funds?
2. What are the purposes for which the ECB can be raised?
3. Why external funds mobilisation required for Trade Credit?
4. What is foreign direct investment? What are routes for attracting the
foreign direct investment?
5. What are the non resident accounts? Explain in brief how it helps to
mobilise the external funds.
6. Explain:
a. QFI
b. ADR
c. IDR
! !546
1. What is external commercial borrowing?

a. Amount borrowed from overseas
b. Loan or equity raised in foreign currency
c. Loan from the banks
d. Loans from the external lender
2. Under ECB, which type of industries are given priority?

a. Infrastructure and core sectors
b. Real estate
c. Banking and insurance
d. International capital markets
3. Who are considered as recognised lender for the purpose of ECB?

a. Banks, suppliers of equipments, equity holders, agencies recognised
internationally
b. Any foreign agency
c. Capital Market
d. All above
4. In which sector Investment is prohibited by borrowing under ECB?

a. Baking and Insurance
b. Infrastructure
c. Stock Market and Real estate
d. Agriculture
5. ECB proposals for borrowing are required to be forwarded to_______.

a. Commerce ministry
b. Finance ministry
c. Ministry of respective sectors
6. What are FRN notes?

a. Long-term instruments
b. Short-term instruments
c. Medium-term instruments
 
! !547
7. What is FRN Bonds?

a. Having shorter maturity
b. Having longer maturity
c. Without any maturity
d. All of the above
8. NRE account can be of opened in the form of .

a. Savings/current/ fixed/recurring deposit
b. Savings and Term/recurring deposit
c. Only savings account
d. Only current account
9. What is bilateral assistance as source of external funds?

a. Assistance provided by more than one external agencies
b. Assistance provided by OECD to developing countries
c. Assistance provided by any countries as loan
d. Assistance provided by way of agreement to an country
10.What is multilateral assistance as source of External funds?

a. Assistance form agencies such as world bank/IMF/ADB/IFC on long-
term basis for specific projects
b. Assistance provided by developed countries
c. Assistance provided for infrastructure projects
d. It is aid by developed counties on short-term basis
! !548
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !549
EXPORT PROMOTION INCENTIVES
Chapter 10
Objectives
describe:
• Role of Government, RBI, Exim Bank and Commercial Banks in Export

promotion
• Incentive offered by the Government/RBI/Exim Bank and Commercial
Banks to Exporters
• Cover issued by ECGL
• Export Promotion institution
• Combine Transport Document (CTD)
• Concessions granted to exporters
Structure:
10.5 Role of Banks
10.9 Export Assistance by the EXIM Bank
10.14 Economical and Technical Cooperation Agreements
10.16 Sum up: Concessions Granted to Exporters
10.17 Summary
! !550
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.
India has emerged victorious in the recent recession, which started in the
US and engulfed the whole world in a short span of time. India could be
able to secure a respectable rate of growth of 6.7 per cent during 2008-09,
which is the second highest in world after China. This was mainly because
of the domestic-led demand of the Indian economy and stimulus measures
initiated by the government at the fiscal and monetary policy levels.
However, the exports of India suffered a great deal as a result of the
sagging demand in the world economy in general and its main trading
partners’ economies in particular. Except for the fiscal year 2009-10
witnessed negative export growth rates.
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.
! !551
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 Scheme
(CIB) 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:
• 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.
! !552
• 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.
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. This has enabled banks to increase their
lending capacity under export credit in foreign currency.
! !553
Exim Bank has been striving to promote exports of products and services
from the creative industry, through capacity building and skill development.
Export-Import Bank of India is the premier export finance institution in
India, established in 1982 under the Export-Import Bank of India Act 1981.
Since its inception, Exim Bank of India has been both a catalyst and a key
player in the promotion of cross-border trade and investment. Commencing
operations as a purveyor of export credit, like other Export Credit Agencies
in the world, Exim Bank of India has, over the period, evolved into an
institution that plays a major role in partnering Indian industries,
particularly the Small and Medium Enterprises, in their globalisation 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's functions are segmented into several operating groups

including:
• Corporate Banking Group which handles a variety of financing

programmes for Export-oriented Units (EOUs), Importers, and overseas
investment by Indian companies.
• Project Finance/Trade Finance Group handles the entire range of export

credit services such as supplier's credit, Pre-shipment Agriculture
Business Group, to spearhead the initiative to promote and support
Agricultural exports. The Group handles projects and export transactions
in the agricultural sector for financing.
• Small and Medium Enterprise: The group handles credit proposals from
SMEs under various lending programmes of the Bank.
• Export Services Group offers variety of advisory and value-added

information services aimed at investment promotion.
• Export Marketing Services Bank offers assistance to Indian companies, to

enable them establish their products in overseas markets. The idea
behind this service is to promote Indian export. Export Marketing
Services covers wide range of export oriented companies and
! !554
organisations. EMS group also covers Project exports and Export of

Services.
• Besides these, the Support Services groups, which include: Research and
Planning, Treasury and Accounts, Loan Administration, Internal Audit,
Management Information Services, Information Technology, Legal,
Human Resources Management and Corporate Communication
10.5 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.
! !555
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 have no
options but to increase its exports substantially for the health of our
economy.
When major developed countries are yet to come out of recession, India is
expected to achieve 8.5 per cent 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:
a. Advance Authorisation [AA] including Annual Advance Authorisation
b. Duty Free Import Authorisation [DFIA]
! !556
These instruments offer exemption from payment of Customs/Excise duties

on imports/indigenous procurement of inputs.
c. Duty Entitlement Passbook Scheme [DEPB] and Duty Drawback [DBK]

are instruments which offer duty remission or duty refund of input
duties post-exports. These instruments neutralise the impact of central
duty/taxes on inputs.
The salient features of these instruments are as under:
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 Additional Duty [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 per cent 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.
! !557
• 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
per cent of the FOB value of physical export and/or FOR value of deemed
export in preceding licensing year.
Duty Free Import Authorisation [DFIA]
• DFIA can be availed for all export products having fixed SION.
• 20 per cent 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.
! !558
Duty Drawback [DBK]
i. 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.
ii. These duties may be duties of Customs paid on imported materials and/
or duties of Central Excise paid on indigenous materials.
iii. There are three types of DBK rates, which are:
• 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 Scripps. 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 per cent
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.
! !559
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
i. Allows import of capital goods [CGs] at zero customs duty.
ii. 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.
iii. 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].
! !560
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 per cent 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 per cent 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

