Programme on Letter of Credit Transactions and UCP 600

1. Programme onLetter of Credit Transactions and UCP 600

2. SESSION I Features of an International commercial contract & terms of payment A quick review…..

3. Initial quote • confirmed order • contract

4. Features of a commercial contract - • Everything they have agreed between themselves • Evidence of contract • Record of agreed goods • Record of agreed time of delivery • Record of agreed terms of delivery • Record of agreed point of delivery • Record of agreed method of payment • Design can vary but not the contents • First document to bring parties together • Any inaccuracy or inconsistency may have legal repercussions if shipment is not as per contract

5. Essential details in a contract • Details of buyer / seller – with full address • Manufacturer – Seller – buyer – end user…. • Method of despatch • Terms of delivery • Exact point at which risks and responsibilities pass from seller to buyer (INCO TERMS 2000) • Insurance • freight • References / dates – • terms to be avoided FAV (first available vessel) /ASAP • Appointment of freight forwarder • Terms of payment • Documentation • Other instructions

6. Four main categories of charges / cost • Despatch, carriage, delivery • Customs clearance for export / import • Service / assistance rendered in addition • Insurance

7. Responsibilities of the parties • Loading charges at sellers place • Local transportation charges – Inland freight in the sellers country • Delivery to the carrier at notified place or at the port • Customs clearance in the exporting country • Export charges – loading expenses • Any special equipment and accessories • Main carriage expenses • Transit insurance – cargo insurance

8. Responsibilities of the parties • Unloading expenses • Customs clearance at importing country • Importing country’s taxes • Local cartage – transportation charges • Unloading at buyers place

9. INCO TERMS 2000 • EXW EX-WORKS (place) • Loading charges for buyer • FCA FREE CARRIER (place) • FAS FREE ALONGSIDE SHIP (port of loading) • FOB FREE ON BOARD (port of loading) • FCA/FAS/FOB – customs clearance in the exporting country for seller • CFR COST AND FREIGHT (port of discharge) • CIF COST INSURANCE FREIGHT (port of discharge)

10. INCOTERMS CONTD • CPT CARRIAGE PAID TO (Place of destination) • CIP CARRIAGE INSURANCE PAID TO (place of destination) • DAF DELIVERED AT FRONTIER (place of delivery) • DES DELIVERED EX SHIP (port of destination) • DAF / DES importing country’s customs clearance for buyer • DEQ DELIVERED EX QUAY(private port of buyer) • Import clearance – customs clearance for seller

11. INCO TERMS CONTD • DDU DELIVERED DUTY UNPAID (place of destination) • DDP DELIVERED DUTY PAID (place of destination)

12. In short… • Sea transport – FAS/FOB/CFR/CIF/DES/DEQ • Others – all other modes of transport • EXW/FCA/CPT/CIP/DAF/DDU/DDP

13. Different types of trade transactions • Export / import of capital goods • Export / import of accessories – non capital goods • Export / import of services

14. Terms of payment • Documents on collection basis • Documentary collection • At sight – DP basis • On due date – DA basis • Direct collection • Consignment basis • Payment guarantees • Documentary Credit / Letter of Credit • Standby letter of credits • Advance Payment

15. 3 Banco Bradesco, Sau Paulo Citi Bank, Establishing Letter of Credit 2 4 ABC LTD Sau Paulo Importer COMMERCIAL CONTRACT HPC L 1

16. Commercial contract insisting letter of credit • LC application submitted by the applicant to the issuing bank • LC established by issuing bank through their correspondent bank with a request to pay on their behalf against submission of prescribed documents by the beneficiary • LC advised- with /without confirmation

17. NEGOTIATION OF DOCUMENTS UNDER CONFIRMED CREDIT 3 Banco Bradesco 4 Citi Bank 5 6 2 1 HPC L ABC LTD

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19. BENEFITS OF A CONFIRMED CREDIT • Since the credit is confirmed by confirming bank they have a commitment to pay to the beneficiary if the documents presented, represents ‘complying presentation’. • Their undertaking will be an additional undertaking in addition to the issuing bank’s undertaking • Beneficiary is more comfortable under this arrangement since he is assured of payment immediately on presentation of documents to the confirming bank

20. NEGOTIATION OF DOCUMENTS UNDER UNCONFIRMED CREDIT 3 Banco Bradesco 4 BARCLAYS BANK 5 6 2 1 HPC L ABC LTD

21. UNCONFIRMED CREDIT PAYMENT BY A NEGOTIATING BANK… • Even though Negotiating bank does not have any commitment to pay, they pay value against set of credit complied documents drawn under a letter of credit to the beneficiary.

22. Reimbursement under LC transaction LC Issuing Bank (BANCO BRADESCO) 1 2 3 4 CITI BANK / BARCLAYS BANK Confirming or Negotiating Bank Reimbursing Bank- JP MORGAN • Reimbursement authority from Issuing Bank to RB • IB advising claiming bank • Claiming bank submits valid claim message • RB debits the IB account and reimburses the claiming bank

23. DOCUMENTARY CREDIT….. • An arrangement whereby a bank acting at the request and on instructions of a customer i.e., the applicant • To make payment to a third party (the beneficiary) by themselves or authorize other bank to pay or negotiate • Against stipulated documents Provided • The documents presented represents ‘complying presentation’.

