BFM-Module: A-International Banking
Forex
Business; factors
determining exchange rates,
Direct and indirect quotations, spot / forward rates,
premium and discount, cross
rates.
Basics of forex derivatives; forward exchange rate contracts, Options, Swaps. Correspondent
banking, NRI accounts
Documentary letters of Credit - UCPDC 600, various facilities to exporters and importers. Risks in foreign trade,
role of ECGC, types
of insurance and guarantee covers or ECGC. Role of
Exim Bank - Role of RBI and exchange control
- Regulations in India, Role and rules of FEDAI - Role of FEMA and its
rules
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FOREIGN EXCHANGE MANAGEMENT ACT, 1999
The Foreign Exchange Management Act 1999 (FEMA) was
enacted on December 02, 1999 to replace Foreign Exchange Regulation Act (FERA)
1973. The Act came into on June 01, 2000 and extends to the entire country, all
branches, offices, agencies outside India - those owned or controlled by a
person residing in India.
Objective of FEMA : (i)
Facilitating external trade and payments and (ii) for promoting the orderly
development and maintenance of foreign exchange market in IndiaThe Foreign
Exchange Management Act, 1999, extends to the whole of India. It shall also
applies to all branches, offices and agencies outside India owned or controlled
by a person resident in India. It came into force wef June 01, 2000.
Important
terms and definitions
Authorised person means an authorised dealer, money changer, off-shore banking unit or
any other person being authorised to deal in foreign exchange or foreign
securities, by RBI, Currency includes all currency
notes, postal notes, postal
orders, money orders,
cheques, drafts, travellers' cheques, letters of credit,
bills of exchange and promissory
notes, credit cards or
such other similar instruments, as
may be notified by the Reserve
Bank.
Currency notes means and includes cash in the form of
coins and bank notes;Current account transaction means a transaction other than
a capital account transaction and includes,-
(i)
payments due in connection with
foreign trade, other current business, services, and short-term banking and
credit facilities in the ordinary course of
business,
(ii)
payments due as interest on
loans and as net income from investments,
(iii) remittances for living expenses of parents, spouse and children
residing abroad, and
(iv) expenses in connection with foreign travel, education and medical
care of parents, spouse and children;
Foreign exchange from whom : As per Section
5, any person may
sell or draw foreign exchange to
or from an authorised person if such sale or drawal
is a current account transaction.
Central Government may, in consultation with the Reserve Bank,
impose such reasonable
restrictions for current account transactions.
Export, with its
grammatical variations and cognate expressions means, the taking out of India
to a place outside India any goods and provision of services from India to any
person outside India; Foreign currency means any currency other than Indian
currency;
Foreign exchange means foreign currency and
includes,-
(i)
deposits, credits and balances
payable in any foreign currency,
(ii)
drafts,
travellers' cheques, letters of credit or bills of exchange, expressed or
drawn in Indian currency but payable in any foreign currency,
(iii)
drafts,
travellers cheques,
letters of credit or bills of exchange
drawn by banks,
institutions or persons outside India, but payable in
Indian currency; Foreign security means any security, in the form of shares,
stocks, bonds, debentures, or any other instrument denominated or expressed in
foreign currency and includes securities expressed in foreign currency, but
where redemption or any form of return such as interest or dividends is payable
in Indian currency;
Import, with its grammatical variations and cognate
expressions, means bringing into India any goods, or services;
Person
resident in India means -
(I)
a person residing in India for more than 182 days during the course of the preceding financial
year but does not include-
(A)
a person who has gone
out of India or who stays
outside India, in either
case- (a) for or on taking
up employment outside India, or (b) for carrying on a business
or vocation outside
India, or (c) for any other
purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) a person who has
come to stay in India,
in either case, otherwise than- (a)
for or on taking up
employment in India,
or (b) for carrying on
a business or vocation
in -India, or (c) for any other
purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
(ii)
any person or body corporate
registered or incorporated in India,
(iii)
an office, branch or agency in
India owned or controlled by a person resident outside India,
(iv)
an office, branch or agency outside India owned or controlled by a person resident
in India; Person
resident outside India means a person who is not resident in India.
