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Presentation on Export- Import Documentation and Risk Management in Export-Import Business.

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1 Presentation on Export- Import Documentation and Risk Management in Export-Import Business

2 Role of Export Documentation Export documentation plays a vital role in international marketing as it facilitates the smooth flow of goods and payments thereof across national frontiers. Export documentation plays a vital role in international marketing as it facilitates the smooth flow of goods and payments thereof across national frontiers. Exporters are required to follow certain formalities and procedures, using a number of documents. Exporters are required to follow certain formalities and procedures, using a number of documents. Each of these documents serves a specific purpose and hence carries its own significance. Each of these documents serves a specific purpose and hence carries its own significance. A clear understanding of all documents and their purpose, how to prepare these, number of copies required, when and where to file, is a must for all export professionals. A clear understanding of all documents and their purpose, how to prepare these, number of copies required, when and where to file, is a must for all export professionals.

3 Export Documentation in India Export Documentation in India has evolved a great deal of interest since Export Documentation in India has evolved a great deal of interest since Efforts are on, at a faster footing to streamline and modernize the system further. Efforts are on, at a faster footing to streamline and modernize the system further. Prior to 1990, documentation was manual and it lacked proper co-ordination. Prior to 1990, documentation was manual and it lacked proper co-ordination. The result was lot of delays and mistakes, rendering the task very clumsy, tiresome, repetitive, and truly frustrating. The result was lot of delays and mistakes, rendering the task very clumsy, tiresome, repetitive, and truly frustrating. India adopted the ADS (Aligned Documentation System) in 1991 which is the Internationally accepted documentation system India adopted the ADS (Aligned Documentation System) in 1991 which is the Internationally accepted documentation system

4 Export Documentation in India Export documentation is complex in nature as the number of documents to be filled-in is very large, so also is the number of the concerned authorities to whom the relevant documents to be submitted. It is, therefore, advisable to take the help of shipping and forwarding agents who will obtain and fill out the documents correctly as well as arrange for transportation. Export documentation is complex in nature as the number of documents to be filled-in is very large, so also is the number of the concerned authorities to whom the relevant documents to be submitted. It is, therefore, advisable to take the help of shipping and forwarding agents who will obtain and fill out the documents correctly as well as arrange for transportation. There are buyers and exporters, buying agents, RBI, authorized dealers (where the exporter has his bank Account), buyers bank (foreign bank), DGFT, Customs and Port Authorities, VAT and Excise Authorities, EPCs, Insurance Companies, Inspection Agencies, Clearing and Forwarding Agents, Shipping Companies/Airlines and Inland Carriers etc There are buyers and exporters, buying agents, RBI, authorized dealers (where the exporter has his bank Account), buyers bank (foreign bank), DGFT, Customs and Port Authorities, VAT and Excise Authorities, EPCs, Insurance Companies, Inspection Agencies, Clearing and Forwarding Agents, Shipping Companies/Airlines and Inland Carriers etc

5 Export Documentation in India Proper Documentation will ensure smooth sailing with the requirements of the above agencies and the resulting transaction will be a successful one. Proper Documentation will ensure smooth sailing with the requirements of the above agencies and the resulting transaction will be a successful one. Inaccurate or incomplete documentation will result in serious financial and goodwill losses. Inaccurate or incomplete documentation will result in serious financial and goodwill losses. Such losses can be completely avoided by understanding clearly the documentation requirements of all concerned parties and then meticulously planning to get the right documents in the right numbers, at the right places and at the right time. Such losses can be completely avoided by understanding clearly the documentation requirements of all concerned parties and then meticulously planning to get the right documents in the right numbers, at the right places and at the right time.

6 Classification of Export Documents Export Documents can be classified into following four categories: Export Documents can be classified into following four categories: (1) Commercial Documents (2) Regulatory Documents (3) Export Assistance Documents (4) Documents Required by Importing Countries (1) Commercial Documents: These documents are used by exporters/importers to discharge their respective legal and other incidental responsibilities under sales contract.

7 Classification of Export Documents Commercial documents can be further sub-divided into: (i) Principal Commercial Documents (ii) Auxiliary Commercial Documents (i) Principal Commercial Documents: These documents serves the following purposes: (a) To effect physical transfer of goods and title of the goods from exporter to the buyer. (b) To realize export sales proceeds.

