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BASICS OF TRADE FINANCE OPERATION IN DAY TODAY LIFE

IDBI BANK LTD, MADURAI.

Submitted in partial fulfillment of the requirement for the award of the Degree of Master of Business Administration

Name of the candidate Enrolment No. Reg. No. Name of the specialization Study Centre

: A.BALAJI : 09AMBFM0329 : 09NFM5329 : FINANCE : BHARATHIAR UNIVERSITYSCHOOL OF DISTANCE EDUCATION

Under the guidance of ANIRBAN SAHA M.B.A., IDBI BANK LTD

School of Distance Education Bharathiar University Coimbatore-641046

DECLARATION I hereby declare that the project work entitled


BASICS OF TRADE FINANCE

OPERATION IN DAY TODAY LIFE IDBI BANK LTD, MADURAI. Guidance of


ANIRBAN SAHA M.B.A., IDBI BANK LTD. and

that this project work has not formed the

basis for the award of my Degree/Diploma/Associate ship/Fellowship or similar title to any candidate of any University.

Signature of the Candidate

Name Enrolment No.

: A.BALAJI : 09AMBFM0329

Course with specialization : MBA FINANCE

Date: Counter signed by

FOR IDBI BANK LTD

AUTHORIZED SIGNATURE

Signature of the guide


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CERTIFICATE This is to certify that the dissertation, titled


BASICS OF TRADE

FINANCE OPERATION IN DAY TODAY LIFE IDBI BANK LTD, MADURAI.

Submitted to the Bharathiar University, in partial fulfillment of the requirements for the award of the Degree of Master of Business Administration in Financial Management is a record of original work done by A.BALAJI under my supervision and guidance and dissertation has not formed the basis for the award of any Degree / Diploma / Associate ship / Fellowship or other similar title to any candidate of any University.
FOR IDBI BANK LTD

AUTHORIZED SIGNATURE

Signature of the Guide Forwarded by Director School of Distance Education Bharathiar University Coimbatore-641046 Submitted for University Examination held on _______________________

Internal Examiner

External Examiner

TO WHOM SO EVER IT MAY CONCERN

This to certify that A.BALAJI Enrolment No: 09AMBFM0329 a final year, MBA has successfully completed his project in Trade finance department from our organization during the period of 01.12.2010 to 31.05.2011. During his project work his performance was found good Thanking you

Yours faithfully FOR IDBI BANK LTD

AUTHORIZED SIGNATURE

ACKNOWLEDGEMENT

I think the almighty for giving me the strength and will power to complete this project I express my sincere thanks to THE DIRECTOR, School Of Distance Education, Coimbatore for giving me an opportunity to carry out the project. I would also express my sincere and heartful thanks to my guide
ANIRBAN SAHA M.B.A.,

for his perfect and clear guidance to complete the

project work successfully. I also express my sincere gratitude to TRADE FINANCE OPERATION OF
DAY TODAY LIFEManagement

and employees for having permitted me to

undertake this project in the company and for having rendered all the help.I thank my beloved parents and friend for providing me continuous support to complete the project successfully.

TABLE OF CONTENTS
CHAPTER NO. CONTENTS
LIST OF TABLES LIST OF CHARTS 1 INTRODUCTION OF TRADE FINANCE

PAGE NO.

1.1 Introduction 1.2 Trade Finance Services 1.3 Trade Finance Perspectives
2 DOCUMENTARY CREDIT

7 7 11

2.1 Introduction 2.2 Parties to Letter of Credit 2.3 Roles and Responsibilities
3 BANK GUARANTEE

15 16 21 41 44 55

3.1 Introduction 3.2 Foreign Exchange Management Rules 3.3 Guidance and Clarifications 4 5 6 7 8 9
IMPORTS

4.1 Introduction 4.2 Import Of Goods In To A Third Country


EXPORTS

62 76 78 86 98 99 106 109 118 119

5.1 Introduction 5.2 Operational Guidelines for Bank


REMITTANCES

6.1 Introduction 6.2Remittance facilities for Residents


FORWARD CONTRACTS

7.1 Introduction 7.2 Forward Contract Concepts


CONCLUSION BIBLIOGRAPHY

CHAPTER 1
INTRODUCTION OF TRADE FINANCE 1.1 Introduction
Every commercial business organization in the world is involved in some kind of Trade, i.e., the buying and selling of products and services. The popular term that is used to describe the financing of these transactions is working capital finance or cash credit. A major element of the relationship between a bank and any corporation involved in Trade is the element of Trade Finance. For any large global bank to be successful it is critical for them to offer Transaction Banking services. Also, Trade Finance contributes a significant part of the interest and fee income earnings within Transaction Banking. However, Trade Finance is the method by which the Banks finance commercial businesses through the issuance of a short-term loan facility which is backed by the underlying trade documents.

1.2 Trade Finance Services


Domestic Trade Processing Services: These services involve processing of domestic trades from invoicing to settlement, usually referred to as the cashto- order cycle. Traditionally these services are provided by the captive finance departments of the corporations involved in Trade. Exporters Services: These services involve processing of an Export Transaction from Contracting to Settlement. Importers Services: These services involve processing of an Import Transaction from Contracting to Settlement. They are provided to importers of various corporate houses and firms engaged in the import activity. Banking Services: Transaction banking services including remittances and other Corporate Banking services.
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Insurance Services: These are the services provided by multiple insurance firms involved in domestic and international trade. Agent Services: These are services provided by Clearing and Forwarding Agents involved in processing exports and imports Other Services: Services like goods inspection, credit verification, arbitration services, legal services, consulting services, regulatory services. Chambers of Commerce, Trade Organizations and Associations, Export Promotion Councils etc. form the part of Other Services. Mechanics of Trade Finance A better understanding of Trade Finance services can be achieved using a detailed view of the elements involved in the Lifecycle of a Trade. The Trade lifecycle begins with an agreement to buy and sell between any two business entities involved in the trade of goods and or services, this is also known as Trade Origination. Only business to business (B2B) transactions are considered as a part of Trade Finance. These B2B transactions are standardized procedures as defined by the ICC UCPDC 600 and the INCOTERMS 2000. A classical view of the Trade Finance activities is provided below. Other activities that form a part of Trade Origination could involve things like seeking credit information about the buyer and the country in case of exports. The seller receives a purchase order or a letter of credit (LC) from the buyer, either directly or via a bank. In case of a LC-based transaction, the buyer opens a LC with his bank and the buyers bank then sends the LC to the sellers bank. The sellers bank upon receipt of the LC advises the Seller of the receipt of the LC. The next step is the preparation of the shipment documents along with the shipment. Once the goods / service have been shipped, the seller submits the documents to his bank for processing. Depending on the type of service needed, i.e., Collection, Purchasing, Negotiation, or

Discounting, the bank processes these documents and sends the same to the Buyers bank. The buyers bank then processes these documents in accordance with the LC, if needed. Upon maturity, the Buyers bank initiates the payment against the documents and sends the same to the sellers bank. The sellers bank in turn credits this money to the seller. There are different types of trade finance transactions that the banks handle during the course of the day: a. Exports Export LC Advising / Transfers LC Confirmation Bill Purchase / Negotiation / Discounting b. Imports LC Issuance LC Amendment / Cancellation Import Bills against LC Sight / Usance payments c. Collections Outward Bills on Collection Inward Bills on Collection d. Domestic Bills LC Issuance LC Advising Bills Purchase / Negotiation / Discounting e. Trade Related Bank Guarantees Bid Bonds

Payment Guarantee Performance Guarantee Processing of Transactions By and large the following steps are involved in processing any transaction a. Document Verification b. Credit Limit Check / Approval Process c. Rate Taking from Treasury. d. Trade Data Capture in live system e. Document Duplication (e.g. BG/LC) f. Filing of documents g. Mailing h. Advising Other Services The Trade Finance/Services offered by Bank also includes: a. Remittance (i) Current Account (ii) Capital Account b. Arranging import finance c. Factoring d. Credit Check e. Advisory

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Categories of Trade Finance Trade finance provides alternative solutions that balance risk and payment. In this overview, we'll outline the following categories of trade finance: Funded Bill Discounting Pre- Shipment Post Shipment Other schemes provided by the government Non Funded Bank Guarantees Co Acceptances Documentary Credits

1.3 Trade Finance Perspectives


At pre-shipment stage, Export Finance in the form of Packing Credit is made in the form of 'Loan' or as a 'Running account' in a manner 'Cash credit' accounts are operated. In addition, trade finance loans are often self-liquidating-that the lending bank stipulates that all sales proceeds are to be collected, and then applied to liquidate the loan. The remainder is credited to the exporters account. The self-liquidating feature of trade finance is critical to many small, under capitalized businesses. Lenders who may otherwise have reached their lending limits for such businesses may nevertheless finance individual export sales, if the lenders are assured that the loan proceeds will be used solely for pre-export production; and any export sale proceeds will first be collected by them before the balance is passed on to the exporter. Given the extent of control that lenders can exercise over such transactions and the existence of guaranteed payment

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mechanisms unique to or established for international trade, trade finance can be less risky for banks/lenders than general working capital loans.Trade Finance business in India, as in many other countries is conducted in a well regulated regime. The business is subjected to : Statutory laws like FEMA, Indian Contract Act, Negotiable Instruments Act. Trade Practices & Conventions like UCPDC, URC, URR, URDG, Fedai Rules etc. National Trade Policy Regulatory Requirements All through the manual excerpts from regulatory provisions wherever necessary have been provided and for ease of user reading indicated by symbols Reserve Bank of India - 'RBI' Master Circulars and Notifications Reserve Bank of India (RBI), periodically issues notifications under Foreign Exchange Management Act( FEMA) 1999 and directives through AP ( DIR Series) Circulars with regard to Trade Finance and Foreign Exchange Transactions. Consolidated circulars incorporating all the changes are also published by RBI every year in the form of Master Circular which is to be kept handy in Trade Finance Department of the bank. Trade Control Foreign Trade Policy (FTP) the current policy being effective for 2004-2009 to be referred to with regard to various trade control and trade facilitation guidelines. Notifications published by DGFT are to be referred by branches while handling trade transactions to ensure that no restrictions have been imposed for export and import of the underlying goods and they

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are freely importable or exportable. Foreign Trade Development Act and Customs Act etc. also need to be referred wherever necessary. UCPDC Guidelines International Chamber of Commerce (ICC) is engaged in formulation of business policy and mechanics of trade and various other relevant international trade practices. In order to standardize the rules governing operations of documentary letters of credit, ICC has codified standard set of rules for operations of Letter of Credit which are known as Uniform Customs and Practices for Documentary Credits (UCPDC). These are guidelines accepted by over 200 countries, including India, to facilitate trade and payment through LC. ISBP2007 International Standard Banking Practice (ISBP) As documentary credits are one of the chosen methods of payment for financing world trade, rejection of documents have been slowing trade and have led to costly disputes and court cases The ISBP has been written to help businesses that use ICC's internationally accepted rules on letters of credit, the Uniform Customs and Practice for Documentary Credits (UCP 600).The ISBP has been written as a supplement to the UCP 600, explaining how the rules are used in day-to-day practice. The printed versions of the ISBP and UCP 600 have been supplied to all Trade Finance branches for their use. FEDAl Guidelines FEDAI (Foreign Exchange Dealers Association of India) an apex forum of Authorized Dealers in foreign exchange, issues guidelines with the concurrence of RBI for smooth conduct of various foreign exchange transactions.

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Bank's Internal Procedures In addition to the above Bank has its internal guidelines and procedures to be adhered to. These may be relate to sector exposures, inter bank limits, customer limits etc. Before commencement of trade Finance Finance/Trade services for a customer a separate KYC exercise should be carried out from Trade Finance perspective. A KYC form as per Annexure I should be completed and filed for each customer. Theseforms should be made available to auditors as and when called for. Organization of Trade Finance Department

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CHAPTER 2 DOCUMENTARY CREDIT 2.1 Introduction


Documentary Credits, more commonly known as letters of credit are a widely used method to effect payments in domestic and international trade. A written undertaking is issued by a bank (usually referred to as the issuing bank) on the instructions of the buyer of goods to the seller. The payment is made under conditions stated in the undertaking. Payments are always up to a stated limit and against stipulated documents. The use of documentary credits provides enough safeguards for the parties involved. The seller is ensured payment, provided he complies with terms he agreed to while the buyer can include all terms and conditions within the documentary credits that satisfy him on the quality and quantity of the goods without having to sight / inspect the goods themselves. Since banks act as trustworthy third parties/ intermediaries, the issues relating to trust between the buyer and the seller are taken care of. Documentary Credits can be either sight or usance depending on whether credit period is extended to the buyer by the seller. The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for Documentary Credit (UCPDC) defines documentary credits as An arrangement, however named or described, whereby bank (the Issuing bank) acting at the request and on the instructions of a customer (the applicant) or on its own behalf:Is to make a payment to or to the order of a third party (the beneficiary) or is to accept bills of exchange (drafts) drawn by the beneficiary Or Authorizes another bank to effect such payments or to accept and pay such bills of exchange (drafts)Or Authorizes another bank to negotiate against stipulated documents provided that the terms are complied with Documentary credits are commonly known as Letter

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of Credit and is abbreviated as an LC or L/C, DC or D/C, documentary letter of credit, or simply as credit.

2.2 Parties to Letters Of Credit


a. Applicant (Opener): Applicant is normally a buyer of the goods / services, who has to make payment to beneficiary. LC is initiated and issued at his request and on the basis of his instructions but Applicant is not considered as a party in a LC established as the issuing bank is primarily obligated to pay under LC.

b. Issuing Bank (Opening Bank): Issuing Bank is one which issues the Credit i.e. it is the bank that creates a letter of credit and undertakes to make payment. The issuing banks' role is to provide a guarantee to the seller that if compliant documents are presented, the bank will pay the seller the amount due and to examine the documents, and only pay if these documents comply with the terms and conditions set out in the letter of credit. c. Beneficiary: Beneficiary is normally a seller of the goods who has to receive payment from the Applicant. The beneficiary is entitled to payment as he submits credit complying documents y The letter of credit is a distinct and separate transaction from the contract on which it is based. The issuing bank is not liable for performance of the underlying contract between the applicants and beneficiary. The issuing bank's to ensure that they meet all the terms and conditions of the credit.

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The beneficiary needs to ensure that all conditions of the agreement have been complied with. If the beneficiary (seller) conforms to the letter of credit, the seller must be paid by the bank.

d. Advising Bank: Advising Bank advises the Credit to the Beneficiary, thereby assuring the genuineness of the Credit. It is normally situated in the country/place of Beneficiary. The Advising Bank may be correspondent bank of the Issuing Bank or could be specifically notified by the Beneficiary. e. Confirming Bank: A bank that provides its confirmation to a credit upon the issuing banksauthorization / request Usually a Confirming Bank is required where the exporter is not satisfied with the undertaking of only the Issuing Bank. A confirmation constitutes a definite undertaking by the Confirming Bank that the provision for payments or acceptance will be duly fulfilled. The Confirming Bank takes a credit view on the Issuing Bank f. Negotiating Bank: Negotiation is the process of giving value to the documents. The negotiating bank is one with whom the documents may be negotiated. The LC may either specify the negotiating bank (restricted negotiation) or the exporter may be free to negotiate through any Bank (unrestricted negotiation).