Regulation And Management Of Foreign Exchange Dealing
in foreign exchange (Sec 3): No person shall-
(a)
deal in or transfer any foreign exchange or foreign security to any person not being an authorized person;
(b)
make any payment to or for the Credit
of any person resident
outside India in any manner;
(c)
receive otherwise through an
authorised person, any payment by order or on behalf of any person resident
outside India in any manner;
(d)
enter into any financial
transaction in India as consideration for or in association with acquisition or creation or transfer of a right to
acquire, any asset outside India by any person.
Holding of foreign exchange: No person resident in India shall acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India, unless permitted by RBI.
Holding of foreign currency by Residents:
A person resident in India
may hold, own, transfer or invest in foreign
currency, foreign security
or any immovable property situated outside India if
such currency, security or
property was acquired, held or
owned by such person
when he was resident
outside India or
inherited from a person who
was resident outside India.
Holding of foreign currency by non-residents
A person resident outside
India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India
if such currency, security or
property was acquired, held or owned by such
person when he
was resident in India
or inherited from a person who was resident in India.
Capital account transactions A transaction which alters the
assets or liabilities, including contingent liabilities, outside India of persons
resident in India or assets or
liabilities in India of persons
resident outside India, is called capital
account transaction. As per Section 6 any person may sell or draw
foreign exchange to or from an authorised person for a capital account
transaction. Reserve Bank may, in consultation with the Central Government,
specify :
(a)
any class or classes of capital
account transactions which are permissible;
(b)
the limit up to which foreign
exchange shall be admissible for such transactions:
Reserve Bank
shall not impose any restriction on the drawal of foreign exchange for payments
due on account of amortisation of loans or for depreciation of direct
investments in the ordinary course of business. transaction. As per Section 6
any person may sell or draw foreign exchange to or from an authorised person
for a capital account transaction. Reserve Bank may, in consultation with the
Central Government, specify :
(c)
any class or classes of capital
account transactions which are permissible;
(d)
the limit up to which foreign
exchange shall be admissible for such transactions:
Reserve Bank shall not impose any restriction on the
drawal of foreign exchange for payments due on account of amortisation of loans
or for depreciation of direct investments in the ordinary course of business
Restriction on
capital account transactions Reserve Bank may, by
regulations, prohibit, restrict or regulate the following-
(a)
transfer or issue of any
foreign security by a person resident in India;
(b)
transfer or issue of any
security by a person resident outside India;
(c)
transfer or issue of any
security or foreign
security by any branch, office or agency in India of
a person resident outside India;
(d)
any borrowing or lending in
foreign exchange in whatever form or
by whatever name called;
(e)
any borrowing or lending in rupees in whatever form or by whatever name called between
a person resident in India and a person resident outside India;
(f
) deposits between persons
resident in India and persons resident outside
India;
(9) export,
import or holding of currency or currency notes;
(h)
transfer of immovable property
outside India,
other than a lease not exceeding five years, by a
person resident in India;
(i)
acquisition or transfer of
immovable property in
India, other than a lease not exceeding five years,
by a person resident outside India;
(j)
giving of a guarantee or surety
in respect of any debt, obligation or other liability incurred-
(i)
by a person resident in India
and owed to a person resident outside India;
or
(ii)
by a person resident outside India.
Reserve Bank's
powers to issue directions to authorised person (Section
11) : Reserve Bank, may give to the authorised persons, any direction in regard
to making of payment or the doing or desist from doing any act relating to
foreign exchange or foreign security, direct any authorised person to furnish
such information, in such manner, as it deems fit.
Penalty on
authorized person : Where any authorised person
contravenes any direction given by the Reserve Bank under this Act or fails to
file any return as directed by the Reserve Bank, the Reserve Bank may, after
giving reasonable opportunity of being heard, impose on the authorised person a
penalty which may extend to Rs.10000 and in the case of continuing
contravention with for every day during which such contravention continues.
Power of Reserve Bank to inspect authorised person (Sec 12)
Reserve Bank may undertake an inspection of the business
of any authorised person for the purpose of verifying the correctness of any
statement, information or particulars furnished to the Reserve Bank, obtaining
any information or particulars which such authorised person has failed to
furnish on being called upon to do so.
CONTRAVENTION AND PENALTIES : Penalties (Sec
13) : If any person contravenes any provisions of this Act, or contravenes any
rule, regulation, notification, direction or order issued in exercise of the p
If any person fails to make full payment of the
penalty imposed on him under section 13 within a period
of 90 days from the date on which the notice for
payment of such penalty is served on him, he shall be liable to civil
imprisonment u/s 14.
