In India and many other countries the following steps are generally involved in the procedure of exports: 1. Quotation and Indent 2. Shipping and Credit Enquiry 3. Preparations for Export 4. Customs and Exchange Formalities 5. Placing the Goods On-Board the Ship 6. Mate’s Receipt 7. Marine Insurance 8. Bill of Lading 9. Shipping Documents 10. Securing Payment 11. Export Incentives.
How to Export in India: Procedure and Steps Involved
An exporter gives a quotation or an offer for sale to the foreign buyer or importer. It may be in the form of a Proforma Invoice — an offer to sell but given in the form of an invoice. Proforma invoice or quotation gives-(1) Name and address of the buyer or consignee, (2) Description of goods to be sold, (3) Price, (4) Conditions of sale, and (5) Other provisions such as delivery schedules, payment terms, escalation clause due to rising prices/costs, etc.
In the export trade it is essential to have a clear understanding as to where the responsibilities of the seller end. The seller would like to quote his price ‘ex-works’ in his own currency and leave the rest to the foreign purchaser. On the other hand, the buyer or importer would always prefer to have the goods delivered to his own warehouse free of all charges, at an inclusive price quoted in his own currency.
The first type of the price quotation is called ‘ex- factory or loco’ while the second type is called ‘franco’ quotation. In a competitive world, the exporter must go as far as he can to meet importer’s wishes. We should like to mention the two most common types of quotations — the f.o.b. and c.i.f.
(a) Free on Board (f.o.b.) Quotation:
Under an f.o.b. quotation, the exporter will deliver the goods free on board a ship as per contract at the port named; that is to say he will pay all expenses and give delivery of goods on board the ship. The buyer must take responsibility from then on, and must pay for freight, insurance and all subsequent expenses.
(b) Cost, Insurance and Freight (c.i.f.) Quotation:
Under a c.i.f. quotation the seller must ship the goods (meeting all charges up to) ‘on board’ and pay freight and insurance of goods also. The buyer is responsible for loss or damage after the goods are delivered to the ship-owner and must pay all expenses, customs duties, etc., on arrival at the port of destination. If the goods are lost in transit, the buyer can claim against the ship-owner by virtue of the bill of lading or against the insurer by virtue of the insurance policy.
The quotation is an offer of sale made by the seller to the buyer and it must include in a clear-cut manner all terms and conditions on which the goods are offered for sale. These relate to quantity, quality, prices, terms of delivery, discounts, payments, etc.
The exporter, at first receives the order or indent from the importer or his agent. The indent contains all important particulars of the transaction such as description and price of goods, instructions for packing, marking, insuring etc., mode of payment to be adopted by exporter, methods of time of delivery of goods, details of import licence, etc.
In the olden days all foreign orders were drawn in triplicate and placed together indented or torn irregularly at the edge to prevent forgery or substitution. Hence, a foreign order is called an ‘indent’.
At present, three or four typed copies of a foreign order are prepared and one or two may be sent to the exporter when a proforma invoice is accepted by the buyer, it becomes a confirmed order. An export order is usually treated as confirmed order when L/C is established in favour of the exporter. There may be a formal sale contract also.
The exporter may have to arrange for booking of shipping space in advance of actual sending of goods. Usually, the exporter hands over this responsibility to a shipping and freight broker who has specialised in this work. He possesses full knowledge of the various shipping lines and gives expert advice as to which line is cheaper.
The shipping company issues a shipping order to the exporter when it agrees to carry the exporter’s goods. The shipping order is a document containing instructions to the captain of the ship to accept goods on board the ship from the exporter or his agent. Similarly, creditworthiness of the importer should be thoroughly verified.
He may be requested to open an account in the form of a letter of credit with a bank having branches in both exporting and importing countries. If the reputation of importer is high, ordinary bank reference may be enough for the purpose of granting credit.
Collection or Production of Goods:
In case an export commission house is acting as an agent of the importer, it will be in charge of collection of goods as per indent, from exporters, i.e., local producers and manufacturers. The indent house will act as a principal in placing orders and securing the supplies as per instructions of the foreign buyers.
Once the goods for exports are collected or manufactured, the export commission house will have to look after making up, packing and marking of goods as per usage or as per special instructions of importer. If exporter is also a manufacturer, the indent or order is sent to the factory with all specifications and the deadlines for delivery.
Arrangement for Shipment:
The manufacturer-exporter or merchant-exporter can get exemption from the sales tax and refund of excise duty and customs duty. Certain legal formalities have to be performed before the goods are released for shipment. ‘Form 14’ is required for sales tax exemption and ‘AR-4’ form is needed for exemption or refund of excise duty.