24. PARTIES TO DOC. CREDIT • Applicant • Beneficiary • Issuing bank • Advising bank • Confirming bank • Negotiating bank • Reimbursing bank

25. Discounting of bills under Inland letter of credit buyer 6 4 seller 2 5 3 1 Sellers Bank Issuing bank

26. TYPES OF CREDIT • Irrevocable (from 1st July 2007 all credits are irrevocable) • Confirmed /unconfirmed • Restricted/free • Transferable • Back to back • Revolving • Deferred • Red clause • Standby

27. Requirements….. • Name of the issuing bank • Name of the confirming bank • Value of LC • Last date of shipment • Expiry date • If the shipment is completed on 1st Dec what will be the expiry date for LC • Documents required • Type of LC

28. Confirmed Credit Issuing Bank requests another Bank – can be in the exporter’s country or in the third country to pay to the beneficiary on their behalf against presentation of documents. Once this arrangement is agreed for, then this credit is known as confirmed credit.

29. Restricted Credit • Issuing Bank, while issuing the letter of credit, nominates a specified bank to negotiate the documents under this credit. • It means only the nominated Bank will be • authorised to negotiate the documents. • Recent developments

30. Freely Negotiable credit.. • In a freely negotiable letter of credit any bank can negotiate the documents and claim reimbursement. Beneficiary has got the choice of presenting the documents to his own bank and claim payment. This will be advantageous to the exporter.

31. Beneficiary approaches nominated bank to transfer this L/C in favour of 3 sub suppliers (A, B & C) at 50%, 25%, 25% retaining his profit margin of 10 % .Please note the same L/C is transferred in parts .

32. Transferable Credit • A LC is transferable only if the issuing bank designates it. • Beneficiary has the right to request the nominated bank to transfer credits in parts or in full in favour of one or more beneficiaries if partial shipment permitted.

33. Back To Back L/C Beneficiary Global Exports India Ltd. is now becoming the Applicant and requests for opening fresh L/C’s Beneficiary’s Bank Bank of India A KARNAL B DELHI C CHANDIGARH At the request of Beneficiary, Bank of India has opened 3 fresh L/C’s

34. Back to Back • The second set of LC opened by a bank at the request of the exporter is known as Back to Back Credit. ( in case the exporter is not the actual manufacturer) • The beneficiary of the original LC becomes the applicant for the Back to Back LC.

35. Revolving Credit The amount of drawing is reinstated and made available to the beneficiary again for the agreed period of time on notification of payment by the applicant or on submission of documents.

36. Deferred Payment Credits • The amount is payable by the Issuing Bank in installments on deferred payment basis. • Partial payment is done in advance and balance in agreed installments according to terms in LC.

37. STANDBY CREDITS • Promise to honour beneficiary’s presentation of a document indicating the default of the applicant • Act as a standby arrangement in case the obligation is not fulfilled by the applicant

38. 3 1 Goods consigned directly Payment demanded on due date and defaulted by importer 2 3 Standby credit 4 Submission of Draft / Bill of Exchange 7 8 Payment made to Exporter Documents Presented Payment made 6 Payment made Documents forwarded Exporter’s Bank 5 Issuing Bank

39. Date of shipment 15th dec 2008 • Expiry date 31th dec 2008 • Payment terms: • 10% advance payment • 80% on 360th day from date of shipment • 10% on installation and satisfactory commissioning of the equipments

40. STANDBY CREDITS • More useful in collection instruments • On account – consignment sale. • In respect of any debt, obligation or any liability by the overseas party in connection with bonafide trade transaction • As a back up instrument for collection

41. STANDBY CREDITS.. • To present a copy of commercial invoice & unpaid bill of exchange • ISP 98 issued by ICC is the governing guidelines for this transaction • Reserve bank of India has since permitted authorised dealers to open standby credits to cover import trade transactions….

42. TYPES OF STANDBY CREDITS.. • Performance standby – to pay the losses arising out of default of the applicant • Advance payment standby • Bid bond / tender • Counter standby – separate standby by the beneficiary • Financial standby – obligation to repay the borrowed money • Commercial standby – applicant to pay for the goods • Insurance standby – to meet reinsurance obligation

43. Presently used in case of • Export transactions: • Advance payment of the overseas buyer to the exporter can be secured by Standby credit • Direct dispatch of shipping documents to the overseas buyer can be secured by the exporter • Consignment sales • Deferred payments …… if not paid on due date

44. Import transactions... • Default of payment by the importer in case of suppliers credit and buyers credit • Risk factors: • absence of evidence of shipment/ Insurance documents…..

45. Who can opt for Import Standbycredits.. • Importers of crude oil & petroleum products • Independent power producers • Status exporters / 100% EOUs • Public Sector Undertakings / Public Limited Companies with good track record • Private Ltd companies / non corporate bodies

46. Precautions... • Status report on the seller • invocation of SBC only with supportive documents • declaration of importers default • copy of invoice • non-negotiable bill of lading*** • Lloyds / SGS inspection certificate

47. Precautions... • Incorporation of an additional clause • In the event of payment being made earlier - provision to dishonor the claim • Subject to Intl.Standby Practices (ISP 98) • certain highlights on ISP 98

48. ISP 98 • 1.02 - If local laws conflicting with SBC operations, local law will prevail • 3.14 - Expiration day - if closed for transaction - extended to 30 calendar days • Reasonable time for refusal of documents by Issuing Bank / Confirming bank • within 3 days - reasonable • beyond 7 days - unreasonable…..?

49. END OF PART I