Power to compound contravention : U/s 15, any contravention under section 13 may, on an application
made by the person committing such contravention, be compounded within 180 days
from the date of receipt of application by the Director of Enforcement or such
other officers of the Directorate of Enforcement and officers of the Reserve
Bank as may be authorised in this behalf by the Central Government.
ADJUDICATION AND APPEAL
U/s 16 Central Government may appoint
officers of the Central Government, as the Adjudicating Authorities for holding
an inquiry. Adjudicating Authority may direct the said person to furnish a bond
or guarantee,
· No Adjudicating Authority shall hold an enquiry except
upon a complaint in writing made by any officer
authorised by a general or special order by the Central Government.
Adjudicating Authority shall have the powers of a civil court.
All proceedings before it
shall be deemed to be judicial proceedings within the meaning of sections 193
and 228 of the Indian Penal Code.
·
Adjudicating Authority shall
deal with the complaint to dispose of the complaint finally within one year
from the date of receipt of the complaint:
Appellate Tribunal
(Sec 18): The Central Government shall, establish
an Appellate Tribunal to be known as the Appellate Tribunal for Foreign
Exchange to hear appeals against the orders of the Adjudicating
Authorities and the
Special Director (Appeals). Appellate Tribunal shall consist of a Chairperson and such
number of Members as the Central Government may deem fit.
Restriction on
capital account transactions Reserve Bank may, by
regulations, prohibit, restrict or regulate the following-
(a)transfer or issue of any foreign security by a
person resident in India;
(b) transfer
or issue of any security by a person resident outside India;
(f)
transfer or issue of any
security or foreign
security by any branch, office or agency in India of
a person resident outside India;
(g)
any borrowing or lending in foreign exchange
in whatever form or by whatever name called;
(h)
any borrowing or lending in rupees in whatever form or by whatever name called between
a person resident in India and a person resident outside India;
deposits between
persons resident in India and persons resident outside India;
(9) export,
import or holding of currency or currency notes;
(k)
transfer of immovable property
outside India,
other than a
lease not exceeding five years, by a person resident in India;
(l)
acquisition or transfer of
immovable property in
India, other
than a lease not exceeding five years, by a person resident outside India;
(m)
giving of a guarantee or surety
in respect of any debt, obligation or other liability incurred-
(i)
by a person resident in India
and owed to a person resident outside India;
or
(ii)
by a person resident outside India.
Reserve Bank's
powers to issue directions to authorised person (Section
11) : Reserve Bank, may give to the authorised persons, any direction in regard
to making of payment or the doing or desist from doing any act relating to
foreign exchange or foreign security, direct any authorised person to furnish
such information, in such manner, as it deems fit.
Penalty on
authorized person : Where any authorised person
contravenes any direction given by the Reserve Bank under this Act or fails to
file any return as directed by the Reserve Bank, the Reserve Bank may, after
giving reasonable opportunity of being heard, impose on the authorised person a
penalty which may extend to Rs.10000 and in the case of continuing
contravention with an additional penalty which may extend to Rs.2000.Appeal to High Court (Sec 35) : No civil court
shall have jurisdiction to entertain any suit or
proceeding in respect
of any matter which
an Adjudicating Authority or the Appellate
Tribunal or the Special Director (Appeals) is empowered.
Any person aggrieved by any decision
or order of the Appellate
Tribunal may file
an appeal to the High Court within
60 days from the
date of communication of the decision or
order of the Appellate
Tribunal to him on any question of law arising out
of such order:
DIRECTORATE OF
ENFORCEMENT : U/S 36, Central Government shall
establish a Directorate of Enforcement with a Director and other officers. U/s
37, the Director of Enforcement and other officers of Enforcement, not below
the rank of an Assistant Director, shall take up for investigation, the
contravention r
Empowering other officers
: U/s 38, Central
Government may authorise any officer of customs or any Central Excise Officer or any police officer or any other officer of the Central Government or a State Government to exercise such of the powers and
discharge such of
the duties of the Director
of Enforcement or any other
officer of Enforcement under this Act. The officers shalt exercise the like powers
which are conferred on
the income-tax authorities under the
Income Tax Act,
1961.