The schematic below elucidates Documentary Credit transaction flow: Types of Letter Of Credit a. Revocable Letter of Credit

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Revocable Letter of Credit is a credit, which can be revoked, i.e: cancelled or amended by the bank issuing the credit, without the notice of other parties. Revocable Letters Of Credit are rarely used. From an exporter's point of view this type of LC is not a satisfactory one. But, it is advantageous to the importer and the Issuing Bank. As per UCP600, even though it is not stated in the LC, it is irrevocable. b. Irrevocable Letter of Credit Irrevocable Letter of Credit is a firm undertaking on the part of Issuing Bank and cannot be cancelled or amended without the consent of the parties to LC, particularly the beneficiary. From an exporter's point of view this is more favorable. The irrevocable nature of the letter of credit has enabled building up an elaborate commercial system on the basis of irrevocable banker's credit. c. Confirmed Letter of Credit Confirmed Letter of Credit is a LC to which another bank (Bank other than the Issuing Bank) has added its confirmation or guarantee. Thus, there is a double guarantee in such Credit and it is more favorable to Beneficiary. Generally, the confirmation is desired by Beneficiary from a bank known to him, preferably the one located in his country so that his risk becomes localized and he can deal easily with a local bank rather than deal with a bank abroad, which has issued the Credit. But this type of LC is costlier to the parties concerned, since there would be charges of confirming bank. At times, the seller's bank/negotiating bank may insist on the LC being confirmed by a prime bank in the seller's home country in the following cases: Its counter party limits on the LC opening Bank are not in place or, It does not have country limits on the country of the Buyer. d. Sight Credit and Usance Credit

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Sight credit states that the payment would be made by the Issuing Bank at sight, on demand or on presentation. In case of usance credit, drafts are drawn on the issuing bank or the correspondent bank at specified usance period. Thecredit will indicate whether the usance drafts are to be drawn on the issuing bank or, in the case of confirmed credit on the confirming bank. e. Back-to-Back Letter of Credit It is also called as Countervailing Credit. When a LC is opened with security of another LC, the credit thus opened is termed as 'Back-to-Back Letter of Credit'. The original credit, which is offered as security for opening a back-toback credit is called as overriding credit/principal credit. The practical use of this Credit is seen when LC is opened by the ultimate buyer in favor of a particular beneficiary, who may not be the actual supplier or manufacturer. He will open another credit with near identical terms in favor of the actual supplier/manufacturer offering the main credit opened in his favor as security and will be able to obtain reimbursement by presenting the documents received under back-to-back credit under the main LC. f. Transferable Letter of Credit It is a credit, which can be transferred by the Original Beneficiary in favor of asecond beneficiary or several second beneficiaries. As per UCPDC a LC can be transferred only if it is specifically stated as "Transferable" in the LC. Further, such Credit can be transferred only once (i.e. from the First Beneficiary to a Second Beneficiary and not (thereafter) from the Second Beneficiary to third beneficiary) and subject only to the original terms and conditions of the Credit. The First Beneficiary can also substitute his name for that of the applicant. The First Beneficiary can hide the name of the actual supplier to the buyer and vice versa. The benefit of such a form of LC is that the original beneficiary is only an intermediary (middleman) between

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the importer and the actual manufacturer. The bank requested to affect the transfer (the transferring Bank) is under no obligation to affect the transfer except to the extent and manner specified to by the bank. g. Standby Letter of Credit These credits are generally used as a substitute for performance guarantee or for securing loans. The document generally called for under such credit is a simple statement of claim or proof of delivery of goods or certificate of nonperformance. This type of LC is issued mostly by Banks in countries where law precludes them from issuing guarantees. Even though standby credit is mere substitute for guarantee, it has developed as an all-purpose financial support instrument embracing wider range of uses than normal demand guarantee and is issued to cover situation of non-performance. h. Payment Credit This is available for payment at the counter of the paying bank, as nominated in the credit. The seller can, therefore, present documents to the paying bank and does not have to wait for the documents to be forwarded to the issuing bank for checking and subsequent payment. i. Negotiation Credit Beneficiary, in a negotiation credit gets paid by the nominated bank or any bank in case of a freely available credit. j. Deferred Payment Credit Similar to payment credits, except that they are payable at a future date(s).

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k. Acceptance Credit The accepting bank guarantees payment to the holder of the bill of exchange on maturity date - regardless of whether the credit is confirmed or not. This option comes with an acceptance fee which can be substantial. l. Revolving Credit This allows for the credit to be automatically reinstated under certain circumstances. It is normally used where shipments of the same goods are made to the same importer. LC may revolve cumulatively or noncumulatively. In a non-cumulative revolvement, the outstanding LC value will remain the same at any point of time. However, in cumulative revolvement the LC is paid up to the stated amount. A revolving LC may be restricted for revolvement in terms of number and amount within a stated expiry date.

2.3 Roles and Responsibilities


A. Issuing Bank It issues a credit at the request of an applicant or on its own behalf. a. Provided that the stipulated documents are presented to the nominated bank or to the issuing bank and that they constitute a complying presentation, the issuing bank must honour if the credit is available. b. An issuing bank is irrevocably bound to honour as of the time it issues the credit. c. An issuing bank undertakes to reimburse a nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the issuing bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not the nominated bank prepaid or

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purchased before maturity. An issuing bank's undertaking to reimburse a nominated bank is independent of the issuing bank's undertaking to the beneficiary. B. Confirming Bank It adds its confirmation to a credit upon the issuing bank's authorization or request. a. Provided that the stipulated documents are presented to the confirming bank or to any other nominated bank and that they constitute a complying presentation, the confirming bank must honour, if the credit is available by b. Bank must check whether required lines of credit are available and then pass necessary contingent contra entries. c. A confirming bank is irrevocably bound to honour or negotiate as of the time it adds its confirmation to the credit. d. A confirming bank undertakes to reimburse another nominated bank that has honoured or negotiated a complying presentation and forwarded the documents to the confirming bank. Reimbursement for the amount of a complying presentation under a credit available by acceptance or deferred payment is due at maturity, whether or not another nominated bank prepaid or purchased before maturity. A confirming bank's undertaking to reimburse another nominated bank is independent of the confirming bank's undertaking to the beneficiary. e. If a bank is authorized or requested by the issuing bank to confirm a credit but is not prepared to do so, it must inform the issuing bank without delay and may advise the credit without confirmation. C. Nominated Bank The bank with which the credit is available is known as a Nominated Bank.

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a. Unless a nominated bank is the confirming bank, an authorization to honour or negotiate does not impose any obligation on that nominated bank to honour or negotiate, except when expressly agreed to by that nominated bank and so communicated to the beneficiary. b. By nominating a bank to accept a draft or incur a deferred payment undertaking, an issuing bank authorizes that nominated bank to prepay or purchase a draft accepted or a deferred payment undertaking incurred by that nominated bank. c. Receipt or examination and forwarding of documents by a nominated bank that is not a confirming bank does not make that nominated bank liable to honour or negotiate, nor does it constitute honour or negotiation. D. Advising Bank The bank that advises the credit at the request of the issuing bank . a. A credit and any amendment may be advised to a beneficiary through an advising bank. An advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honour or negotiate. b. By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received. c. An advising bank may utilize the services of another bank ("second advising bank") to advise the credit and any amendment to the beneficiary. By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received.

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d. A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment thereto. e. If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received. f. If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice. Process Flowchart for Issuance of Inland/ Foreign Letter of Credit Operational guidelines Issuance of letters of credit: The references to UCP and RBI circulars have been provided to enable a user to minimize the errors during issuance of an LC Safeguards in Opening of LCs Bank must ensure before LC delivery:a. LCs are issued in security forms only/affixed with security holograms (in case of inland LC's) or issued through authenticated swift messages; b. LCs are issued under two authorised signatures. c. LCs are not issued for amounts out of proportion to the borrowers' genuine requirements and these are opened only after ensuring that the borrowers have made adequate arrangements for retiring the bills received under LCs out of their own resources or from the existing borrowing arrangements;

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d. The LC is opened for purchase of commodities / equipment / products which have relevance to the line of activity of applicant company otherwise specific approval to be taken from the relationship group. The LC to be opened for the tenor as per sanction terms. e. LCs for acquisition of capital goods should be opened only after we have satisfied ourselves about tying up of funds for meeting the relative liability by way of providing for long term funds or term loans from financial institutions/Bank; f. In no case, working capital limits should be allowed to be utilised for retiring bills pertaining to acquisition of capital assets. g. One should not ordinarily extend any non-fund based facilities oradditional/ad-hoc credit facilities to parties who are not regular constituents. h. If LC to be opened is to have clauses which are not standard / the standard clauses are deleted and this is likely to impact the credit adversely then necessary approval to be taken as per delegation of powers. Common Defects in Documents A discrepancy is an irregularity in the documents that causes them to be in noncompliance to the letter of credit. Requirements set forth in the letter of credit cannot be waived or altered by the issuing bank without the express consent of the applicant. The beneficiary should prepare and examine all documents carefully before presentation to the paying bank to avoid any delay in receipt of payment. Commonly found discrepancies in documents under a letter of credit and supporting documents include:

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Standard for Examination of Documents a. Nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation. b. Nominated bank acting on its nomination, a confirming bank, if any, and the issuing bank shall each have a maximum of five banking days following the day of presentation to determine if a presentation is complying. This period is not curtailed or otherwise affected by the occurrence on or after the date of presentation of any expiry date or last day for presentation. c. A presentation including one or more original transport documents subject to articles 19, 20, 21, 22, 23, 24 or 25 must be made by or on behalf of the beneficiary not later than 21 calendar days after the date of shipment as described in these rules, but in any event not later than the expiry date of the credit. d. Data in a document, when read in context with the credit, the document itself and international standard banking practice, need not be identical to, but must not conflict with, data in that document, any other stipulated document or the credit. e. In documents other than the commercial invoice, the description of the goods, services or performance, if stated, may be in general terms not conflicting with their description in the credit. f. If a credit requires presentation of a document other than a transport document, insurance document or commercial invoice, without stipulating by whom the document is to be issued or its data content, banks will accept the document as presented if its content appears to fulfill the function of the required document and otherwise complies with sub-article 14 (d).

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g. A document presented but not required by the credit will be disregarded and may be returned to the presenter. h. If a credit contains a condition without stipulating the document to indicate compliance with the condition, banks will deem such condition as not stated and will disregard it. i. A document may be dated prior to the issuance date of the credit, but must not be dated later than its date of presentation. j. When the addresses of the beneficiary and the applicant appear in any stipulated document, they need not be the same as those stated in the credit or in any other stipulated document, but must be within the same country as the respective addresses mentioned in the credit. Contact details (telefax, telephone, email and the like) stated as part of the beneficiary's and the applicant's address will be disregarded. However, when the address and contact details of the applicant appear as part of the consignee or notify party details on a transport document subject to articles 19, 20, 21, 22, 23, 24 or 25, they must be as stated in the credit. k. The shipper or consignor of the goods indicated on any document need not be the beneficiary of the credit. l. A transport document may be issued by any party other than a carrier, owner,master or charterer provided that the transport document meets the requirements of articles 19, 20, 21, 22, 23 or 24 of these rules. Documents requested in an LC Usually the commercial documents requested in an LC are the following: Commercial invoice. Transport document such as a Bill of lading or Airway bill. Insurance document.

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Inspection Certificate. Certificate of Origin. Packing List. In specifying documents required of the seller, it is very important to stipulate those that are required for customs clearance and those that reflect the agreement reached between the buyer and the seller. Prices should be stated in the currency of the LC and documents should be supplied in the language of the LC. a. The buyer's bank sends the letter of credit to the advising bank in the seller's country. The seller may request that a particular bank be the advising bank, or the buyer's bank may select one of its correspondent banks in the seller's country. b. The advising bank forwards the letter of credit to the seller. The advising bank checks on the authenticity of the LC before forwarding it to the seller. The seller carefully reviews all conditions the buyer has stipulated in the letter of credit. If the seller cannot comply with one or more of the provisions, the buyer is immediately notified and asked to make an amendment to the letter of credit. c. After final terms are agreed upon, the seller prepares the goods and arranges for shipment to the appropriate port. The seller ships the goods, and obtains a bill of lading and other documents as required by the buyer in the letter of credit some of these documents may need to be obtained prior to shipment. d. The seller presents the documents to the Negotiating bank, indicating full compliance with the terms of the letter of credit. The Negotiating bank reviews the documents. If they are in order, they are forwarded to the Issuing bank. If there is a Confirming bank in the transaction the documents have to flow through the Confirming bank.

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e. The Negotiating bank forwards a reimbursement claim to the Reimbursingbank. f. The Reimbursing bank pays the Negotiating bank as per instructions issued to it by the Issuing bank. g. On receipt of payment the Negotiating bank, makes payment to the Beneficiary, if he has not discounted the bill earlier. h. Once the Issuing bank receives the documents it notifies the buyer who then reviews them. If they are in order the buyer signs off, makes payment to the bank, and receives the documents. i. The transfer of funds from the buyer to the bank, from the buyer's bank to the seller s bank, and from the seller's bank to the seller may be handled at the same time as the exchange of documents, or under terms agreed upon inadvance. Original Documents and Copies - UCP 600 - Article 17 a. At least one original of each document stipulated in the credit must be presented. b. A bank shall treat as an original any document bearing an apparently original signature, mark, stamp, or label of the issuer of the document, unless the document itself indicates that it is not an original. c. Unless a document indicates otherwise, a bank will also accept a document as original if it: d. appears to be written, typed, perforated or stamped by the document issuer's hand; or e. appears to be on the document issuer's original stationery; or f. states that it is original, unless the statement appears not to apply to the document presented. g. If a credit requires presentation of copies of documents, presentation of either originals or copies is permitted.

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h. If a credit requires presentation of multiple documents by using terms such as "in duplicate", "in two fold" or "in two copies", this will be satisfied by the presentation of at least one original and the remaining number in copies, except when the document itself indicates otherwise. Further kindly refer to the following Amendment of a Letter of Credit Advising of Amendments to LCs All the procedures outlined for advising the original LCs must be followed for amendments also. While advising the amendments normally the Issuing Bank serializes the amendment numbers. Before advising the amendment it has to be ensured that no previous amendment is missing. Normally, whenever an amendment is effected there is a likelihood of inconsistencies creeping into the LCs because of not amending the connected clause of LC (for example whenever LC value is enhanced there should be a corresponding enhancement in the quantity / or unit prices). The Advising Bank must go through the provisions of LC and the amendments, to ensure that on account of such amendments no inconsistency arises in the LC. Only on receipt of satisfactory information/ clarification, the amendment may be advised. The following points may also be noted for amendments to an LC a. A credit and any amendment may be advised to a beneficiary through an advising bank. An advising bank that is not a confirming bank advises the credit and any amendment without any undertaking to honor or negotiate.