We have compulsory quality control for export goods. Export Inspection Council (EIC) does the pre-shipment inspection. Emphasis is on quality control and not on inspection for export. EIC gives an Inspection Certificate in triplicate to the exporter.
In order to look after all shipping and customs formalities and the actual loading of goods on board the ship, a specialist called ‘forwarding agent’ may be appointed by the exporter. These forwarding agents are experts in their line of business and on nominal commission offer valuable services to the exporter.
In particular, they perform the following functions- (1) Negotiation of shipping contract, (2) Customs formalities, (3) Marine Insurance Policy, and (4) Loading of goods and securing of Bill of Lading. They may also be entrusted with the work of packing, marking etc., of the goods to be exported.
Packing may be done by the manufacturer himself or may be entrusted to the packing agents. Packing for export is a highly specialised work. Firstly, packing must not only provide adequate protection for the goods, but must also be in accordance with the requirements of the shipping company and of the customs authorities.
Secondly, the goods clearly marked, must be packed strictly as per contract. Otherwise the buyer may refuse to take delivery. The forwarding agents are experienced in the general routine of export and know the special requirements of the importing country with reference to packing, etc.
Each package should be stamped with a distinct mark pointing out the name of the importers and destination port. The gross weight, the tare, i.e., the weight of the package itself, and the net weight along with measurements should be marked on the package.
The essential steps in customs and exchange formalities are outlined below in brief:
(1) Shipping Bills:
The shipping bill or customs challan contains detailed description of the goods, viz., quantity, quality, value, numbers, marks, measurement, the port of destination, the name of the ship carrying the goods, etc. The exporter is required to fill in three copies of shipping bills.
(2) Export Permission Form:
It is an application to export. This form or application is filled in duplicate and the exporter submits four copies of shipping bill and two copies of application to export to the landing and shipping dues office. This office collects shipping dues or charges, retains one copy of application to export and returns to the exporter the other along with three copies of shipping bills.
(3) Customs House:
The exporter is required to present a copy of application to export, three copies of shipping bill, export licence (for verification) to the customs house. Shipping bills for dutiable goods differ from those for free goods. The customs house will register details of export in its books and will return to the exporter a copy of shipping bill with necessary endorsement.
The original and duplicate copy of the shipping bill are retained by the customs house. Export duty, if any, will have to be paid. The customs house will direct the examining officer or appraiser to carry out physical examination of goods at the dock with reference to value, description, quality, etc.
A customs export pass will be issued in favour of the exporter when he has gone through all customs formalities to the satisfaction of the customs house.
(4) Export Licence:
At present, every exporter is required to procure an Export Licence from the Controller of Exports. The licence is valid for three months though the period can be extended by the licensing authority.
(5) Exchange Control:
Similarly, under Foreign Exchange Regulation Act, four G.R. forms are to be filled in by every exporter — one copy to be given to the customs house at the time of shipment and three copies to be given to the authorised exchange dealer along with one copy of invoice and other shipping documents. The exchange dealer, i.e., the foreign exchange bank, will forward two copies of G.R. forms to the Reserve Bank of India.
After having received back the two copies of Shipping Bill and one copy of the Application to Export, the Shipper makes arrangements to place the goods on-board the steamer. He has to hand over one copy of the Shipping Bill at the dock while the goods are taken in.
The Captain of the ship or the Mate, who is his assistant, cannot allow the shipping of the goods unless the shipper presents to either of them a copy of the Shipping Bill and the Shipping Order. The Mate issues a receipt after examining the packing and counting of the packages.
This receipt is called the ‘Mate’s Receipt.’ If the Mate is not satisfied with the packing of the goods a remark to that effect is made on the receipt. A receipt with this remark thereon is regarded as dirty or foul receipt. The exporter must take proper care in packing his goods so as to avoid this remark on the Mate’s Receipt.
The receipt without any bad remark thereon is termed as a clean Mate’s Receipt. This remark is transferred to the Bill of Lading when the exporter gets it in exchange for the Mate’s Receipt.
While the work connected with the shipping of the goods is being carried out, the exporter makes arrangements with some Marine Insurance Company for insuring the goods to safeguard them against marine risks.
Usually the goods are insured for the amount which covers, not only the value of the goods but also a reasonable profit (generally 20 per cent of the value of the goods) and reasonable expenses expected to be incurred in the event of the loss or destruction of the goods by the perils of the sea.
The exporter approaches the Shipping Company, presents the Mate’s Receipt and, in exchange, receives a document known as Bill of Lading. Actually, the exporter himself fills in the details regarding the goods, destination, name of ship, etc., in the blank forms of the Bill of Lading.