Power to make
regulations : U/s 47, Reserve Bank may,
make regulations to carry out the provisions of this Act and the rules
made there-under. Such regulations may provide
for ,-
(a)
the
permissible classes of capital account transactions, the limits of admissibility of foreign exchange for such transactions, and the prohibition,
restriction or regulation of certain capital account transactions
under section 6;
(b)
the manner and the form in which the declaration is to be furnished under clause (a) of sub-section
(1)
of section 7;
(c)
the period within which
and the manner
of repatriation of foreign exchange
under section 8;
(d)
the limit up to which any
person may possess foreign currency or foreign coins under clause (a) of
section 9;
(e)
the
class of persons and the limit up to which foreign
currency account may be held or
operated under clause
(b) of section 9;
(f)
the limit up to which foreign
exchange acquired may be exempted
under clause (d) of section 9;
(9) the limit up to which foreign exchange acquired
may be retained under clause (e) of section
9;
(h) any other matter which is required to be, or may
be, specified.
Foreign Exchange in simple
terms means any currency other than Home Currency (INR). It also means the
conversion of one currency to another to facilitate trade, travel and movement
of capital between countries. The need for foreign exchange arises because the
exporter would like to receive the proceeds of exports in his home currency
while the importer would like-to pay for his imports in his home currency.
Forex transaction is
a contract to exchange funds,
in one currency against funds in another
currency at an agreed rate. Buying transaction means
receiving Forex and releasing home currency and selling transaction means
releasing Forex and receiving home currency.
Foreign Exchange is a
commodity. Forex transactions (sale/purchase) are regulated in India under FEMA
1999.Objective of FEMA: To facilitate external trade and orderly management and
development of inter- bank forex markets in India. Inter-bank forex market
regulated in India by : RBI. Inter-bank forex market timing: 9 am to 5 pm
(Saturday-closed).Foreign Currency rates are fixed in India by: Market forces
of demand and supply (Higher demand -
higher rate).Foreign trade is regulated by: DGFT. In India direct rates
is used W.e.f. 1.8.1993.
Introduction
1.
In India, forex transactions are subject to Foreign Exchange Management Act 1999.
2.
The Act came into operation with effect from 1.6.2000.
3.
The main objective of the Act is to ensure orderly
conduct of forex transactions. Prior to FEMA, forex
transactions were regulated by Foreign Exchange
Regulation Act which provided for criminal proceedings also whereas FEMA provides
for only civil proceedings.
4.
In India, exchange control is
exercised by RBI and trade control is exercised by DGFT (Director General of Foreign
Trade.
5.
Balance of Trade means
export of goods minus import
of goods. Balance
of Payment means receipt of forex minus payment of forex.
6.
Only Authorised persons i.e. who are authorised by RBI can undertake forex
transactions. Authorised
persons would include Authorised Dealers (AD) and Full fledged money changers.
7.
AD are classified in 3 categories. AD category —I can undertake all current and capital account transactions.
AD Category — II can undertake
specified non-trade related current account transactions. AD Category
III would include select Financial and
Other institutions and can undertake transactions incidental to the foreign exchange activities undertaken by these
institutions. Full fledged
Money Changers can purchase as
well as sell foreign currency and traveller cheques.
8.
Branches
are also categorised in 3 categories. Category A branches purchase and sell
forex in the open
market; open Nostro and Vostro accounts. Category B branches
_deal with customers and undertake handling of export & import bills, open foreign currency accounts, purchase and sell
forex and undertake other
functions. Category C branches
route their forex business through category B branches.
Correspondent Accounts
1.
Banks have three types of correspondent bank accounts namely Nostro, Vostro and Loro accounts.
2.
Nostro account: It means our account with you. The account of a bank in India with a
foreign_correspondent bank abroad in Foreign currency is called Nostro account. For example, account of
PNB Delhi with City Bank New york.
3.
Vostro account: It means your account with us. The account of a foreign correspondent bank abroad with a bank in India in Indian Rupees will be a Vostro account. For example, account of City Bank New York with PNB Delhi.
1.
Loro Account: Their account
with them. For example, PNB has account with City Bank New York. For PNB, this account is Nostro account.
For City Bank, this account is Vostro account. For any other bank, this account
is Loro account.
2.
All
foreign exchange transactions
are settled through Nostro accounts.
R RETURNS
1.
R Return is a statement
of purchase and sale of forex by an authorised dealer.