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b. By advising the credit or amendment, the advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit or amendment and that the advice accurately reflects the terms and conditions of the credit or amendment received. c. An advising bank may utilize the services of another bank ("second advising bank") to advise the credit and any amendment to the beneficiary. By advising the credit or amendment, the second advising bank signifies that it has satisfied itself as to the apparent authenticity of the advice it has received and that the advice accurately reflects the terms and conditions of the credit or amendment received. d. A bank utilizing the services of an advising bank or second advising bank to advise a credit must use the same bank to advise any amendment thereto. e. If a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received. f. If a bank is requested to advise a credit or amendment but cannot satisfy itself as to the apparent authenticity of the credit, the amendment or the advice, it must so inform, without delay, the bank from which the instructions appear to have been received. If the advising bank or second advising bank elects nonetheless to advise the credit or amendment, it must inform the beneficiary or second advising bank that it has not been able to satisfy itself as to the apparent authenticity of the credit, the amendment or the advice. g. Except as otherwise provided by article 38, a credit can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any, and the beneficiary. h. An issuing bank is irrevocably bound by an amendment as of the time it issues the amendment. A confirming bank may extend its confirmation to an amendment and will be

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irrevocably bound as of the time it advises the amendment. A confirming bank may, however, choose to advise an amendment without extending its confirmation and, if so, it must inform the issuing bank without delay and inform the beneficiary in its advice i. The terms and conditions of the original credit (or a credit incorporating previously accepted amendments) will remain in force for the beneficiary until the beneficiary communicates its acceptance of the amendment to the bank that advised such amendment. The beneficiary should give notification of acceptance or rejection of an amendment. If the beneficiary fails to give such notification, a presentation that complies with the credit and to any not yet accepted amendment will be deemed to be notification of acceptance by the beneficiary of such amendment. As of that moment the credit will be amended. j. A bank that advises an amendment should inform the bank from which it received the amendment of any notification of acceptance or rejection. k. Partial acceptance of an amendment is not allowed and will be deemed to be notification of rejection of the amendment l. A provision in an amendment to the effect that the amendment shall enter into force unless rejected by the beneficiary within a certain time shall be disregarded Amendment of a letter of credit The process for amending an LC is as follows a. Seller requests a modification or amendment of any questionable terms in the letter of credit. b. If the terms are agreed upon, Buyer issues order to his or her (buyer's) bank to make an amendment to the terms of the letter of credit.

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c. Buyer's bank notifies seller's bank of amendment, through the advising bank. d. Seller's bank notifies seller of amendment. Bank-to-Bank Reimbursement Arrangements In respect of all LC's issued by the bank which provide for reimbursement necessary authorization should be given to the reimbursing bank well in time with particulars of the of the LC. The Treasury is also to be informed for funding purposes. If a credit states that reimbursement is to be obtained by a nominated bank ("claiming bank") claiming on another party ("reimbursing bank"), the credit must state if the reimbursement is subject to the ICC rules for bank-to-bank reimbursements in effect on the date of issuance of the credit. Export Operations Under LC Letters of Credit established in favor of Indian residents by persons resident outside India for purchase of goods and services are referred to as Export Letters of Credit. Such letters of credit may be received for following purposes: a. For physical export of goods and services from India to a foreign country. b. For execution of projects (project exports) outside India by Indian exporters by supply of goods and services from India or partly from India and partly from outside India (third countries).

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Process flowchart for Amendments to Foreign Letter of Credit

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c. Towards deemed exports where there is no physical movement of goods from outside India but the supplies are being made to a project financed in foreign exchange by multilateral agencies, UN Organization or projects being executed in India with the aid of external agencies. d. For sale of goods by Indian exporters with total procurement and supply from outside India (merchant trade by India intermediary) in all the above cases there would be earning of foreign exchange or conservation of foreign exchange. Advising an Export LC The basic responsibility of an Advising Bank is to advise the credit received from its overseas branch/correspondent only after checking the apparent authenticity of the credit established by the issuing bank and getting themselves satisfied. As a further step, as a prudent bank, it must also go through the letter of credit, try to understand the underlying transaction, terms and conditions of the credit and advice the beneficiary in the matter. However, if bank is unable to verify the authenticity but elects to advise the LC to the beneficiary, it may do so clearly indicating in the advising memo that "LC ADVISED UNAUTHENTICATED". Further, if a bank is requested to advise a credit or amendment but elects not to do so, it must so inform, without delay, the bank from which the credit, amendment or advice has been received. In advising export LCs, there are no credit risks as the bank receives a one-time commission for the advising service. Another important feature is that there are no capital adequacy requirements for the advising function. Advising business act as an opportunity lead for LC negotiation and discounting business.

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Process flow chart for Advising an Export Letter of Credit

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Confirmation of Export Letters of Credit In confirmation the Bank adds its guarantee to the undertaking given by the Issuing Bank. Hence, adding of confirmation entails assessment of risk on the Issuing Bank and the country of the Issuing Bank. Bills under LC Under L/C opened by the bank when bills are received a thorough scrutiny of documents including the remittance schedule should be made to determine whether the presentation is in accordance with the L/C terms or not. If presentation is compliant then bills are lodged through BM /FBM module in Finnacle. Remittance / acceptance is sent to the nominated bank. Fees and reimbursements under Import LC The different charges/fees payable under import LC is briefly as follows a. Opening Charges - This would comprise commitment charges and usance charges, to be charged upfront for the period of the LC. Commitment period is the period from date of opening of the letter of credit until the last date of negotiation of documents under the LC or the expiry of the LC, whichever is later. The fee charged by the LC opening Bank during the commitment period is referred to as commitment fees. b. Usance Charges - Usance is the credit period agreed between the buyer and the seller under the Letter of Credit. This may vary from 7 days usance (sight) to 90/180 days. The fee charged by Bank for the usance period is referred to as usance charges. c. Retirement Charges would be payable at the time of retirement of documents under LCs. LC opening bank examines the documents presented under the LCs according to UCPDC guidelines keeping ISBP standard and procedures in mind and decides whether the said presentation is complying. It then decides whether to take up or refuse the presentation.

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d. The advising bank charges an advising fee to the beneficiary unless stated otherwise. The fees could vary depending on the country of the beneficiary. The advising bank charges may be eventually borne by the issuing bank or reimbursed from the applicant. e. The Confirming Bank's fee depends on the credit of the Issuing Bank and would be borne by the beneficiary or the Issuing bank (applicant eventually) depending on the terms of contract. f. The Reimbursing Bank charges are to the account of the Issuing Bank. e. 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. f. 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. g. 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. Charges for Letters of Credits Charges for Letter of Credit are usually: A. Regular Structure Charges which comprises of two components Commitment Charges Sight / Usance Charges

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B. Flat Fee based on sanction terms In this structure, the commitment and usance are clubbed as a single charge and levied as a percentage on the L/C value and flat amount in INR. C. Opening of LC Commitment fee is charged on validity of LC In case of sight the calculations are based on 30 days from the date of bill of lading Flat Fee on per annum basis based on sanction terms (may be collected in number of quarters/months /days as per sanction terms). Exceptions if any are as per the sanction terms and with specific instructions fromthe head office. Note: All charges are calculated as per the 365 days year. D. Amendment to an LC In the case of amendments to a letter of credit the charges calculation will be as follows Financial amendment or Tenor changes - Charges will be based on the change and treated on par with new LC opening charges. Other minor amendments a nominal amendment fee to be charged. E. Retirement of Bills At the stage of retirement of bills charges need to be collected separately as per schedule of charges, where "All inclusive" charges are prescribed in terms of sanction, this charge may be waived. F. Exceptions a. In case of documents received after LC date charges will have to be collected that are similar to LC opening charges

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b. In case seller sends document in excess of the LC value and are eventually accepted and paid - the difference arising out of this needs to be collected. The treatment to be the same in case of discrepant documents. c. Charges to be collected from beneficiary - In some cases the LC provides for charges to the account of beneficiary. In such cases the issuance charges should be claimed from the advisory bank / nominated bank. If not received in time the same to be deducted from proceeds of the First set of documents received under LC. d. Recovery from TFRA A/C - In cases where sufficient balance is not available in the applicants account or there is no operative account; the commission for issuance of LC should be recovered at the time of issuance by DR TFRA A/C and reversed as and when received from the applicantcustomer.

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CHAPTER 3 BANK GUARANTEES

3.1 Introduction
Bank Guarantee is an instrument issued by the Bank in which the Bank agrees to stand guarantee against the non-performance of some action of a party. The quantum of guarantee is called the guarantee amount. The guarantee is issued upon receipt of a request from applicant for some purpose/transaction in favor of a Beneficiary. The issuing bank will pay the guarantee amount to the beneficiary of the guarantee upon receipt of the claim from the beneficiary. This results in invocation of the Guarantee. Legal Regulations applicable to Bank Guarantee This instrument is governed by the following legal regulations besides The Reserve Bank of India. The implication of these legal regulations and RBI guidelines Symbols Reference Indian Contract Act 1872 Reserve Bank Of India Foreign Exchange Management Act Excerpts from the Indian Contract Act Contract of indemnity defined.-A contract, by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity". "Contract of guarantee", "surety", principal debtor" and "creditor". A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the " surety"; the person in respect of whose default the guarantee is given is called the " principal debtor ", and the

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person to whom the guarantee is given is called the " creditor ". A guarantee may be either oral or written. Types of Bank Guarantees The guarantees issued by the bank have been classified into Foreign guarantee and Inland Guarantee that have been provided under the following types a. Advance payment: The advance payment guarantee is intended to bind the supplier to use the advance payment for the purpose stated in the contract between the buyer and the supplier. In general, the advance payment guarantee should contain a reduction clause that automatically reduces the amount in proportion to the value of the (partial) delivery (ies). The advance payment guarantee should only become effective once the advance payment has been received. b. Bid Bond: The purpose of a bid bond is to prevent a company from submitting a tender, winning the contract and then declining to accept it on the grounds that the deal is no longer lucrative, Tender bonds offer buyers security against dubious or unqualified bids. They are often mandatory for public invitations to tender. c. Financial : Guarantee that provides the beneficiary/seller or the employer with a security in case the applicant /buyer or the contractor fails fully or partially to meet his payment obligations d. Performance Bond: This is also known as a performance guarantee. A performance bond / guarantee provide security for any costs that may be incurred by the bond beneficiary on non performance of a contractually agreed service and/ or non-compliance with the contractual deadline. The purpose of a performance guarantee is To provide the beneficiary with financial compensation for any loss he suffers if his contractor/applicant /supplier does not fulfill his contractual obligation or To protect the buyer /importer against the risk that the seller /exporter fails to fulfill his delivery commitments or

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To secure any claims the employer/buyer/importer may have against the contractor/seller in the event of under performance of the goods machinery supplied, or defects established after goods are supplied or project is executed e. Deferred Payment : It is a contract under which a bank promises to pay the supplier the price of machinery supplied by him on deferred terms, in agreed installments, with stipulated interest in the respective due dates in case of default in payment of the amount by the buyer. Deferred Payment guarantee is a standby credit guaranteeing deferred payment usually for payment for capital goods, turnkey projects etc. Under a bank guarantee, the bank acts as guarantor of a claim or obligation in lieu of the debtor. The bank cannot be held liable in the event that the debtor fails to "perform". The Bank obligation is limited to its pledge to pay a maximum specified amount on fulfillment of the terms of the commitment. A bank guarantee/ surety bond may only be issued if the customer has been granted a line of credit. In certain cases, the bank may require adequate collateral. However, even though both Letter of Credit and Bank Guarantee ensure that the issuing bank guarantees payment, the difference lies in that fact that while LC is a 'positive action' instrument, BG is a nonperformance instrument. Hence, payment is released under LC as and when all the terms of the underlying trade transaction are met. On the other hand, payment is released under BG if and when the terms of the underlying transactions are not complied with. Guidelines with regards to Bank Guarantees a. As regards the purpose of the guarantee, as a general rule, the Bank should confine itself to the provision of financial guarantees and exercise due caution with regard to performance guarantee business. b. As regards maturity, as a rule, Bank should guarantee shorter maturities and leave longer maturities to be guaranteed by other institutions.

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c. No bank guarantee should normally have a maturity of more than 10 years. Please refer to Para 18 (b) of latest Credit Policy (2009) for recent liberalization in thisregard. d. General permission has been granted to Bank to issue guarantees/ Letter of Undertaking (LoU)/ Letter of Comfort (LoC) in favour of the overseas supplier, up to USD 20 million per import transaction for a period of 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.

e. As regards reporting arrangements, Bank is required to furnish data on issuance of guarantees/LoUs/LoCs by all its branches, in a consolidated statement, at quarterly intervals from December, 2004 onwards so as to reach RBI not later than the 10th of the following month.

3.2 Foreign Exchange Management Rules


Issue of the following types of guarantees is governed by the Foreign Exchange Management Regulations: A. Minor Guarantees B. Bank Guarantees for Imports C. Guarantees for Non-Residents A. Minor guarantees Bank may freely give on behalf of their customers and overseas branches and correspondents, guarantees in the ordinary course of business in respect of missing or defective documents, authenticity of signatures and for other similar purposes. B. Bank guarantees for Imports I. Import under foreign loans/credits

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a. Issue of guarantees in favour of foreign lenders or suppliers (in the case of Suppliers Credits except those issued for short term Trade Credits covered in Para II hereafter) requires approval of RBI. While granting approval for raising the foreign currency loan/ credit, RBI will grant the required permission to the concerned Bank in the event of invocation of the guarantee, Bank may make the necessary remittance without reference to RBI. A report should, be sent to RBI giving full details citing reference to the approval for furnishing the guarantee. A copy of the claim received from the overseas party should be enclosed with such report. b. Bank is not permitted to issue guarantees/ standby letters of credit or letters of comfort in favour of overseas lenders relating to External Commercial Borrowing (ECB). Applications for providing guarantees/ standby letters of credit or letters of comfort by Bank relating to ECB in the case of SMEs will be considered by the Reserve Bank on merit under the Approval Route, subject to prudential norms. c. Applications by bank for issue of guarantees, standby letters of credit, letters of undertaking or letter of comfort in respect of ECB by textile companies for modernization or expansion of the textile units, after the phasing out of Multi Fibre Agreements, will be considered by Reserve Bank under the Approval Route subject to prudential norms. II. Trade Credits for imports into India a. Credit extended for imports directly by the overseas supplier/ bank for original maturity of less than three years is hereinafter referred to as trade credit for imports. b. 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.

