31 Foreign Trade: Export Procedure

Dr. Savita

1. Learning Objective

After completing this module, you will be able to:

i. Understand the meaning and concept Exporting in Foreign Trade

ii. Understand the benefits of Exports, and

iii. Know about the Export Procedure in the context of Foreign Trade

2. Introduction

Foreign trade refers to the trade between two or more countries. It is the exchange of goods of goods or services between the citizens of different countries. A trade between India and U.S.A. or U.K. will be termed as foreign trade/international trade. Foreign trade can be divided into three categories:

a) Export Trade: When goods are sold to the foreign countries, it is called as Export Trade.

b) Import Trade: When goods are purchased from the other countries, it is known as Import Trade.

c) Entrepot Trade: When goods are purchased from a foreign country and are sold to some other country, it is called as Entrepot trade

Thus, Exporting is the act of transferring goods or services, which are produced one country and selling or trading them to another country. The term export originates from the Latin words ex and portare, which means ‘to carry out’. On the other hand, the counterpart to exporting is importing which is the acquisition of goods or services from another country and selling them within the country. Countries may be in a favorable position to export for several reasons. A country may export goods if it has access to natural resources that others lack and sometimes they are also able to manufacture goods at a relatively lower cost than other countries due to cheap labour costs, government subsidies, low inflation rate in the country etc.

Export is a national priority for every nation, be it a developed, developing, or an under developed economy. Export is not only an engine of economic growth and development but also generates large employment opportunities thereby raising the standard of living of the people of an economy. It is in this context that the government of every nation provides for various export promotion schemes and incentives to encourage and motivate the business community in general, and export community in particular for enhancing its export effort. In consonance of its objective to increase its share of global merchandise exports, the Government of India is providing from time to time a stimulus through various export promotion schemes and incentives to the exporters.

3. Export Procedure

Export of goods passes through the following stages:

1. Enquiry: The first step in export trade relates to the enquiry received from the importer. The foreign buyer or his agent may ask for a variety of information relating to goods such as price, quality, terms and conditions, delivery, mode of payment etc. Thus, enquiry from the buyer is actually a request for information relating to goods which the importer wants from the exporter.

2. Sending Quotation: In reply to an enquiry, the seller sends a quotation mentioning all the information asked for in the enquiry (such as price, quality, terms and conditions etc). The seller (exporter) may give additional information such as concessions or discounts being offered to fetch the order from the prospective importer. The quotation should be sent immediately and it should be in clear and unambiguous language For example, e-mail can be done on the same day to the buyer.

3. Receipt of Order (or indent): The order received from the importer is called as Indent. The order may be received either directly from the importer or through some ‘Indent Houses (which are specialised middlemen who get commission for providing this service). Indent is prepared in triplicate. All the details, such as price, quality, quantity, terms of payment, packing etc should be clearly mentioned in the indent.

An indent is of two types

a) Open indent: As the name indicates, the importer does not give specific instructions and a free hand is given to the exporter (seller) to send the best possible goods using his own skill, talent, prudence and discretion.

b) Closed Indent: In this order, the importer mentions all the details of goods and exporter cannot use his discretion to select goods for the buyer.

4. Obtaining Letter of Credit (L/C): A letter of credit is issued by the bank of the importer in favour of the exporter specifying that the bills of exchange drawn by the exporter on the importer will be met upto a specified amount. On receipt of L/C, the exporter gets an assurance or guarantee from the importer’s bank about the credit worthiness of the importer. Thus the exporter gets assurance of receiving the payment for the goods being exported. A letter of credit is thus, a very important document in export trade.

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5. Obtaining Export License and Quota: In order to export goods to a foreign country, every exporter has to get a license under the Import and Export (control) Act 1947. Quota permit is also required if goods being exported are in short supply in our own country. The established exporters get quota on the basis of exports handled by them. The new exporters have to get license from Joint Chief Controller of Imports and Exports.

For the purpose of exports, goods are divided into three categories(a) Free Goods. No license is required for these goods.

(b) Open General List. Such goods can be freely exported during a specific period

6. Fulfillment of Foreign Exchange Regulations: Every exporter is required to give a declaration that the foreign exchange received from the export of goods will be surrendered to the Reserve Bank of India (RBI) within the prescribed time limit. For this purpose he has to prepare four copies of G.R. forms. Original copy is submitted to custom authorities. The remaining three copies are submitted to the bank which forwards two copies to the RBI.

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7. Fixing Exchange Rate: The rate at which the foreign currency is converted into the currency of the exporter’s country is called ‘exchange rate’. The exchange rate keeps on fluctuating. Normally, the exchange rates at the time of receiving the order and at the time receiving the payment of goods are different. It is therefore, necessary that exchange rate is settled in advance.