8 Classification of Export Documents Principal Documents include: Commercial Invoice (and the invoice prescribed by the importer) Commercial Invoice (and the invoice prescribed by the importer) Packing list Packing list Certificate of Inspection Certificate of Inspection Certificate of Insurance/Insurance Policy Certificate of Insurance/Insurance Policy Bill of Lading/Airway bill/Combined Transport Documents Bill of Lading/Airway bill/Combined Transport Documents Certificate of Origin Certificate of Origin Bill of Exchange Bill of Exchange Shipment Advice Shipment Advice

9 Classification of Export Documents (ii) Auxiliary Commercial Documents: These Documents are required to prepare /procure the principal commercial documents and include: Proforma Invoice Proforma Invoice Shipping Instructions Shipping Instructions Insurance Declaration Insurance Declaration Intimation for Inspection Intimation for Inspection Shipping Order Shipping Order Mates Receipt Mates Receipt Application for Certificate of Origin Application for Certificate of Origin Letter to bank for negotiation /collection of documents Letter to bank for negotiation /collection of documents

10 Classification of Export Documents (2) Regulatory Documents: These are prescribed by various Government Departments/Bodies for compliance of formalities under relevant laws governing export transactions. These include: (i) Exchange Control Declaration Form-GR Form (ii) Freight Payment Certificate (iii) Insurance Premium Payment Certificate (iv) ARE I/ARE II Forms (v) Shipping Bill/Bill of Export (vi) Port Trust Copy of Shipping Bill/Export Application/Dock Challan (vii) Receipt of Payment of Port Charges (viii) Vehicle Ticket.

11 Classification of Export Documents (3) Export Assistance Documents: These are the documents which are required for claiming assistance under the various export assistance measures as may be in operation from to time. Currently, these refer to drawbacks of central excise and customs duties, packing credit facilities etc (4) Documentation required by Importing Countries: These are the documents which are required by the importer in order to satisfy the requirements of his Government. These include certificates of origin, consular invoice, quality control certificate etc.

12 Commercial Documents (1) Commercial Invoice: It is the basic and most important document in an export transaction and extreme care has to be taken by the exporter to prepare this document. It is the basic and most important document in an export transaction and extreme care has to be taken by the exporter to prepare this document. This document requires the exporter to submit details such as his own details, Invoice number with date, details of the consignee and buyer (if the buyer is other than consignee), buyers order number with date, country of origin of the goods, country of final destination, terms of payment and delivery, pre-carriage details (Road/Rail), vessel/flight number, port of loading, port of discharge, final destination, container number, number and kind of packaging, detailed description of goods, quantity, rate and total amount chargeable etc This document requires the exporter to submit details such as his own details, Invoice number with date, details of the consignee and buyer (if the buyer is other than consignee), buyers order number with date, country of origin of the goods, country of final destination, terms of payment and delivery, pre-carriage details (Road/Rail), vessel/flight number, port of loading, port of discharge, final destination, container number, number and kind of packaging, detailed description of goods, quantity, rate and total amount chargeable etc

13 Commercial Documents Therefore, a Commercial Invoice contains the complete details of the export order. Therefore, a Commercial Invoice contains the complete details of the export order. Normally, the trade practice is to raise and send a Proforma Invoice to the buyer for his approval, once the order has been finalized. Normally, the trade practice is to raise and send a Proforma Invoice to the buyer for his approval, once the order has been finalized. On receipt of the approved Proforma Invoice, the exporter can use it as a part of the export contract. On receipt of the approved Proforma Invoice, the exporter can use it as a part of the export contract. The Commercial Invoice then becomes easier to prepare on the basis of the approved Proforma Invoice. The Commercial Invoice then becomes easier to prepare on the basis of the approved Proforma Invoice.

14 Commercial Documents (2) Packing List: This document provides the details of number of packages; quantity packed in each of them; the weight and measurement of each of the package and the net and gross weight of the total consignment. This document provides the details of number of packages; quantity packed in each of them; the weight and measurement of each of the package and the net and gross weight of the total consignment. Net weight refers to the actual weight of the items and the gross weight means the weight of the items plus the weight of the packing material. Net weight refers to the actual weight of the items and the gross weight means the weight of the items plus the weight of the packing material. The packing list serves a useful purpose of the exporter while dispatching the consignment as a cross check of goods sent. The packing list serves a useful purpose of the exporter while dispatching the consignment as a cross check of goods sent.