The authorised person, on behalf of the Shipping Company, checks, signs and then returns this Bill of Lading to the exporter along with the freight note as soon as the freight charges are also paid by the exporter. Freight note is, thus, a receipt of having paid the requisite freight to the Shipping Company by the shipper.
Sometimes, the importer agrees to pay the freight according to a contract between the exporter and the importer. In such a case, the exporter gets the Bill of Lading, duly signed and stamped by the Shipping Company, and marked with the words ‘Freight Forward.’ When the goods in such a case reach the importer’s destination, he presents the Bill of Lading along with the payment of the freight, and then only the importer can take charge of the goods.
A Bill of Lading may be defined as a document wherein the steamship company gives its official receipt for goods shipped in one of its vessels and at the same time contracts to carry them to the port of destination. The possession of this document gives the title, i.e., the ownership, to the goods.
It is freely transferred by endorsement and delivery. The exporter sends this Bill of Lading to the importer who can take possession of the goods by presenting the same to the shipping company at his station port. Generally, two and sometimes three copies of the Bill of Lading are made and sent to the importer by different air mail so that even if one is lost in transit, the importer may get another in time.
Functions of the Bills of Lading:
(1) It denotes the contract of carriage of goods entered in by the exporter and the importer.
(2) It entitles the importer to take delivery of goods.
(3) It is a document to title of goods. A possessor of this document becomes the owner of goods.
(4) It is a semi-negotiable instrument.
(5) It is transferable by endorsement and delivery.
The Bill of Lading is said to be ‘clean’ if it is signed without any adverse remark on it. A ‘clean’ Bill of Lading is an evidence of the goods having been packed in good condition at the time of loading. The above discussion reveals that the Bill of Lading is essentially an important document.
(a) Letter of Indemnity:
If the Bill of Lading contains some adverse remarks regarding packing of the goods, the importer may refuse to take delivery or may claim damage. In order to avoid this trouble, the exporter gives to the Shipping Company a Letter of Indemnity by which he agrees to indemnify the Shipping Company, in return for a clean Bill of Lading for any claim on the part of the importer in respect of the goods.
(b) Consular Invoice:
In those countries where ad valorem duties are charged, it is in the interest of the importer to present to the Customs Authorities of the importing country the document called ‘Consular Invoice’, in order to save time and trouble while taking delivery of the goods. This invoice has to be sent to him by the exporter who fills in a special form and gets it duly certified by the Consul of the importing country stationed in the exporting country.
The Consul, who is the representative of the importing country, certifies this special form, only after the exporter swears to the accuracy of the details in it and pays the prescribed fees. The Customs Authorities of the importing country consider the invoice as containing a genuine statement of the contents and value of the goods.
This document, thus, rids the importer of the trouble of opening all the packages at the time of assessing the duties by the Customs House.
(c) Certificate of Origin:
Trade agreements between two countries may offer a preferential treatment in respect of import duties to the goods sent from one country to the other. The most favoured nation treatment, as it is often called, gives an advantage to the importers. Indirectly, the exporters are also benefited, as this treatment induces the importers to place orders with the exporters of only that country with whom the trade pact has been entered into by the importing country.
(d) Certificate of Quality:
Quality control is compulsory in exports. The quality control and inspection must be done before shipment. Exporter must duly secure the Certificate of Quality. In order to prove that the imported goods belong originally to the exporting country with whom the trade agreement has been entered into, the importer has to present to Customs Authorities the certificate called, ‘Certificate of Origin.’
This document certifies the name of the country in which the goods are manufactured. It is necessary, therefore, on the part of the exporter to obtain this certificate and send it to the importers so that the latter may get the benefits of the preferential treatment in duties.
The exporter obtains this certificate from the Chamber of Commerce or such other important commercial organisation by proving to them that the goods are manufactured in his country. This certificate has to be duly legalised later by presenting it to the Consul of the importing country stationed in the exporting country.
The Documents Attached to Bill of Exchange:
It will be seen from the foregoing discussion that the exporter is required to send the following documents to the importer to facilitate the delivery of goods to the latter- (1) The Bill of Lading. (2) The Insurance Policy. (3) The Certificate of Origin. (4) The Consular Invoice. (5) The Invoice showing the details of the goods sent and the net dues from the importer as prepared by the exporter himself. (6) The Certificate of Quality.
The exporter can resort to a number of alternatives for securing payment of export dues from the importer. The method of obtaining payment for his goods will, of course, be determined by his contract with the importer. Broadly speaking, there are mainly four methods available for the exporter to secure payment from the importer.
