Definition of Foreign Exchange:

The foreign exchange stock includes foreign currency assets, balances kept abroad, instruments payable in foreign currency and instruments drawn abroad but payable in Indian currency.

International Trade:

International trade is the exchange of capital, and services across international borders. A product that is sold to the global market is an export and that is bought from the global market is an import. In other words, inflow of currency in the country is an export and outflow of currency from the country is an import.

Foreign Exchange Management Act: 1999:

It is effective from Ist June, 2000 for facilitating external trade and payment. It replaced Foreign Exchange Regulation Act-1973. It is applicable to the whole of India.  It contains 49 sections.

Foreign Exchange Authorized Persons:

As per Sec.10 of FEMA, the RBI may, on an application made to it, authorize any person to be known as ‘Authorized Person’ (AP) to deal in foreign exchange or in foreign securities as an ‘Authorized Dealer’ (AD).

AD Category I: Commercial, State and Urban Coop. Banks.  Deals in all types of foreign exchange business. 

AD Category II: Full Fledged Money Changers (FFMCs), Coop. Banks and RRBs Deals in non-trade transactions.

AD Category III: Select Financial Institutions.  Deals in transactions incidental to foreign exchange activities.

Mandate to RBI under FEMA:

As per sec.10 of FEMA, Reserve Bank may by regulations, prohibit, restrict or regulate the following transactions between resident and non-resident persons/entity:

Transfer/issue of security

Borrowing and lending in foreign exchange and INR

Deposits/investments

Export/import, holding of currency

Guarantee in respect of any debt, obligation or other liability

RBI is empowered to notify regulations to give effect the FEMA through AP(DIR Series) circulars.

Forex Transaction under FEMA:

Current Account Transactions: Visible trade comprises receipt/payment towards goods/merchandise. (Export/Import)

Invisible trade comprises remittances, divided and interest payment, income and expenditure etc.

Capital Account Transactions: Capital account transactions affects the assets and liabilities outside India of persons resident in India or assets and liabilities in India of persons resident outside India and includes: borrowing and investment, raising foreign currency loans, maintenance of foreign currency accounts in India and abroad, acquisition of immovable property in India and abroad etc.

Balance of Trade: It is a difference between visible export and visible import.

Balance of Payment: Balance of Payment is the summary of the transactions of the residents of country with the non-residents outside India during a specified period which includes visible/invisible export/import and investment and borrowings:

Liberalized Remittance Scheme:

Eligibility: Resident individuals including minors including proprietorship firms are eligible. Corporates, societies and trusts are not eligible under this scheme.

Amount: USD 250000/ equv. per FY per family member subject to individual family members complying to the terms and conditions of the scheme. It is mandatory to have a PAN to make remittances under the scheme. Current Account Transactions:

All facilities (including private/business visits) for remittances earlier under Schedule III have been subsumed under overall limit of USD 250000/- equv.

Capital Account Transactions:

Opening of foreign currency accounts abroad.

Purchase of property abroad.

Making investments abroad.

Setting of wholly owned subsidiaries and joint ventures abroad.

Loans included in INR to non-resident Indians close relatives as defined in Companies act ,2013 and it will be credited to NRO account of NRI.

Banks should not extend any type of credit facilities to resident individuals to facilitate remittance under LRS.

Repayment of loan shall be made by way of inward remittance/debit of NRO/NRE/FCNR(B) account.

Foreign Exchange Remittance Facilities for Residents:

Nepal and Bhutan: No release of forex for travel or trade.

Release of Forex:

i) Cash upto USD 3000 equv. Balance in TC or Bank draft or any other mode.

ii) For Iraq or Libya, cash upto USD 5000 equv. Balance in TC or bank draft or any other mode.

iii) For Iran, Russian Federation and other Republic of Commonwealth countries, no ceiling for cash.

Time for purchase of Forex: Forex to be used within 180 days of purchase.

Mode of Purchase: In cash upto Rs.50,000/- above this, to the debit of account of the purchaser.