15 Commercial Documents For the port personnel, it comes handy while planning the loading and offloading of cargo. For the port personnel, it comes handy while planning the loading and offloading of cargo. It is also an essential document for the customs authorities as they as they can carry out the physical examination of the cargo and conduct checks on the weight and measurements of the goods smoothly against the declarations made by the exporter in the packing list. It is also an essential document for the customs authorities as they as they can carry out the physical examination of the cargo and conduct checks on the weight and measurements of the goods smoothly against the declarations made by the exporter in the packing list. (3) Certificate of Inspection: This is the Certificate issued by the Export Inspection Agency after it has conducted the pre-shipment inspection of goods for export provided the goods fall under the notified category of goods requiring compulsory shipment of inspection.

16 Commercial Documents (4) Certificate of Insurance/Insurance Policy: Insurance is an important area in the export business as the stakes are usually very high. Insurance is an important area in the export business as the stakes are usually very high. Protection needs to be taken in the form of insurance cover for the duration of transit of goods from the exporter to the importer. Protection needs to be taken in the form of insurance cover for the duration of transit of goods from the exporter to the importer. (5) Bill of Lading: This is issued when the goods are shipped using ocean (marine) transport. This is issued when the goods are shipped using ocean (marine) transport. When the exporter finally hand over the goods to the shipping company for loading on board the ship for transport to their final destination, the shipping company issues a set of Bills of Lading to the exporter. When the exporter finally hand over the goods to the shipping company for loading on board the ship for transport to their final destination, the shipping company issues a set of Bills of Lading to the exporter.

17 Commercial Documents (6) Airway Bill: Airway Bill is a bill of lading when the goods are shipped using air transport. Airway Bill is a bill of lading when the goods are shipped using air transport. It is also known as air consignment note or airway bill of lading. It is also known as air consignment note or airway bill of lading. (7) Combined Transport Document: This is also known as Multi-modal Transport Document. This is also known as Multi-modal Transport Document. Ever since containers have become popular, the concept of Combined Transport Document has gained solid ground. Ever since containers have become popular, the concept of Combined Transport Document has gained solid ground.

18 Commercial Documents (8) Certificate Of Origin: This document serves as a proof of the country of origin of goods for the importer in his country. This document serves as a proof of the country of origin of goods for the importer in his country. Imported countries usually require this to be produced at the time customs clearance of import cargo. Imported countries usually require this to be produced at the time customs clearance of import cargo. It also plays an important part in computing the liability and the rate of import duty in the country of import. It also plays an important part in computing the liability and the rate of import duty in the country of import. This certificate declares the details of goods to be shipped and the country where these goods are grown, manufactured or produced. This certificate declares the details of goods to be shipped and the country where these goods are grown, manufactured or produced. Such goods needs to have substantial value addition so as to become eligible to certification of this nature. Such goods needs to have substantial value addition so as to become eligible to certification of this nature.

19 Commercial Documents (9) Bill of Exchange: Also known as Draft, this is an instruments for payment realization. Also known as Draft, this is an instruments for payment realization. It is a written unconditional order for payment from a drawer to a drawee, directing the drawee to pay a specified amount of money in a given currency to the drawer or a named payee at a fixed or determinable future date. It is a written unconditional order for payment from a drawer to a drawee, directing the drawee to pay a specified amount of money in a given currency to the drawer or a named payee at a fixed or determinable future date. The exporter is the drawer and he draws (prepares and signs) this unconditional order in writing upon the importer (drawee) asking him to pay a certain sum of money either to himself or his nominee (endorsee). The exporter is the drawer and he draws (prepares and signs) this unconditional order in writing upon the importer (drawee) asking him to pay a certain sum of money either to himself or his nominee (endorsee).