1. Documentary Bill of Exchange (On the Importer):
Under this arrangement, the exporter sends the documents through his bank to be delivered to the importer against the importer’s acceptance or payment of an accompanying bill of exchange. This bill may be a D./P. or D./A. bill of exchange. If the bill is drawn at sight or on demand, the relative documents will not be handed over to the importer except against payment of the bill, i.e., documents to be surrendered against payment (D./P.).
But the bill may be a usance bill, that is, it may be drawn at 30, 60 or 90 days after sight. Usually when a usance bill accompanies a set of documents, these are deliverable to the importer against his acceptance (D./A.) and the bill is then held by the presenting bank until it is due to be presented for payment.
The exporter hands over such documentary bill to the bank having branches in the importing country. The bank forwards the documentary bill, a bill along with all shipping and insurance documents, to its branch in the importing country. The branch concerned receives payment on maturity of the bill and then only the exporter gets credit to his account. If it is a D./P. bill, payment can be secured promptly but if it is a D./A. bill, there is some delay in securing payment.
2. Discounting Documentary Bill with a Letter of Hypothecation:
According to the second method, the procedure is just the same as described above with the only difference that the exporter requests the bank to discount the bill and, thus, obtains the payment immediately he hands over the documentary bill to a bank.
If the bank agrees to discount the bill, the exporter is asked to sign what is called the Letter of Hypothecation. In case the bill, on the date of maturity, is dishonoured by the importer, this letter authorises the bank to sell the goods and thus recover the amount already paid to the exporter.
If the bank recovers less amount than the amount paid to the exporter, the exporter is liable to pay the difference. The exporter does not favour this method also as it involves an uncertainty of whether the importer would honour the bill on the date of maturity. It also involves a loss by way of discount on the part of the exporter.
3. Documentary Credit:
In this method, the importer is asked to open a ‘Letter of Credit’ with a bank. The importer approaches the banker and requests him to issue a Letter addressed to the exporter authorising him to ship the goods and draw the sight bill of exchange on the banker. The importer must have an account opened at the bank or he must deposit the requisite amount with it before he can ask the bank to open a Letter of Credit.
As soon as the exporter receives a Letter of Credit, he presents a sight documentary bill to a banker who pays him immediately the amount of the bill.
In the case of bank acceptance credit, the exporter draws a time bill of exchange on the bank at which Letter of Credit account is opened in his favour. The time documentary bill is accepted by the bank and then it is called a banker’s acceptance. The letter of credit is an assurance that the bill will be paid by the bank if it is a sight bill or accepted by the bank if it is a time bill.
Issuance of a Letter of Credit by a bank in favour of an exporter substitutes the credit of the individual importer by its own credit and thereby gives the exporter greater assurance of payment. Documentary credit in the form of letter of credit is a popular method of securing payment. This method is favoured by the exporter as it ensures a quick and guaranteed payment from the importer and the exporter’s capital is not thereby kept locked up for a long time.
A Letter of Credit is of Two Types- revocable and irrevocable. A revocable Letter of Credit may be cancelled at any time, by the banker without giving prior-intimation. The exporter does not favour this Letter of Credit as it is liable to bring him into trouble at any time. An irrevocable Letter of Credit cannot be cancelled by the bank without giving prior notice and is, therefore, safer than the revocable Letter from the point of view of the exporter.
4. Cable and Mail Transfers and Bank Drafts:
Many transactions in the foreign exchange market involve the transfer of a deposit held in a bank or its branch abroad. We may have trading in bank balances through cable (telegraphic) and mail transfers and bank drafts.
A cable transfer (T.T.) is just an order sent by cable to a foreign bank or a branch holding on account for the seller of a particular currency, directing that bank or branch to debit this account and credit the account of the buyer or his nominee with a specified amount. An exporter having command over a foreign currency may sell a cable transfer and thus secure payment in his own currency immediately.
An importer may purchase a cable transfer and direct the bank to pay the exporter in his currency immediately. Thus, payment can be effected with great speed either on the same day or on the second day of purchase or sale of cable or telegraphic transfer.
When such an order for transfer or payment is sent by airmail, it is called a mail transfer. In some cases, a remitter of funds to someone abroad may want to make payment directly to the firm or individual without going through a foreign bank. In such cases, an Indian bank sells the remitter a draft on the bank’s balance abroad.
A bank draft is a written order from the Indian bank to the bank holding its account abroad to make a specified payment to a named person or firm upon presentation of the draft. The bank draft is mailed to the beneficiary abroad, who is able to cash it as he would like any other cheque.
An exporter gets export incentives under the export promotion such as cash compensatory allowance, import replenishment licence, duty drawback or refund and excise duty refund. We have simplified procedure for quick payment of the claims under the scheme as well as issue of import replenishment licence against exports.