Surrender of Unspent Forex: 180 days from the date of return or from the date of purchase, if not utilized.

Retention of Forex: USD 2000 equv., lawfully acquired. No restriction on coins.

Import of Foreign Exchange from Abroad: Any amount subject to declaration on Currency Declaration Form (CDF), when total amount exceeds UISD 10,000/- equv.  or value of foreign currency notes exceeds USD 5000/- equv. declaration should be Made before custom authorities through CDF on arrival in India.

Export/Import of Indian Currency by Residents and Non-Residents: Upto Rs.25,000/- each to or from any country except Pakistan and Bangladesh, where amount is Rs.10,000/-.

Nepal and Bhutan: There is no restriction for Indian currency for denomination of currency notes upto Rs.100/- denomination. However, upto Rs.25,000/- for denomination of Rs.200 and Rs.500/- denomination currency notes.

Other Remittance Facilities for Persons other than individual:

i) Donation upto 1% of forex earnings in previous three FY or USD 5000,000/- whichever is less.

ii) Commission, per transaction, to agents abroad for sale of residential flats/commercial plots in India upto USD 25000/- or 5% of inward remittance whichever is more.

iii) Remittance of USD 10,000,000 per project for any consultancy service for infrastructure projects and USD 1000,000 per project for other consultancy services procured from outside India.

iv) Remittance upto 5% of investment brought into India or USD 100,000 whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Procedures and Tools for Exchange Rate Mechanism:

1. Concept - Foreign trade leads to foreign exchange and in the absence of single currency for the whole world there is a need to convert one currency to another and the mechanism by which this process is done is known as foreign exchange and the tool used for this conversion is the exchange rate.
2. Forex Market - The currencies of different countries are considered as commodities and when these commodities are bought and sold, there will be a market to facilitate this trade. This market has its own features:

• Foreign exchange market is described as an over the counter (OTC) market, with no physical presence.
• Foreign exchange market operates through telecommunication networks.
• Foreign exchange market is a 24-hour market, situated throughout the different time zones of the globe.

3. Forex Market Participants - Any person engaged in transacting a currency with another is a participant in the foreign exchange market. The main players in forex market are :

• Merchants – Importer & Exporters as well as Individuals
• Commercial Banks – For all transactions, a merchant utilizes the services of an authorized dealer i.e. commercial banks. So, banks with an exposure to international trade offer services of conversion of one currency to another through various types of transactions permitted under FEMA.
• Central Banks – Central Banks (in our case is RBI) are entrusted with the responsibility of maintaining the external value of the country’s currency. The central bank ensures orderliness in the exchange rate movement through “Intervention” in the forex market by buying and selling of the US Dollars.

4. Factors affecting Foreign Exchange Rates Movements - The exchange rates are derived through market forces as such there are several factors affecting the exchange rate movement, such as 1) Balance of  payment  2) Inflation 3) Interest Rates 4) Market and political factors 5) Exchange control 

5. Various Terms in Exchange Rates :

 Direct quotation – If the one unit of foreign currency is expressed in terms of number of units of home currency i.e. 1 USD = Rs. 65.10. or 1 USD = HKD 7.7530

 Indirect quotation – If one unit of home currency is expressed in terms of no. of foreign currency i.e. 1 GBP = US$ 1.5290, 1 EURO = US$ 1.1220, 1 AUD = US$ 0.7650

 Two-way Quotation - The interbank market always quotes rates in ‘Two-way Quotation’ i.e. 1USD =Rs.65.10/12, The first rate, i.e. 65.10 is bank’s buying rate and 65.12 is bank’ selling rate.

 Bid and Offer- If the quoting bank is quoting above rate as 1USD = Rs.65.10/12, it means, 65.10 is Bid Rate (buying) and 65.12 is Offer rate (selling).

Spread - The difference between the buying and selling rate (Bid and Offer Rate) i.e. 65.10/12, is known as spread, which according to the quoting bank is sufficient to take care of exchange rate fluctuation at that point of time.