paperwork.
! !561
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 per cent 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, Nonferrous 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)
! !562
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:
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 & 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.
! !563
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 Department 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.
! !564
The rupee export credit interest rate subvention scheme was formulated by
the Government of India to alleviate the exporters’ concerns for which
operational instructions are issued by the Reserve Bank of India based on
advice from the Ministry of Finance, Government of India. The sectors/sub-
sectors to be included under the interest subvention facility are decided by
the Government.
In 2007, the Government of India announced a package of measures to

provide interest rate subvention of 2 percentage points per annum on
rupee export credit availed of by exporters in nine specified categories of
exports, viz., textiles (including handlooms), readymade garments, leather
products, handicrafts, engineering products, processed agricultural
products, marine products, sports goods and toys and to all exporters from
the SME sector defined as micro enterprises, small enterprises and medium
enterprises for a period from April 1, 2007 to September 30, 2008. The
coverage was extended to include jute and carpets, processed cashew,
coffee and tea, solvent extracted de-oiled cake, plastics and linoleum.
Further, in respect of leather and leather manufactures, marine products,
all categories of textiles under the existing scheme including Ready-made
Garments and carpets but excluding man-made fibre and handicrafts, the
Government provided additional subvention of 2 per cent (in addition to
the 2 per cent offered earlier) in pre-shipment credit for 180 days and
post-shipment credit for 90 days (for carpet sector, the pre-shipment credit
would be available for 270 days). Accordingly, banks would charge interest
rate not exceeding BPLR minus 4.5/6.5 per cent, as applicable, on pre-
shipment credit upto 180 days and post-shipment credit upto 90 days on
the outstanding amount for the period April 1, 2007 to September 30,
2008. However, the total subvention will be subject to the condition that
the interest rate, after subvention will not fall below 7 per cent which is the
rate applicable to the agriculture sector under priority sector lending.
In December 2008, the Government of India announced the second

scheme of interest subvention of 2 percentage points for certain
employment-oriented export sectors, viz., Textiles (including Handloom),
handicrafts, carpets, leather, gems and jewellery, marine products and
Small and Medium Enterprises for the period December 1, 2008 to
September 30, 2009. Accordingly, banks would charge interest rate not
exceeding BPLR minus 4.5 per cent on pre-shipment credit upto 270 days
! !565
and post-shipment credit upto 180 days on the outstanding amount for the
period December 1, 2008 to September 30, 2009. This scheme was
subsequently extended upto March 31, 2010.
In April 2010, the Government of India announced the third scheme of

interest rate subvention of 2 percentage points for certain employment
oriented export sectors, viz., Handicrafts, Carpets, Handlooms and Small
and Medium Enterprises (SME) for the period April 1, 2010 to March 31,
2011, subject to the condition that banks will charge interest rate not
exceeding BPLR minus 4.5 percentage points on pre-shipment credit upto
270 days and post-shipment credit upto 180 days on the outstanding
amount for the above period to these sectors. However, the total
subvention is subject to the condition that the interest rate, after
subvention will not fall below 7 per cent, which is the rate applicable to the
short term crop loan under priority sector lending.
In August 2010, the Government of India decided to extend interest rate

subvention of 2 per cent on rupee export credit with effect from April 1,
2010 to March 31, 2011 on the same terms and conditions to certain
additional sectors, viz., Leather and Leather Manufactures, Jute
Manufacturing including Floor covering, Engineering Goods and Textiles.
In October 2011, the Government of India announced the fourth scheme of

oriented export sectors, viz., Handicrafts, Handlooms, Carpets and SMEs.
In June 2012, the Government of India announced the fifth scheme of
oriented export sectors viz; Handicrafts, Carpet, Handlooms, SMEs,
Readymade Garments, Processed Agriculture Products, Sport Goods and
Toys.
In January 2013, Government of India announced the sixth scheme of

interest rate subvention of 2 percentage points on the same terms and
conditions for Handicrafts, Carpet, Handlooms, Small and Medium
Enterprises, Readymade Garments, Processed Agriculture Goods, Sports
Goods and Toys for the period April 1, 2013 to March 31, 2014. The
scheme was also widened to include 134 tariff lines of engineering products
on the same terms and conditions for the period January 1, 2013 to March
31, 2014.
! !566
Later in May 2013, the Government extended the 2 per cent interest rate
subvention scheme to a list of another 101 tariff lines in engineering goods
sector (in addition to the existing 134 tariff lines mentioned above) and 6
tariff lines of textile good sector on the same terms and conditions for the
period April 1, 2013 to March 31, 2014.
With the change over to the Base Rate System, the interest rates
applicable for all tenors of rupee export credit advances with effect from
July 1, 2010 are at or above Base Rate in respect of all fresh/renewed
a d v a n c e s a s a d v i s e d v i d e c i r c u l a r D B O D . D i r. ( E x p ) . B C . N o .
102/04.02.001/2009-10 dated May 6, 2010. Accordingly, banks should
reduce the interest rate chargeable to the exporters as per the Base Rate
System in the above mentioned sectors eligible for export credit subvention
by the amount of subvention available, subject to a floor rate of 7 Per cent.
If, as a consequence, the interest rate charged to exporters goes below the
Base Rate, such lending will not be construed to be a violation of the Base
Rate guidelines.
Banks are required to completely pass on the benefit of interest

subvention, as applicable, to the eligible exporters upfront and submit the
claims to RBI for reimbursement duly certified by the external auditor. The
subvention would be reimbursed by RBI on the basis of quarterly claims
submitted by the banks in the prescribed format.
! !567
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

eligible for concessional rate of interest and refinance from RBI upto a
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
! !568
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.
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 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 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:
• No advances may be granted against retention money relating to

services portion of the contract.
• Exporters may be advised to arrange, as far as possible, provision of

suitable guarantees, instead of retention money.
! !569
• 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
! !570
10.9 Export Assistance by the 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, supervision 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.
! !571
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 mobilization advance as a percentage (10-20 per cent)
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 per cent 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
! !572
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 per cent 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.
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
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
! !573
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
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
! !574
cover for buyer's credit; Line of Credit, Overseas investment insurance

and Exchange fluctuation risk insurance.
The covers issued by ECGC are policies issued to exporters and guarantees
issued to Banks. They are as under:
• Standard Policies
• Specific Policies
• Financial Guarantees
• Special Scheme Guarantees
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 lakh.
The risks covered under the Standard Policy:
A. Commercial Risks
1. 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.
2. 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.
! !575
• Insolvency of the LC Opening bank.
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 lakh. 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 DP bill