20 Commercial Documents This order could be made for payment on demand, called a bill of exchange at sight or payment at a future date, called a usance bill of exchange. This order could be made for payment on demand, called a bill of exchange at sight or payment at a future date, called a usance bill of exchange. (10) Shipping Advice: The exporter sends this document, called shipping advice, to the buyer soon after the shipment is made to provide him all the shipment details. The exporter sends this document, called shipping advice, to the buyer soon after the shipment is made to provide him all the shipment details. This serves as an advance intimation of the shipment and allows the importer to arrange for delivery of the same. This serves as an advance intimation of the shipment and allows the importer to arrange for delivery of the same.

21 Risk Management in Export-import Business Risk is a fact of business life, more so of international business. Risk is a fact of business life, more so of international business. The Management of International business is the management of risk. The Management of International business is the management of risk. No manager can make a strategic business decision or enter into important business transaction without a full evaluation of the risks involved. No manager can make a strategic business decision or enter into important business transaction without a full evaluation of the risks involved. Many of the best business plans have been ruined by a miscalculation or a mistake, or an error in judgment that could have been avoided with proper planning. Many of the best business plans have been ruined by a miscalculation or a mistake, or an error in judgment that could have been avoided with proper planning.

22 Risk Management in Export-import Business If the risk cannot be reduced through advance planning and careful execution, perhaps it can be shifted to some other party to the transaction. If the risk cannot be reduced through advance planning and careful execution, perhaps it can be shifted to some other party to the transaction. If the risk cannot be shifted to another party to the transaction, it might be shifted to an insurance company. If the risk cannot be shifted to another party to the transaction, it might be shifted to an insurance company. Many types of risks can be insured against, including the risk of damage to the goods at sea, the risk of loosing an investment in a developing country and many others. Many types of risks can be insured against, including the risk of damage to the goods at sea, the risk of loosing an investment in a developing country and many others.

23 Risk Management in Export-import Business (1) Risk Assessment and the Firms Foreign Market Entry Strategy: When a firm is considering its entry or expansion in a foreign market, it must consider all options and decide on a course of action commensurate with its objectives, capabilities and its willingness to assume risk. When a firm is considering its entry or expansion in a foreign market, it must consider all options and decide on a course of action commensurate with its objectives, capabilities and its willingness to assume risk. Selling to a customer in another country results in less risk to the firm than licensing trademarks, patents and copyrights there. Selling to a customer in another country results in less risk to the firm than licensing trademarks, patents and copyrights there.

24 Risk Management in Export-import Business (2) Managing Distance and Communications: The risks of doing business in a foreign country are different from those encountered at home. The risks of doing business in a foreign country are different from those encountered at home. A firm doing business in a foreign country would encounter greater distances; problems in communications; language and cultural barriers; differences in ethical, moral and religious codes; exposure to strange foreign laws and government regulations; and different currencies. All these factors affect the risks of doing business abroad. A firm doing business in a foreign country would encounter greater distances; problems in communications; language and cultural barriers; differences in ethical, moral and religious codes; exposure to strange foreign laws and government regulations; and different currencies. All these factors affect the risks of doing business abroad.

25 Risk Management in Export-import Business (3) Managing Currency and Exchange Rate Risks: Currency risk is risk a firm is exposed to as a result of buying, selling, or holding a foreign currency. Currency risk includes: Currency risk is risk a firm is exposed to as a result of buying, selling, or holding a foreign currency. Currency risk includes: (i) Exchange Rate Risk (ii) Currency Control Risk (i) Exchange Rate Risk: Exchange rate risk results from the fluctuations in the relative values of the foreign currencies against each other when they are bought and sold on international financial markets.

26 Risk Management in Export-import Business (ii) Currency Control Risk: Some countries, particularly developing countries where access to ready foreign reserve is limited, put restrictions on currency transactions. Some countries, particularly developing countries where access to ready foreign reserve is limited, put restrictions on currency transactions. In order to preserve the little foreign exchange that is available for international transactions, such as importing merchandise, these countries restrict the amount of foreign currency that they will sell to private companies. In order to preserve the little foreign exchange that is available for international transactions, such as importing merchandise, these countries restrict the amount of foreign currency that they will sell to private companies. This limitation can cause problems for a U.S or any other country exporter waiting for payment from its foreign customer who cannot obtain the dollars needed to pay for the goods. This limitation can cause problems for a U.S or any other country exporter waiting for payment from its foreign customer who cannot obtain the dollars needed to pay for the goods.