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c. Bank can approve trade credits for imports into India up to USD 20 million per import transaction for import of all items (permissible under the EXIM Policy) with a maturity period (from the date of shipment) up to one year. For import of capital goods, Bank 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 Bank beyond the permissible period III. Loans abroad against securities provided in India In terms of Regulation 4(2) of Notification No. FEMA.8/2000-RB dated May 3, 2000, Bank may give guarantee in respect of any debt, obligations or other liability incurred by a person resident outside India, among others, where such debt, obligation or liability is owed to a person resident in India in connection with a bona fide trade transaction, provided that the guarantee is covered by a counter guarantee of a bank of international repute resident abroad.

IV. Issue of Guarantee- Import of services Bank may issue guarantee on behalf of their customers importing services, provided: a. the guarantee amount does not exceed USD 100,000; b. Bank is satisfied about the bonafides of the transaction; c. Bank ensures submission of documentary evidence for import of services in the normal course; and d. the guarantee is to secure a direct contractual liability arising out of a contract between a resident and a non-resident. In case of invocation of the guarantee, Bank is required to submit to the Chief General Manager-in-Charge, Foreign Exchange Department, Foreign Investments Division(EPD), a report on the circumstances leading to the invocation of the guarantee. C. Guarantees for non-residents I. For Non Residents
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a. Reserve Bank has granted general permission to Bank, vide its Notification No. FEMA/8/ 2000 dated 3rd May 2000, to give guarantees in favour of persons resident in India in respect of any debt or other obligation or liability of a person resident outside India, subject to such instructions as may be issued by RBI from time to time. b. Bank may, accordingly, give on behalf of its overseas branches/ correspondents or a bank of international repute, guarantees/ performance bonds in favour of residents of India in connection with genuine transactions involving debt, liability or obligation of non-residents, provided the bond/ guarantee is covered by a counter-guarantee of the overseas Head Office/ branch/ correspondent or a bank of international repute. c. Bank should ensure that counter-guarantees are properly evaluated and their own guarantees against such guarantees are not issued in a routine manner. Before issuing a guarantee against the counter-guarantee from an overseas Head Office/branch/ correspondent/ bank of international repute, Bank should satisfy itself that the obligations under the counter-guarantee, when invoked, would be honoured by the overseas bank promptly. If the Bank desires to issue guarantee with the condition that payment will be made, provided reimbursement has been received from the overseas bank which had issued the counter-guarantee, this fact should be made clearly known to the beneficiary in the guarantee document itself. d. Bank may make rupee payments to the resident beneficiaries immediately when the guarantee is invoked and, simultaneously, arrange to obtain the reimbursement from the overseas bank concerned, which had issued the counter-guarantee. e. Cases where payments are not received by the Bank when the guarantees ofoverseas Bank are invoked, should be reported to RBI indicating the steps being taken by the bank to recover the amount due under the guarantee. f. Bank may issue guarantees in favour of overseas organizations issuing traveler scheques in respect of blank travellers cheques stocked for sale by it or on behalf of its constituents who are full47

fledged money changers holding valid licenses from Reserve Bank, subject to suitable counterguarantee being obtained from the latter. II. Overseas Investment Guarantee on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs) abroad a. Previously, only promoter corporates were permitted to offer guarantees on behalf of their Wholly Owned Subsidiaries (WOSs)/Joint Ventures (JVs), under the Automatic Route and issue of personal, collateral and third party guarantees requires prior approval of Reserve Bank and is considered by RBI, on a case by case basis. b. The scope of guarantees covered under the Automatic Route has now (Ref: RBI/2008-09/14
dated July 01,2008) been enlarged. Indian entities are nowpermitted to offer any forms of guarantee

corporate or personal/ primary or collateral/ guarantee by the promoter company/ guarantee by Group Company, sister concern or associate company in India, provided: All "financial commitments" including all forms of guarantees are within the overall prescribed ceiling for overseas investment of the Indian party i.e. currently within 400 per cent of the net worth of the investing company (Indian party). No guarantee is 'open ended' i.e. the amount of the guarantee should be specified upfront, and As in the case of corporate guarantees, all guarantees are required to be reported to RBI in form ODI, Part II. Guarantees issued by Bank in India in favour of WOS/ JVs outside India are outside this ceiling and would be subject to prudential norms issued by RBI from time to time. Inter-Institutional Guarantees a. Bank should not execute guarantees covering inter-company deposits/ loans. Guarantees should not, also, be issued for the purpose of indirectly enabling the placement of deposits with nonbanking institutions. This stipulation will apply to all types of deposits/loans irrespective of their source, e.g. deposits/ loans received by non-banking companies from trusts and other institutions.
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b. Transactions of the following type are in the nature of guarantees executed by Bank in respect of funds made available by one non-banking to another nonbanking company and Bank should therefore, desist from such practices: A seller drew bills, normally of 120 to 180 days usance, on the buyer which were accepted by the buyer and co-accepted by his banker. The bills were discounted by the seller with the accommodating company, which retained the bills till the due date. The bank which gave coacceptance invariably earmarked funds for the liability under the bills against the drawing power in respect of stocks held in the cash credit account of its client, the buyer, or The accommodating company kept deposits for a specific period with the bank's borrowers under a guarantee executed by the Bank. In such a case also, the bank earmarked the amount against drawing power available in the cash credit account. c. Bank may issue guarantees favouring other Bank/ FIs/ other lending agencies for the loans extended by the latter, subject to strict compliance with the following conditions. The guarantee shall be extended only in respect of borrower constituents and to enable them to avail of additional credit facility from other Bank/FIs/lending agencies. The guaranteeing bank should assume a funded exposure of at least 10% of the exposure guaranteed. Bank should not extend guarantees or letters of comfort in favour of overseas lenders including those assignable to overseas lenders. However, AD Bank may also be guided by the provisions contained in Notification No. FEMA 8/2000-RB dated May 3, 2000. The guarantee issued by the Bank will be an exposure on the borrowing entity on whose behalf the guarantee has been issued and will attract appropriate risk weight, as per the extant guidelines. Bank should ensure compliance with the recommendations of the Ghosh Committee and other internal requirements relating to issue of guarantees, to obviate the possibility of frauds in this area.
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Guidelines for Lending Bank Bank extending credit facilities against the guarantees issued by other Bank/FIs should ensure strict compliance with the following conditions: The exposure assumed by the bank against the guarantee of another bank/FI will be deemed as an exposure on the guaranteeing bank/FI and will attract appropriate risk weight as per the extant guidelines. Exposures assumed by way of credit facilities extended against the guarantees issued by other Bank should be reckoned within the inter bank exposure limits prescribed by the Board of Directors. Since the exposure assumed by the bank against the guarantee of another bank/FI will be for a fairly longer term than those assumed on account of inter-bank dealings in the money market, foreign exchange market and securities market, the Board of Directors should fix an appropriate sub-limit for the longer term exposures, since these exposures attract greater risk. Bank should monitor the exposure assumed on the guaranteeing bank/ FI, on a continuous basis and ensure strict compliance with the prudential limits/ sub limits prescribed by the Board for Bank and the prudential single borrower limits prescribed by RBI for FIs. Bank should comply with the recommendations of the Ghosh Committee and other internal requirements relating to acceptance of guarantees of other Bank, to obviate the possibility of frauds in this area. Exceptions a. In regard to rehabilitation of sick/weak industrial units, in exceptional cases, where Bank are unable to participate in rehabilitation packages on account of temporary liquidity constraints, the concerned Bank could provide guarantees in favour of the Bank which take up their additional share. Such guarantees will remain extant until such time that the Bank providing additional finance against guarantees are re-compensated.

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b. In respect of infrastructure projects, Bank may issue guarantees favouring other lending institutions, provided the bank issuing the guarantee takes a funded share in the project at least to the extent of 5 percent of the project cost and undertakes normal credit appraisal, monitoring and follow up of the project. c. Similarly, guarantees can be issued in favour of HUDCO/ State Housing Boards and similar bodies/ organisations for the loans granted by them to private borrowers who are unable to offer clear and marketable title to property, provided Bank is otherwise satisfied with the capacity of the borrowers to adequately service such loans. d. Bank may sanction issuance of guarantees on behalf of its constituents, favouring Development Agencies/ Boards like Indian Renewable Energy Development Agency, National Horticulture Board, etc., for obtaining soft loans and/or other forms of development assistance. Infrastructure projects Keeping in view the special features of lending to infrastructure projects viz., the high degree of appraisal skills on the part of lenders and availability of resources of a maturity matching with the project period, Bank have been given discretion in the matter of issuance of guarantees favoring other lending agencies, in respect of infrastructureprojects alone, subject to the following conditions: a. Bank issuing the guarantee takes a funded share in the project at least to the extent of 5 percent of the project cost and undertakes normal credit appraisal, monitoring and follow-up of the project. b. The guarantor bank has a satisfactory record in compliance with the prudential regulations, such as, capital adequacy, credit exposure, norms relating to income recognition, asset classification and provisioning, etc. Precautions for Averting Frauds While issuing guarantees on behalf of customers, the following safeguards should be observed by Bank:
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a. At the time of issuing financial guarantees, Bank should be satisfied that the customer would be in a position to reimburse the bank in case the bank is required to make payment under the guarantee. b. In the case of performance guarantee, Bank should exercise due caution and have sufficient experience with the customer to satisfy themselves that the customer has the necessary experience, capacity and means to perform the obligations under the contract, and is not likely to commit any default. c. Bank should, normally, refrain from issuing guarantees on behalf of customers who do not enjoy credit facilities with it.

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Process Flowchart for Issuance of Bank Guarantee (Inland & Foreign)

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Process Flowchart for Reversal of Expired Bank Guarantee

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Claim/Encashment of guarantee at a center other than issuing branch Normally a bank guarantee is payable on invocation at the counter of the issuing branch. However sometimes branches may get a request for issuance of guarantees that have a clause which makes them encashable at a branch other than the issuing branch such request may be considered subject to provisions of circular no. IDBI Bank/200910/30/CBG/TF/5 dated May 11, 2009. Reversal of guarantee Any expired guarantee can be reversed. Reversal of guarantee will reverse the contingent transactions already put through at the time of issue. The entries are created as a part of verification process. The user will invoke GMM and use R reverse function for reversal of the guarantee. The screen interface is same as in the case of issue.

3.3 Guidance and Clarifications


The clarifications and guidance notes provided herein places reliance on the various master circulars issued by RBI from time to time. I. Prevention of Fraudulent and Unaccounted Bank Guarantees 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. Further, Bank should, while forwarding guarantees, caution the beneficiaries that they should, in their own interest, verify the genuineness of the guarantee with the issuing bank. II. Recommended Internal Control Systems for Bank Guarantees All Bank guarantees should be signed by two officials jointly. III. Guarantees governed by regulations issued under Foreign Exchange Management (Guarantees) Regulations

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Bid bonds and performance bonds or guarantees for exports a. In terms of Notification No.FEMA.8/2000-RB dated May 3, 2000, Authorised Dealer Bank have the permission to give performance bond or guarantee in favour of overseas buyers on account of bona fide exports from India. b. Prior approval of RBI should be obtained by the Bank 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. c. Bank, 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 Bank are acceptable to overseas buyers in accordance with local laws/ regulations. d. If and when the bond/ guarantee are invoked, Bank may make payments due thereunder to non-resident beneficiaries. IV. Issue of Bank Guarantee in favour of Foreign Airlines/IATA Indian agents In terms of Regulation 4 of the Foreign Exchange Management (Guarantees) Regulations, 2000 notified by Notification no. FEMA.8/2000-RB dated May 3, 2000, AD Bank are allowed to give guarantees in certain cases, as stated therein. Issue of Bank Guarantee in favour of Foreign Airlines/IATA Indian agents of foreign airline companies who are members of International Air Transport Association (IATA), are required to furnish bank guarantees in favour of foreign airline companies/IATA, in connection with their ticketing business. As this is

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a standard requirement in this business, Authorised Dealer Bank in their ordinary course of business can issue guarantees in favour of the foreign airline companies/IATA on behalf of Indian agents of foreign airline companies, who are members of International Air Transport Association (IATA), in connection with their ticketing business. Issue of Bank Guarantee on behalf of Service Importers V. Issue of Bank Guarantee on behalf of Service Importers With a view to further liberalise the procedure for import of services, AD Category-I Bank have been permitted (with effect from November 17, 2006) to issue guarantee on behalf of their customers importing services, provided: a. the guarantee amount does not exceed USD 100,000; b. the AD Category-I bank is satisfied about the bona fides of the transaction; c. the AD Category-I bank ensures submission of documentary evidence for import of services in the normal course; and d. the guarantee is to secure a direct contractual liability arising out of a contract between a resident and a non-resident. e. In case of invocation of the guarantee, bank should send a detailed report to the RBI, explaining the circumstances leading to the invocation of the guarantee VI. Precautions in case of Project Exports a. Bank 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.

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b. As the Working Group approvals are based on the recommendations of the sponsor Bank, the latter should examine the project proposals thoroughly with regard to the capacity of the contractor/ sub-contractors, protective clauses in the contracts, adequacy of security, credit ratings of the overseas sub-contractors, if any, etc. c. Therefore, the need for a careful assessment of financial and technical demands involved in the proposals vis--vis the capability of the contractors (including subcontractors) as well as the overseas employers can hardly be under-rated to the financing of any domestic projects. In fact, the export projects should be given more attention, in view of their high values and the possibilities of foreign exchange losses in case of failure, apart from damage to the image of Indian entrepreneurs. d. While bid bonds and performance guarantees cannot be avoided, it is to be considered whether guarantees should be given by the Bank 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 postaward follow-up and monitoring of the contracts. VII. Guarantees for Export Advance 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 Bank in Indian Rupees for interest rate arbitrage. 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. It is, therefore, reiterated that as guarantees contain inherent risks, it would not be in the interest of

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the Bank if such transactions, are entered into by Bank. Bank should, therefore, be careful while extending guarantees against export advances so as to ensure that no violation of FEMA regulations takes place and Bank is not exposed to various risks and hence it is important for the Bank to carry out due diligence and verify the track record of such exporters to assess their ability to execute such export orders. Bank 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. Co-acceptance of bills Bank while discounting co-accepted bills, appear to ignore this important aspect presumably because of the co-acceptance given by other banks. The bills, on maturity, are not honoured by the drawees and the banks which co-accept the bills have to make payment of these bills, and they find it difficult to recover the amount from the drawers/ drawees of bills. Banks also discount bills for sizeable amounts, which are co-accepted by certain Urban Co-operative Banks. On maturity, the bills are not honoured and the cooperative banks, which co-accept the bills, also find it difficult to make the payment. The financial position and capacity of the coaccepting bank to honour the bills, in the event of need, is not being gone into. Safeguards to be kept in view of Co-acceptances a. While sanctioning co-acceptance limits to the customers, the need should be ascertained, and limits should be extended only to those customers who enjoy other limits with the bank. b. Only genuine trade bills should be co-accepted and bank should ensure that the goods covered by bills co-accepted are actually received in the stock accounts of the borrowers.