 Buy low sell high - forex market function on the maxim of ‘buy low sell high’.

 Cross Rates - The international markets adopt the USD as the standard currency and the exchange rates are quoted in terms of or against this currency. i.e. 1 USD = CHF 0.9590/9600 or 1GBP = USD 1.5660/5670.

                       The exchange rate between a pair of currencies, neither of them being US dollar, is worked by using the rate for each of these currencies in terms of US dollar. Such rate is known as ‘Cross Rate’ and the method for calculation is called as ‘Chain Rule”

                       In our country USD is the intervention currency. Therefore, only USD/INR quotes are available in the Indian Market and the exchange rate of rupee with all other currencies is derived from this rate through crosses. 

Value Date - This is the date on which exchange of currencies actually take place irrespective of the date of deal. Based on this concept, forex market has the following type of deals and offer different exchange rates in the market for execution of said deals.

Date of deal                 Type                 Value Date                    Execution of deal

23.10.15 (Friday)   Cash/Ready 23.10.15 (Friday)     Execution on same day  

23.10.15 (Friday) Tom             26.10.15 (Monday) Execution on next business day    

23.10.15 (Friday) Spot            27.10.15 (Tuesday) Execution on second business day

23.10.15 (Friday) Forward      28.10.15 (Wednesday) Execution beyond spot onwards

Forward Exchange Rate – The exchange rate for a settlement date beyond spot date is called the forward rate and it has two components :

spot

forward points or differentials

• Premium/Discounts - When a currency is costlier in future (forward) as compared to spot rate, the currency is said to be on premium vis-à-vis other currency. Premium is always added to both buying and selling rate.

                      When a currency is cheaper in future (forward) as compared to spot, the currency is said to be at a discount vis-à-vis other currencies. Discount is always deducted from both buying and selling rates. (For illustration, please see/discuss presentation/case study)

• Base currency – It is the currency which is bought and sold. It may be noted that it is the base currency for which premium/discount is mentioned.
• Forward rate quotation- Forex market always quote the spot rate. The forward rates are expressed in terms of differential to spot rates. (Illustration see presentation)
• Merchant Rates -  Importer and exporters and others who are required to buy or sell foreign currency are popularly known as  ‘Merchants’ and the rates quoted by the AD Banks for their merchant transactions are known as ‘Merchant Rates’ (For calculation of merchant rates by the banks, see/discuss presentation/case study)

 Foreign Exchange Risk Management:

Foreign exchange risk may be defined as the risk that a corporate/bank may suffer losses as result of adverse exchange rate movements during a period in which it has an open position, either spot or forward or a combination of two, in an individual foreign currency. 

                                                                                               Or 

It may refer to losses that an international financial transaction may incur due to currency fluctuation.  Also known as Currency risk, foreign exchange risk or Exchange rate risk. 

Types of Foreign Exchange Risk

Transaction Risk: The risk related to sales or purchases in foreign currency. It arises whenever receivable or payables entered and settled at different timing on account of exchange rate fluctuations. It affects the cash flows.

Translation Risk: The risk related to holding assets or liabilities in a foreign currency and these have to be shown in books of account in domestic currency. This arises when assets or liabilities are valued at current rates. The risk directly affects the accounting earning of a company. It does not affect cash flows.

Economic Risk: It relates to the effect of unexpected exchange rates on the future operating cash flows. It refers to when a company’s market value is continuously impacted by an unavoidable exposure to currency fluctuation.

Understanding Hedging: Hedging is a method of protecting against changes in currency exchange rates. It eliminates risk resulting from transactions in foreign currencies and limits the impact of foreign exchange movements on profitability.  

Derivative Instruments:

Derivative instruments are management tools derived from underlying exposures such as currency, commodities, shares, bonds or any other indices used to reduce or neutralize the exposure on the underlying contracts.

Derivative Market: Derivatives could be over the counter (OTC) i.e., made to order or exchange traded facilities which are standardized in terms of quantity, quality, start and ending dates.