2.
It is sent to RBI fortnightly as on 15th and last day of the month.
3.
With
effect from Jan 2009, it will be sent by bank as a whole.
4.
R Return is prepared to know balance of payment position.
Foreign Exchange Management Act 1999: Certain Definitions
1.
Objective: Facilitating external trade
and payments and for promoting the orderly development
and maintenance of foreign exchange market in
India
2.
It extends to the whole of
India. It shall also apply to all branches, offices and agencies outside India owned or controlled by a person
resident in India.
3.
It was implemented from 1st June 2000.
4.
"capital account transaction" means a transaction which alters the assets or
liabilities, including contingent
liabilities, outside
India of persons resident in India or assets or liabilities in India of persons resident outside India.
5. "current account transaction"
means a transaction other than a capital account transaction and
without
prejudice to the generality of the foregoing such transaction includes,- (i) payments due in connection with foreign trade, other current business, services, and short-term banking and
credit facilities in the ordinary course of business, (ii) payments due as interest on loans and as net income from investments,
(iii) remittances for living expenses of
parents, spouse and children residing abroad, and (iv) expenses in connection with foreign travel, education and medical care of parents, spouse and
children;
6.
"export", with its grammatical variations and cognate expressions means: (i) the taking out of India to a place outside India any goods, (ii) provision of services from India to any person outside India;
7.
"foreign
exchange" means foreign currency and includes,- (i) deposits, credits and balances payable in any foreign currency, (ii) drafts, travellers' cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, (iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency;
8.
"Person
resident in India" means- (i) a person residing in India for more than
one hundred and eighty-two
days during the course
of the preceding financial year but
does not include a person who has gone out
of - India or who stays outside India, in either
case (a) for or on taking
up employment outside India, or
(b) for carrying on outside
India a business or vocation
outside India, or (c)
for any other purpose, in
such circumstances as would indicate his intention to stay outside
India for an uncertain period;
9. "person resident outside India" means a person who is not
resident in India;
Exchange Rates
1.
Exchange Rates are applied when there is a sale or purchase
of foreign exchange.
2.
Direct
Rates and Indirect Rates:
3.
Direct Rate: When foreign currency is fixed and value of home currency is
variable, it is Direct rate
e.g. US$1= Rs 46.43;
4.
Indirect Rate: When home currency
is fixed and value of foreign currency
is variable, it is Indirect
rate
e.g. Rs 100= US
$ 2.39.
5.
In India, direct rates are applied. When direct rates are applied, the principle is "Buy Low and Sell High".
6.
In India, rates are determined by market forces of demand and supply and not by RBI or any other agency.
7.
Buying
or Selling Rate:
8.
Buying
Rate: When there is inflow of forex, it is purchased and buying rate is applied. For example, in the case of purchase of export bills buying rate will be applicable. Buying rate are of two types. TT Buying rate is applied when Nostro
account of the bank is credited before the
payment to the tenderer e.g. payment of FDD drawn on us or collection of export bills. Bills Buying Rate is applied when Nostro account is credited later and
payment made earlier as in the case of negotiation of export bills or purchase of foreign demand draft or cheque drawn abroad.
9.
Selling
Rate: When there is outflow of forex, it is sold and selling rate is applied. For example, in the case of retirement of import bills, selling rate will be applicable.
Selling rates are of two types. Bills Selling rate is applied when handling of import bill is involved. TT Selling Rate is applied when there is sale of foreign exchange but import bill is not handled like issue of Foreign Demand draft, crystalisation of overdue export bills.
10. TT selling or buying rate is more favourable than Bills selling or buying rate.
11. The exchange rate for purchase or sale of foreign currency
are most unfavourable as holding cost of
currency is high.
S u m m a r y o f E x c h a n g e R a t e
A p p l i c a t i o n
|
Rate
|
Transaction
|
|
TT-Selling
|
Outward remittance such as DD, TC etc. Cancellation of purchase such as:
·
bills
purchased returned unpaid,
·
bills
transferred to collection account
·
forward
purchase contract cancelled
|
|
Bill-selling
|
Transfer of
proceeds of import bills even if these are by way DD or TT.
|
|
TCs/
currency note — selling
|
At the
discretion of the AD
|
|
TT-Buying
|
·
cancellation
of outward TT, MT etc.