into DA bill, provided that he has already obtained suitable credit limit on
the buyer on DA terms.
• Where the value of this bill is not more than Rs. 3 lakh, conversion of DP
bill into DA bill is permitted even if credit limit on the buyer has been
obtained on DP terms only, but only one claim can be considered during
the policy period on account of losses arising from such conversions.
! !576
• A small exporter may, without the prior approval of ECGC extend the due
date of payment of a DA bill provided that a credit limit on the buyer on
DA 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:
• 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.
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.
! !577
• 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. Service 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 lakh per annum towards
premium. Therefore, all the exporters who will pay a premium of Rs. 10
lakh 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.
In most of the other respects including commercial and political risks
! !578
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
i. Exporters who do not hold SCR Policy and
ii. 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
i. Risks covered on the overseas buyers:
ii. Insolvency of the buyer.
iii. Failure of the buyer to make the payment due within a specified
period, normally four months from the due date.
iv. 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.
! !579
• 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
! !580
• 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.
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. 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.
! !581
Two types of Exposure policies are offered, viz.,
i. Exposure (Single Buyer) Policy – for covering the risks on a specified

buyer and
ii. 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, 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 per cent of the value of export.
! !582
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.
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.
! !583
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 per cent and loss due to commercial risks up to
75 per cent.
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 underthe policy can be enhanced subsequently if
necessary.
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 two shipments. Credit limit is the limit on the
! !584
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 lakh. 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 two
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 on 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. 10,00,000 for DP bills and
Rs. 3,00,000 for DA bills.
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.
! !585
Percentage of Cover: ECGC normally pays 90 per cent of the loss

whether it arises due to commercial risk or political risk. The remaining 10
per cent 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 policy

holder 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 wil be remitted along with the
declaration. If no shipment is made during the month, NIL declaration has
to be submitted.
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 the comprehensive risk or only
political risk.
For enabling the policy holder 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.
1. Reporting Default:
The event of non payment of any export bill, policy holder 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.
! !586
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 policy holder
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 per cent 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 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 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.
! !587
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
• 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, 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 their adjusting all legal expenses, outstanding charges,
out of pocket expenses etc.
! !588
2. 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:
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
2
during the month. Maximum Liability that will be covered is ! 66 per cent of
3
the Packing Credit Limit sanctioned and approved by ECGC.
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.
Individual Post shipment Guarantee (INPS)

Any bank or financial institution who is an authorized 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 per cent risk is covered by ECGC. Premium rate is 0.09
per cent 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
! !589
or extended due date of advances. If not recovered, filing of claim within 6

months of the Report of Default.
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 per cent.
The obligation of the bank is 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.
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 cent per annum for 75% cover and 1.08 per cent
per annum for 90 per cent cover. Premium is payable in Indian Rupees.
Claims under the Guarantee will also be paid in Indian Rupees.
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 per cent up to certain Limit and
! !590
65 per cent beyond the said Limit. (For others varies from 55 per cent to
75 per cent depending on claim premium ratio of the bank.) For Small
Scale Exporters (SSE)/Small Scale Industrial Units (SSI), it is 90 per cent.
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
Highlights of this guarantee – Banks can exercise option to exclude,

Government Companies 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.
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 per cent. 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 per cent 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
! !591
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.
3. 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 per cent to 95 per
cent in respect of exporters who are policy holders of ECGC and 50 per
cent to 75 per cent for non-policy holders, depending upon the claim
premium ratio of the bank. For bills drawn on Associates of policy holders
coverage is 60 per cent and of non-policy holders it is 50 per cent.
Premium payable is 4.5 paisa TO 6.00 paisa per Rs. 100 p.m. if advances
against LC 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
extended due date of advances, if not recovered, filing of claim within 6
Banks Individual Post-shipment (ECIB-INPS)

Any bank or financial institution who is an authorised dealer in foreign
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-
! !592
shipment advances due to protracted default or insolvency of the exporter-

client. Percentage cover offered is 75 per cent for advances against bills
drawn on buyers other than associates. 60 per cent 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 per cent 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 extended due date of advances, if not
recovered, filing of claim within 6 months of the Report of Default.
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 per cent.
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
LC 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 per cent.
! !593
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 LCs. 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 per cent
for advances against bills drawn on buyers other than LC bills and on
associates. 60 per cent on associates and LC 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 per cent of the
Post-shipment Limit sanctioned to the account.
The Most accepted and Popular Guarantee among the Banks is

Whole Turnover (Pre- and Post-shipment) Guarantee
The important features are already discussed under each type as above.
However, there are certain common features which are as under:
• Maximum liability: It is the overall limit up to which claim can be paid

by ECGC in respect of advances granted in any guarantee year. Maximum
liability does not mean that the bank will limit their advances up to the
maximum liability fixed under the guarantee.
• Discretionary limit: ECGC will fix a limit called discretionary limit for
each guarantee up to which the bank can make pre- or post-shipment
advances to any single exporter withot the prior approval of ECGC. The
application in appropriate form required to be made by bank within 60
days from the date of sanction of advance along with copies of the
balance sheet, provisional financial statement, internal processing note
etc. only after obtaining the prior approval the limit in excess of
discretionary limit can be extended. This process is applied to the
substandard assets (Health Code - 2). As regards Health Code -1
(Standard assets) no prior approval is required
! !594
• Advances in respect of exports to restricted cover countries: ECGC

will advice from time to time names of the countries placed under
restricted cover. In respect of export to such countries, the concerned
exporter should obtain form ECGC specific approval under policy issued
to him. If exporter is not policy holder then the banker should obtain
ECGC prior approval before extending the facilities.
• Reporting of limit: Whenever export limits are sanctioned or existing

limits are enhanced/ reduced/cancelled should be reported to ECGC
within 30 days. A copy of the report shall be sent to appropriate
sanctioning authority.
• Monthly declaration: timely submission of monthly declaration along

with the premium due thereon, is one of the prime conditions to be
complied under guarantee. Any delay in submission of declaration and
payment of premium could absolve the ECGC of its liability and
jeopardise the interest of the bank.
• Extension of due date: In terms of guarantee the due date can be

extended with prior approval of sanction authority for valid reason up to
360 days in case of pre shipment and 180 days in case of post-shipment
advances. For any extension beyond this stipulated period prior approval
of ECGC is required. When extension is approved by ECGC, further
advance can be made by the bank to exporter if account is not causing
any anxiety and that is moving normally. For the purpose of extension
exporter is required to submit application in form ETX to AD bank/RBI.
• Cancellation and reduction in cover: ECGC may at its sole discretion