Participants: Users and market makers

Purpose: It enables transfer of various financial risks to entities who are better suited to manage them.

Derivative/Hedging Instruments:

Forward Contracts:

Definition:  forward contract is an agreement between bank and customer where bank agrees to buy/sell foreign exchange at a future date at a rate fixed on the date of contract. However, it is obligatory on the part of the customer to fulfill the contract.

Types of Contracts: Fixed date basis, Option forward period basis.

Early Delivery: Delivery before the due date. Bank shall recover/pay swap difference and interest on outlay/inflow of funds.

Cancellation: Request to be obtained on or before maturity of contract subject to recovery/pay the exchange difference.

Extension: Extension of contract is by way of cancellation/rebooking subject to recovery of charges and other guidelines.

Automatic Cancellation: The overdue contracts will be automatically cancelled on the 3rd working day after the maturity date. However, the contract may be cancelled before the 3rd working day with the specific request from the customer.

Option Contracts:

Definition: An option contract confers on the buyer the eligibility to buy or sell a sum of foreign currency at a predetermined rate on a future date without investing him with an obligation to do so. On the due date the buyer of the option may elect to buy or sell or he may choose to let it go unused.

Types of Option: 

American Option: The option buyer can exercise his right on any day during the currency of the option.

European Option: The option buyer can exercise his right only on maturity date. RBI has allowed to issue only European Option.

Features of Option contracts:

Parties: Option buyer and option seller

Call option: Buyer has right to purchase the currency

Put option: Buyer has right to sell the currency

Premium: Consideration for the seller to offer the right to the buyer.

Strike price: Exchange rate fixed for the contract

Maturity: Due date on which the contract expires.

Execution: When the buyer can exercise his right.

At the Money: Strike price is equal to the current spot rate.

In the Money: Strike price is favorable in relation to current spot rate

Out of Money: Strike price is unfavorable in relation to current spot rate.

Currency Future Contracts

Definition: Future contract conveys the right to purchase or sell a specified quantity of a foreign currency at a fixed exchange rate on a specified future date. Currency future contracts are traded in recognized stock exchanges.

Features of Future Contracts:

Currency:  USD, GBP, EURO and Yen against INR

Size: USD, GBP, EURO = 1000, Yen = 100000

Quotation: In rupee terms.

Maturity: Monthly maturities ranging from 1 to 12 months.

Due Date: Contract expires last working day of month.

Last Trading Day: Two days before the expiry date.

Settlement Price: Fixed on last trading day at RBI reference rate.

Settlement: The difference between strike price and settlement price exchanged between buyer and seller.

Trading Hours: As per market regulator.

Swaps:

The word swap means exchange. Swap in foreign exchange market is different from swap in the financial market.

Foreign Exchange Swap: Involve simultaneous sale and purchase of one currency for another for different periods.

Financial Swap: It is an arrangement whereby the financial streams are exchanged between two parties. The prices concerned are exchange rates/interest rates.

Correspondence Banking:

Introduction:

i) It is a relationship between two banks having mutual accounts with each other or one of them having an account with each other.

ii) A relationship and servicing of banking needs, as an agent without having an account relationship.

iii)  Correspondent banking is the practice whereby a bank establishes a presence in an over-costful or otherwise accessible market by means of relationship with a local bank.

Correspondent Banking Services:

i) Clearing house function

ii) Payment and collection

iii) Letter of credit and banker’s acceptance, guarantees

iv) Trade development and referrals

v) Credit services – loans and placements

vi) Foreign exchange services

vii) Travel services

Types of Bank’s Accounts:

Nostro Accounts: This is an account of a bank in another country in Foreign Currency. It means ‘Our account with you’. For example, SBI Mumbai maintains a USD account with CitiBank, Newyork is Nostro Account in the books of SBI, Mumbai.

Vostro Account: This is an account of foreign bank in our currency. It means ’Your account with us’. For example, Citi Bank, Newyork, maintaining a rupee account with SBI Mumbai is a Vostro account in the books of SBI Mumbai. 