8. Packing and Marking: The goods being exported must be properly packed as the distance involved is very long. Goods must be packed as per the specifications given by the importer in the indent. Defective packing can damage the goods and the loss will be borne by the exporter. The packing should be done in such a way that it covers the minimum space on the ship.

9. Shipping Order. After packing and marking goods are to be sent to the ship. For this purpose, the exporter has to get a shipping order from the shipping company. A contract of affreightment is signed and the shipping company issues a ‘Shipping Order ‘which gives an order to the captain of the ship to receive the goods. This work can also be done through the Freight brokers who charge commission for hiring a space in the ship. If the entire ship or substantial part is hired, it is called as ‘Charter Party Agreement’.

Shipping order may be either a (i) Ready Shipping Order or (ii) Forwarding Shipping Order If the name of the ship and the date of departure of the ship is mentioned in the shipping order, it is called as Ready Shipping Order In case of Forwarding Shipping order, only the date of departure of the ship is mentioned. The exporter is under obligation to pay for freight even if the goods are not, exported alter this agreement is entered into. This freight is called as ‘dead freight’.

10. Compliance with custom formalities. Certain custom formalities have to be completed before exporting the goods Different forms have to be used for free goods, dutiable goods and coastal goods. Three copies of forms are filled out of which two are returned to the exporter by the custom authorities. –

After completion of these formalities, the exporter gets ‘Custom Export Pass’.

11. Payment of Dock Dues: These goods are then taken to the dock where dock dues are paid. The exporter is then given a ‘Dock Receipt’. The goods are then taken to the ship and handed over to the ‘Captain ‘ of the ship (or his assistant known as Mate’) along with the shipping order. If the packing of the goods is satisfactory, the receipt issued by the Mate is known as Mate Clean Receipt’. If packing is unsatisfactory, the mate puts his remarks on the receipt and such a receipt is called as ‘Dirty or foul Mate’s Receipt.

12. Loading of goods: Goods are loaded into the ship by the dock officials. Before that goods are checked by custom officials to ensure that only those goods are being sent which are mentioned in the shipping bill. Banned goods cannot be loaded on the ship.

13. Bill of Lading: Bill of Lading is the official receipt issued by the shipping company. It is just like Railway Receipt (RIR) issued by the railway company when goods are sent by rail. Bill of lading is sent to the importer in advance and delivery of the goods can be taken from the shipping company at the port of destination only on showing the Bill of Lading. It is in fact a document of title of goods. A Bill of lading is generally prepared in five copies and contain the particulars like name of the exporter, importer, details of goods, number of packages, marking on packages, place of loading, destination, name of the ship, freight and date etc.

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The following procedure is followed for getting Bill of Lading

i) Exporter or his agent prepares five copies of Bill of Lading and submits it to the shipping company along with Mate’s receipt (or dock’s receipt).

ii) The company then prepares a ‘Freight Note’ and the agent of the exporter pays the freight and a freight receipt is issued If freight is to be paid by the importer, the bill of lading contains the remarks as freight foreword’.

iii) Four copies of the bill of lading are then given to the agent. If the bill of lading does not contain any adverse or negative remarks, it is called as Clean bill of lading. Sometimes adverse remarks are written on the bill of lading such as ‘defective packing’ etc. In such a case, the bill of lading is said to be foul’ or ‘dirty’. A copy of the bill of lading is sent to the captain of the ship

iv) The exporter then sends three copies of the bill of lading and other document to the importer so that he can get the delivery of the goods by showing these documents to the captain of the ship. Three copies are sent by different mails so that the importer receives atleast one copy well in time.

14. Insurance: Marine insurance of the goods is affected to cover up the risk involved in the transit due to ‘perils of sea’. Marine Insurance policy is taken by the exporter and sent to the importer alongwith the other documents such as Bill of Lading etc.

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15. Certificate of Origin: It is a document which mentions that the goods were produced in the country mentioned therein. Sometimes, the importer gets benefits of lower custom duty if the goods are produced in the exporting country as a result of trade agreements between the two countries.

16. Forward Agent’s advice: The forwarding agent prepares an account of all expenses and his commission and sends it to the exporter. It is the duty of the exporter to pay these expenses and commission to the forwarding agent if such a person has been appointed for completing all formal ties relating to export of goods.

17. Preparation of Invoice (Consular Invoice): When the exporter receives the forward agent’s advice and all other documents, then an invoice is prepared in triplicate The invoice contains the details such as indent number, date and port of shipment, port of distinction, details of goods (quantity, quality, price, packing, marking) expenses incurred, insurance charges, freight paid etc.

Out of the three copies, one is sent to the importer, the second is sent to the importer’s bank and the third copy is retained by the exporter. While preparing the invoice, the exporter should ensure that it is as per the terms and conditions already given in the indent and quotation.

When goods are sent on consignment basis (i.e. to be sold by the consignee on commission basis) a ‘Proforma Invoice’ is sent instead of ‘Invoice’. A proforma invoice is just like an invoice containing all the information but ownership of the goods remains with the owner and only possession is given to the importer.