give notice to reduce the percentage of cover on particular exporter or
cancelling cover given in respect of particular exporter and such
reduction and cancellation shall apply to advances granted after the
receipt of the notice.
• Reporting of default: If an overdue advance is not liquidated within 4

months form the due date or extended due date it will be classified as
being default and reported as default to concerned branch office of ECGC
in prescribed format within 1 month from the date of calling the advance
or within 4 months from the due date/extended due date whichever is
earlier.
! !595
• Specific Approval List (SAL): This list maintained by ECGC consists of

names and addresses of the specific exporter, periodically brought out
and made available to banks. Bank should ensure before sanctioning of
any limit to exporter that names of the firm, partner, Director, company,
guarantor etc are not included in this specific approval list. Reference
also can be made to ECGC to ascertain the correct position. Prior
approval of ECGC is required for granting any advance under any
guarantee to any exporter named in the list.
• Covering letter to Guarantee: The covering letter is an important

document and forms part of the guarantee. The letter contains useful
information for operating the guarantee. The said letter along with copies
are made available to AD Bank who are expected to go through the same
and follow the guidelines given thereunder to avoid the rejection of claim
if any at later date.
• Interest: Interest payable by exporter in respect of pre-shipment credit

advance granted is not eligible for cover under guarantee. Debiting the
interest amount to loan account without recovering will lead to payment
of ECGC premium without availability of risk cover besides inflating
export finance figure for availment of refinance.
• Exchange losses: Exchange losses on bill return unpaid, crystallised

export bill are not covered under WTPSG. In such cases, it is prudent to
recover the amount from the account of the exporter.
• Claims: Claims should be filed in the prescribed format with office of

ECGC servicing the concern office of the bank under copy to the
respective control office. The waiting period for settlement of claim is as
under:
i. Where loos is due to insolvency unless otherwise agreed to in writing

by ECGC, immediately after the expiry of 4 months from the due date
of payment or one month after the loss has been admitted to rank
against the insolvents estate in favour of the bank in any insolvency
proceeding, whichever of the 2 dates is earlier.
ii. Where the loss is due to protracted default, immediately after the
expiry of 4 months form the due date of the payment.
! !596
• Time limit for filing the claim: The claim in respect of filing the claim
is 6 months from the date of report of default is submitted, unless before
the expiry of said limit, the time limit for filing the claim is extended by
writing to ECGC at the written request made by the bank.
• Documents to be submitted along with the claim form: The

following documents to be attached to the respective claim form:
i. Copy of the sanction letter.
ii. Copy of the extract for the period commencing 6 months prior to the
date of granting the first advance in default up to date.
iii. Copy of the letter recalling the advance along with the
correspondence with exporter.
iv. Copy of the legal notice and of the plaint and exporters reply, if any.
v. If the export has gone insolvent:

a. Proof of insolvency
b. Copy of the claim filed by with receiver/liquidator
c. Copy of the letter issued by the receiver/liquidator. If such letter is
not received, a declaration should be attached to the effect that
the bank has done or omitted nothing whereby its claim is liable to
be rejected by the court.
vi. Copies of orders/LC against which the overdue advance have been
granted.
vii. In case of pre-shipment advance, stock statement and inspection

report for the 12 months preceding the date of granting the first
advance in default and for the subsequent period.
viii. In case of post-shipment advance, copies of bill of exchange,

invoice, AWB/Bill of lading, relating to advance in default and advice
of non-payment received and correspondence made with the
collecting banks.
ix. Certificate from Chartered accountants as to the business and

export turnover of the exporter, if exporter is small-scale exporter.
! !597
x. Copies of the communication in which limit was reported to ECGC.
xi. Copies of RBI’s communication approving the extension of due dates

of export bills, if any.
xii. Explanation for granting further advance after one or more advance
became overdue wherever applicable.
xiii. Copy of ECGC’s letter approving the advance against shipment to

“Restricted countries”.
xiv. Approval of ECGC for extension grated to an exporter in due date

beyond 180 days from the date of shipment.
• Payment of claims: after examining the claim, ECGC arranges the

settlement of the claim. The claim remittances is made by cheque which
will be forwarded under a covering letter containing the following:
i. Ratio at which recovery is to be shared
ii. Request to send a stamped receipt for claim amount.
• Action after settlement of claim:
i. Bank should maintain its recourse to the exporter for the full amount
owed by him and effective action for recovering the amount including
such action as may be suggested by ECGC including general
proceedings should be initiated against the borrower or such other
person against whom such action can be taken
ii. The recovery expenses as approved by ECGC shall be first charge on

any amount recovered.
iii. The payment of claim by ECGC, does not in any way take away the
responsibility of exporter to repay the entire amount of outstanding
to the bank. Further, the exporter is not absolved of his obligation to
RBI under EDF/GR form to repatriate the export bill proceeds. The
bank should maintain the proper follow-up with regards to the export
! !598
bills as per the RBI Directives and GR/EDF etc. Forms should continue
to be held with branch as per RBI Directives.
• Sharing of recoveries: As soon as the claim is received from ECGC, it

should be held in separate account styled as ECGC claims received
account and in any case should not be adjusted towards the loan account
and share of ECGC should be remitted after obtaining the approval from
the appropriate sanctioning authority by debit to this head of account as
and when recoveries are made. The guidelines for apportionment of
recoveries are:
i. Legal expenses incurred with the approval of ECGC for effecting

recovery from exporter or for realisation of collateral securities or any
other sources shall be first deducted from the amount recovered.
ii. In respect of primary security of stocks, charges if any incurred by for

and/or realisation of stock shall form the first charge on sale proceeds.
iii. If primary and collateral securities are charged exclusively for pre-
shipment or post shipment finance, proceeds realised out of the
securities should be adjusted only against pre-shipment or post-
shipment as the case may be.
iv. In case of securities which are common for export advances as well as
domestic advances, the proceeds realised.
v. Any amount kept as margin deposits will have to be set off against the
amount claimed at the time of consideration of the claim.
vi. It is general practice to adjust the recoveries first, against the overdue
interest. Hence, while dealing with such cases, the amount recovered
should be set off in proportion to the amount outstanding under various
heads of the account of the borrower.
vii.For the purpose of apportion of recoveries, interest debited to the

account only up to and inclusive of the month of default/first recall
should be taken in to account and not thereafter. This rule is applicable
to all the advances which are overdue in respect of captioned exporter.
The recoveries are then to be shared with ECGC in the same proportion
in which the claim is settled.
! !599
• Writing of bad debts:
i. In the event of recovery of advance whole or part of the amount due