27 Risk Management in Export-import Business (4) Special Transactions Risks in Contracts for the Sale of Goods: Special risks are inherent in international transactions for the purchase and sale of goods. Special risks are inherent in international transactions for the purchase and sale of goods. These transactions present special risks to both the parties because the process of shipping goods and receiving payment between distant countries is riskier than within a country. Such risks are: These transactions present special risks to both the parties because the process of shipping goods and receiving payment between distant countries is riskier than within a country. Such risks are: (i) Payment or Credit Risk (ii) Property or Marine Risk (iii) Delivery Risk (iv) Pilferage and Theft Risk

28 Risk Management in Export-import Business (5) Managing Political Risk: Political Risk is generally defined as the risk to a firms business interests arising form political instability or political change in a country in which the firm is doing business. Political Risk is generally defined as the risk to a firms business interests arising form political instability or political change in a country in which the firm is doing business. Political Risk includes risk derived from potentially adverse actions of Governments of the foreign countries in which one is doing business or whose laws and regulations one is subject to. Political Risk includes risk derived from potentially adverse actions of Governments of the foreign countries in which one is doing business or whose laws and regulations one is subject to. It also includes laws and Government policies instituted by the firms home country which adversely affect the firms that do business in a foreign country. It also includes laws and Government policies instituted by the firms home country which adversely affect the firms that do business in a foreign country.

29 Risk Management in Export-import Business (6) Risks of Foreign Laws and Courts: Many Acts that are perfectly legal in one country can be illegal in another. Indeed, most travelers to a foreign country could conceivably break a host of laws and not even be aware of it. Many Acts that are perfectly legal in one country can be illegal in another. Indeed, most travelers to a foreign country could conceivably break a host of laws and not even be aware of it. The same is true for the law of contracts, employment, competition, torts and other business laws. The same is true for the law of contracts, employment, competition, torts and other business laws. It is virtually impossible to catalog all of the differences between these laws from country to country It is virtually impossible to catalog all of the differences between these laws from country to country

30 Risk Management in Export- import Business (7) Commercial Risks: The risks arising from suitability of the product for the market or otherwise change in supply and demand conditions and changes in price. Commercial risks arise due to: (i) Lack of Knowledge (i) Lack of Knowledge (ii) Inability to adapt to the environment (ii) Inability to adapt to the environment (iii) Different kinds of situations to be dealt with (iii) Different kinds of situations to be dealt with (iv) Greater transit time involved (iv) Greater transit time involved

31 Risk Management in Export-import Business (8) Cargo Risk: Transit disasters are an ever present hazard for those engaged in Export-Import business. Transit disasters are an ever present hazard for those engaged in Export-Import business. Every shipment runs the risk of a long list of hazards such as storm, collision, theft, leakage, explosion, spoilage etc. It is possible to transfer the financial losses resulting from perils of and in transit to professional risk bearers known as underwriters. Every shipment runs the risk of a long list of hazards such as storm, collision, theft, leakage, explosion, spoilage etc. It is possible to transfer the financial losses resulting from perils of and in transit to professional risk bearers known as underwriters. As most goods are transported by marine transport, every exporter should have an elementary knowledge of marine insurance to get the protection at the minimum cost. As most goods are transported by marine transport, every exporter should have an elementary knowledge of marine insurance to get the protection at the minimum cost.

32 Suggested Readings (1) International Marketing Management-an Indian perspective by R.L Varshney and B.Bhattacharya, Sixth Edition, 2006 published by Sultan Chand and Sons, New Delhi. (2) International Business Law and its Environment by Richard Schaffer, Beverley and Filiberto Augsti, Sixth Edition, 2005 published by Thomson South-Western United States. (3) Manual on Export Documentation published by Commercial Law Publishers (India) Private Limited, NREW Delhi, (4) International Business Law, Text, Cases and Readings, Fourth Edition, Published by Prentice Hall, U.S.A (4) International Business Law, Text, Cases and Readings, Fourth Edition, Published by Prentice Hall, U.S.A (5) International Marketing by Philips R.Cateora and John L. Graham published by Tata McGraw Hill (6) International Business by Charles W.L Hill and Arun K.Jain published by Tata McGraw-Hill Publishing Company Limited, New Delhi. (7) Export and import Management by Aseem Kumar published by Excel Books, 2007


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