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c. The valuation of the goods as mentioned in the accompanying invoice should be verified to see that there is no over-valuation of stocks. d. Bank should not extend its co-acceptance to house bills/ accommodation bills drawn by group concerns on one another. e. Bank when discounting such bills, co-accepted by other banks, should also ensure that the bills are not accommodation bills and that the co-accepting bank has the capacity to redeem the obligation in case of need. f. Bank-wise limits should be fixed, taking into consideration the size of each bank for discounting bills co-accepted by other banks, and the relative powers of the officials of the other banks should be got registered with the discounting banks. g. Care should be taken to see that the co-acceptance liability of any bank is not disproportionate to its known resources position. h. A system of obtaining periodical confirmation of the liability of co-accepting banks in regard to the outstanding bills should be introduced. i. Proper records of the bills co-accepted for each customer should be maintained, so that the commitments for each customer and the total commitments at a branch can be readily ascertained. j. It is also desirable for the discounting bank to advise the Head Office/ Controlling Office of the bank, which has co-accepted the bills, whenever such transactions appear to be disproportionate or large. k. Reports should be taken which reveal the position of bills that have become overdue, and which the bank had to meet under the co-acceptance obligation.

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l. Co-acceptances in respect of bills for Rs.10,000/- and above should be signed by two officials jointly, deviation being allowed only in exceptional cases, e.g. nonavailability of two officials at a branch. m. Banks should not co-accept bills drawn by NBFCs. In addition, banks are advised not to extend co-acceptance on behalf of their buyers/constituents under the SIDBI Scheme. Precautions Bank must not extend any non-fund based facilities or additional/ad-hoc credit facilities to parties who are not their regular constituents, nor should it discount bills drawn under LCs, or otherwise, for beneficiaries who are not their regular clients. a. In the case of LCs for import of goods, bank must be very vigilant while making payment to the overseas suppliers on the basis of shipping documents. It should exercise precaution and care in comparing the clients. b. The payments should be released to the foreign parties only after ensuing that the documents are strictly in conformity with the terms of the LCs.

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CHAPTER 4 IMPORTS 4.1 Introduction


Import is any good (e.g. a commodity) or service brought into one country from another country in a legitimate fashion, typically for use in trade. Import trade is regulated by the Directorate General of Foreign Trade (DGFT) under the Ministry of Commerce & Industry, Department of Commerce, Government of India. Bank must ensure that the imports into India are in conformity with the Foreign Trade Policy in force and Foreign Exchange Management (Current Account Transactions) Rules, and the Directions issued by Reserve Bank under Foreign Exchange Management Act, 1999 from time to time.This chapter discusses the broad areas/guidelines/processes/procedures that one needs to be aware while dealing with Import Trade 1. Import Licenses Except for goods included in the negative list which require licence under the Foreign Trade Policy in force, Bank can 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 licences should be adhered to. Where the goods to be imported are not subject to licence, the customer should state the Import Trade Control (H. S.) classification number together with serial number allotted to commodity on the relative Form A1 and LC application. Such import was commonly referred to as Import under "Open General Licence" (OGL). As no licence is issued for the same the term OGL is redundant, however the term is still widely prevalent in practice. Whenever the same is referred it simply implies that the import if these items can be freely made. The applicant of the credit
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should normally be the party in whose favour the licence has been issued. Value indicated on import licence is always for the CIF value of the goods authorised to be imported. In no case the CIF value of the merchandise covered by the credit should exceed the amount of the licence. Consequently if insurance is covered by the buyer and/or freight is payable at destination the LC will have to be opened for a lesser amount and the endorsement on the import licence should be to the extent of the cost of goods plus insurance and freight. The import licence should be valid as on the date of opening of the LC. Validity of an Import authorization is decided with reference to date of shipment/dispatch of goods from supplying country and not at the date of arrival of goods at an Indian port. Therefore, the last shipment date permitted under the LC should not go beyond the date of expiry of the import licence. While scrutinizing the Import licence before opening the LC branch should ensure that: The description, value and the quantity of the imported goods are in accordance with the terms of licence The shipment/dispatch of the material from the supplier country should take place within the validity period of the LC Carefully check with regard to: o List of items permitted for import o Validity o Licensing period o Signature of licensing authority o Office seal o Special conditions of licence o Quantity of goods

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o Value of licence etc. 2. Obligation of Purchaser of Foreign Exchange When foreign exchange utilised for import of goods into India, importer must furnish evidence of import viz., Exchange Control copy of the Bill of Entry, Postal Appraisal Form or Customs Assessment Certificate, etc., to the Bank to ensure that goods equivalent to the value of remittance have been imported. 3. Time Limit for Settlement of Import Payments 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. Bank can permit settlement of import dues delayed after considering the interest in respect of such delayed payments 4. Advance Remittance for import of goods Bank may allow advance remittance for import of goods without any ceiling subject to the following conditions: If the amount of advance remittance exceeds USD 100,000 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. In cases where the importer (other than a Public Sector Company or a Department/Undertaking of the Government of India/State Governments) is unable to obtain bank guarantee from overseas suppliers and the Bank is satisfied about the track record and

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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). 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. The remittance is made directly to the supplier or manufacturer of the goods and not to any third party or to a numbered account. iii. The importer should be the customer of the Bank iv. The customers account must be fully compliant with Reserve Banks extant KYC / AML guidelines. v. In case of import of capital goods, certified copy of importer's contract with the supplier or any other evidence indicating terms of payment should be submitted. vi. 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. vii. The importer should hold the EC copy of a valid import licence if the goods to be imported are those included in the negative list of imports given in the Export and Import Policy. viii. In the event of non-import of goods, Bank should ensure that the amount of advance remittance is repatriated to India or is utilised for any other purposes for which release of exchange is permissible under the FEMA, Rules or Regulations made there under.

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5. Advance Remittance for Import of Rough Diamonds i. Bank can 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 under noted mining companies, viz. a. Diamond Trading Company Pvt. Ltd., UK, 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 ii. While allowing the advance remittance, Bank may ensure the following: a) The importer should be a recognized processor of rough diamonds as per a 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) 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;

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c) 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 Bank can 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. Bank is required to submit a report 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, to the Chief General Manager, Reserve Bank of India, on a half yearly basis, as at the end of September and March every year. The report should be submitted within 15 days from the close of the respective half year. 6. Advance Remittance for Import of Aircrafts/Helicopters and other Aviation Related purchases i. 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. Bank can 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: a. 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.

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b. The facility will be extended to borrower customers as well as non-borrower customers. c. Borrower customers should have a good track record with the bank. d. Non-borrower customer must be well-known airline company with track record of satisfactory account operation with us. e. Remittance under this category will NOT be handled for non-customer. f. Head (Corporate Banking) is the Approving Authority (Format in Anneure II) g. The following 5 branches (designated branches) only will be authorized to handle advance remittance under this category/delegation: 1. Nariman Point branch (Mafatlal Center), Mumbai 2. K.G.Marg branch, New Delhi 3. Greams Road branch, Chennai 4. Mission Road branch, Bangalore ii. In the case of a Public Sector Company or a Department / Undertaking of Central / State Governments, Bank must ensure that the requirement of bank guarantee has been specifically waived by the Ministry of Finance, Government of India for advance remittances exceeding USD100,000. iii. 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.

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iv. Prior to making the remittance, Bank must 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. v. In the event of non-import of aircraft and aviation sector related products, Bank should ensure that the amount of advance remittance is immediately repatriated to India prior approval of the concerned Regional Office of the Reserve Bank will be required in case of any deviation from the above stipulations. 7. Import of films on lease/rental basis Bank may allow remittance of rent, royalty, licence fee, profit, etc. in connection with import of cinematograph feature films and video films subject to the following conditions: Import has been made in accordance with provisions of Exim Policy in force. A 'No Objection Certificate' from Central Board of Film Certification, wherever required, has been submitted. Exchange Control copy of Bill of Entry for Home Consumption has been submitted as evidence of import. The remittance is in accordance with the agreement entered into between the overseas supplier and importer. A certified copy of the contract/agreement should be retained by authorised dealer for record. A Chartered Accountant's certificate is produced indicating that the payment to overseas supplier is due and the amount sought to be remitted is as per the terms of contract. Undertaking/Certificate regarding payment of income-tax has been submitted

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8. Import of Software through Datacom.Channels/Internet Bank may allow remittances towards import of software through Datacom channels/Internet and also for import of drawings and designs through E-Mail/Fax, on production of the following documents by the applicant, as applicable. (i) A declaration from the importer that the software/drawings and designs in question, have been actually received by him from the overseas licensor/supplier. (ii) Invoice stating the details of software/drawings and designs supplied, in support of the amount to be remitted. (iii) User's licence authorising the importer to use the software/drawings and designs. (iv) Copies of E-mail/Fax certified by the officials of the remitter, at the level of Company Secretary/Financial Director/ Adviser. 9. Imports by Government/Public Sector Undertakings, etc. As per the procedure laid down by Government of India, import contracts by Central/State Governments, Central & State Public Sector undertakings and autonomous bodies are required to be made on FOB/FAS basis in respect of transportation of Government owned / controlled cargo by foreign flag vessels (i.e. ocean transportation of cargo) . In case of the import contracts entered into on terms other than FOB/FAS, a No Objection Certificate from the Ministry of Surface Transport (MOST), Government of India is required to be obtained. Banl, before opening import letters of credit or releasing foreign exchange for imports, should ensure that necessary No Objection Certificate is obtained by the concerned Government organisation in cases of import contracts made on terms other than FOB/FAS.

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10. Interest on Import Bills 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 prescribed rates. The current all-in-cost ceilings are as under: Maturity period All-in-cost ceilings over 6 months LIBOR* Up to one year 75 basis points More than one year but less than three years 125 basis points In case of pre-payment 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. Remittances of interest on imports wherever applicable should be subjected to withholding tax (WHT) at the applicable rates. 11. Remittances against Replacement Imports Where goods are short-supplied, damaged, short-landed or lost in transit and the Exchange Control copy of the import licence has already been utilised to cover the opening of a letter of credit against the original goods which have been lost, the original endorsement to the extent of the value of the lost goods may be cancelled by the Bank and fresh remittance for replacement imports may be permitted without reference to Reserve Bank, provided the

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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 licence 12. 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, Bank may issue guarantees at the request of importer client for dispatch/return of the defective goods, according to their commercial judgment. 13. Import of Equipment by Business Process Outsourcing (BPO) Companies for their overseas sites Bank can allow BPO companies in India to make remittances towards the cost of equipment to be imported and installed at their overseas sites in connection with the setting up of their International Call Centres (ICCs) subject to the following conditions: a) The BPO company should have obtained necessary approval from the Ministry of Communications and Information Technology, Government of India and other authorities concerned for setting up of the ICC. b) The remittance is made directly to the account of the overseas supplier. c) Bank 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. 14. High Sea Sale High Sea Sale is a sale carried out by the consignee of a shipment to another buyer while the goods are still on high seas or after their dispatch from the port/airport of origin and before their arrival at the port/airport of destination. Foreign Trade Policy recognizes high sea sale as a

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legitimate activity. Such sale takes place by an agreement and transfer/endorsement of documents of title to goods. Sometimes the seller writes to the shipping company or agent informing about the high sea sale enclosing a copy of the agreement with a request that the document of title to goods be considered as endorsed in favour of the high sale buyer. The custom document i.e. bill of entry is either filed in the name of the high sea sale buyer or such bill of entry has an endorsement indicating the high sea sale buyers name. Bank may accept such bill of entry as sufficient entry of import provided all other details agree. The title of goods transfers to high sea sale buyer prior to entry of goods in territorial jurisdiction of India. The delivery from customs is therefore on account of high sea sale buyer. 15. Receipt of Import Bills/Documents Bank can make remittances where import bills have been received directly by the importers from the overseas supplier upto USD 300,000, subject to the following conditions: (i) The import would be subject to the prevailing Foreign Trade Policy (ii) The transactions are based on the commercial judgement and the Bank needs to be satisfied about the bonafides of the transactions. (iii) Bank must be fully satisfied about the financial standing/status and track record of the importer customer. (iv) It is customary in that trade to receive import documents directly from the overseas exporter a. Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors As a sector specific measure Bank can 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

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import is submitted by the importer at the time of remittance. Bank may undertake such transactions subject to the following conditions: The import would be subject to the prevailing Foreign Trade Policy. Bank needs to do the KYC and exercise due diligence 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 credit rating agency overseas. Remittance must be made only after the importer submits the Exchange Control Copy of the bill of entry b. Receipt of import documents by the bank directly from overseas suppliers (i) At the request of importer clients, bank may receive bills directly from the overseas supplier as above, provided bank is fully satisfied about the financial standing/status and track record of the importer customer. (ii) Before extending the facility, bank should obtain a report on each individual overseas supplier from the overseas banker or a reputed credit agency. However, such credit report on the overseas supplier need not be obtained in cases where the invoice value does not exceed USD 100,000 provided bank is satisfied about the bonafides of the transaction and track record of the importer constituent. 16. Physical Imports a. 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 Bank, to ensure that the importer submits : The Exchange Control copy of the Bill of Entry for home consumption, or

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The Exchange Control copy of the Bill of Entry for warehousing, in case of 100% Export Oriented Units, or 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. b. In respect of imports on D/A basis, Bank must 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., bank may, if satisfied with the genuiness of request, allow reasonable time, not exceeding three months from the date of remittance, to the importer to submit the evidence of import. 17. Evidence of import in lieu of Bill of Entry 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 : the amount of foreign exchange remitted is less than USD 1,000,000 or its equivalent, the importer is a company listed on a stock exchange in India and whose net worth is not less than Rs.100 crore as on the date of its last audited balance sheet, or the importer is a public sector company or an undertaking of the Government of India or its departments. The above facility may also be extended to autonomous bodies, including scientific bodies/academic institutions, such as Indian Institute of Science / Indian Institute of

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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. 18. Issue of acknowledgement 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.

4.2 Import Of Goods In To A Third Country


a. Exporters who have been awarded projects overseas are required to import goods to the project site situated in that country. As per guidelines of RBI as stated in Memorandum of Instructions on Project and Service Exports (PEM), Bank can open letters of credit in India in favour of third country suppliers provided they are on backto- back basis. b. Availability of letters of credit opened by foreign client in favour of the Indian exporters with similar terms and conditions need not be insisted upon. However, the amount of such letter of credit should not exceed the value of third country imports agreed to by the approving authority while according post award clearance to the project export proposal. c. Payment under such letters of credit should be made from out of the project receipts. Bank should, be satisfied of the bona fide of the transaction. Bank can grant waiver for submission of the exchange control copy of the bill of entry subject to certain conditions where third country purchases are directly transported by the overseas supplier to the project site and for which payment is made under letter of credit opened in India.