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The foreign governments open a consular office and appoint a consular to take care of goods being exported to that country. A consular invoice is also taken from the consular office and it is sent by the exporter to the importer. The consular invoice is a proof of the fact that whatever value has been written in the invoice is correct and the custom authorities of the importing country accept that value for the purpose of buying import duty.

18. Securing Payment: The final stage of export transaction relates to getting payment from the importer. The following are the five methods to get the payment for the goods sent to the importer:

i) Documentary Bill. A bill of exchange is drawn by the exporter on the importer and is sent along with the other documents (such as bill of lading etc.) to the bank of the importer since the bill is sent along with the documents, it is called as the Documentary Bill.

The documentary bill is of two types:

(a) Documents against payment (D/P)

(b) Documents against Acceptance (D/A)

In case of D/P bills of exchange, the documents are given to the importer by the bank only when he makes payment of the bill. In D/A, bills of exchange, and documents are handed over to the importer after he accepts the bill of exchange. In such a case, payment will be received by the bank from the importer on maturity of the bill of exchange.

ii) Letter of Hypothecation (Or Discounting B/E). A bill of exchange can be discounted from the bank by giving a ‘letter of hypothecation’ in which an authority is given to the bank to sell the goods if the importer of goods does not make payment of the bill of exchange. If there is any profit on sale of such goods, it has to be handed over to the exporter by the bank. If the amount recovered from sale of goods is less, the difference has to be paid to the bank by the exporter. Thus, this method of getting the payment from the importer involves an element of risk and uncertainty. Moreover, the loss by way of discount has to be borne by the exporter. On account of all these reasons, this method is not considered good for the exporters.

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iii) Letter of Credit. In this case, the importer sends a letter of credit (L/C) to the exporter after procuring it from his bank. The bank of the exporter pays cash immediately on opening the L/C.

Thus, there is a certainty of payment when Letter of credit is received by the exporter from the importer. The payment is quick as well as guaranteed.

iv) Payment by Bank Draft. In this case, the importer sends to the exporter a ‘Bank Draft’ for the amount due against goods supplied. Since the bank draft is received from a foreign country, it is called as foreign bank draft’. This method of receiving payment is best suited to the exporters. However, the foreign exchange received from the importer must be surrendered to the Reserve Bank of India within the prescribed time limit.

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v) Telegraphic Transfer. In the modern changing business scenario, new methods of transfer of funds are being followed. These methods are speedy and quick and money gets transferred from the bank of the importer to the bank of the exporter within no time. Telegram, cable, telex, internet etc. are being used for remitting money from one country to another.

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In this case, the exporter receives immediate payment and that too in his own currency. Thus there is no loss on account of interest, discount etc. which we find in other methods of payment.

4. Summary:

In this module we have learnt that about the meaning and concept of Foreign Trade, Exporting and Export Procedure. As we have discussed Foreign trade refers to the trade between two or more countries. It is the exchange of goods of goods or services between the citizens of different countries. Exporting is the act of transferring goods or services, which are produced in one country and selling or trading them to another country. A country may export goods if it has access to natural resources that others lack and sometimes they are also able to manufacture goods at a relatively lower cost than other countries due to cheap labour costs, government subsidies, low inflation rate in the country etc. Export is not only an engine of economic growth and development but also generates large employment opportunities thereby raising the standard of living of the people of an economy. The Government of India is providing from time to time a stimulus through various export promotion schemes and incentives to the exporters. Export of goods passes through many stages. It starts from the enquiry from the importer, sending him quotation, receipt of indent, obtaining Letter of Credit, obtaining Export License and so on till the payment of order through documentary bill, Letter of credit or demand draft etc.

Suggested Readings

Sundharam K.P.M. and Datt Ruddar (2010). Indian Economy, S. Chand & Sons, New Delhi.
Sharan Vyptakesh (2003). International Business: Concept, Environment and Strategy. Pearson Education, New Delhi
Cullen. (2010). International Business. Routledge.
Bennett Roger (2011). International Business. Pearson Education, New Delhi
Paul Justin (2010). Business Environment-Text and Cases. Tata McGraw Hill, New Delhi.
Cherunilam Francis (2010). International Business. Prentice Hall of India Private Limited. New Delhi.
Cherunilam Francis (2013). Global Economy and Business Environment. Himalaya Publishing House, New Delhi.
Levi MauriceD. (2009). International Finance. Routledge.
Conklin David w. (2011). The Global Environment of Business. Sage Publications.
Mithani D M. (2009). Economics of Global Trade and Finance. Himalaya Publishing House New Delhi.
Cherunilam Francis (2011). International Business Environment. Himalaya Publishing House, New Delhi.
Saleem Shaikh (2010). Business Environment. Pearson Education, New Delhi.