·
clean inward remittances
(TT,DD, MT) where cover already received
abroad
·
Conversion of proceeds of instruments that are sent for collection
·
Cancellation
of forward sale contract
|
|
Bills-Buying
|
·
Purchase
of bills and other instruments
|
|
TCs/currency note — Buying
|
At the discretion of the AD
|
Types of
Letters of Credit
1.
Revocable Credit : Such a Credit
can be revoked / modified
amended without consent of beneficiary.
2.
Irrevocable Credit : Such a Credit cannot be cancelled / modified or amended without
consent of beneficiary. In the
absence of any indication whether an L/C is revocable or irrevocable, it shall be deemed to be irrevocable. As
per UCPDC 600, banks will issue only
irrevocable LC
3.
Confirmed
Credit: An irrevocable credit which carries
confirmation of the advising bank is called confirmed credit. Article 8 of UCPDC,
600 says that a confirmation of irrevocable
credit by another bank (the 'Confirming Bank') upon the
authorisation or request
of the Issuing Bank constitutes a definite
undertaking of the confirming Bank, in addition to
that of the Issuing Bank, provided that the
stipulated documents are presented
to the Confirming Bank or any other Nominated
Bank-and that the terms
and conditions of the Credit
are complied with. 4. Transferable Credit: Under a transferable VC the beneficiary requests for credit being made available in whole
or
in part to one or more other beneficiaries. Under Article 38 of UCPDC, 600 a credit is transferable only if it
designated as 'Transferable' by the issuing bank.
Unless otherwise stated in
the Credit, a transferable Credit can be transferred once only. Other features
of a transferable credit are :
a) Transferable credit can't be transferred at the request
of the Second Beneficiary to any subsequent Third Beneficiary. However a
retransfer to the First Beneficiary is allowed.
b)
Fraction
of a transferable Credit (not exceeding in the aggregate
of the amount of the credit) can
be transferred separately, provided
partial shipments/drawings are not
prohibited and the aggregate of such transfers will be considered as constituting only one transfer
of credit. The first Beneficiary
has the right to substitute
his own invoice (s) (and Draft(s)) for those of the Second Beneficiary(ies), for amounts not in excess of the original amount
stipulated in the Credit
and for the original unit prices if stipulated
in the Credit, and upon such
substitution of invoice(s)
(and Draft(s)) the First Beneficiary
can draw under the Credit for
the difference, if any, between his invoice(s) and the Second
Beneficiary(ies)'s invoice(s)
5.
Revolving
Credit In such an L/C the amount of drawing is reinstated and made available to the beneficiary again after negotiation of documents drawn under LC. There will be restriction regarding number of times LC can revolve or maximum value upto which documents can be negotiated or both.
6.
Back to Back Credit: It is an UC which is issued on the strength of original UC.
Beneficiary of original UC is applicant of Back to Back credit. Normally an
exporter uses his export UC as a cover for
UC in favour of local suppliers.
7.
Red Clause UC: This LC has a clause permitting the correspondent bank in the
exporters country to grant advance
to beneficiary at issuing bank's risk and responsibility. These advances
8.
are adjusted from proceeds of
the bills negotiated.
9.
Green Clause UC: This type of UC is an extension of Red Clause L/C. Besides
pre-shipment credit, Green Clause UC entails finance for storing of goods in a
warehouse. Both Red clause and Green clause
LC are called anticipatory credits.
10.
Restricted LC: A letter of credit
in which negotiation is restricted to a particular
bank.
11.
Stand by LC: A LC issued in lieu of Bank Guarantee.
12.
DA LCs are those, where the payment is to be made on the maturity date in terms of the credit. The documents of title to goods are delivered to applicant merely on acceptance of documents drawn under LC.
13. DP LCs are those where the payment is made against documents on presentation.
Merchant
Exporter will prefer transferable or back to back credit whereas manufacturer
exporter will prefer Red clause or Green clause LC. All exporters prefer
Irrevocable LC
Parties to a LC
transaction
1. There are 05 parties to LC i.e. a.Exporter who is beneficiary of
credit, b. Issuing bank who is
importer's bank.
3.Advising bank is the one through whom LC is advised to the exporter. 4. Confirming bank is the one who gives additional undertaking to make issuing bank.
45 Negotiating
Bank : who will purchase or discount bills drawn under LC
Salient provisions of
UCPDC
1.