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d. If the projects are executed in India, where imported goods are delivered in a 3rd country for certain value addition/changes or modifications, the above guideline is not applicable. Sometimes, the goods are sent to a 3rd country where the goods undergo fabrication or structural changes and value additions before being shipped back to Indias project site. Thus under our LC shipment is allowed for discharge into third country port. Branches need to seek RBIs prior permission to issue such LCs that allow import to a third country destination. e. The value of goods imported to India finally would be sum total of value of import invoices plus the cost of fabrication or modification. In such cases the Bill of entry will show import of a finished or semi-finished goods cost of which will be the sum total of cost plus fabrication/modification charges. Precautions for Handling Import Documents Bank should exercise due care while handling import documents on collection basis on behalf of importer customers with reference to: their line of business, financial standing, frequency of import, etc. to establish the genuineness of the import. a. In the case of bills involving large values, Bank should satisfy itself that the importer is known to be trading in items mentioned in the shipping documents or that the items are required for his actual use. b. In case of importers who are not our constituents, Bank must at the time of acceptance of the documents/making payment, call for detailed Certificate-cum-Report from their bankers in support of the genuineness of imports.

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.CHAPTER

EXPORTS
5.1 Introduction
Export trade is regulated by the DGFT functioning under the Ministry of Commerce and Industries. Bank conducts export transactions in conformity with the Foreign Trade Policy in vogue and the rules framed by the government of India and the directives of RBI issued from time to time. Export Regulations notified vide notification no. 23/2000-RB dated May 03, 2000 as amended from time to time form the regulatory framework for conducting export transactions. Extract of RBI Guidelines with reference to FEMA A General guidelines for Exports 1. Realisation and Repatriation of export proceeds It is obligatory on the part of the exporter to realize and repatriate the amount representing the full value of goods or software exported to India within the stipulated period from the date of export, as under : Units in Special Economic Zones (SEZs): No specific time period has been stipulated; By Status Holder Exporters as defined in the Foreign Trade Policy : Within a period of twelve months from the date of export; By 100 % 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;

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Goods exported to a warehouse established outside India with the permission of the Reserve Bank : As soon as it is realized and in any case within fifteen months from the date of shipment of goods; In all other cases : Within six months from the date of export. With effect from June 3, 2008, this period of six months has been enhanced to twelve months, subject to review after one year 2. Foreign Currency Account a. 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 under Notification No. FEMA 10/2000-RB dated May 3, 2000 for opening a temporary foreign currency account abroad. b. 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 Bank concerned. c. RBI may consider applications in Form EFC 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 the 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. d. 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

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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 3rd, 2000 and as amended from time to time. e. A unit located in a Special Economic Zone (SEZ) may open, hold and maintain a Foreign Currency Account with the Bank in India subject to conditions stipulated in Regulation 6 (A) of Notification No. FEMA 10/2000- RB dated May 3rd, 2000 and as amended from time to time. f. 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 issued vide AP 3. Diamond Dollar Account a. Under the scheme of Government of India, firms and companies dealing in purchase / sale of rough or cut and polished diamonds / diamond studded jewellery, with track record of at least three years in import or export of diamonds and having an average annual turnover of Rs. 5 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. b. They may be allowed to open not more than five Diamond Dollar Accounts with the Bank. 4. Exchange Earners Foreign Currency (EEFC) Account a. A person resident in India may open with, the Bank, 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)

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Regulations, 2000 notified under Notification No. FEMA 10/2000-RB dated May 3, 2000 as amended from time to time. b. All categories of foreign exchange earners are allowed to credit up to 100 per cent of their foreign exchange earnings to their EEFC Accounts. c. 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 Bank. d. The eligible credits represent inward remittance received through normal banking channel, other than the remittance received pursuant to any undertaking given to the RBI or which represents foreign currency loan raised or investment received from outside India or those received for meeting specific obligations by the account holder. e. Payments received in foreign exchange by a unit in Domestic Tariff Area (DTA) for supplying goods to an unit in Special Economic Zone out of its foreign currency account. f. Bank can permit their its 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 3rd May 2000 as amended from time to time. g. Bank 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. Note: For full details of the EEFC Scheme, refer to Notification No. FEMA 10/2000- RB dated 3rd May 2000 as amended from time to time.

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5. Setting up of Offices Abroad and Acquisition of Immovable Property for Overseas Offices a. At the time of setting up of the office, Bank may allow remittances towards initial expenses up to fifteen per cent of the average annual sales/income or turnover during the last two financial years or up to twenty-five per cent of the net worth, whichever is higher. b. For recurring expenses, remittances up to ten per cent of the average annual sales/income or turnover during the last two financial years may be sent for the purpose of normal business operations of the office (trading / non-trading) / branch or representative office outside India subject to the following terms and conditions; the overseas branch/office has been set up or representative is posted overseas for conducting normal business activities of the Indian entity; the overseas branch/office/representative shall not enter into any contract or agreement in contravention of the Act, Rules or Regulations made there under; that 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 RBI. Any funds rendered surplus should be repatriated to India. c. The details of bank accounts opened in the overseas country should be promptly reported to the Bank. d. Bank can 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.

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e. 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. f. 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. g. An audited yearly statement showing receipts under off-site' and on-sitecontracts undertaken by the overseas office, expenses and repatriation thereon may be sent to the Bank 6. Advance Payments against Exports a. In terms of Regulation 16 of Notification No. FEMA 23 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 the shipment of goods is made within one year from the date of receipt of advance payment; the rate of interest, if any, payable on the advance payment does not exceed London Inter-Bank Offered Rate (LIBOR) + 100 basis points, and the documents covering the shipment are routed through the 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 unutilized 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 RBI. b. Where the export agreement provides for shipment of goods extending beyond the period of one year from the date of receipt of advance payment, the exporter shall require the prior approval of the RBI.

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c. Bank may allow the purchase of foreign exchange from the market for refunding advance payment credited to EEFC account only after utilising the entire balances held in the exporters EEFC accounts maintained at different branches/banks. Note : Where Bank is required to issue a guarantee against such advance payments it should be ensured that the guarantee will not have a validity of more than one year from the date of advance payment. Besides interest, if any, payable in terms of the guarantee clauses should not be more than L plus100 basis points Bank may also be guided by circular DBOD No. Dir.BC.72/13.03.00/2006-07 on Guarantees for Export Advance. 7. GR Approval for Trade Fair/Exhibitions abroad a. Bank can consider request from exporters for granting GR approval in cases where goods are being exported for re-import after repairs / maintenance / testing /calibration etc. subject to the condition that the exporter shall produce relative Bill of Entry within one month of re-import of the exported item from India. b. Where the goods being exported for testing are destroyed during testing, Bank 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. 8. Consignment Exports a. When goods have been exported on consignment basis, Bank, while forwarding shipping documents to their overseas branch/correspondent, must instruct the latter to deliver them only against trust receipt/undertaking to deliver sale proceeds by a specified date within the period prescribed for realisation of proceeds of the export. This procedure should be followed even if, according to the practice in certain trades, a bill for part of the estimated value is drawn in advance against the exports. The agents/consignees may deduct from sale proceeds of the

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goods expenses normally incurred towards receipt, storage and sale of the goods, such as landing charges, warehouse rent, handling charges, etc. and remit the net proceeds to the exporter b. The account sales received from the Agent/Consignee should be verified by the Bank. 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. c. In case of goods exported on consignment basis, freight and marine insurance must be arranged in India. d. Reserve Bank will permit on application, exporters with satisfactory track record, a longer period up to twelve months for realisation of export proceeds for exports on consignment basis made to CIS countries and East European countries financed in any permitted currency. e. In the case of export of books on consignment basis, Bank may approve such proposals allowing for realisation of export proceeds up to 360 days from the date of shipment. The exporters may be allowed 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. 9. 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 RBI. a. All imports and exports under the arrangement should be at international prices in conformity with the Foreign Trade Policy and Foreign Exchange Management Act, 1999 and the Rules and Regulations made there under.

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b. Application for permission for opening an Escrow Account may be made by the overseas exporter/organisation through his Bank to the concerned Regional Office of the Reserve Bank. c. 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 shortterm 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. d. No fund based/or non-fund based facilities would be permitted against the balances in the Escrow Account. 10. Project Exports and Service Exports Export of engineering goods on deferred payment terms and execution of turnkey projects and civil construction contracts abroad are collectively referred to as Project Exports. Indian exporters 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 Bank/Exim Bank/Working Group at postaward stage before undertaking execution of such contracts. Regulations relating to Project Exports and Service exports are laid down in the revised Memorandum on Project Exports (PEM October2003 as amended from time to time).

5.2 Operational Guidelines for Bank with reference to FEMA


1. Citing of Specific Identification Numbers In all applications / correspondence with the RBI, the specific identification number as available on the GR, PP and SOFTEX forms should invariably be cited. In the case of declarations made on SDF form, the port code number and shipping bill number should be cited.

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2. GR/SDF/PP/SOFTEX procedure 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: 3. GR forms a. GR 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. b. 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. c. Customs will certify the value declared by the exporter on both the copies of the GR form at the space earmarked and will also record the assessed value. d. They will then return the duplicate copy of the form to the exporter and retain the original for transmission to RBI e. Exporters should submit the duplicate copy of the GR form again to Customs along with the cargo to be shipped. f. 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 Bank for negotiation or collection of export bills. g. 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 Bank named in the GR form. If the GR contains the name of a different bank then NOC from such a bank should be obtained before handling the export billsh. After the documents have been negotiated /

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sent for collection, the Bank should report the transaction to Reserve Bank in statement ENC under cover of appropriate R-Supplementary Return. i. The duplicate copy of the form together with a copy of invoice etc. shall be retained by the Bank and may not be submitted to RBI. j. 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 RBI approval and/or number and date of the relative RBI circular should be recorded at the appropriate place on the GR form k. Where Duplicate copy of GR form is misplaced or lost, Bank can accept another copy of duplicate GR form duly certified by Customs. 4. SDF The following system may be followed in case of SDF: a. The SDF should be submitted in duplicate (to be annexed to the relative shipping bill) to the Commissioner of Customs concerned. b. After verifying and authenticating the declaration in SDF, the Commissioner of Customs will hand over to the exporter, one copy of the shipping bill marked Exchange Control Copy in which form SDF has been appended for being submitted to the AD Category I banks within 21 days from the date of export. c. The Bank 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.

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d. The manner of disposal of EC copy of shipping Bill (and form SDF appended thereto) is the same as that for GR forms. The duplicate copy of the form together with a copy of invoice etc. shall be retained by the Bank and may not be submitted to RBI. e. 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/buyers 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 Bank, date of negotiation, bill number, invoice value and the amount actually received by ECGC and private insurance companies regulated by IRDA 5. Softex Softex form is an export declaration form like GR form used to make declaration of export of all types of software by units in SEZs, Software Technology Parks, Free Trade Zones, EPZs etc. Procedure for Software Export Certification The valuation of Software Export declared on SOFTEX Form & Physical Export will be done by the designated official of DoE at the Software Technology Parks of India (STPI) as per clause 6.5.1 of the Foreign Trade Policy - hand Book of Procedures 2006-07.

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Time limit for realization of Export Value & Invoicing: In respect of long duration contracts involving series of transmissions the exporter should bill their overseas clients periodically i.e., at least once a month or on reach the milestone as provided in the contract entered into with the overseas client and last invoice/bill should be raised not later than 15 days from the date of completion of the contract. In respect of contract involving only one shot operation the invoice/bill should be raised within 15 days from the date of transmission. The exporter should submit SOFTEX form to the concerned official of the Govt. of India at STPI for valuation/certification not later than 30 days from the date of invoice/the date of last invoice in a month as indicated above. The full value of the software exported as declared on the SOFTEX form or as certified by the officials concerned of Government of India, whichever higher should be realized on due date of payment or within 360 days from the date of invoice which ever is earlier. Off-Shore Services - Non Physical Exports Export of computer software in non-physical i.e., Export through Datacom. /Satellite links form should be declared on SOFTEX form. Each set of SOFTEX forms comprises three copies marked, Original, Duplicate and Triplicate, which carry a identical preprinted number. All the three forms in each set should be completed and the entire set submitted for the purpose of certification together with relevant documents. Each exporter will have to designate a single branch of an authorized dealer, i.e., Banker, to whom export documents in respect of all software exports made via dedicated earth stations / satellite links will be submitted by him together with the relative SOFTEX forms for negotiation / collection. RBI has now allowed exporters to download the softex form format from the RBI website.

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Disposal of SOFTEX Form 1. After certifying all three copies of SOFTEX Forms the designated DoE / STPI Official will forward the original directly to the nearest office of the Exchange Control Department of Reserve Bank. The duplicate will be returned to the exporter and the triplicate will be retained by the DoE/STPI for their record. 2. Within 21 days, from the date of certification of SOFTEX Form by DoE/STPI the exporter should submit the duplicate copy together with a copy each of the supporting documents to the authorized dealer. The duplicate copy of the form together with documents will be retained by the authorized dealer till full export proceeds have been realized and repatriated and thereafter will be submitted to Reserve Bank, duly certified under cover of an appropriate R return along with the copy of invoice/s. Key elements of Export Declaration A softex form is expected to contain the following key information: Validity of STP status Softex Form Nos allotted y y y y y y y y y Address of the Exporter STPI Center Address Importer and Exporter Code number Buyers name and address Date and Number of Invoice Data Comm. Service Provider (STPI / VSNL / DOT / Internet / Others) The Software Category The Export Value Currency and Amount as per the Export Invoice and Agreement / Contract / Purchase Order.

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Name , Address and code No. of the Authorised Dealer

Exports through Physical Media If Export of computer software is undertaken in physical form i.e., software prepared on magnetic tapes and paper media the same needs to be declared in EDI with two copies of invoice/bill for certification Check list for Export Declaration (Physical) 1. STP unit are required to file a copy of Purchase Order / Purchase Agreement /Contract with STPI as soon as the STP unit enter into Purchase Agreement with their client. This can be done one time before raising the first invoice. 2. The Floppy / CD / Cartridge any other mode of Software has to be submitted to STPI for Examination and verification for the Certification of Physical Exports. 3. The Invoice should be submitted in Duplicate (the invoice should be as per the Customs guidelines). A request letter with relevant forms & corresponding Invoices based on media of Exports should be submitted to STPI for certification, NOC for physical exports is issued by STPI and the same is required to be filed with RBI and customs. 6. PP Forms The manner of disposal of PP forms is the same as that for GR forms. Postal Authorities will allow export of goods by post only if the original copy of the form has been countersigned by the Bank. Therefore, PP forms should be first presented by the exporter to the Bank for countersignature. a. Bank 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.

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b. The duplicate copy of the PP form will be retained by the Banks to whom the exporter should submit relevant documents together with an extra copy of invoice for

negotiation/collection, within the prescribed period of 21 days. c. The concerned overseas branch or correspondent should be instructed to deliver the parcel to consignee against payment or acceptance of relative bill. d. Bank can, however, countersign PP forms covering parcels addressed direct to the consignees, provided: 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 Bank concerned or The full value of the shipment has been received in advance by the exporter through the Bank or The Bank is satisfied, on the basis of the standing and track record of the exporter and the arrangements made for realisation of the export proceeds, that he could do so. In such cases, particulars of advance payment/letter of credit / Banks certification of standing, etc., of the exporter should be furnished on the form under proper authentication. e. Any alteration in the name and address of consignee on the PP form should also be authenticated by the Bank under his stamp and signature. 7. Random verification In all the above procedures, Bank needs to ensure, by random check of the relevant duplicate forms by their internal / concurrent auditors, that non-realisation or short realisation allowed, if any, is within the powers delegated to them or has been duly approved by RBI, wherever necessary. 8. Certification for EEFC Credits

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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 realization credited to the EEFC account maintained by the exporter with .. " 9. Delay in submission of shipping documents by exporters In cases where exporters present documents pertaining to exports after the prescribed period of 21days from date of export, Bank can handle them without prior approval of RBI, provided they are satisfied with the reasons for the delay. 10. Check-list for Scrutiny of Forms Bank must ensure: a. The number on the duplicate copy of a GR 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. b. The Shipping Bill No. on the SDF form should be the same as that appearing on the Bill of Lading. c. In the case of c.i.f., 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 GR/SDF form or the actual amount of freight indicated on the Bill of Lading/Airway Bill, whichever is less. d. The documents submitted do not reveal any material inter se discrepancies in regard to description of goods exported; export value or country of destination. e. Where the marine insurance is taken by the exporters on buyers account to verify, that the actual amount paid is received from the buyer through invoice and the bill.

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f. To accept the Bill of Lading/Airway Bill issued on freight prepaid basis where the sale contract is on f.o.b., f.a.s. etc. basis provided the amount of freight has been included in the invoice and the bill. g. To negotiate the documents, in cases where the documents are being negotiated by a person other than the exporter who has signed GR/PP/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 h. 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: The export realisable value may be more than what was originally declared to/accepted by the Customs on the GR/SDF form in certain circumstances such as where in c.i.f. 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. 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

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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. To accept for negotiation or collection the bills for exports by sea or air which fall short of the value declared on GR/SDF forms on account of trade, only if the discount has been declared by the exporter on relative GR/SDF form at the time of shipment and accepted by Customs. 11. Return of Documents to Exporters The duplicate copies of GR/SDF/PP forms and shipping documents, once submitted to the Bank for negotiation, collection, etc., should not ordinarily be returned to exporters, except for rectification of errors and resubmission. 12. Follow-up of Overdue Bills a. Bank needs to closely watch realization 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 RO concerned of the Reserve Bank stating, where possible, the reason for the delay in realising the proceeds. b. The duplicate copies of GR / SDF / PP Forms should, continue to be held by Bank until the full proceeds are realised, except in case of undrawn balances. c. Bank should follow up export outstandings 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 Bank will be viewed seriously by Reserve Bank, leading to the invocation of the penal provision under FEMA, 1999.

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d. Exporters who have been certified as `Status Holder' in terms of Foreign Trade Policy are permitted to realize and repatriate the full value of export proceeds within a period of 12 months from the date of shipment. e. 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 are permitted to realise and repatriate the full value of export proceeds within a period of 12 months from the date of export in respect of export made on or after September 1, 2004. 12. Reduction in Value Reduction in Invoice Value on Account of Prepayment of Usance Bills - Occasionally, exporters can approach the Bank for reduction in invoice value on account of cash discount to overseas buyers for prepayment of the usance bills. Bank 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.

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CHAPTER 6 REMITTANCES 6.1 Introduction


Money sent from one place or person to another. A remittance economy is one dependent on such money transfers, often from a family member abroad to relatives back home. Remittances are playing an increasingly large role in the economies of countries, contributing to economic growth and to the livelihoods of the people. As remittance receivers often have a higher propensity to own a bank account, remittances promote access to financial services for the sender and recipient, an essential aspect of leveraging remittances to promote economic development. For ease of reference this chapter has been broadly split into three categories namely: I. Remittance facility for Resident Indians II. Remittance facility for Non-Residents III. Liberalised Remittance Scheme In exercise of the powers conferred by Section 5 of FEMA. The Central Government has announced relevant rules which specify three types of restrictions on Current Account Restrictions. Schedule I lists several transactions/items of current account, remittance in respect of which is totally prohibited. Schedule II to the said rules permits remittance for certain specified types of current account transactions only with the prior approval of the Government of India

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Schedule III to the said rules permits remittance for certain specified current account transactions with the prior approval of the Reserve Bank. An updated list of Schedule I,II & III items is provided later in this chapter.

6.2 Remittance facilities for Residents


a. Sale of Exchange Authorized Dealers may release foreign exchange for travel purposes on the basis of a declaration given by the traveler regarding the amount of foreign exchange availed of during the financial year. In case of issue of travellers cheques, the traveler should sign the cheques in the presence of an authorised official and the purchasers acknowledgement for receipt of the travellers cheques should be held on record. Out of the overall foreign exchange being sold to a traveler, exchange in the form of foreign currency notes and coins may be sold up to the limit indicated below: (i) Travelers proceeding to countries other than Iraq, Libya, Islamic Republic of Iran, Russian Federation and other Republics of Commonwealth of Independent States Not exceeding USD 2000 or its equivalent (ii) (iii) Travelers proceeding to Iraq or Libya, Not exceeding USD 5000 or its equivalent Travelers proceeding to Islamic Republic of Iran, Russian Federation and other

Republics of Commonwealth of Independent States. Full exchange may be released b. Forms The form A2 relating to sale of foreign exchange should be retained for a period of one year by the Bank, together with the related documents, for the purpose of verification by the Internal Auditors. However, in respect of remittance applications for miscellaneous non-trade current account transactions of value not exceeding USD 5,000, Bank may obtain simplified Application-cum-Declaration form (Form A2) In cases where the remittances are allowed on the

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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. c. Medical Treatment With a view to enable residents to avail of foreign exchange for medical treatment abroad without any hassles and any loss of time, Bank can release foreign exchange up to an amount of USD 100,000 or its equivalent, on the basis of self declaration that the applicant is buying exchange for medical treatment outside India, without insisting on any estimate from a hospital/doctor. For amount exceeding the above limit, estimate from the doctor in India or hospital/doctor abroad, is required to be submitted to the Bank. A person who has fallen sick after proceeding abroad may also be released foreign exchange by the Bank for medical treatment outside India d. Cultural Tours Dance troupes, artistes, etc., who wish to undertake tours abroad for cultural purposes should apply to the Ministry of Human Resources Development (Department of Education and Culture), Government of India, for their foreign exchange requirements. Bank can release foreign exchange, on the strength of the sanction from the concerned Ministry, to the extent and subject to conditions indicated therein e. Private visits Foreign exchange for private visit can also be released to a person who is availing of foreign exchange for travel outside India for any purpose up to the limits specified f. Business visits Foreign exchange for undertaking business travel or attending a conference or specialised training or for maintenance expenses of a patient going broad for medical treatment or check up

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abroad or for accompanying as attendant to a patient going abroad for medical treatment / check up to the limits specified in Schedule III to the Rules g. 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 utilized for any other eligible purpose for which drawal of foreign exchange is permitted under the relevant 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 traveler, as the case may be. The liberalized uniform time limit of 180 days is applicable only to resident individuals and that too in areas other than export of goods and services. h. Unspent Foreign Exchange As stated above, unspent foreign exchange brought back to India by a resident individual should be surrendered to an Authorised Person/Bank within 180 days from the date of return of the traveler. Exchange so brought back can be utilised by the individual for his/her subsequent visit abroad. However, a returning traveler is also permitted to retain with him, foreign currency travelers cheques and currency notes up to an aggregate amount of USD 2000 and foreign coins without any ceiling. Foreign exchange so retained, can be utilised by the traveler for his subsequent visit abroad. A person resident in India can open, hold and maintain with the Bank in India, a Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, bank notes and travelers 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 /

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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 Companies Act) and repatriated to India through normal banking channels by resident individuals. The eligible credits to the Resident Foreign Currency (Domestic) Account, out of foreign exchange acquired in the form of currency notes, bank notes and travelers 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. Note: Where a person approaches an Authorised Person/Bank for surrender of unspent/unutilized foreign exchange after the prescribed period, Authorised Person/Bank should not refuse to purchase the foreign exchange merely on the ground that the prescribed period has expired. i. Remittances for Tour Arrangements, etc. Bank may remit foreign exchange up to a reasonable limit, at the request of a traveler towards his hotel accommodation, tour arrangements, etc., in the countries proposed to be visited by him, provided it is out of the foreign exchange purchased by the traveler from an Authorised Person (including exchange drawn for private travel abroad) in accordance with the Rules, Regulations and Directions in force. Bank may effect remittances at the request of agents in India who have tie-up arrangements with hotels / agents, etc., abroad for providing hotel accommodation or

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making other tour arrangements for travelers from India, provided Bank is satisfied that the remittance is being made out of the foreign exchange purchased by the concerned traveler from an Authorised Person (including exchange drawn for private travel abroad), in accordance with the Rules, Regulations and Directions in force. Bank may open foreign currency accounts in the name of agents in India who have tie up arrangements with hotels / agents, etc., abroad for providing hotel accommodation or making other tour arrangements for travelers from India provided:a) the credits to the account are by way of depositing i) collections made in foreign exchange from travelers; and ii) refunds received from outside India on account of cancellation of bookings/tour arrangements, etc., and b) the debits in foreign exchange are for making payments towards hotel accommodation, tour arrangements, etc., outside India, in accordance with the point above Bank may allow tour operators to remit the cost of rail/road/water transportation charges outside India without any prior approval from the Reserve Bank, net of commission/mark up due to the agent. The sale of passes/ticket in India can be made either against the payment in Indian Rupees or in foreign exchange released for visits abroad. The cost of passes/tickets collected in Indian Rupees need not be adjusted in the travelers entitlement of foreign exchange for private visit. In respect of consolidated tours arranged by travel agents in India for foreign tourists visiting India and neighbouring countries like Nepal, Bangladesh, Sri Lanka, etc., against advance payments / reimbursement through an authorised dealer, part of the foreign exchange received in India against such consolidated tour arrangement, may require to be remitted from India to these

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neighbouring countries for services rendered by travel agents and hoteliers in these countries. Bank may allow such remittances after verifying that the amount being j. Payment in Rupees Bank may accept payment in cash up to Rs. 50,000 (Rupees fifty thousand only) against sale of foreign exchange for travel abroad (for private visit or for any other purpose). Wherever the sale of foreign exchange exceeds the amount equivalent to Rs.50,000, the payment must be received only by a (i) crossed cheque drawn on the applicants bank account, or (ii) crossed cheque drawn on the bank account of the firm/company sponsoring the visit of the applicant, or (iii) Bankers Cheque/Pay Order/ Demand Draft. Note: Where the rupee equivalent of foreign exchange drawn exceeds Rs 50,000 either for any single drawal or more than one drawal reckoned together for a single journey/visit, it should be paid by cheque or draft remitted to the neighbouring countries (inclusive of remittances, if any, already made against the tour) does not exceed the amount actually remitted to India and the country of residence of the beneficiary is not Pakistan. k. Advance Remittance Import of services Bank may allow advance remittance for import of services. However, where the amount exceeds USD 500,000 or its equivalent (AP DIR 15, dated September 08, 2008), a guarantee from a bank of International repute situated outside India or a guarantee from a Bank in India, if such a guarantee is issued against the counterguarantee of a bank of International repute situated outside India, should be obtained from the overseas beneficiary. Bank should also follow up to

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ensure that the beneficiary of the advance remittance has fulfilled his obligations under the contract or agreement with the remitter in India. l. Documentation In terms of sub-section (5) of Section 10 of the FEMA, 1999 an authorised person shall require any person wanting to transact in foreign exchange to make such a declaration and to give such information as will reasonably satisfy him that the transaction will not involve and is not designed for the purpose of any contravention or evasion of the provisions of the FEMA or any rule, regulation, notification, direction or order issued there under. Bank is also required to keep on record any information / documentation, on the basis of which the transaction was undertaken, for verification by the Reserve Bank. In case the applicant refuses to comply with any such requirement or makes unsatisfactory compliance therewith, the Bank must refuse, in writing, to undertake the transaction and shall, if he has reasons to believe that any contravention/evasion is contemplated by the person, report the matter to Reserve Bank. Further, Bank may release foreign exchange up to USD 100,000 each for employment, emigration, maintenance of close relatives, education and medical treatment abroad without insisting on any supporting documents but on the basis of self declaration incorporating certain basic details of the transactions and submission of Form A2. In addition, the existing facility of release of exchange by Authorised Persons up to USD 10,000 or its equivalent in one financial year for one or more private visits to any country (except Nepal and Bhutan) will continue to be available on a self-declaration basis.

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CHAPTER 7 FORWARD CONTRACTS 7.1 Introduction


A Forward Exchange Contract is a contract between the customer and bank where the Bank agrees to BUY from the customer, or SELL to the customer, foreign currency on a fixed future date, at a fixed rate of exchange. The customer undertakes to pay the Bank, the overseas currency in terms of the contract in exchange The Bank provides Forward Exchange Contract in major foreign currencies, for the protection of all those who have a exposure (exporters and importers) who are subject to exchange risks in the course of their international transactions. Forward Exchange Contracts can be used to cover exchange risk between an overseas currency and local currency or between two overseas currencies. The contract may be entered into at anytime and can be used to cover both trade and non-trade transactions. As with the Exchange Rate, Forward Exchange Contracts are described as Buying or Selling Contracts. For an Importer, the Bank contracts to sell overseas currency, hence a Bank selling Contract is established for a future date. At maturity, the Bank selling Contract is used to meet the Importer's overseas commitment. In the case of an Exporter the contract is a Buying Contract. An Importer may place an order overseas for goods with payment to be made to the supplier in overseas currency. Types of Forward Exchange Contracts Forward Exchange Contracts, both buying and selling, may be either fixed or optional term contracts.