from the exporter is not possible, the fact and the circumstances of the
case should be reported to ECGC. If ECGC agrees to the branch
proposal, it will convey its decision and the amount could be written off
after obtaining the approval from the sanctioning authority, provided
they have powers to do so under the powers delegated to it by RBI.
ii. RBI has granted permission to AD bank as well as to exporters to write-

off unrealisable export after following the procedural aspects as per the
directives issued thereunder. Whenever such write-off powers are
exercised the concerned as per the provisions, it is to be noted that the
claim from ECGC are not likely to be settled. Besides this, if write-off is
regularly exercised on buyer, then there may be chances of refusal of
claim by ECGC on such buyers when their export bills really stands
unrealised. Besides, if claim on such buyers had already settled by
ECGC, the write-off can be exercised only with the prior permission of
ECGC. Hence, exercising the write-off facilities against those export bills
where bank finance is involved needs specific special treatment.
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, hey
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
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5. Indian Institute of Foreign Trade
6. Indian Institute of Packaging
• Public Sector Undertakings:
7. State Trading Corporation (STC)
8. MMTC Limited
9. PEC Limited
10.Export Credit Guarantee Corporation of India Limited
11.India Trade Promotion Organisation
• 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 Stabilization Fund Trust
7. GS1-India
Let us see functions undertaken by these bodies:
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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.
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.
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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.
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, fertilizers, petrochemicals, 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.
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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 fertilizers, raw materials and finished fertilizers.
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 takeover the canalised
business of STC’s railway equipment division, to diversify into turnkey
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 stores; import of industrial
raw materials, bullion and agro commodities; consolidation of existing
lines of business and simultaneously developing new products and new
markets; diversification in export of non-engineering items, eg. coal and
coke, iron ore, edible oils, steel scraps, etc.; and structuring counter
trade/special trading arrangements for further exports
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
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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.
6. 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, 2009-14. These
Councils are also the registering authorities for exporters under the
Foreign Trade Policy 2009-14. The export promotion councils under
Department of Commerce are as under:
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 and SEZ Units
12. Pharmaceutical Export Promotion Council
13. Indian Oil Seeds and Produce Exporters Association
14. Services Export Promotion Council
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 organisations 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 organisations
connected with export promotion. It provides the content, direction and
thrust to India’s global export effort. It also functions as a primary
! !605
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 organises 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 organisation originally established in 1965 promotes and
administers the use of Alternative Dispute Resolution mechanisms in
commercial disputes, thereby expediting dispute resolution 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 patronised 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 recognised by Government of India as an approved
Diamond Grading/Certification Institution for cut and polished diamonds
upto weight of 0.25 carat. The Institute has been recognised 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
! !606
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, 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.
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 recognised 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 Organisation (ITPO) and National Informatics Centre (NIC).
6. Price Stabilisation Fund Trust: The Price Stabilisation 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 realisation 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,
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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, Government etc.
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 (USA), which oversees operations of a
network of over 100 GS1 organisations across the world.
! !608
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 countrys 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 three organisations of the
Government of India, viz., India International Trade Fair Organisation,
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 organising 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,
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 Bangalore, 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.
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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 centers 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.
• 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.
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• Trade information services through electronic accessibility at Business

Information Centre.
Highlights
• ITPO has two subsidiaries namely Karnataka Trade Promotion

Organisation (KTPO)[21] and Tamil Nadu Trade Promotion Organisation
(TNTPO)[22] with share holding of 51 per cent in each of them. With the
commissioning of the state-of-the-art Chennai Trade Centre (CTC) in
January 2001 and the Trade Centre Bangalore in September 2004, ITPO
has successfully completed the first phase of the setting up of modern
exhibition facilities outside Delhi
• ITPO is networking with International Organisation in the field of Trade

and Commerce through membership or collaborative arrangements such
as Memorandum of Understanding (MoU), ITPO is a founder member of
Asia Trade Promotion Forum (ATPF) and participates in its Annual meets
regularly.
• A MoU was signed between ITPO and Qatar Tourism Authority of the
State of Qatar in April 2012 for cooperation in holding the exhibitions.
The MoU aims to strengthen the bilateral relations between the two
countries through developing the means of cooperation in the field of
organising exhibitions based on the mutual interests of their respective
countries
• In order to facilitate bilateral ties, ITPO has signed MoU with the Trade
Development Authority of Pakistan (TDAP). The MoU would cover
exchange of information relating to business activities, conduct market
research, implementation of bilateral trade promotion activities and
organise training programmes plus exchange of experts. After signing
MoU between TDAP and ITPO, along with FICCI have held a successful
“India Show” from 11-13 February, 2012 at Expo Centre, Lahore. 2012.
• ITPO has also signed MoU with the Confederation of Indian Industry (CII)
in April 2011, directed towards a collective and well-directed effort to
promote India's trade identifying the internal strengths of the respective
organisations. The MOU provides for mutual cooperation in the areas of
knowledge-based services, market studies, organising seminars and
workshops, mobilising participation for trade fairs, organising
! !611
presentation meetings, popularising the new Regional Trade Promotion

Centres and events in various States of India.
• ITPO is to participate in 18th Addis Abeba Chamber of Commerce and

Sectoral Association (AACCSA) International Trade Fair to be held at
Addis Abeba Exhibition Center and Market Development Enterprise
(AACMDE), located at Meskel Square.
• ITPO recently signed MoU with Visvesvaraya Industrial Trade Centre

(VITC), Karnataka in May 2013 with the objective of co-operating with
each other to carry forward the objectives of their respective
organisations for mutual benefit and achievement of common goals of
promoting the industry and exports from the region.
• ITPO registered an increase of about Rs. 68 crores in total income during