Loro Account: It refers to accounts of other banks. It means ‘Their account with them’. For example, CitiBank referring to the rupee account of American Express bank with SBI Mumbai or some other bank referring to the USD account of SBI Mumbai with CitiBank Newyork. It is a third-party account.

Mirror Account: While a bank maintains a Nostro account with a foreign bank in foreign currency, it has to keep any of the same in its own books. This is more or less a reflection or a shadow of the Nostro account. The entries in the Mirror account are used for reconciliation of entries in the Nostro account. The Mirror account is maintained in two currencies, one of which is foreign currency and other one is home currency.

Electronic Modes of Transmission/Payments:

SWIFT: Society for Worldwide Interbank Financial Telecommunications

CHIPS: Clearing House Interbank Payment System (Major payment system in USA)

FEDWIRE: Payment System operated by Federal Reserve Bank in USA

ABA No.: It is the number allotted by the Federal Reserve Bank of USA to banks participating in Fedwire to identify the senders/receivers of payment.

CHAPS: Clearing House Automated Payment System (Major payment system in UK)

TARGET: Trans-European Automated Real-Time Gross Settlement Express Transfer System (Major payment system for Euro)

RTGS: Real Time Gross Settlement for the banks in India. RTGS system is managed by RBI and IDRBT, Hyderabad. For customer remittances, the minimum amount for RTGS transfer is Rs.2 lac.

NEFT: National Electronic Fund Transfer. It is also a facility for banks in India, which runs on a batch process method. 

Types of Person-Definitions:

Non-Resident Person: As per FEMA, a person who is not a resident, is called a non-resident.

Person Resident in India: A person residing in India for more than 182 days during the course of the preceding financial year.

Non-Resident Indian (NRI): A person holding an Indian passport, who has gone abroad for an indefinite period of stay outside India.

Person of Indian Origin (PIO): i)A foreigner, whose parents or grandparents were citizen of India (not being a citizen of Pakistan, Bangladesh, Sri-Lanka, Afghanistan, China, Nepal, Bhutan and Iran)

ii) A foreigner spouse of an Indian citizen.

iii) A person, who holds an Indian Passport at any time.

NRI Accounts – Rupee and Foreign Currency Accounts:

Non-Resident (External) Rupee Account (NRE):

NRE accounts can be opened and maintained by Non-resident Indians by remittance from abroad or transfer from another NRE account. It can also be opened by tendering foreign currency notes/TC by NRI during his visit to India provided the AD is satisfied about his non-resident status.

NRE accounts can be opened as Saving, Current, term Deposit or Recurring Deposit.

Joint accounts can be opened in the name of two or more NRIs. It can also be opened with resident close relatives as defined in Companies Act, 2013 on ‘Former or Survivor Basis’.

Residents can operate the account on the basis of power of attorney granted by the account holder provided such operations are restricted to withdrawals for local payments or remittance to account holder himself through banking channels.

Nomination facility is available in favour of resident or non-resident. 

Local funds will not be credited to this account.

Principal and interest can be repatriated, however exchange risk to the account holder.

Loan against security of funds held in account-to-account holder, to third party and loans outside India. However, loan amount will be adjusted with inward remittance or debit to NRE or FCNR account.

No tax in India on interest payment.

Foreign Currency Non-Resident (Banks) Accounts (FCNR(B):

NRIs and PIOs are permitted to open FCNR accounts and the account can be opened in USD, GBP. EURO, YEN, CAD and AUD.

It is a term deposit account. Minimum maturity one year and maximum maturity five years. No interest is payable if cancelled before one year. 

Joint accounts can be opened in the name of two or more NRIs. It can also be opened with resident close relatives as defined in Companies Act, 2013 on ‘Former or Survivor Basis’.

Nomination facility is available in favour of resident or non-resident. 

Principal and interest can be repatriated, however, there is no exchange risk to the account holder.

Loan against security of funds held in account-to-account holder, to third parties and loans outside India. However, loan amount will be adjusted with inward remittance or debit to NRE or FCNR account.