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Fixed Delivery With a Fixed Term Contract the customer specifies the date on which delivery of the overseas currency is to take place. An early delivery can be made and swap cost if any may be received. Optional Delivery Optional delivery Contracts can be entered into for a specific period and the customer stages the period within which delivery is to be made (normally for period not more than one month) Foreign Exchange Contract There are different types of Foreign Exchange Contracts. Ready or cash merchant contracts deliverable on the same day. Value next day or Tom contracts are deliverable on the day immediately succeeding the contract date. Spot contract is deliverable on second succeeding business day following the contract date. Forward contract is a contract deliverable at a future date, duration of the contract being computed from spot value date at the time of transaction. It will be clear from the foregoing that Foreign Exchange contract includes all types of merchant transactions including Forward contracts. Definite amount and period Forward contracts will have to be made for definite amounts and periods. Where a single contract is entered into for more than one rate for bills of different maturities, the contract must state the amount and date of delivery against each rate.

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Currency of Contract Forward contracts can be booked by residents in any permitted currency even if it is different from the currency in which the underlying trade contract is denominated. It need not have rupee as one leg of the contract. For example an importer having a USD payable can: Buy USD Sell INR or Buy USD Sell GBP or Buy GBP Sell INR etc., He can leave the other leg fully uncovered or obtain full / partial cover later depending on his views of the market. Care should always be taken to ensure that double exposure is not created in any currency (in the above case the importer can not enter into a contract where he sells USD which will double his exposure in USD). Delivery Options The customer can enter into contracts which are deliverable on a fixed day (say 15th November xxxx) or over a range of continuous days. However, such option period should not exceed one month (e.g. 1st November xxxx to 30th November xxxx, 12th December xxxx to 11th January xxxx, 7th January xxxx to 13th January xxxx). Contracts permitting option of delivery must state the first and last dates of delivery. Place of Delivery All contracts are understood to be deliverable or paid for at the Bank and at the named place if specifically mentioned. Date of delivery of the contract While fixing date of delivery for sale contracts covering import bills the likely date of retirement or crystallization (whichever is earlier) should be reckoned. In case of other outward

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remittances, the date (or a range of dates 1st November to 20th November xxxx) of actual remittance should be reckoned. In case of inward remittances the date (or a range of dates e.g.1st November to 20th November xxxx) of actual remittance should be reckoned. Before going into details of how a purchase contract involving exports should be treated here, it will be useful to know what factors are taken into account when rates are quoted by the Bank in these contracts. The main criteria that determines the premium or discount applicable to the contract over the spot rate is the date (or range of dates) when the foreign currency funds are expected to be received in our Nostro account. However, the delivery period as per FEDAI guidelines is the date (or range of dates) on which the customer is expected to deliver the shipping documents to the bank and take INR from the bank. In our banks format (Annexure B and C) for forward contract the delivery period is the period during which our Nostro account is expected to receive foreign currency funds.

7.2 Forward Contract Concepts


Both a resident and a non resident can book forward contracts with an Authorized Dealer. However a non resident is permitted to cover only certain exposures. a. Residents A person resident in India may enter into a forward contract with an authorised dealer in India to hedge an exposure to exchange risk in respect of a transaction for which sale and/or purchase of foreign exchange is permitted under FEMA, or rules or regulations or directions or orders made or issued there under. b. Non Residents Foreign Institutional Investors (FIIs) can hedge the market value of their entire investment (equity and/or debt) as on a particular date. Where a hedge becomes naked in part or full owing

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to shrinking of portfolio for reasons other than sale of securities, the contract may be allowed to continue till its original maturity if desired by the customer. These contracts once cancelled can not be rebooked but may be rolled over on or before maturity. Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) can also book forward contracts to cover the dividend due to them on shares held in an Indian company. The recent restrictions announced by RBI on OCBs (A.P.(DIR Series ) Circular No.14 dated 16th September 2003) should also be kept in mind. Investments made under portfolio scheme under FERA 1973 and FEMA can also be covered subject to same terms and conditions applicable to FIIs. The balances held in FCNR or NRE (Rupee) account of NRIs can also be covered by forward contracts with INR as one leg in both cases. In case of balances in FCNR accounts, cross currency forwards can also be booked toconvert the balances in one foreign currency to another foreign currency in which FCNR deposits are permitted to be maintained. FEDAI has recently clarified that forward contracts can not be booked for balances lying in demand accounts (in INR or FCY) even if the depositor agrees not to withdraw the funds during the contract period. c. Foreign Direct Investments in India Forward contracts can also be booked to cover investments made in India since January1, 1993 subject to verification of the exposure. Residents outside India can also enter into forward sales contracts to cover the currency risk arising out of the proposed FDI after ensuring that the overseas entities have completed all formalities and all necessary approvals have been taken for the investment. These contracts should not exceed six months and if cancelled can not be rebooked. Exchange gains if any on cancellation will not be passed on to the overseas customer. Persons having FDIs can enter into forward contracts with the Bank with rupee as one of the currencies to hedge the currency risk on dividend(s) receivable by them on their investments.

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However cover can be taken only after the rate of dividend is approved by the Board of Directors of the concerned company, Guidelines for Forward Contracts
A. Processes / Procedures before booking forward contracts

The branch should set up sufficient limits for the forward contracts. The limits will be sanctioned by the Credit Committee at the appropriate level and will be known as Forward Contract Limit. It may be noted that Forward Contract Limit is a credit limit. Bank may also allow importers and exporters to book forward contracts on the basis of a declaration (Declaration Limit) of an exposure and based on past performance up to the average of the previous three financial years' (April to March) actual import/ export turnover or the previous year's actual import/export turnover, whichever is higher, subject to the following conditions: a. The forward contracts booked in the aggregate during the year and outstanding at any point of time should not exceed the eligible limit i.e. the average of the previous three financial year's (April to March) actual import/export turnover, whichever is higher. Contracts booked in excess of 75 per cent of the eligible limit will be on deliverable basis and cannot be cancelled. These limits shall be computed separately for import/export transactions. b. Any forward contract booked without producing documentary evidence will be market off against this limit. c. Importers and exporters should furnish a declaration to the AD Category I banks regarding amounts booked with other AD d. An undertaking may be taken from the customer to produce supporting documentary evidence before the maturity of the forward contracts.

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e. Outstanding forward contracts higher than 50 per cent of the eligible limit may be permitted by constituents after examination of the following documents: A certificate from the Chartered Accountant of the customer that all guidelines have been adhered to while utilizing this facility. A certificate of import/export turnover of the customer during the past three years duly certified by their Chartered Accountant/bank. In the case of an exporter, the amount of overdue bills should not be in excess of 10 per cent of the turnover to avail the above facility. In view of this branches can obtain a Chartered Accountants certificate from the company showing the average of previous three financial years actual import and export turnover arrive at the declaration limit. This will be called Declaration Limit. This Declaration Limit is a regulatory limit and will be within the Forward Contract Limit which is a credit limit. For example a customer may be enjoying a Forward Contract Limit of Rs.4.5 crores. This means that contracts of aggregate value up to Rs.45 crores can be outstanding against the customer at any one time. The same customer may be given a Declaration Limit of say Rs.100 crores based on his past performance as explained above. In this case the Forward Contract Limit being a credit limit will be sanctioned by the credit committee while the Declaration Limit which is a regulatory limit will be set up at the branch level only. Aggregate INR value of forward contracts outstanding at any time should not exceed Rs.45 crores for this customer even though the Declaration Limit is Rs.100 crores. It may be noted that the limit is not a running limit. For example if a customer has a declaration limit of USD 100 million and books a contract of USD 10 million under this agreement, then his Declaration Limit will stand reduced to USD 90 million. The branch should maintain separate manual record for tracking this. The format of the register is given in Annexure A. The limits

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will have to be set every April for the financial year. However, it is possible that many corporates may not have their export / import figures for the previous year ready in April. In those cases we may permit the corporates up to 50% of their previous years Declaration Limit. The same can be suitably corrected once the figures are received. In any case the required information should be submitted by the corporates before end of May every year. Delinquent cases should be referred to Corporate Office. In case of corporates whose main borrowing arrangements are with another bank, a letter from that bank indicating the limit set up by them for the year will be sufficient branches need not do this exercise separately. Cancellation and rebooking Forward contracts booked in respect of foreign currency exposures of residents falling due within one year may be cancelled and rebooked. Branches may offer this facility without any restrictions in respect of export transactions (including cross currency contracts). For import and other non-trade transactions, this facility should be made available only to customers who submit details of exposure to us as per the format enclosed. For these purposes, import transactions falling due within one year will be a projected figure based on the past performance, non-trade payments and receipts would be on actual basis. In other words forward contracts for imports and other non-trade transactions can be freely cancelled and rebooked provided the customer has submitted details of exposure as above. Forward contracts booked to cover exposures falling due beyond one year once cancelled, cannot be rebooked. All forward contracts may be rolled over at on-going market rates. It should be noted that the above provisions are applicable only to residents and not nonresidents such as FIIs and entities having FDIs in India.

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B. Processes / Procedures while booking forward contracts

Branches should verify and satisfy themselves that the request for booking the forward contracts has been signed by signatory(ies) authorized for this purpose by the customer. Branch besides checking the underlying and the request from the FEMA angle, will also ensure that sufficient forward contract limits are available. In case of FIIs, the amount eligible to be covered is to be determined on the basis of a declaration taken from the FII. In case of contracts booked on behalf of FIIs a monthly statement should be furnished to the RBI before the 10th of the succeeding month indicating the name of the FII / Fund, the eligible amount of cover and the actual cover taken. The branch should be in receipt of a specific written request from the customer for booking the forward contract(s). It is possible that many customers may place the order on phone. In case of valued constituents the transactions may be processed pending receipt of written confirmation. Branch should follow up such cases to get written confirmation at the earliest. The details of underlying transaction for which the contract is being booked should also be verified to ensure that maturity of the contract does not fall beyond that of the underlying and the amount of the contract does not exceed the value of the contract. Our treasury marketing team also interacts directly with customers and book forward contracts. Procedures outlined above for branches should also be followed by front office. In such cases, the front office should immediately inform the details to the branch so that the branch can put through necessary entries. Before booking the contracts, the branch / front office (whoever deals with the customer) should ensure that sufficient vacant Forward Contract Limits are available. Further, availability of Declaration Limit will also have to be ensured if applicable. Once the contract details are finalized, branch to put through necessary entries in Finacle and send reports to TBO in the required format.

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C. Processes / Procedures after booking forward contracts

The customers request letter along with copies of documentary proof of the underlying will be filed in a separate file chronologically. The maturity of the contract should not exceed the maturity of the underlying transaction. It can however fall before the maturity of the underlying transaction. To illustrate, an exporter having a receivable on 31st March xxxx can book a contract for delivery on 31st March xxxx or any date (or range of dates) before 31st March xxxx say, 28th January xxxx. He can not however book a contract maturing on 2nd April 2004 (i.e. beyond 31st March 2004). The original documentary proof will be returned to customer after making a suitable remark regarding the forward contract booked. In the copies of proof, the remark original examined and returned to customer should be made under the officers initials and banks round stamp. In case of foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank where such approval is necessary or loan identification number is given by the Regional Office of the Reserve Bank. Global Depository Receipts (GDRs) will be eligible for hedge after the issue price has been finalized. In case of contract being booked under Declaration Limit proof regarding underlying transaction need not be obtained at the time of booking the contract. However, the same should be obtained before maturity / cancellation of the contract. A contract note will be prepared as per our standard format (Annexure B and C) and sent to the customer for his confirmation. Annexure B is for the customer and may be retained with him. Annexure C should be stamped and signed by the authorized signatory (ies) of the customer and returned to the bank for records. Cancellation of forward contracts: Branch should first report to Treasury Front office about the cancellation of forward contract and obtain appropriate cancellation rate. Full details of forward contract to be cancelled
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are required to be informed to FX dealers for obtaining the rate. Thereafter, on same day branch should inform TBO in the prescribed format (Annexure E) the cancellation of forward contract. The Rupee amount will be recovered/paid by debit/credit to the customer's cash-credit or current account and the same should be worked out by deducting from the exchange differential, the interest amount for the period for which this early payment is accounted for. All the recoveries from / payments to the clients on account of Fx forward Deals entered into will be calculated by the branches and recovered by crediting the Fx and Other Charges Recoverable from Clients A/c ( XXX 77900010070) or paid by debiting the Fx and Other Charges payable to Clients A/c (XXX 34450010070) in the respective branchs sol id. TBO will in turn debit or credit the above accounts (maintained at the respective branches) on the same value date. Wherever there are delays in recovering the amounts from the clients, branches may calculate and recover interest charges on the recoverable amount from the clients at our Benchmark Prime Lending Rate (BPLR) prevailing on the value date plus 3% with the interest compounding at daily rests. The interest so received from clients on account of delayed payments may be credited to the Interest Income Account used for crediting interest on Temporary Overdrafts (TOD) in the respective branch sol ID. If for some reason, branches propose to waive or collect interest at a rate lower than the above mentioned rates, then the same may be got approved by the competent authority under the prevailing Delegation of Powers (DOP). As a policy the bank pays / receives the differentials on date of cancellation. Interest on outflow of funds is to be calculated at PLR, while on inflow of funds at retail deposit rate of respective maturity for which the interest is payable. However, it is possible that some customers may prefer to pay / receive the differential on the due date. In cases where the recoveries have to be made from the customer at the maturity

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date, the same should be approved by the Corporate Banking department at the Corporate Office while sanctioning the FX limits to that customer. Substitution of underlying contract Branch may permit customers to substitute an export / import order under a forward contract provided it is satisfied after verification of suitable documentary evidence that genuine exposure to the extent of the amount of the original forward contract subsists under the substituted order. The amount and the tenor of the new order should enable the customer to effect deliveries under the contract. Business hours Like any other product, booking, delivery, cancellation or rollover of forward contracts also will be subject to certain cut-off times stipulated by the Corporate Office from time to time. The cut-off time will be applicable for customer dealings as well as internal procedures like TMO reporting to branches, branches reporting to TBO, etc. Forward Contracts of the following nature cannot be cancelled EEFC balances sold forward by the account holders Forward contracts booked by residents to cover exposure falling due beyond one year Forward Contracts booked on the basis of declaration of exposure in excess of 75% of limit fixed on the basis of past performance. Forward Contracts covering Overseas Direct Investmen

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CHAPTER 8 CONCLUSION
This study has been conducted to know about basis trade finance operation and products to day to day trading activities. Dealing with trade finance products is adequate for every company in normal course of business, for doing international trade which means of globalizations of free of trade.

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CHAPTER 9 BIBLIOGRAPHY

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Trade Finance Handbook by Richard Thomas, Alan Beard International Trade Finance by TARSEM BHOGAL ARUN KUMAR TRIVEDI The World Economy: Trade And Finance by Beth V. Yarbrough Mediaeval Trade And Finance by M. M. Postan Commodity Trade & Finance by Tamvakis Michael

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