All
LC transactions are subject to Uniform Customs and Practice for Documentary Credits
(UCPDC) 600 which is effective from 1st July 2007 and has been issued
by International Chamber of Commerce Paris. However, when there is a contradiction between terms of LC and UCPDC, provisions as stated in LC will prevail.
2.
Advising bank is not liable for making payment under LC. His responsibility is only to ensure apparent authenticity of credit. Both issuing bank and confirming bank are liable for making the payment.
3.
Banking day: A day when bank is
regularly open at the place at whom an act, subject to UCPDC rules, is to be performed.
4.
Credit (or LC): Any
arrangement, however named or described, that
is irrevocable and thereby constitutes a definite undertaking of the issuing
bank to honour a complying presentation.
5.
Honour: (a) to pay at sight if the credit is available by sight- payment. (b) to incur a deferred payment
undertaking and pay at maturity
if the credit is available by
deferred payment (c) to accept
a bill of exchange (draft) drawn by the beneficiary and pay at maturity if the credit is available by acceptance.
6.
Negotiation:
Purchase by the nominated bank of drafts (drawn on a bank other than the nominated bank) and/or documents under a complying
presentation, by advancing or agreeing to advance funds to the beneficiary
on or before banking day on which reimbursement is due to the nominated bank.
7.
Nominated bank: The bank with which the credit is
available or any bank in case of a credit
available with any bank.
8.
A credit is irrevocable even if there is no indication to that effect.
9.
On or about — Such expression will be interepreted as a stipulation that an event is to occur
during a period of
5 calendar days before
and until 5 calendar days after
the specified date, both the start and end
dates included.
10. The words 'to', 'until', 'from' and 'between' when used to determine a period of shipment include
the date mentioned and the
words 'before' and 'after exclude the
date mentioned.
11.
The words 'from' and 'after when used to determine a maturity date exclude the date mentioned.
12.
The terms 'first half and
'second half of a month shall be construed respectively as the 1st to the 15th and the 16th to the last day of
the month, all dates inclusive.
13.
The terms 'beginning', 'middle'
and 'end' of a month shall be construed respectively as the 1st to 10th, the 11th to the 20th and the
21st to the last day of the month, all dates
inclusive.
14.
Branches
in different countries are considered to
be separate banks.
15.
The date of issuance of the transport documents will be deemed to be date of dispatch, taking in charge or shipped on board and the date of shipment. If the transport
document indicates, by stamp or notation, a date of dispatch taking in charge or shipped on board, this date will be deemed to the date of shipment.
16.
Transshipment means unloading from one means_ of conveyance and reloading to another means of conveyance (whether or not in
different modes of transport) during the carriage, from the place of dispatch
taking in charge or shipment to the place of final destination stated in the credit.
17.
A clean transport documents
is one bearing no clause
or notation expressly declaring a defective
condition of the goods or their packaging.
18.
if there is no indication in
the credit about insurance coverage, amount of insurance coverage must be at least 110% of CIF or CI P
value of the goods.
19.
Bill of Lading should be
"On Board Bill of Lading". Since Bill of Lading is issued in more
than one set, all negotiable copies
of bill of lading should be obtained.
20.
Bank should accept Clean Bill
of Lading and not claused one. Claused Bill of Lading means the one which indicates defective condition of goods or packing. Clean
bill of lading
means a BL in which
there are no adverse remarks
on Bill of Lading.
21.
Bill of Lading should be
presented for negotiation within 21 days of shipment otherwise it will be treated as Stale Bill of Lading.
22.
If words about is written in LC with quantity or amount, then variation of plus or minus 10% is permitted. if word 'a
23.
Insurance policy should be in the same currency as those of LC.
24.
If insurance policy is dated
later than the date of issue of Bill of Lading, then it should cover the risk from date of Bill of Lading.
25.
If expiry date of LC falls on a holiday declared for banks, then LC can be negotiated on the next working day. But as per 'Forece
Majeaure' clause, if
on expiry date of LC, banks are
closed due to riots or
strike or any reason beyond the control of the bank,
expiry date will not be extended.
Force Majeure clauses envisage eventualities beyond the control of
contracting parties. In the UCPDC 600,
acts of terrorism have
also been added to
this clause.
26. Negotiating, confirming and
Issuing Bank are given 5 banking days each to scrutinize that documents are as per LC.
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