No tax in India on interest payment.

Non-Resident (Ordinary) Rupee Account (NRO):

These accounts are rupee accounts and can be opened and maintained by any person resident outside India and also by foreign tourists, who are on short visit to India on tourist visa. The accounts are to be opened by sending fresh remittances from abroad for transfer of funds from NRO/NRE/FCNR accounts.

Typically, when a resident becomes a non-resident, his domestic rupee account has to be redesigned as an NRO account.

This is basically a domestic account of an NRI to facilitate credits which accrue in India, from investments that were made prior to his leaving the country, rent, LI maturities, income from other investments made on non- repairable basis.  No cash will be deposited in the account.

The account can be opened as Saving, Current, Recurring and Term Deposit. The interest on NRO accounts is subject to income tax.

The account may be held jointly with resident individual on’ Former and Survivor Basis’

Opening of account by individual /entities of Pakistan nationality and entities of Bangladesh requires prior approval of Reserve Bank However, individuals of Bangladesh and Afghanistan may open NRO accounts subject to valid visa or valid residential permit issued by Foreign Regional Registration office (FRRO).

Outward remittance upto 1 million per FY is allowed out of this account.

Nomination facility is available. 

Operations by Power of Attorney holders are allowed for local payments and remittance to account holders.

Account of Foreign National:

NRO (Saving/current) can be opened by foreign nationals of non-Indian origin visiting India with funds remitted from outside India or by sale of foreign exchange brought by them.

The balance in the NRO accounts may be remitted back in foreign currency on departure provided the account has been maintained for a period not exceeding six months and the account has not been credited with local funds.

RBI permission is required for remittance of funds, if the account exceeds six months.

 Accounts of Foreign Students:

NRO accounts can be opened on the basis of passport, photo and admission letter.

Local address proof to be submitted within 30 days, when monthly withdrawal will be upto Rs.50,000/- and FC inward remittance upto USD 1000/-.

On receiving local address proof, normal operation is allowed in the account. 

Rupee Account by Citizen of Bangladesh, Pakistan and Afghanistan:

 AD may open one NRO account for a citizen belonging to minority communities, namely, Hindus, Sikhs, Buddhists, Jain, Parsis and Christians residing in India and who has been granted a Long-Term Visa (LTV) by the Central Govt. In case if such person has applied for LTV, the account will be opened initially for 6 months.

Account for Nepal and Bhutan: 

Person Resident of India: When a person resident in India leaves India for Nepal and Bhutan for indefinite stay, his existing account will continue as a resident account.

Person Resident of Nepal and Bhutan: NRE/FCNR account of resident in Nepal and Bhutan, who are citizen of India, /PIO, provided the funds are remitted in free foreign exchange. However, interest earned in these accounts can be remitted only in Indian rupees.

AD may open and maintain Rupee accounts of residents of Nepal and Bhutan.

Investments by NRIs:

NRI can invest on repatriation/non repatriation basis in shares/securities. Payment for acquisition by way of inward remittance/debit to NRE/FCNR account. There is no limit for investment on non-repairable basis but sale proceeds will be credited to NRO account.

NRIs are allowed to invest in immovable property in India other than agricultural/plantation/farmhouse, and transfer the same to any person resident in India or to a person resident outside India, who is an Indian citizen. Payment for said investment will be made by remittance outside India or to the debit of NRE/FCNR account.

NRIs can also acquire property by way of gift/inheritance from a person of resident in India or person resident outside India, who is citizen of India or PIO resident outside India.

NRIs are not permitted to make investment in Small Saving Schemes and Public Provident Fund (PPF).

Banks may grant housing loans to NRIs in rupees but the same will not be credited to NRE/FCNR account, however repayment will be made by remittance from abroad or to the debit of NRE/FCNR /NRO account or any rental income generated from the property acquired.

 Documentary Letter of Credit:

It is an instrument by which a bank undertakes to make payment to a seller on production of documents drawn in accordance with the terms of the credit.