FY 2011-12 which went up to about Rs. 374 crores from about Rs. 305
crores during FY 2010-11. The net profit of the company skyrocketed to
about Rs. 183 crores, an impressive increase of about 158 per cent over
the previous year profit of about Rs. 78 crores. The company is having a
Total Assets exceeding Rs. 1100 crores and more than 1050 employees.
[41] The Company is registered under Section 25 of the Companies Act,
1956 and so it does not declare any dividend.
10.14 Economical and Technical Co-operation Agreements
India has entered in to agreement for economic and technical cooperation

with some major countries. Some of the agreements which are recently
entered in to 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 and Products), Transport Equipments, Cotton,
Yarn Fabrics, Sugar, Drugs Pharmaceuticals and Fine Chemicals. The main
Sri Lankan exports to India are, spices, electrical Machinery except
! !612
electronic, Transport Equipments, Pulp and 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.
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 liberalising 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 finalized. The 2nd round of negotiations
was also held in Riyadh on 9-10 September, 2008. Proposed Tariff
Liberalisation Scheduled 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 are being finalised 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
! !613
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 finalised 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
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:
i. The text on ‘Dispute Settlement Procedures’
ii. To use the text proposed by India on ‘Customs Cooperation and Trade
Facilitation’ and TBT as the working text
iii. To use the text on ‘SPS’ proposed by SACU as the working text.
! !614
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
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 webpage 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.
! !615
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
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. Pakistan
recognised that grant of MFN status to India would help in expanding
bilateral trade relations. It agreed to replace its present ‘Positive List’ with
‘Negative List’, by October 2011.
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.
Pakistan recognised that grant of MFN status to India would help in

expanding bilateral trade relations. It has agreed to replace its present
‘Positive List’ with ‘Negative List’, by October 2011.
! !616
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.
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). Recognising 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.
! !617
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:
i. To launch the 4th Round of Negotiations;
ii. To adopt modalities for extension of negotiations in other areas such

as non-tariff measures, trade facilitation, services, and investment;
iii. 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
iv. To explore the possibilities of expanding the membership of the

Agreement.
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.
! !618
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.
14.I n d i a - A u s t r a l i a C o m p r e h e n s i v e E c o n o m i c C o o p e r a t i o n
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.
! !619
Exporters in India residing or having their manufactory at inland centres

away from sea or airport had to arrange for carriage of their ocean or air
borne export goods to the sea or airport. This practice involved loss of time
and additional inland transport and other incidental expenses, to say
nothing of the attendants trouble and worries. All these trouble and
expenses have been eliminated for the benefit of the exporters by a
through transport system of export goods having been arranged at the
inland manufacturing/packing centres.
But a through transport system from the inland centres requires:
• Certain infrastructural facilities, such as inland container depots (ICDs) at

the inland centres, where the export goods can be stuffed in containers
and stored, the customs formalities completed and then the goods
despatched to the sea or airport in customs sealed containers and
• Recognised combined transporters (CTO) who can provide the combined

transportation and issue the combined transport documents (CTD) which
will not only protect the interest of the exporter and the collecting/
negotiating banks but will also be acceptable internationally.
As regards the inland container depots, the Government of India has

established such depots at Bangalore, Delhi, Guntur, and Coimbatore and
also at other inland centres such as Ahmedabad, Guwahati, Hyderabad,
Madurai etc. but the other pre conditions such as availability of capable
recognised CTOs and introduction of legally enforceable and internationally
acceptable CTDs, necessitates settlement of certain questions of
considerable national importance, such as defining qualifications required
of officially recognisable CTOs, as well as the terms and conditions of the
CTDs that will be adequate for purpose.
The international chamber of commerce has brought out certain standard

rules for adoption by persons desirous of functioning as recognised CTOs.
As matter stands, a CTD cannot be held as document to the title of goods
consigned for the purpose of which a law, as in case of bill of lading or
railway receipts has to be enacted. However the bankers in the member
countries have been authorised under UCPDC of ICC to accept for
! !620
collection, purchase, discount or negotiations of the transport receipt

issued by the freight forwarder.
• In terms of UCP 600 article 19, Combined Transport Documents means

covering at least two different Modes of transport. Combined transport
document:
• Must appear to indicate name of carrier
• Signed by carrier, master or named agent
• If signed by agent, need to specify for whom – carrier or master – it is

signed
• The term multimodal transport document means the same thing as

combined transport document, it is just that to use the term combined
transport document in L/Cs and transport documents..
• To avoid any confusion, ICC has preferred to use the sentence "Transport
Document covering at least two different modes of transport".
• Whether the transport document is a Port-to-Port BL, Through BL or

Combined/Multimodal BL, it is to be decided when checking the
document on its face.
• A B/L does not need to bear the heading Marine BL or Ocean BL to

comply with UCP provided that it covers a port-to-port shipment.
• If B/L indicates shipment from the port of loading (A) to the port of
discharge (C) stipulated in LC, then it is a Port-to-Port BL.
• If, however, LC requires that B/L show (port A) as loading port and (port
C) as port of discharge, and BL shows (port A) as loading port, (port B)
as port of discharge and (port C) as place of delivery, then BL is not
acceptable as it does not cover a port-to-port shipment but a through
transport.
• The titles of art.19 and 20 of UCP 600 have been adopted due to the
practice of shipping lines to use one form of BL for both port-to-port
shipments and multimodal transport document.
! !621
• A Liner BL used for a port-to-port shipment may also cover inland

carriage prior to loading and/or after discharge so that it may also be
considered a multimodal transport document.
• The only type of BLs acceptable as multimodal transport document is

FIATA BL and NVOCC B/L. The only new type of transport document to be
used with LCs in Europe is the CIM/SMGS Consignment Note for rail
shipments to and from Russia.
• The CTDs incorporating those terms and conditions and issued by the
recognised CTOs are desired to be accepted by banks where the LC does
not contain an express stipulations for an ocean bill of lading and also the
cases where there is such stipulations, provided no negotiations is made
until the stipulated ocean bill of lading is produced.
10.16 Sum up: Concessions granted to Exporters
• Let us sum up in pursuance of its export promotion policy the

Government of India made during the past few years quite a number of
concessions to the Indian exporters. Brief of these concessions are
mentioned below:
• The Ministry of Commerce and Industry announced a number of

concessions for various sectors to provide a much-needed boost to the
country’s exports.
• In its final annual supplement to the five-year Foreign Trade Policy

(2009-14), the government extended following concessions to import of
capital goods.
• Zero duty EPCG benefit available to all sectors.
• In order to promote exports from SEZs, Minimum land requirement for

sector-specific SEZs has been slashed from 100 hectares to 50 hectares.
• Market Linked Focus Product Scheme (MLFPS) has been extended to add
nearly 47 new products, with Yemen and Brunei as two new countries.
• Exporters will be able to continue to avail the interest subvention scheme

of 2 per cent till March 2014.
! !622
• In addition to 134 sub-sectors of engineering, this scheme will include

garments, handicrafts, carpets, handlooms, toys, and processed food.
• The rate of interest subvention was raised to 3 per cent from 2 per cent
with effect from August 01, 2013 and the scheme covers toys, carpets,
handlooms, handicraft, sports goods, processed foods and readymade
garments in addition to 235 tariff lines in engineering and six tariff lines
in textile sectors.
• Major fiscal incentives provided by the Government of India have been

for the Export-oriented Units (EOU), Software Technology Parks (STP),
and Special Economic Zones (SEZ).
• Customs Duty Exemption in full on imports.
• Central Excise Duty Exemption in full on indigenous procurement.
• Central Sales Tax Reimbursement on indigenous purchase against from

C.
• All relevant equipment/goods including second hand equipment can be

imported (except prohibited items).
• Equipment can also be imported on loan basis/lease.
• 100% FDI is permitted through automatic route.
• Sales in the DTA up to 50 per cent of the FOB value of exports

permissible.
• Use of computer imported for training permissible subject to certain

conditions.
• Depreciation on computers at accelerated rates up to 100 per cent over 5

years is permissible.
• Computers can be donated after two years of use to recognised non-

commercial Educational Institutions/Hospitals without payment of duty.
• Export proceeds will be realised within 12 months.
! !623
10.17 Summary
The Government, RBI, Exim Bank and Commercial Banks have played
important role in promoting exports in the country. Incentives are also
granted by Exim Bank, RBI and Banks for boosting experts. Exim Bank
extends funded and non-funded facilities for overseas turnkey projects,
Civil Construction Project, Technical and consultancy services contracts as
well as supply contracts. Export credit insurance is provided by ECGC to
protect exporters from the consequences of the payment risk, both political
and commercial, and to enable them to expand their overseas business
without fear or loss. The covers issued by ECGC are policies issued to
exporters and guarantees issued to banks namely standard policies,
specific policies, financial guarantees and special scheme guarantees. For
the purpose of export promotion, the Government of India has set up
certain institutions to advise the Central Government, local authorities,
Public bodies and exporters on matters concerning exports.
They are autonomous bodies, public sector undertakings, export promotion

councils and other organisations. Combine Transport Document (CTD) is
provided by recognised combined transporters (CTO) which protect the
interest of the exporter as well as the Collecting) negotiating banks and is
acceptable internationally. The Government of India introduced a number
of concessions to the indian exporters in addition to export promotion
policy.
! !624
1. Write short Notes on:

a. Facilities offered by Reserve Bank and commercial banks to exporters
b. ECGC
c. WTPCG
2. What is the role of Exim Bank for export promotions?
3. What are the incentives offered by Government to Exporters? Describe

in brief.
4. Write a brief note on “Deemed Export”.
5. Write a short note on India Trade Promotion Organisation (ITPO).
6. What are the concessions granted to exporters?
7. Describe Combine transport documents.
! !625
1. Duty drawback credit scheme by banks is to grant to exporters at_____.

a. Pre-shipment stage
b. Post-shipment stage
2. Maximum period for advance against retention money is________.

a. 90 days
b. 120 days
c. 180 days
d. 240 days
3. What is duty drawback?

a. Getting back the duty paid by exporter
b. To receive the duty paid back from customs
c. It is rebate allowed to exporter on customs (import) duty
d. Getting back any kind of duty paid
4. Major risks covered under the policy issued by insurance company are :
a. Commercial risks
b. Political risks
d. All risks
5. For fixing the maximum liability under each policy ECGC covers
shipment that is to be made by exporters in next months.
a. 12 months
b. 6 months
c. 18 months
d. 24 months
6. Declaration of shipment made by the exporter required to be reported

to ECGC on or before of every month.
a. 15
b. 30
c. None of the above
! !626
7. Period of WCPCG issued by ECGC to banks is months.

a. 6
b. 12
c. 18
d. 24
8. Under the pre-shipment credit scheme, what is the maximum period

within which export is required to be made?
a. Period as mentioned in the order/LC
b. 180 days from the date of credit
c. 270 days from the date of credit
d. One year from the date of credit
9. What type of facilities is provided to exporters by ECGC?

a. Issues policies to exporters
b. Provides advisory services
c. Issues guarantees to exporters
d. Grants special loans to exporters
10.The economic and technical cooperation agreements with various

countries is part of___.
a. Bilateral Trade agreement
b. Government initiative to boost the export
c. Agreement to avoid double taxation
d. Agreeing to exchange technical know-how 
! !627
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !628
IMPORT/EXPORT GUARANTEES
Chapter 11
Objectives
describe:
• Definition of and parties to guarantee

• Meaning and types of import guarantee
• Meaning and types of export guarantee
• Exchange control regulations for issue of guarantees
• Deferred Payment Export Guarantee
• ECGC Counter guarantee
• Redemption or invocation
Structure:
11.13 ECGC Counter-guarantee
11.16 Summary
! !629
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 three 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.
The guarantee given in connection with import of goods and services is an

import guarantees. An Import guarantee should be specific covering only
particular transaction.
! !630
The person to whom, and purposes for which, bankers are usually
approached by their customers for guarantee in connection with import
are:
Beneficiary Purposes
1 2
The President of India For Authorisation to open a letter of credit in

foreign 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 Customs/ For the clearance of imported goods without

The Central Excise production of import licence (customs purpose
Authorities copy) or without payment of customs duty or
central excise duty, or against defective
documents etc. for clearance of goods without
tendering the bill of lading.
The steamship company For allowing the delivery of the imported goods
without surrender of bill of lading or against
defective documents.
Foreign Supplier or For due payment of the instalments against

Manufacturer imported goods under deferred payment
arrangement.
In terms of Regulation 4 of the Foreign Exchange Management

(Guarantees) Regulations, 2000 notified by Notification No. FEMA8/2000-
RB dated May 3, 2000, AD banks are allowed to give guarantees in certain
cases, as stated therein.
! !631
Precautions for Issuing Guarantees
Banks should adopt the following precautions while issuing guarantees on

behalf of their customers.
1. 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 trades.
2. Unsecured guarantees on account of any individual constituent should

be limited to a reasonable proportion of the bank’s total unsecured
guarantees. Guarantees on behalf of an individual should also bear a
reasonable proportion to the constituent's equity.
3. 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.
4. 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:
1. 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.
! !632
2. 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.
3. 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 cooperative banks
against counter guarantee of the cooperative bank. Further, banks must
satisfy themselves that the concerned cooperative 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 cooperative banks, they must satisfy themselves that KYC has been
done properly in these cases.
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):
1. 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.
2. 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 signatures discipline only in exceptional
circumstances. The responsibility for ensuring the adequacy and
! !633
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.
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.
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.
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 per cent 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
! !634
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 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
bank/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 proforma
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.
Commission: Commission for issue of the guarantee or for an extension

thereof is to be recovered in advance from the customer as per individual
banks schedule of charges. This charges are vary from bank to bank.
! !635
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
byu him. The indemnity should contain a full text of the guarantee.
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
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 up on the bank.
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 5000 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).
! !636
1. Trade Credits for imports into India - Issue of Guarantees
1. 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 Series) Circular No. 60 dated January 31, 2004
and modified from time to time.
2. 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.
3. 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.
4. 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,
! !637
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:
a. the AD Category-I bank is satisfied about the bonafides 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

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
! !638
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.
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 nay public
sector financial institutions or by 100 per cent 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
! !639
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.
1. Bid bonds and Performance Bonds or Guarantees for Exports
In terms of Notification No. FEMA8/2000-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 bonafide 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.
! !640
If and when the bond/guarantee are invoked, Authorised Dealer banks may
make payments due there under to non-resident beneficiaries.
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 later 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.
! !641
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
bankers to exercise due caution with regard to their performance
guarantee business.
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 per cent above the
tender invitation.
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.
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.
! !642
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,
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:
1. The exporter is in a position, as will be evident from his past

performance to undertake the transaction
2. That the terms of the contract between the exporter and foreign
buyer are in accordance with FEMA Regulations 2000.
3. 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
4. That the amount of guarantee is not beyond the known means of the
exporter
5. That the guarantee is adequately covered, even to the extent of 10

per cent to 15 per cent where deemed necessary.
6. That the guarantee period is between 5 to 7 years.
! !643
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
prior approval of the Reserve Bank.
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.
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
! !644
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 overextend their commitments and embark upon enterprises
solely relying on the easy availability of guarantee facilities. It is,
therefore, reiterated that as guarantees contain inherent risks, it would
not be in the interest of the banks or the financial system if such
transactions, as mentioned at paragraph 2.3.6(i) above, are entered
into by banks. 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.
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.
! !645
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
contractors (including sub-contractors) 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.
! !646
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 100 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:
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;
! !647
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.
11.13 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
! !648
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.
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.
! !649
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.
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.
! !650
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.
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.
! !651
An export contract may run in to various stages:
1. Acceptance of contract by Exporter
2. Actual supply/erection of Machinery etc
3. 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 1 per cent to 10 per cent 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 per cent of contract amount.
The guarantee meant for performance of contract entered in to 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 in to
by him but also declares that in the event of default by the customer he
will up on being informed of such default and such information being
conclusive make payment for such default as agreed in the guarantee.
There are two types of performance guarantees. First type secures
! !652
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 in time and
services performed.
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 per cent of
the contract value, although it can be as much as 100 per cent. 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 be 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 per cent of the contract amount be paid to the exporter,
the balance 5 per cent 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
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.
! !653
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 bans 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
for such guarantees are normally advance payment of 10 to 15 per cent of
the price of the capital goods and payment of another 10 per cent to 15
per cent on receipt of the goods or documents.
! !654
11.16 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. It is a guarantee
made by a bank on behalf of a customer. There are three parties to
guarantee, i.e., surety cobligators, principal debtor (bank’s customer) and
creditor. In this chapter, purpose of the beneficiaries, exchange rate
regulation, general guidelines, particulars and Furnishining of guarantee,
types of import and export guarantee, deferred payment expert guarantee,
ECGC guarantee, redemption or invocation are discussed.
1. What are the exchange control regulations for issue of guarantees?
2. What type of Import guarantees are issued by AD Banks?
3. Why guarantee is required to be issued for advance payment against

export?
4. What is export performance guarantee?
5. Explain Deferred payment Export Guarantee.

i. Bid Bond Guarantee
ii. Standby Letter of Credit
iii. Retention Money Guarantee
iv. Guarantee invocation
! !655
1. How many parties are there in Guarantee?

a. 2
b. 3
c. 4
2. What is the maximum period upto which guarantee can be issued?

a. 2 years
b. 3 years
c. 5 years
d. 10 years
3. What is the amount beyond which signatures of two bank officials are
required on guarantee?
a. 10,000,00
b. 100,000
c. 50,000
d. 25,000
4. 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 Department.
d. Approval of leader consortium bank
5. What is the amount of invoked guarantee beyond which invocation is

required to be reported to RBI?
a. USD 5,000
b. USD 10,000
c. USD 25,000
d. USD 50,000
6. _______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
! !656
7. Service guarantee can be issued up to .

a. USD 5,000
b. USD 10,000
c. USD 50,000
d. USD 500,000
8. 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
9. Which type of guarantee is issued to participate in tender?

a. Performance
b. Bid Bond
c. Financial
d. Any one of above
10.The validity of the advance payment guarantee depends on the period

of time expected for_______.
a. delivery of the goods
b. receipt of payment
c. performance of contract
d. any one act of above 
! !657
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !658

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Trade Finance

Sub Code - 402

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 (May-2014)

Chapter 1: Foreign Trade 12-79

1.2 Foreign Trade: Meaning

1.4 Balance of Trade

1.5 Balance of Payment (BOP)

1.7 Correcting the Deficit

1.8 INCOTERMS: Foreign Contracts

1.9 International Trade Agreements/Institutions

1.10 Asian Clearing Union (ACU)

1.11 Most Favoured Nation (MFN) Clause

1.12 Euro Money

1.13 Method of Foreign Trade

1.14 Banking Facilities

1.15 Role of Exim Bank

1.16 Free Port/Free Trade Zones

1.17 Offshore Banking Operations

1.19 European Currency Unit (ECU)

1.21 Self Assessment Questions

Chapter 2: Instruments of Foreign Trade 80-129

2.2 Commercial Documents

2.3 Official Documents

2.4 Insurance Documents

2.5 Transport Documents

2.6 Financial and Financing Documents

2.8 Self Assessment Questions

Chapter 3: Import Control 130-173

3.2 Import Trade Control

3.3 Import Licence

3.4 Types of Import Licenses

3.5 Imports without Licence

3.6 Evidence of Import

3.7 Import of Gold, Silver, Platinum, Jewellery, Foreign

3.8 Import of Bills/Receipt of Documents Directly

3.9 Import under Foreign Currency Loan/Credit

3.10 Acquisition of Foreign Currency/Exchange

3.13 Deferred Payment LC

3.15 Self Assessment Questions

Chapter 4: Export Control 174-220

4.2 Export of Gold etc.

4.3 Exporters Code Number

4.4 Methods of Payment

4.5 Prescribed Period for Realisation of Exports: Realisation and

4.6 Direct Dispatch of Documents by the Exporter

4.7 Opening/Hiring of Warehouses Abroad

4.8 Exempted Categories of Export Declaration Form

4.9 EDF/SDF Approval for Trade Fairs/Exhibitions Abroad