The letter of credit governed by the provision of UCPDC-600.

There are 39 articles in UCP-600.

Types of Letters of Credit:

Irrevocable LC: Issuing bank cannot amend/cancel LC with the consent of beneficiary (Seller)

Revocable LC: Issuing bank can amend/cancel the LC without the consent of beneficiary (Seller)

Restricted LC: Where a specified bank is designated to pay, accept or negotiate the documents.

Confirmed LC: Where the advising/other bank at the request of the issuing bank adds confirmation that payment will be made.

Transferable LC: At the request of the opener, the LC can be transferred to one or more parties. But it can be transferred only once.

Back-to-Back LC: Where an exporter request for opening of LC in favour of local suppliers in cover of original LC received from his buyer.

Red Clause LC: Where the LC permits the negotiating bank to grant packing credit to the beneficiary at issuing bank’s responsibility.

Green Clause LC: LC permits the advance for storage of goods in addition to packing credit advance.

Stand by LC: It is similar to a performance bond or guarantee. The beneficiary can submit the claim along-with requisite documents to the issuing bank.

Revolving LC: The amount of drawing made under LC would be reinstated and made available to the beneficiary again. 

Interpretations Used in UCPDC-600:

A credit is Irrevocable: A credit is Irrevocable, even. If there is no indication to that effect.

On or about: An event is to occur during a period of 5 calendar days before until 5 calendar days after the specified date, both start and end date included.

To, until, from and between: To determine a period of shipment include the date mentioned and the word ‘before and after’ exclude the date mentioned.

From and after: To determine maturity date exclude the date mentioned.

First half and second half: Related to Ist to 15th and 16th to the last day of the month, all dates inclusive.

Beginning., middle and end: Relates to Ist to 10th, 11th to 20th and 21st to last day of the month, both start and end dates inclusive.

Date of issuance of transport document: If the transport document indicates, date of dispatch taking in charge, shipped on board, this date will be deemed to be the date of shipment.

Trans-shipment: Unloading from one means of conveyance and reloading to another means of conveyance during the carriage.

Clean transport document: Bearing no clause of notation expressly declaring a defective condition of goods or packaging.

Insurance: If there is no indication, the amount of insurance coverage must be at-least 110% of CIF/CIP value of goods.

Commercial invoice: Description of goods must correspond with the credits. In other documents, the goods may be described in general terms.

Time for Scrutiny of documents: The issuing bank, the confirming bank, if any, or a nominated bank shall each have 5 banking days following the day of receipt of the documents, to examine the documents and determine whether to take up or refuse the documents and to inform the party from which it received the documents accordingly.

Other ICC Rules:

ISBP: International Standard Banking Practices. The current version of ISBP-745 was released in April 2013.

URR: Uniform Rules for Bank-to-Bank Reimbursement. The current version of URR-725 came into effect from Ist October, 2008.

URC: Uniform Rules for Collection. The current version is URC-522.

Incoterms:

Incoterms are a series of International recognized, standardized trade terms published by the ICC and widely used in international contracts of sale as well as in domestic trade also. 

Incoterms rules mainly focus on obligation, costs and risks associated with transportation and delivery of goods.

Incoterms 2010 effective from Ist January, 2010

Incoterms 2020 effective from Ist January, 2020

Both Incoterms contain 11 items in two groups based on mode of transport.

7 Incoterms are for any mode of transport

4 Incoterms are for sea and inland waterways transport

Presently Incoterm 2010 and Incoterm 2020, both are operational.

Purpose of Incoterms:

Who does what?

Who pays for what?

When risk in the goods passes.

When delivery occurs.

Who bears the insurance?

Who will do export/import clearance?

Who will pay other costs pertaining to delivery of goods?

Incoterms do not cover:

Do not cover service contracts.

Do not determine transfer of title.

Do not determine breach of contract.

Do not protect parties from their own risk of loss.

Do not cover goods before or after delivery.

Explanation of Incoterms: