Summer Internship Project

LOGISTICS

AND

INTERNATIONAL FINANCE

PROCEDURES

IN

ORIENT CRAFT LIMITED

Submitted in Summer Internship of MFM program

2011-2013

 

  Submitted by

RAVI KANT VERMA

M/MFM/22/11

Company Guide: Faculty Guide:

Mr. Shatish Das Miss Sonali Saldanha

GM (Logistics)

Orient Craft Ltd.

 National Institute of Fashion Management

Kharghar, Mumbai

July 2012

ACKNOWLEDGEMENT

I would like to express my sincere gratitude to all those, who helped me in completing

this project. I want to thanks all the staff of ORIENT CRAFT LTD., 7D for guiding

and helping me throughout. I would like to thanks Mr. Satish Das (GM, LOGISTICS),

Mr. Jitin (AGM, FINANCE), Mr. Praveen (MANAGER, BANKING), Mr. Yogesh

(AM, FINANCE), Mr. Ankaj (AM, PRE SHIPMENT DEPTT.), Mr. Rakesh (AM,

POST SHIPMENT DEPTT.) for their guidance, continuous support and cooperation

throughout the internship.

I would also like to thank Miss Solani Saldana for guiding me in the project and helping

in completing the project successfully and the faculty members.

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CERTIFICATE

This is to certify that the project work done on “LOGISTICS AND

INTERNATIONAL FINANCE PROCEDURES” Submitted to National

Institute of Fashion Technology, Mumbai by RAVI KANT VERMA in

partial fulfillment of the requirement for the award of Master of Fashion

Management, is a bonafide work carried out by him under my supervision

and guidance. This work has not been submitted anywhere else for any other

degree/diploma. The original work was carried out during 1st June to 30th

July in ORIENT CRAFT LIMITED.

Date:

Name of the faculty mentor:

Miss Sonali Saldanha

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TABLE OF CONTENTS

SL. NO. CONTENTS PAGE

NO.

EXECUTIVE SUMMARY 6

CHAPTER 1 INTRODUCTION 8

CHAPTER 2 INDUSTRY PROFILE 11

2.1 WORLD APPAREL INDUSTRY 10

2.2 INDIAN APPAREL INDUSTRY 12

CHAPTER 3 COMPANY PROFILE 20

3.1 INTRODUCTION 20

CHAPTER 4 ABOUT THE TOPIC 35

4.1 EXPORT PORCESS 35

4.1.i EXPORT FINANCING 57

4.2 IMPORT PROCESS 65

4.2.i IMPORT FINANCING 68

CHAPTER 5 CONCLUSIONS 73

CHAPTER 7 BIBLIOGRAPHY 77

4

SL. NO. FIGURE NUMBER PAGE NO.

1 Fig 1 India’s Foreign trade

1 Fig 2 Composition of Sales

2 Fig 3 Flow of documents against payment

3 Fig 4 Flow of documents against acceptance

4 Fig 5 Flow of letter of credit

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EXECUTIVE SUMMARY

The purpose of this report is to literally act as a window to the project undertaken as a

part of the internship with the organization ORIENT CRAFT LIMITED. The objective of

the project is to understand that how EXIM logistic procedures and how the funds for

them are generated. OCL being 100% export house is the No.1 Government recognized

export house. And there main objective is to provide their buyers a quality product as per

their requirements. OCL has 16 export house units in Delhi and NCR.

The company is engaged not only in manufacturing clothes but also owns home

furnishing and accessories designing. Company’s maximum revenue is generated from

export of clothes. The well renowned names in the world are their customers; Espirit,

levis, Mark & Spencer, GAP, D&G, Tommy Hilfiger, DKNY (Donna Karan Newyork)

etc.

The company has a production capacity of 50000 dz. Woven and equal number of Knit

Garments every month. The major exports comprise dresses, skirts, knitted shirts/T-

shirts, men’s shirts, blouses, jacket, co-ordinates, kids wear, rompers, outerwear, duvet

cover and pillow covers mostly to USA, Europe and Canada.

The main objective of the project is to understand the “management of funds for export

import done by export houses for running their export import activities and logistics

procedures”. How all the activities in an export house take place? Orient craft being an

export house, still does import. They import the trims/ accessories and fabrics as per

buyer’s requirement. So, that the quality of the garment is same when received by all the

exporters from across the world.

The export procedure starts from merchandisers getting the orders and then confirming

the order by sending the samples as per the requirements of the buyer. After the

confirmation of the order, taking the purchase order, importing the fabrics and trims, then

the documentation procedure starts. From pre shipment department to post shipment

department and banking and finance department arranging funds to export the shipment.

6

Each and every export and import procedures require finance to proceed further. Without

it, export import activities are not possible.

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CHAPTER 1

INTRODUCTION

The term export is derived from the conceptual meaning as to ship the goods and

services out of the port of a country. The seller of such goods and services is referred to

as an "exporter" who is based in the country of export whereas the overseas based

buyer is referred to as an "importer". In International Trade, "exports" refers to selling

goods and services produced in home country to other markets.

Any good or commodity, transported from one country to another country in a legitimate

fashion, typically for use in trade. Export goods or services are provided to

foreign consumers by domestic producers.

Export of commercial quantities of goods normally requires involvement of the customs

authorities in both the country of export and the country of import. The advent of small

trades over the internet such as through Amazon and e-Bay has largely bypassed the

involvement of Customs in many countries because of the low individual values of these

trades. Nonetheless, these small exports are still subject to legal restrictions applied by

the country of export. An export's counterpart is an import.

Table showing India’s Foreign Trade for the period of:-

2009-2010

Particulars Amount in (Rupees crores)

Total Exports 845125.2

Total Imports 1356468.7

Trade Balance for the period -511343.5

Fig 1

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PROBLEMS

There are few problems which need to be solved before India makes a mark for itself in

the export sector. The Indian goods have to be of superior quality. The packaging and

branding should be such that countries are interested to export from India. At the same

time India must look for potential market to sell their goods. The government policies

amendments can give a boost to the exports.

Though India has not been affected to the same extent as other economies of the world,

yet our exports have suffered a decline in the last 10 months due to a contraction in

demand in the traditional markets of our exports

ADVANTAGES OF EXPORT IMPORT

Enhance your domestic competitiveness

Increase sales and profits

Gain your global market share

Reduce dependence on existing markets

Exploit international trade technology

Reduce dependence on existing markets

Extend sales potential of existing products

Stabilize seasonal market fluctuations

Enhance potential for expansion of your business

Sell excess production capacity

Maintain cost competitiveness in your domestic market

 

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DISADVANTAGES OF EXPORT IMPORT

You may need to wait for long-term gains

Hire staff to launch international trading

Modify your product or packaging

Develop new promotional material

Incur added administrative costs

Wait long for payments

10

CHAPTER 2

INDUSTRY PROFILE

2.1 WORLD APPAREL INDUSTRY

Global garment exports are valued at more than US$ 310 billion a year, of which

the world's top 15 clothing exporters account for more than 80%.

Developing countries in Asia continue expanding their Garment Industry due to

their very-low-cost production.

India is the second most preferred country after China for textile and apparel

sourcing. Its Apparel industry is likely to achieve an export target of US$ 28

billion by 2012-13. Factors effecting like vast sources of raw materials, low labor

costs, entrepreneurship and design skills of Indian traders, changes in the policies

to open up Indian economy to the outside world etc.

Bangladesh has emerged as a key player in RMG sector (Ready Made Garment

Industry).

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2.2 INDIAN APPAREL INDUSTRY

14% of total industrial Production and 30% of total exports (in India).

Current share in world clothing export – 3.5-4 %

One of the largest foreign exchange earners.

2nd largest exporter and producer of Apparel Products.

30,000 manufacturing units and 35 million employed.

Industry is dominated by sub-contractors and consists mainly of small

units.

55% of investment in technology done for spinning.

Supply base is medium quality with small volume.

During 2008, exports of apparel and textile products to US declined by

0.43% in value terms though export volumes increased by 7.49% due

value increase in Rupee

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PRODUCTS

Garments and Clothing

Home Decor and Furnishings:

The majority of home textiles are produced in Asia. Lower prices and high

volume products have contributed to the expansion of exports particularly from

China and India.

Handlooms:

30 lakh Weavers, 23% of total cloth produced, promoted through input support,

publicity, market support, up gradation of technology, welfare measures.

Textiles, Fabrics and Yarns:

8% of GDP, 30% of export earnings, 2nd highest mill area after china, facing

competition on quality and value addition factors.

Leather- Clothing and other Products:

Comprises of jackets, footwear, etc. with 7% share in exports, major centers

include Chennai, Kanpur, Agra, Jalandhar & Delhi employing 15 lakh people.

50% consumption within India. Top importers: Germany, USA and UK.

Apparel Accessories- Industry and Products:

One of the major manufacturers of accessories with low price and quality

products.

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PRODUCTION CENTRES

LUDHIANA

TIRUPUR

NEW DELHI

BANGALORE

MUMBAI

CHENNAI

JAIPUR

COMPETITIVENESS

Caters basic requirement of people.

Large skilled/ unskilled workforce with cheap rate.

Sound Export Potential

Comprises of effective Supply Chain( Diverse Fabrics to large market)

Heavy Production Capacity

India has a large fiber base

Have a large and organized mill area

Economic Upgraded Technology

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DOMESTIC INDUSTRY

Domestic market has grown from US$ 23 billion to US$ 30 billion, exports has

increased from around US$ 14 billion to US$ 19 billion (04-06 to 06-07  )

Current share in world export 3.5-4%

Men’s Apparel 46%, Women – 17%, Kids – 37%

50% of prod. need to be exported.

2,000 manufacturer-exporters export apparel, while the roughly 26,000 merchant-

exporters serve as export brokers.

India has more than 6,000 knitting units registered as producers or exporters; the

majority are SSI units

MAJOR EXPORTERS IN INDIA

Madura Garments (Indian Rayan)

Arvind Mills Ltd

Raymonds Ltd.

Alok Industries Ltd.

Welspun India Ltd.

Bombay Dyeing

JNS Fabrics & Exports.

Primex Apparel Sourcing Services

The Outlook Sourcing Services

Pratibha Syntex Pvt. Ltd

Provogue India Ltd.

Wills Lifestyle

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Orient Craft Limited

Gokaldas Exports Limited

COMPETITORS

China

Vietnam

Bangladesh

Indonesia

Mexico

Hong Kong

Dominican Republic

Korea

Thailand

Philippines

QUALITY STANDARDS

For textile and apparel industry product quality is calculated in terms of quality

and standard of fibers, yarns, fabric construction, color fastness, surface designs

and the final finished garment products. However quality expectations for export

are related to the type of customer segments and the retail outlets.

Only limited use of various chemicals like azo dyes, heavy metals, odour, etc

should be permitted to prevent ecological requirements.

Apparel Industry have ISO Certification

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Operation incurs heavy expenditure to the manufacturers. ISO standards are

implemented to lower its operating costs and improve the quality of its output,

ultimately increasing the level of customer satisfaction.

ISO standards enable the industry to enhance the quality of raw material input,

thereby strengthening the quality of the ultimate/final product, which leads to

performance improvement, factual approach towards the decision making process,

and a mutually benefiting suppliers relationship.

Right from yarn purchase to shipment every activity is governed by documented

standard operating procedures and instructions, which complies with the

requirements of ISO 9001.

Each process is carried out with the PDCA process approach (i.e. Plan-Do-Check-

Act), which gives better results in achieving better quality and on time shipments.

Inspection and testing at each stage of manufacture assures quality requirements

are met.

Internal audit and external audit performed periodically ensures effective

implementation of Quality Management System

Periodical feedback from customers reveals their level of satisfaction

Standards are specified on selection of Cotton Yarn.

FOREIGN TRADE POLICY

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Clothing and accessories are classified under HS code 61 and 62. All the products

listed under these codes are freely importable. Further more the manufacturers of

these products are exempt from obtaining a license to manufacture though they

are required to file an Industrial Entrepreneur Memoranda (IEM) in Part 'A' with

the Secretariat of Industrial Assistance (SIA), and obtain an acknowledgement

and part B after the commencement of commercial production. Certain items of

clothing are reserved for small scale industries.

Most of the articles falling under HS 61-62 carry an import duty of 56.83 per cent

which includes 30 per cent basic duty, 16 per cent additional duty and 4 per cent

special additional duty. India has reduced peak rate of customs duty to 20%, in

view of the WTO Agreement.

In the foreign trade policy, certain amendments and inclusions have been done

pertaining to specific sectors of textiles and garment specially the handlooms.

Handlooms

Specific funds would be earmarked under MAI/ MDA Scheme for

promoting handloom exports.

Duty free import entitlement of specified trimmings and embellishments

shall be 5% of FOB value of exports during the previous financial year.

Duty free import entitlement of hand knotted carpet samples shall be 1%

of FOB value of exports during the previous financial year.

Duty free import of old pieces of hand knotted carpets on consignment

basis for re-export after repair shall be permitted.

New towns of export excellence with a threshold limit of Rs 250 crore

shall be notified.

The textile and apparel industry is an important one to India, contributing

1.6% of industrial production and 30 % of total exports.

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Import duties on capital equipment are low (the majority of the capital

equipment used by the apparel industry, like sewing machines, can be

imported at 5% basic customs duty).

Fabrics can be imported duty-free if made up into garments and re-

exported

Import duties on fabrics and other raw materials are duty free for export

production.

The apparel industry can import duty free specified trimmings and

embellishments like Fasteners, Rivets, Garment Stay, textile, Badges,

Sewing Thread, Sequin, Tape & others for export production.

CHALLENGES TO INDIAN APPAREL INDUSTRY

Policies of the Government of India favoring small firms

Small units use low levels of technology and produce mostly low value-added

goods of low quality that are less competitive globally

India’s Apparel industry depends heavily on domestically produced cotton

Small Unit sector had restricted the entry of large-scale units and discouraged

investment in new apparel manufacturing technologies

India have high energy and capital costs, raw material costs, multiple taxation etc.

Appreciation of Rupee

Low Institutional Support

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CHAPTER 3

COMPANY PROFILE

3.1 INTRODUCTION

Orient craft limited was established in 1978 and is one of the largest Export House in

India having a turnover of around 94350 crores. It is dealing with US and European

buyers and is having 21 manufacturing units in and around Delhi. It is one of the largest

manufacturers of women’s, men’s and children’s woven and knit garments in India.

HISTORY

The company was incorporated on February 28, 1978 under the Companies Act, 1956 as

Orient Craft Private Limited. With effect from July 1, 1992, the word ‘private’ was

deleted from the name of the company under section 43A (1A) of the companies Act.

Subsequently, the company became a public limited company on December 13, 2000.

Initially, till 1986, the Company was exporting only to the European market. In 1987, it

decided to shift its profile and explore the possibility of executing large orders of one

style. In the late eighties it started exploring the American market which offered good

scope for its value added products. The company started from a single manufacturing

unit and has moved to multiple locations with the passage of time. From a modest

manufacturing space of less than 6000 sq. ft. in 1987, the company now commands

around 125 million sq. ft. covered area to manufacture garments at its different locations.

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OWNERSHIP PATTERN

Orient Craft Limited, a public limited company incorporated under the Companies Act

1956. Initially OCL was incorporated in 1978 as a private limited company. Then the

word private was deleted from the name and the company became a public limited

company in 2000. OCL is not a listed company.

The company is managed by the Board of directors. The board comprises of

Mr. Sudhir Dhingra (CMD)

Mr. K.K. Kohli (Joint MD)

Mr. Anoop Thatai (Joint MD)

Mr. Anoop Dhanda (Executive Director)

Mr. Alok Narayan Pandey (Company Secretary)

Mr. Lalgudi Vaidhyanathan Saptharishi (Director)

Mr. Ashok Kumar Munjal (Director)

Mr. Ajit kumar Sahay (Director)

VISION

At “Orient Craft Limited” CUSTOMER DELIGHT is top most priority to be

achieved through timely shipment of quality products.

OCL team continuously strives for more value for money through COST

REDUCTION drive in the organization.

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The challenges in terms of TARGETS TO BE MET at all levels through effective

team work, continuous improvement and meaningful HR

MISSION

Company’s milestones to achieve our vision are:

KRA’S

Review and monitor progress daily, weekly, fortnightly and monthly.

Focus on objectives to achieve and align corrective actions.

Corrective actions to be implemented within 24 hours.

GOALS

Develop production in Special Economic zones.

Moving up the textile value chain by exploring retail opportunities.

Grow business through strategic partnerships and acquisitions.

Continue to seek cost efficiencies to improve competitiveness.

Maintain Focus on innovative Value Added Design Elements.

Grow our core garment manufacturing business

OBJECTIVES

Growth

Profitability

Customer Focus

People Orientation

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Image

MAJOR BANKS

The company conducts its business through multiple banking. Some of the major banks

include:

Corporation Bank

Bank of Baroda

State Bank of Travancore.

State Bank of Mysore

State Bank of Hyderabad

Allahabad Bank

Bank of India

Central Bank of India

Union Bank of India

DBS Bank Ltd

State Bank of Patiala

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Indian Bank

Indian Overseas Bank

MAJOR BUYERS:

Orient Craft prides itself in making quality products and execute orders for such

customers only. However, no single customer constitutes more than 22.5% of the

company’s sales. The top customers contribute 90% of the company’s turnover. Given

below is the list of topmost buyers:

DSK Industries/ Tommy Hilfiger Group

The GAP Inc. /Banana Republic Inc.

Ann Taylor

Levi’s Straus Inc.

Marks & Spencer

Dillards Stores

Monsoon Accessories

Macys merchandising group

Next retail ltd

Debenhams retail plc

Urban outfitters

MAJOR PROBLEMS

1. Inflexible Indian Labor laws are the biggest disadvantage that the company has.

Garment business around the world but particularly in India is subject to highs and lows

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of seasonal overseas demands. While spring and summer production months have very

high demand for garments, but winter and Christmas seasons, demand is considerably

low. Hence all of us in the Garment Manufacturing sector, setup factories to cater to the

lower number as we do not have the ability to fire surplus labor during lean months.

This way country is losing a lot of export business opportunity as well as employment

potential, if piece rate contract or time bound contract labor was permitted, huge amounts

of new employment would be created.

Lack of discipline amongst work force in the Indian garment factories is the reason for

very low productivity and high cost of Indian garments. The same Indian worker,

working in overseas factories produces 3-4 times more, because of the fear of losing his

job. Too much job security is no good for an industry whose performance greatly

depends on the performance of its labor force. If we could allow productivity linked

wage system and allow at least 25% flexibility, you would suddenly see hundreds of new

factories being set up which will generate new employment for millions of people.

2. Simpler and liberal export policies should be formed to facilitate import of world class

fabrics and trims from around the world, which may not be available in India, or may be

more expensive in India. This would help even the small exporters who cannot afford to

deal with the current bureaucratic maze of policies and procedures.

3. Another challenge is shorter lead-time; several of the competing countries have

substantially shorter transit times to Europe and USA, which are our main markets. Non

availability of direct sailing vessels and excessive government holidays (currently about

160 days a year including Saturday and Sunday's) also lead to a lot higher transit times

from Indian ports. Most of Indian Garment exports being fashion garments, have very

limited shelf life, hence it is important for us to device ways to deliver it to our customers

in the quickest possible time.

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SOME KEY EVENTS

Feb 28, 1978 Company was incorporated under the name Orient Craft Private Limited

1978 Established woven garments unit

July 1, 1992 The word “private” was deleted from the name of the company pursuant to

section 43A (1A) of the companies Act

1994 Established the manufacturing plant at Gurgaon which covers an area of

over 87,000 square feet

1996 Established the company’s knit garments unit

1999 Established the company’s home furnishing unit

2002 Established the multi product manufacturing plant at Gurgaon, which

covers an area of over 301,478 square feet that houses the woven and knits

units

2002 Established the company’s embroidery unit

2003 Incorporated the company’s wholly owned subsidiary, Orient Craft USA

Inc., in the state of Delaware in the US

2004 Established a design studio in New York

2005 Acquired a fully automatic denim stitching plant from Levis in Spain and

reinstalled it in Manesar, Gurgaon

2006 Acquired 9.72 acres of land in Hyderabad in connection with a proposed

manufacturing facility.

2007 Established a retail venture in India with S.Oliver

2007 Entered the SEZ and started major capital projects in Bhiwadi and

Hyderabad

2008 Opened various training centers in Rajasthan and Haryana

2009 Acquired land for SEZ & work expected to start in near future

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The figure of export turnover of the company for the last ten year

Year Export Sale (in Lacs)

1997-98 12202.72

1998-99 15486.60

1999-00 22072.47

2000-01 30545.70

2001-02 36406.60

2002-03 41787.13

2003-04 48780.94

2004-05 60499.90

2006-07 71660.68

2007-08 68618.88

2008-09 80336.83

2009-2010 83285.59

2010-2011 91559.83

Fig 2

CAPACITY AND UTILIZATION

The company has a production capacity of 50000 dz. Woven and equal number of Knit

Garments every month. The major exports comprise dresses, skirts, knitted shirts/T-

shirts, men’s shirts, blouses, jacket, co-ordinates, kids wear, rompers, outerwear, duvet

cover and pillow covers mostly to USA, Europe and Canada.

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The company has a 100% export oriented unit thereby having the advantage of importing

all raw materials, trims free of duty from any part of the world. The company has in-

house lab testing for garments, fabrics and trims. The company also has State of the art

in-house computerized embroidery machines, washing plants and dry cleaning units. The

company is rapidly growing year after year and has modern manufacturing facilities

spread over around 125 million sq. ft. area in 21 factories in and around Delhi.

PRODUCT LINE

The Company started off as a manufacturer of ladies garments made out of woven fabric

only. From 1994, Orient Craft started executing orders in a small way for men's shirts.

In early 1995, knitwear division was added and the Company started manufacturing

men's and ladies wear made out of hosiery material.

Orient Craft today manufactures ladies dresses, skirts, blouses, tops and men's shirts and

sportswear. Woven garments today account for 60% of the Company's turnover and the

balance is made out of knitwear products.

PRODUCT RANGE

APPAREL

Shirts

Skirts

Pullovers

T-Shirts

Scarfs

Jackets

Trousers

Jeans

Pants

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Tops

Track suits

HOME FURNISHING ITEMS

Cushions

Quilts

Window panels

Curtains

Pillow Covers

HANDICRAFT & JEWELLERY ITEMS

Fig 3

Composition of sales

55%40%

5%

Woven

Knit

Home furnishing

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SWOT ANALYSIS

STRENGTHS

own manufacturing units (international quality machines)

experience in manufacturing

accessibility to international designs

high quality raw material (imported)

Working capital can be released time to time without hazel due to bulk of orders.

Dealing with prime banks only.

Dealing with reputed buyers who pay on time.

Bank providing high value of limits for it services.

Having high tendency to negotiate with bank for purchase of foreign currency.

(due to its high value business for banks)

Bank perception for money lending is secured.

Most of the export was done on sight basis. (As the payment was to be come with

in seven days)

To strengthen the financial conditions in needs of expansion and up gradation in

operations time to time in short period they raise money from banks in the form of

PC.

The limits providing by the banks were interchangeable.

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WEAKNESS

No experience of the Indian market

No branding initiative ever taken

Uneconomical to produce small orders

Absence of a distribution network (retail n/w)

Risk of availability of liquidity on adhoc basis.

OPPORTUNITIES

Negotiation rates can be more crystallize.

Ability to have existence overseas.

Dollar will become strong against rupee.

Offers from other prime bank to deal large Indian market (Indian denim market is

of the size of Rs.1250 crores. With a high proportion of economically independent

younger population fashion and branded apparel industry is expected to grow).

Few branded Indian ethnic wears like salwar-kameez.

absence of some formal apparels for the Indian women (a mix between Indian and

western wear.

International brands have standard sizes. The Indian bodies are quite different

than western bodies. This usually results in miss-fits.

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THREATS

Fluctuations in foreign currency.

From other competitors.

Plans of international players to enter India.

More export duties to pay due to bulk of export.

Presence of a no. of brands in the male apparel segment.

plans of international players to enter India

cost advantage of the unorganized apparel players

short fashion cycles

designer wear entering the market

MARKETING STRATEGIES

The company’s strategy of making itself a “one stop shop” to enable its customers to

source their entire requirements from a single source has worked well in our favor and we

are today considered as a preferred vendor by most of our overseas buyers. Further, our

strategy of giving away some share of our margins in terms of discounts offered to

customers and partner them in their tough times has helped us to win their confidence and

to grow our business with them. We are pleased to state that our buyers have recognized

our initiatives and the company won laurels from buyers like Macy’s, Ann Taylor,

Monsoon, to name a few. Our strengths with the customers have helped us to cement the

bonds with them and we are proud to state that Orient Craft is the single largest producer

of girls wear for Marks & Spencer and by a long measure, remains the undisputed king

for this category of products bought by Marks & Spencer globally.

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COMPETITORS

The top competitors of Orient Craft are as follows:

RICHA GLOBAL

GOKALDAS EXPORTS LIMITED

SHAHI EXPORTS

MODELAMA

FUTURE PROSPECTS

According to CRISIL Research report, Apparel exports which had recorded a muted

growth of only 0.6 percent in 2008 over 2007 are expected to revive and grow at a CAGR

of 4.6 percent from $9 billion in 2009 to $11.3 billion in 2014. This will be mainly on

account of revival of the US and EU economies in 2010 and expected to grow at 0.3

percent and 1.6 percent respectively. Further, Domestic apparel market is expected to

grow at a CAGR of around 7.4 percent, from ` 1,155 billion in 2009 to around ` 1,649

billion by 2014. The main drivers for the growth being rising incomes and growing

preference for ready made garments vis-à-vis tailored garments.

Despite the slowdown faced in the last two years, the economic environment shows signs

of revival. India’s exports to US, after a decline of further 6% in 2009, are expected to

revive in 2010 to grow at CAGR of 4 percent from $2.9 billion in 2009 to $3.5 billion.

Similarly, India’s exports to EU are expected to show growth from 3.8 euro billion in

2009 to 4.9 euro billion i.e. AA CAGR of 5 percent.

Further, the industry is hopeful that a sizeable portion of the Chinese business is likely to

shift to India on the backdrop of the conditions prevailing in China. The present Chinese

economy is facing pressures on account of significant Yuan appreciation which is

believed to be undervalued by nearly 50%, growing inflationary pressures, increased

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labor costs etc. which make China lose its competitive advantage resulting in a gain to

various other low cost nations. Also, other issues such as increasing environmental

pollution, compliance issues and violation of International Proprietary issues which are

being looked at by both European and American buyers seriously, have also started

effecting the competitiveness of China. With China gradually losing its sheen as a global

leading player in the textile exports, we believe that even a 2-3% percent decline in share

of China (which is nearly US$ 150 billion out of the total industry size of over US$ 400

billion) would provide increased business opportunities to other developing countries.

India being a major player among the developing countries, it is expected that it would be

able to capture majority of the lost market share of China.

However, with price being the major competitive point, it is very critical for Indian

players to maintain the low cost. Maintaining the cost advantage is becoming more

challenging with high raw material and labor costs for the Indian players. Hence, it is

imperative for the companies in India to invest in state-of-the-art machinery to realize

higher productivity and to reduce its administrative costs, which will provide them with a

strong competitive advantage.

CONCLUSIONS

The outlook for the Indian ready made garment exports industry has been improved from

the previous year and big exporters like Orient Craft Limited have been witnessing a

moderate growth in their order books. However the realization from the global economic

crisis. Moreover the appreciating rupee may put a pressure on the margins for export

oriented companies. Given this scenario, it would be critical for Orient Craft Ltd. to

prudently manage its forex exposure as well as rationalize its capital structure going

forward.

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CHAPTER 4

ABOUT THE TOPIC

4.1 EXPORT PROCESS

STEP 1 RECIEPT OF ENQUIRY

It refers to the set of enquiries received by the exporter from the importer to serve his

own purpose. For an exporter it may not be possible to respond to all enquiries, therefore

an exporter checks the worthiness of importer by framing various questions like:-

For how long they have been in that business?

Whether they intend to purchase goods on their own account or they intend to act

as commission agent?

The name and address of at least two firms which they already represent or have

represented in the past?

This process continues further only if the exporter is satisfied with the response.

STEP 2 ROLE OF MERCHANDISER

The merchandiser is an important intermediate between the buyer and the exporter. He

works under the supervision of the directors. He often accompanies the CMD or the head

of department for getting the orders from the overseas buyer. The merchandiser forwards

different styles of samples to the buyer through local buying house as every buyer or

agent wants to assure that the goods manufactured at last should match up to their

description and illustration. This is called ad samples. If these samples are approved by

the buyer or some alterations has to be made say, in color or size, the merchandiser of the

35

buyer informs the merchandiser of the exporter about the alterations. Accordingly, a new

sample is prepared and forwarded.

To send samples to an enquirer is a costly business, specially as samples should always

be sent by air if possible, therefore the enquirer should be asked to pay for the samples

plus the cost of dispatch (or at least be asked to pay half of the cost) & if he is really

interested in that particular contract, he will do so. To serve this purpose, a DEBIT

NOTE is prepared by the exporter. In this context, the firm has maintained a program

which has the records of various buyers and the follow up of sample payments.

The exporter after having satisfied himself that the enquirer abroad is capable of meeting

his obligations provides him with the price list, details of terms of business and payment

which he is expected to adhere to. Once the samples and the other details regarding the

process are approved by the buyer, the process of Documentation starts

MERCHANDISER

BULKSAMPLING

ORDER CONFIRMATION PURCHASE ORDER

36

BULK SHIPMENTS

FABRIC ORDERING 60 – 70 DAYS

TRIMS/ ACCESSORIES 30 – 40 DAYS

FABRIC IN HOUSE

TRIM IN HOUSE

TESTING

WASHING CUTTING FINISHING PACKING INSPECTION

15 – 20 Days prior to ex factory of goods.

Generate invoice (retail invoice)

Booking with nominated forwarder

Booking confirmed in two three days time.

Ex factory vessel cargo cut off date H/O

STEP 3 DOCUMENTATION

An exporter is required to deal with various documents both at the:

1. Pre shipment and

2. Post shipment stages

To complete the export transaction, these documents are important:

As an evidence of shipment and title of goods

For obtaining payments.

37

These documents are of vital interest to both the exporter and the importer. The importer

needs them to claim peaceful and legal possession and delivery of the goods in his

country. The exporter needs to hand them over to him to claim payment for the

shipment.

1. PURCHASE ORDER (P.O.)

Purchase order is the very first document which is being forwarded by the buyer to the

exporter’s merchandiser. It covers all the information regarding the goods. Once the

order is received, the first decision as to whether it will be filled is based upon the

approval of credit. i.e., the shipment should be contingent upon the ability of the

customer to secure foreign exchange in those countries where there are exchange

restrictions. This also applies to merchandiser destined for those countries where there

are import quotas and import license.

The Contents of P.O. Are as follows:

Year

Division

Company

Group

Shipping Group

Purchase order No.

Category

Factory

Proj. Issue

Actual Issue

Style Division

Style No.

38

Prototype No.

Style Desc. No.

Type

Buying Office

Handling Buying Office

LC Beneficiary

Size- Scale

Fabric

Quality

Pack Method

Content

Construct

Finish

Gauge

Type

Garment Weight

LIC

Colour

Unit

Cost

Currency

Terms

Consignment_Date

Ship Mode

Quota category

Duty(%)

Ship To

In Catalog

Size Breakdown

Issue By

Signature

39

Total Value

Scrutinizing the Purchase Order

In particular, the purchase order should be scrutinized on the following basis:

Terms of payments

Documents

TERMS OF PAYMENTS

In international trade, the payment for the goods can be made by means of any of the

following methods of payment. These payment methods are also known as payment

terms.

Advance payment

Open account Documentary Collection (documents against payments(d/p),

documents against acceptance(d/a)

Documentary credit(letter of credit)

ADVANCE PAYMENT:

Under this method the exporter receives payment from the overseas exporter in advance

in the form of demand draft or cheque denominated in foreign currency or by way of

direct telegraphic transfer against the supply of goods to be made later on. When an

exporter receives the advance payment, then he must have an evidence of advance

payment in the form of certificate of foreign inward remittance (FIRC).

OPEN ACCOUNT:

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Open account is an arrangement between the exporter and the importer, where by the

goods are manufactured and delivered even before the payment is required. The importer

does not accept any negotiable instrument and thus, does not provide any evidence to the

exporter of his legal, commitment to make the payment. Importer makes the payment

only when he has received the goods and expected them to be quality satisfaction.

DOCUMENTARY COLLECTION:

It involves collection of given sum of money due from the importer by a bank against

delivery of certain documents at the instructions of the exporter. The parties involved in

the documentary collection are as follows-

The Exporter : The seller ships the goods and then hands over the document

related to the goods to their banks with the instruction on how and when the buyer would

pay.

The Remitting Bank/ Exporter's Bank: the bank which presents documents to

the importer for collection of payments/acceptance of drafts as per instructions of the

collecting bank.

Role of remitting bank:

Check that the documents for consistency.

Send the documents to a bank in the buyer's country with instructions on

collecting payment.

Pay the exporter when it receives payments from the collecting bank.

The Collecting Bank : the bank which forwards the documents for collection or

obtaining acceptance of the draft from the importer as per instructions of the exporter.

Role of the collecting banks are:

Act as the remitting bank's agent

Present the bill to the buyer for payment or acceptance.

Release the documents to the buyer when the exporter's instructions have been

followed.

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Remit the proceeds of the bill according to the Remitting Bank's schedule

instructions.

The Importer i.e., the party to whom the documents are handed over against

payment/acceptance.

i. DOCUMENTS AGAINST PAYMENT:

Under this method, the shipping documents concerning the shipment of goods are given

to the importer against payment for the goods. The payment is made by the importer

against the sight draft sent along with the shipping documents. If the importer does not

honor the draft, he is not given the shipping documents.

Flow of documents against payment

1. 2. 3.

CREDIT MAKES

THE A/C OF PAYMENT

SENDS THE

REMITTANCE

HANDOVER DOX.

Fig. 2

ii. DOCUMENTS AGAINST ACCEPTANCE:

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Exporter (Fwd dox to)

Exporter’s bank

(Fwd dox to)

Importer’s bank (Ask

Payment)

Importer

In this case the remitting bank hands over the shipping documents to the importer

only upon the acceptance of accompanying draft. The acceptance implies that he agrees

to pay the amount of the draft on the due date, under d/a terms, there is always a period of

credit (usance period), on the expiry of which the importer is required to make payment.

Flow of documents against Acceptance

1. 2. 3.

CREDIT

THE

REMITTANCE

SENT TO

MAKES

Fig. 3

LETTER OF CREDIT (DOCUMENTARY CREDIT)

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Exporter (Fwd dox to)

Exporter’s bank

(Fwd dox to)

Importer’s bank (Ask

Payment)

Importer

Letter of credit refers to a written promise made by the importer’s bank to the exporter

that the payment shall be made to him provided the shipment is sent by him in strict

compliance with the terms and conditions to the export contract.

The terms and conditions of the export contract form the part of letter of credit and are

known as the terms and conditions of letter of credit. The essential characteristics of the

letter of credit is that it relies on the doctrine of strict compliance for release of payment

to the exporter against the draft (s) drawn by him. The banks do not deal in goods, they

deal in documents. As such, the importer has to specify to the bank the documents which

it should examine as the evidence to the effect that the exporter has sent the shipment in

strict compliance with the terms and conditions of the export contract.

Flow of Letter Of Credit

Fig. 4

PARTIES OF LETTER OF CREDIT

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Importer Importer’s bank

ExporterExporter’s

bank

Send goods. I'll paySend the dox.

Applicant (Opener): Applicant which is also referred to as account party is

normally a buyer or customer of the goods, who has to make payment to beneficiary. LC

is initiated and issued at his request and on the basis of his instructions.

Issuing Bank (Opening Bank) : The issuing bank is the one which create a letter

of credit and takes the responsibility to make the payments on receipt of the documents

from the beneficiary or through their banker. The payments has to be made to the

beneficiary within seven working days from the date of receipt of documents at their end,

provided the documents are in accordance with the terms and conditions of the letter of

credit. If the documents are discrepant one, the rejection thereof to be communicated

within seven working days from the date of receipt of documents at their end. 

Beneficiary: Beneficiary is normally stands for a seller of the goods, who has to

receive payment from the applicant. A credit is issued in his favor to enable him or his

agent to obtain payment on surrender of stipulated document and comply with the term

and conditions of the L/c. If L/c is a transferable one and he transfers the credit to another

party, then he is referred to as the first or original beneficiary.

Advising Bank: An Advising Bank provides advice to the beneficiary and takes

the responsibility for sending the documents to the issuing bank and is normally located

in the country of the beneficiary.

Second Beneficiary: Second Beneficiary is the person who represent the first or

original Beneficiary of credit in his absence. In this case, the credits belonging to the

original beneficiary is transferable. The rights of the transferee are subject to terms of

transfer.

TYPES OF LETTER OF CREDIT

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1. Revocable Letter of Credit L/C:

A revocable letter of credit may be revoked or modified for any reason, at any time by the

issuing bank without notification.  It is rarely used in international trade and not

considered satisfactory for the exporters but has an advantage over that of the importers

and the issuing bank. There is no provision for confirming revocable credits as per terms

of UCPDC, hence they cannot be confirmed. It should be indicated in LC that the credit

is revocable. If there is no such indication the credit will be deemed as irrevocable.

2. Irrevocable Letter of Credit L/C:

In this case it is not possible to revoke or amended a credit without the agreement of the

issuing bank, the confirming bank, and the beneficiary.  Form an exporter’s point of view

it is believed to be more beneficial. An irrevocable letter of credit from the issuing bank

insures the beneficiary that if the required documents are presented and the terms and

conditions are complied with, payment will be made.

3. Sight Credit and Usance Credit L/C:

Sight credit states that the payments would be made by the issuing bank at sight, on

demand or on presentation. In case of usance credit, draft is drawn on the issuing bank or

the correspondent bank at specified usance period. The credit will indicate whether the

usance draft is to be drawn on the issuing bank or in the case of confirmed credit on the

confirming bank.

DOCUMENTS

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The main purpose of the documents accompanying a shipment is to provide a specific

and complete description of the goods so that they can be assessed correctly for Duty

purpose and meet the Import Licensing requirements or Import Quota Restrictions

imposed on the goods for clearance purpose. If there are any discrepancies in the

documents and or if the required documents are not produced, the shipment may not be

allowed for import or may even be confiscated by the Customs of the importing country.

There is a plethora of documents in export trade - different forms, applications and

documents are required to be filled in for obtaining Export Licenses, completing Pre-

shipment Inspection, for Customs Clearance and shipping, for obtaining payment and

export finance and for claiming export benefits like Duty Drawback, etc.

The experienced exporter, because of the complexity of documentation, will find it a

good idea to have the various documents prepared for him by a Shipping and Forwarding

Agent.

The documentation department can be divided into two parts;

i. Pre shipment documentation

ii. Post shipment documentation

PRE SHIPMENT DOCUMENTATION

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As any large export firm, the orient craft export house also has separate documentation

department, which is further bifurcated into pre-shipment and the post-shipment

department.

Activities

Insurance Policy Quota Endorsement

Generation of documents.

Custom clearance.

QUOTA ENDORSEMENT

The items in respect of which annual levels of quantities are fixed are known as quota

items and other items are known as non-quota items, each bearing distinctive category

number. The textile committee provides facilities for the pre-shipment inspection items.

This inspection is not from the point of view of quality of goods. There is no judgment on

the quality of the garment or other textile products rather, the inspection is conducted to

determine whether the materials used in the ready made garment or the textile product is

in conformity with the requirement of the quota categories. This verification is known as

authentication of ready made garments, thus an exporter dealing in ready made garments

made of cotton, rayon or blended fabrics or other textile products is required to apply for

the same.

GENERATION OF DOCUMENTS

The pre-shipment documents are divided into two broad categories namely commercial

documents and regulatory documents:-

1. Commercial Documents: are the documents used by the exporter and the importer in

discharge of their respective legal and other incidental responsibilities under sales

contracts. These documents are in use because of the “custom of trade” in international

trade.

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2. Regulatory Documents: are those documents that are prescribed in different

government departments /bodies for compliance of formalities under relevant laws , rules

and regulations covering export trade viz. foreign exchange management act , foreign

trade (development and regulation ) act , central excise rules , exports (quality control and

exception ) act , customs act and major port trusts act.

1. COMMERCIAL DOCUMENTS

It is a document showing the value of goods exported. It may take the form of:

Customs invoice

Legalized invoice

Consular invoice

A general commercial invoice contains the following:

Invoice number and date

Buyers order number

Exporter

Consigning

Country of origin of goods

Country of final destination

Vessels /flight number

Port of discharge

Port of loading

Final destination

Description of goods

Quantity

Rates

Amount

Number and kinds of package

Total quantity

49

L.C. terms

Currency

Category

Customs invoice:

When the commercial invoice is prepared on the format prescribed by customs authorities

of importers countries, it is called customs invoice. This is the required in USA, Canada,

Australia.

Consular Invoice:

It is a commercial invoice duly verified by the embassy /consulate of the importers

country based in the country of exportation. .embassy/ consulate attested invoice

becomes legalized/ consular invoice. This is the requirement of countries like Mexico and

Middle East countries

Legalized Invoice:

It is the same as consular invoice this term is in use in countries like Turkey, Taiwan,

Latin America, Libya, etc

Packing List:

This document describes the various boxes in which the goods have been exported, it is a

vital document, it informs the buyer regarding the content of various item

A packing list contains

Exporter

Consignee

Invoice number

Purchase order number

L.C number

50

Color

Style

Total quantity

Fabric

Number of cartons

Certification of inspection:

The export inspection agency conducts pre shipment inspection of the goods notified for

compulsory pre shipment inspection of exports goods.

Certificate of insurance:

This is the document indicating insurance of the cargo. It is issued by the insurance

company. The difference between the two is that the certificate is just an evidence of

insurance. It does not state the terms and conditions of the insurance, on the other hand

the policy states the terms and conditions of the goods.

Bill of lading/airway bill:

This document is a transport document issued by the shipping line indicating the

following:

Title of goods shipped

Receipt for the goods shipped and an admission to their apparent condition and

quality at the time of shipment.

Bill of lading is issued by the shipping line against mates receipt.

Airway bill is the same as bill of lading, but is issued by the airlines carrying the

cargo.

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Certificate of origin:

In most countries, importers are required to submit a certificate of origin in respect of

import consignment for obtaining their custom clearance. This can be issued by any

chamber of commerce. The application should be accompanied by two copies of the

commercial invoice and draft for the prescribed fee.

Combined Transport Document:

Combined Transport Document is also known as Multi modal Transport Document, and

is used when goods are transported using more than one mode of transportation. In the

case of multi modal transport document, the contract of carriage is meant for a combined

transport from the place of shipping to the place of delivery. It also evidence receipt of

goods but it does not evidence on board shipment, if it complies with ICC 500, Art. 26(a).

The liability of the combined transport operator starts from the place of shipment and

ends at the place of delivery. This documents need to be signed with appropriate number

of originals in the full set and proper evidence which indicates that transport charges have

been paid or will be paid at destination port.

G.S.P certificate of origin :

The G.S.P certificate of origin is different from the CO. This is required under the

scheme of generalized system of preferences introduced by the developed countries in

pursuance to unclad resolution of 1971 the scheme enables the importer in developed

countries to import goods from developing countries like India at concessional rates of

import duty or without payment of duty. This is issued by textile committee {ready made

garments}

Bill of exchange

It is an unconditional written order requesting the buyer {drawee} to pay a specified sum

of money to a specified person at a specified time. One who prepares this order is called

drawer {seller}. This is also known as draft in international trade. When the buyer has to

pay for the amount at time of its presentation it is known as sight draft. If a credit time is

allowed by exporter it is called usance draft. It is important to note that bill of exchange

52

should be drawn to the order of the exporter’s bank i.e. the bank which would negotiate

the documents/ collect the proceeds.

Shipment advice:

This document is used to inform the exporter the details of the shipment in advance. The

required set of the documents are sent separately to the buyer through the bank. The

various auxiliary commercial documents are as follows:

Performa invoice

This document indicates the details of the goods to be exported. It is an offer to sell made

by an exporter to the importer. Once the offer is accepted by the importer, the Performa

invoice becomes an export order. It is prepared after negotiation with the buyer has been

concluded.

Shipping instructions

This document provides a check list of various instructions an exporter may like to give

to the shipping agent.

Insurance declaration

This is prescribed by the insurance companies where in the exporter seeking insurance of

the goods make the declaration with regard to the insurance policy desired and the nature

of the goods.

Shipping order:

This is a reservation slip issued by shipping line at the time of reservation of shipping

space for a particular export shipment. In case the shipment is being sent by air then the

reservation slip is known as carting order

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Mates receipt:

It is a receipt issued by the mate (chief officer) of the ship acknowledging the loading of

cargo on the ship. It is used when goods are sent by sea only.

2. REGULATORY DOCUMENTS

Exchange control declaration form (GR Form)

Every exporter is required to declare to the reserve bank of India. The full export value of

the shipment and also submit an undertaking that the full export proceeds shall be

realized by him within a period of six months or due date of payment which ever is

earlier. This declaration is made in the prescribed exchange control declaration form.

These forms are known as gr/ softex/ pp/ sdf form.

Freight payment certificate

This indicates that the freight has been paid.

Insurance premium payment certificate

This is like a receipt for the payment of the freight.

Application for removal of excisable goods for exports

This is used for obtaining approval of the central excise authority to remove the goods

from the factory for sending export shipment.

Shipping bill/bill of export

This is the most important document required by the customs authorities for allowing

exports. It contains all the details of the goods shipped. The clearing and forwarding

agent (C.H.A.) or the exporter himself fills up the shipping bill. It is used when shipment

is sent by sea/air and the bill of export is used when the shipment is sent by road. Various

types of bills are as under

54

Claim for duty drawback (green bill)

For duty free goods(white bill)

For duty entitlement pass book scheme(blue bill)

SETS OF DOCUMENTS

There are three set of documents prepared in the pre shipment department:

1. Office set

The term itself specifies that this set is maintained by the pre shipment department for the

office purpose to be used further by post shipment department.

2. Consignee set

It is same as the office set. It is forwarded to the buyer for the purpose of getting the

delivery order for the release of goods. The set is received by the buyer before the

opening bank receives the original documents forwarded by the negotiating bank of the

exporter. The set contains:

Invoice

Packing list

Airway bill/ bill of lading

Export certificate (Canada and European countries.)

Special custom invoice ( Canada)

G.S. P.( E. U. Countries)

Visa (U.S.A.)

Single country declaration (U.S.A.)

Multiple country declaration (if 100% E.O.U. for U.S.A)

Certificate of origin (E.U.)

Canada custom invoice

55

3. Custom clearance set

This set of document is forwarded to the agent when the goods are ex. Factory for getting

custom clearance. It contains:

Invoice

Packing list

Duplicate visa{U.S.A.}

Draw back declaration form

Export certificate {Canada & E.U.}

S.d.f. {E.U., Canada, non quota}

Certificate of origin{E.U.}

S.d.f (Canada, U.S.A, non quota countries)

Certificate from PhD. Chamber of Commerce( non quota countries)

The above mentioned documents are handed over to the custom house agent (C.H.A.) by

the agent. The C.H.A. in lieu of the same forwards a set of documents to the agent after

getting custom clearance who in turn forwards the same to pre- shipment department. The

set contains:

Custom attested invoice

Custom attested S.d.f

Exchange control copy ( signed by S.P)

Export performance copy

Airway bill/ bill of lading

Drawback / E.D.I.

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4.1.i EXPORT FINANCING

Financial assistance extended by the banks to the exporters pre-shipment and post-

shipment stages. Financial assistance extended to the exporter prior to shipment of goods

from India falls within the scope of pre-shipment finance while that extended after

shipment of the goods falls under post-shipment finance. While the pre-shipment finance

is provided for working capital for the purchase of raw material, processing & finishing

of the goods meant for export, post-shipment finance is generally provided in order to

bridge the gap between shipment of goods & realization of money.

RBI GUIDELINES TO LIBERAL EXPORT FINANCE

The Reserve Bank of India is learnt to be looking at reviewing the interest rate

structure on foreign currency denominated packing credit available to exporters.

PCFC provides an additional window for pre-shipment credit to exporters at

internationally competitive interest rates.

It is applicable to both domestic and imported inputs for export goods, in any

convertible currency, for a maximum of 180 days.

Pre-shipment credit is provided as a loan or advance by a bank to an exporter for

financing the purchase, processing, manufacturing or packing of goods prior to

shipment.

The RBI has already deregulated post-shipment credit beyond 90 days till 180

days, with effect from May 1, 2003.

The RBI is understood to be examining a proposal from exporters who were

facing difficulty in availing concessional foreign currency packing credit.

This is because with demand for dollar loans surpassing supply, banks could

manage a better margin by lending it to corporate, out of the purview of export

credit.

Banking sources said by removing the cap on PCFC, which is acting as a major

disincentive for banks, there will be some pressure on outflow of dollars in

57

addition to meeting the genuine dollar demand of exporters.

According to banking sources, while the RBI wants to deregulate interest rates

and leave it to the discretion of banks, there is a concern that small exporters

might be hit if rates turn too high. Hence, there is also a possibility of putting a

cap as well.

Exporters do not want rates to be deregulated as post deregulation; they will no

longer remain concessional.

At present, the spread charged by banks for pre-shipment credit in foreign

currency is related to the international reference rate such as London inter-bank

offered rate Euro Libor/Euribor (6 months).

The lending rate to the exporters should not exceed 75 basis point over

Libor/Euribor, excluding withholding tax.

In fact, excess dollar inflows are increasingly becoming a problem to manage as

with each dollar sucked out of the market, additional rupee funds is being added

to the liquidity-flush system.

In addition to PCFC, under the existing norm, banks may arrange for 'lines of

credit' from abroad and also negotiate lines of credit with overseas banks for

granting PCFC to exporters without the prior approval of RBI, provided the rate

of interest on the line of credit does not exceed 75 basis point over six months

Libor/Euro.

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1. PRE SHIPMENT FINANCE

Pre Shipment Finance is issued by a financial institution when the seller wants the

payment of the goods before shipment. The main objectives behind pre shipment finance

or pre export finance is to enable exporter to:

Procure raw materials.

Carry out manufacturing process.

Provide a secure warehouse for goods and raw materials.

Process and pack the goods.

Ship the goods to the buyers.

Meet other financial cost of the business.

Export Duty or any other tax.

Freight and insurance charges

T YPES OF PRE SHIPMENT FINANCE:

Packing Credit

Advance against Cheques/Draft etc. representing Advance Payments.

Pre shipment finance is extended in the following forms:

Packing Credit in Indian Rupee

Packing Credit in Foreign Currency (PCFC)

Pre-shipment Credit in Foreign Currency (PCFC)

Authorized dealers are permitted to extend Pre shipment Credit in Foreign Currency

(PCFC) with an objective of making the credit available to the exporters at internationally

competitive price. This is considered as an added advantage under which credit is

provided in foreign currency in order to facilitate the purchase of raw material after

fulfilling the basic export orders. The rate of interest on PCFC is linked to London

Interbank Offered Rate (LIBOR). According to guidelines, the final cost of exporter

must not exceed 200 bps over 6 month LIBOR, excluding the tax. The exporter has

59

freedom to avail PCFC in convertible currencies like USD, Pound Sterling, Euro, Yen

etc. However, the risk associated with the cross currency transaction is that of the

exporter. The sources of funds for the banks for extending PCFC facility include the

Foreign Currency balances available with the bank are

Exchange, Earner Foreign Currency Account (EEFC),

Resident Foreign Currency Accounts (RFC)

Foreign Currency (Non-Resident) Accounts.

Banks are also permitted to utilize the foreign currency balances available under Escrow

account and Exporters Foreign Currency accounts. It ensures that the requirement of

funds by the account holders for permissible transactions is met. But the limit prescribed

for maintaining maximum balance in the account is not exceeded. In addition, banks may

arrange for borrowings from abroad. Banks may negotiate terms of credit with overseas

bank for the purpose of grant of PCFC to exporters, without the prior approval of RBI,

provided the rate of interest on borrowing does not exceed 0.75% over 6 month LIBOR.

STAGES OF PRE SHIPMENT FINANC E

Appraisal and Sanction of Limits

Before making any allowance for Credit facilities banks need to check the different

aspects like product profile, political and economic details about country. Apart from

these things, the bank also looks in to the status report of the prospective buyer, with

whom the exporter proposes to do the business. To check all these information, banks

can seek the help of institution like ECGC or International consulting agencies like Dun

and Brad street etc. The Bank extended the packing credit facilities after ensuring the

following:

The exporter is a regular customer, a bona fide exporter and has a goods standing

in the market.

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Whether the exporter has the necessary license and quota permit (as mentioned

earlier) or not.

Whether the country with which the exporter wants to deal is under the list of

Restricted Cover Countries (RCC) or not.

Disbursement of Packing Credit Advance

Once the proper sanctioning of the documents is done, bank ensures whether exporter has

executed the list of documents mentioned earlier or not. Disbursement is normally

allowed when all the documents are properly executed. Sometimes an exporter is not

able to produce the export order at time of availing packing credit. So, in these cases, the

bank provides a special packing credit facility and is known as Running Account

Packing.

Before disbursing the bank specifically check for the following particulars in the

submitted documents:

a. Name of buyer

b. Commodity to be exported

c. Quantity

d. Value (either CIF or FOB)

e. Last date of shipment / negotiation.

f. Any other terms to be complied with

Follow up of Packing Credit Advance

Exporter needs to submit stock statement giving all the necessary information about the

stocks. It is then used by the banks as a guarantee for securing the packing credit in

advance. Bank also decides the rate of submission of this stock.

Apart from this, authorized dealers (banks) also physically inspect the stock at regular

intervals.

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Liquidation of Packing Credit Advance

Packing Credit Advance needs be liquidated out of as the export proceeds of the

relevant shipment, thereby converting pre shipment credit into post shipment credit. This

liquidation can also be done by the payment receivable from the Government of India and

includes the duty drawback, payment from the Market Development Fund (MDF) of the

Central Government or from any other relevant source. In case if the export does not

take place then the entire advance can also be recovered at a certain interest rate. RBI has

allowed some flexibility in to this regulation under which substitution of commodity or

buyer can be allowed by a bank without any reference to RBI. Hence in effect the

packing credit advance may be repaid by proceeds from export of the same or another

commodity to the same or another buyer. However, bank need to ensure that the

substitution is commercially necessary and unavoidable.

Overdue Packing

Bank considers a packing credit as an overdue, if the borrower fails to liquidate the

packing credit on the due date. And, if the condition persists then the bank takes the

necessary step to recover its dues as per normal recovery procedure.

Document to be submitted to the bank for sanction of limits:

Credit Monitoring Arrangement (CMA)

Monthly stock statement

Half yearly statement

Audited balance sheet

Funds flow statement

Credit Monetary Arrangement:

It is nothing but the bank financing for working capital. It was earlier known as Credit

Authorization Scheme. RBI prescribed certain forms to be filled for applying that is

called as CMA Data Base. It is done for arranging working capital finance information

about income, expenses, assets and liabilities.

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2. POST SHIPMENT FINANCE:

Post Shipment Finance is a kind of loan provided by a financial institution to an exporter

or seller against a shipment that has already been made. This type of export finance is

granted from the date of extending the credit after shipment of the goods to the

realization date of the exporter proceeds. Exporters don’t wait for the importer to deposit

the funds.

TYPES OF POST SHIPMENT FINANCE:

Export Bills purchased/discounted.

Export Bills negotiated

Export Bills Purchased/ Discounted (DP & DA Bills):

Export bills (Non L/C Bills) is used in terms of sale contract/ order may be discounted or

purchased by the banks. It is used in indisputable international trade transactions and the

proper limit has to be sanctioned to the exporter for purchase of export bill facility.

Export Bills Negotiated (Bill under L/C):

The risk of payment is less under the LC, as the issuing bank makes sure the payment.

The risk is further reduced, if a bank guarantees the payments by confirming the LC.

Because of the inborn security available in this method, banks often become ready to

extend the finance against bills under LC. However, this arises two major risk factors for

the banks:

The risk of non performance by the exporter, when he is unable to meet his terms

and conditions. In this case, the issuing banks do not honor the letter of credit.

The bank also faces the documentary risk where the issuing bank refuses to honor

its commitment. So, it is important for the negotiating bank, and the lending bank

to properly check all the necessary documents before submission.

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POST SHIPMENT CREDIT

Post shipment credit is required to bridge the gap between the time of shipment of goods

and the actual payment received. Post shipment credit is provided against the security of

approved shipping documents submitted against letter of credit or otherwise.

Post shipment loans normally are of three types:

Short term: short term period is normally for six months and is provided by

commercial banks.

Medium Term: medium term period is up to five years, loan is provided by the

Commercial banks in collaboration with export import banks.

Long Term: loans are provided for the purchase of capital goods or turnkey

projects. Period of credit is normally more than five years.

Banks enjoy certain benefits for advancing loans to the exporter:

Refinance by export and import bank or by RBI at a given rate of interest.

Guarantee provided by the ECGC or a substantial part of risk is covered by

ECGC.

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4.2 IMPORT

Basic concepts relating to foreign trade in India:

As already mentioned, Orient Craft Ltd. is in the business of manufacturing garments for

exports. We manufacture a wide assortment of garments to suit all customer profiles,

viz., men, women and children. We also make garments to suit all usage types like

sportswear, casual wear, and formal wear and so on.

Understanding the garment manufacture process:

The first step is the order procurement. OCL has earned for itself an extremely

respectable reputation in the international market. This means that even in a highly

competitive industry, OCL is in a commanding position as regards the procurement of

orders. Because of its strong bargaining position, OCL never has to go out and hunt for

orders; rather they are in the enviable position of being overbooked.

Thus, the manufacturing process kicks off once the order has been accepted by OCL.

IMPORT PROCESS

The first step in the process is the import of raw material from the suppliers. To ensure

the highest level of customer satisfaction, OCL has a unique policy of “buyer specified

supplier”. This means that every buyer has the discretion of specifying the name of the

supplier from whom the raw material is to be sourced.

This ensures that the specifications of the final product exactly meet customer’s

requirement. From the buyer’s perspective the main advantage is that the products

sourced from all the different manufacturers all over the world will be identical if the

supplier is the same. For example, suppose GAP USA, needs 1, 00,000 T-shirts. Now

consider that they place the order for this with 4 different manufacturers from different

corners of the world. If the discretion of selecting the supplier is left to manufacturers

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like OCL, then the products coming from different manufacturers will have different

attributes. To standardize the final products, the buyers specify the supplier from whom

the material is to be procured.

Now OCL will need to import the raw material for processing the order from the supplier

as specified by the buyer.

This raw material comprises broadly of:

Fabric – this comprises the major chunk of the imports.

Trims – these include zippers, buttons, lining material etc.

Step 1: Placing the order with the supplier:

OCL sends its requirements to the supplier giving him the exact specifications of the

product required. Then the supplier replies to OCL giving the details of the material he

can supply along with the shipment dates of each of these.

Step 2: Raising a Letter of Credit (L/C):

To safeguard his interests, the supplier would require some sort of payment guarantee

from OCL. This guarantee is given in the form of a L/C.

A L/C is simply a proof of the credit-worthiness of the importer. It is issued by the

importer’s bank on the strength of the amount deposited by the importer with the bank or

on the basis of the accounts of the importer with the bank.

The following figure shows how the flow of funds moves from the importer (OCL) to the

supplier:

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Supplier, in say, ItalyOCL, New Delhi

Bank, Italy branch

XYZ Bank, New Delhi Branch

Requesting the bank to issue

The first step here is to send a request to the bank asking them to issue a L/C in favor of

the specified supplier.

This would typically include:

a. Amount of the L/C

b. Name and address of the beneficiary.

c. Import covered under [the sections or acts of the Import Export Policy pertaining to

the transaction.

In addition to the above specified items, OCL will also at this stage, undertake to submit

the relevant “Bill of Entry” to the bank upon successful completion of the transaction.

Step 3: Bank issues L/C

The bank with which the L/C has been raised next sends this L/C across to the

beneficiary bank. The most popular means of this transfer is SWIFT, a method similar in

function to the TELEX of old days.

At this stage, the commercial department of OCL raises what is known as “L-Number”

Step 4: Arrival of goods

When the goods finally reach the destination port as given in the L/C, a cargo collection

receipt is sent to the bank with which the L/C was raised.

At the same time, OCL also receives a Cargo Arrival Notice, which is an intimation of

the arrival of the goods. It must be noted here that this notice is merely intimation and no

collection of goods can take place against this. The commercial department at OCL

raises an “R-Number” against this notice.

R-Number is the requisition for release order and attestation of documents.

A representative of OCL goes to the bank with this requisition, and signs the declaration

that the payment due is made. The most common method of this payment is to deduct the

amount from the current account of OCL with that bank.

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Once the payment order has been released, the bank endorses the cargo receipt and the

commercial department of OCL can then take delivery of the goods from the warehouse.

Step 5: Transfer of payments

The bank then sends the amount to the beneficiary’s bank through via transfer or any

other method as mutually decided, from where it is sent on to the beneficiary.

Step 6: Submitting the Bill Of Entry

Since imports involve an outflow of foreign currency, the RBI guidelines in this regard

have to be met. Thus OCL needs to submit, within 90 days, a Bill of Entry, which is a

documentary proof of the receipt and delivery of goods.

4.2.i IMPORT FINANCING:

Import financing provides importers who have orders from customers backed by a letter

of credit, with the necessary financial backing to provide their overseas Supplier with a

letter of credit to guarantee payment of goods, it is the loan given to the importer to

provide liquidity for buying with sight payment to the exporter. Each loan must be related

to one specific import transaction and the term of the financing can vary depending on

the type of products imported and the requirements of the importer.

ADVANTAGES

Financing can be arranged for 100% of the transaction. This provides the importer with

sufficient financial strength to sell larger orders than they would be able to on their own

financial strength, below are some advantages:

Obtain liquidity to pay for imports.

The importer can receive better conditions for the purchase based on sight

payment.

Bank can offer the structure, currency and terms that the business or transaction

requires. Depending on the case, it is possible to create a "tailor made" structure.

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Depending on the strength of the buyer, this may be done on “open account” with

the domestic buyer, allowing the buyer to increase their buying power.

Import Trade Finance

International trade continues to grow every year as nations expand their global sales and

new nations join in. Today, over 225 nations are active in trade resulting in over nine

Trillion dollars in global business every year. Trade related financial services have

developed and expanded in depth, complexity and effectiveness to support the expansion

of world trade. Many trade finance options are now available. However, in North

America the Small to Mid- sized Enterprises (SME) trading community is relatively

unaware of many of the more sophisticated and/or the sources of the more effective trade

finance services. Traders commonly believe that the major international banks are the

primary providers of these services. For the SME community this is no longer the case.

A fragmented market of trade finance organizations has grown over the last 20 years to

fill the void left by the major international banks which retreated from trade finance

service in the 1980's.

Settlement of Import Trade Transactions

Various trade terms are available to balance the trade transaction risks for both the

importer and exporter. As an importer/distributor you will wish to negotiate the most

favorable terms of purchase with your overseas supplier. You will negotiate terms of

purchase to ensure that you receive your import purchase in the right quantity, right

quality, at the right price and on time. At the same time you can expect your overseas

supplier to negotiate terms that will minimize potential risks - particularly the risk of

nonpayment. Import trade transactions can be structured in a number of ways. The

structure used in a specific transaction reflects how well the participants know each other,

the countries involved, and the competition in the market.

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MOST COMMON TERMS USED FOR PURCHASE

Consignment Purchase

In a consignment purchase arrangement, the importer/distributor makes payment to the

overseas supplier only after sales to end user is made and payment received.

Consignment purchase terms can be the most advantageous to an importer/distributor. It

is also considered the most risky term for the overseas supplier.

Cash-in-Advance (Advance Payment)

Under these terms of purchase, the importer must send payment to the supplier prior to

shipment of goods. The importer must trust that the supplier will ship the product on

time and that the goods will be as advertised. Basically, Cash-in- advance terms place all

of the risk with the importer/buyer. An Importer may find his seller requiring prepayment

in the following circumstances:

The Importer has not been long established.

The Importer's credit status is doubtful, unsatisfactory and/or the country political

and economic risks are very high.

The product is in heavy demand and the seller does not have to accommodate an

importer's financing request in order to sell the merchandise.

Down Payment

The Buyer pays the Seller a portion of the cost of the goods "in advance" when the

contract is signed or shortly thereafter. There are advantages and disadvantages of down

payment terms. The down payment method induces the Seller to begin performance

without the Buyer paying the full agreed price in advance. The disadvantage is that there

is a possibility the Seller may never deliver the goods even though it has the Buyer's

down payment. This option must be combined with one of the other options to cover the

full cost of goods.

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Open Account Payment

Unsecured Open Account terms allows the importer to make payments at some specific

date in the future and without the buyer issuing any negotiable instrument evidencing his

legal commitment to pay at the appointed time. These terms are most common when the

importer/buyer has a strong credit history and is well-known to the seller. The buyer may

also be able to demand open account sales when there are several sources from which to

obtain the seller's product or when open account is the norm in the buyer's market. This

mechanism offers the seller no protection in case of non-payment. However, an exporter

can structure his open account sale transaction to minimize the risk of non-payment.

Documentary Collections

Collections terms offer an important bank payment mechanism that can serve the needs

of both the exporter and importer. Under this arrangement, the sale transaction is settled

by the bank through an exchange of documents, thus enabling simultaneous payment and

transfer of title. The importer is not obliged to pay for goods prior to shipment and the

exporter retains title to the goods until the importer either pays for the value of the draft

upon presentation (sight draft) or accept to pay at a later date and time (term draft).

Risks in Documentary Collections

For the Exporter

If it is a sight draft, the exporter will reduce the risk of non-payment but will not

eliminate it totally since the importer may not be in a position to pay for the goods or may

not be able to procure sufficient foreign exchange to make the payment. In this case the

exporter may be forced to either call back the goods or negotiate sale to some other

interested party, which may be at a reduced rate.

In the case of term draft, the risk to the exporter is higher since the foreign buyer will

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take possession of the goods and may not pay at due date, forcing therefore the exporter

to try and collect payment from the foreign buyer in the foreign buyer's home country.

The Importer

The importer faces the risk of paying for goods of sub-standard quality or even with

shortages. In such a circumstance, it would take some time to get refunds from the

exporter. It could also happen that the exporter refuses to make refunds, leading the

importer to lengthy legal proceedings.

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CHAPTER 5

CONCLUSIONS

My internship was in Orient Craft Limited, Unit 7-D, Udyog Vihar, Gurgaon. I worked

in the Logistics & Finance department and Documentation department of the company.

Orient Craft has many manufacturing units spread across the Delhi and NCR. The unit

where I worked has a manufacturing plant and the corporate office. Unit 7-D

manufactures garments for women, kids and men. In this plant non denim items are

manufactured. Denim clothes are manufactured in other plant which is in Manesar.

BUSINESS UNIT & ITS CONCENTRATION

Orient Craft Ltd a Government recognized golden trading house was promoted by Mr.

Sudhir Dhingra, who has been the Managing Director of the company since inception. It

was floated as a private limited in 1978. The company was renamed in 1992 as Orient

Craft Ltd on being the deemed public limited company.

The company has a production capacity of 50000 dozen woven and equal number of Knit

Garments every month. The major exports comprise dresses, skirts, knitted shirts/ T-

shirts, men's shirts, blouses, kids wear, rompers, outerwear, duvet cover and pillow

covers. The export is mostly done to USA, Europe and Canada.

The company initially worked in the European Market. However, in the late Eighties, it

started exploring the American market which offers possibility of large lots of single

style of production. The company started from single manufacturing unit and has moved

on to multiple locations with the passage of time.

The company has 100% export oriented unit, thereby having the advantage of importing

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raw materials, trims, free of duty from any part of the world. The company also has an

in-house lab testing for garments, fabrics and trims. The company also has state of art in-

house computerized embroidery machines, washing plants and dry cleaning units.

The company is rapidly growing year after year and has a modern manufacturing

facilities spread over 800000 sq. ft. area in 17 factories in and around Delhi.

The present factories are now running beyond the rated capacity to adhere to the

customer's delivery schedule.

OJECTIVES OF THE COMPANY

Growth

Profitability

Customer focus

People orientation

Image

DEVELOPMENT AND EXPANSION PLANS OF THE COMAPNAY

The company plans to invest INR 1250 million to 1750 million for its expansion

plans over the next three years period. The company plans to spend amount for

expanding capacity, getting into some ancillary business like printing and

retailing. The finance will be raised through internal accruals and debts.

The company is planning to sell 25% stake through an Initial Public Offering

(IPO) by the next fiscal year, 2011-2012. The company feels that there is a huge

upswing in the textiles industry right time has come for the company to go for an

IPO.

OCL is planning to sell 334 acre land that it holds at a Special Economic Zone

(SEZ) in Gurgaon. The company is also planning to set up units in SEZ in

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Gurgaon.

PURPOSE OF THE INTERNSHIP

I wanted to do internship in an Export House. The purpose of my internship was to get

experience in export import logistics procedures and finance and how actually the export

house work. Business. I worked in logistics and finance department and documentation

department and managed to get experience. I was able to put my theoretical knowledge

into practical.

From the very first day to the internship, I was clear about the purpose of working here.

Though the two months are short to learn each and everything. But still I was given

theoretical as well as practical knowledge by the employees of the department I worked

in.

RESPONSIBILITIES GIVEN DURING THE INTERNSHIP

This project has provided a practical learning experience to me. I have studied about the

export import procedures and how the working capital is used during pre shipment

finance and how the various costs are covered. But was not aware of the fact that how it

is important for the organization.

This project gave me the practical approach of the industry and got to know the various

new things.

The first and second week of the internship was given in Import procedures and finance.

Got to know that orient craft being 100% export house, why it import, what does it

import and how does import payment is made. I made the advance payment, payment

after receipt letters and letter of credit given to banks and how various documents are

made.

The third and fourth week of the internship went in the documentation department i.e. Pre

shipment and Post shipment department respectively. What all documents required in the

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pre shipment of the consignment, what is the process of doing the pre shipment, how the

shipment is booked to the forwarding agent and what all formalities are there.

In the post shipment department. The documents which the pre shipment department

gives to the bank and other agencies, the post shipment department prepare the

documents after the shipment is done. They see to it that all the documents are place id

the proper order as per the conditions given in the L/C. They even check that are all the

payment has been made by the buyer. And waits for the notification given by the bank

regarding the payment made by the buyer to the bank.

The next four weeks were done in the banking and finance department. I was told to

study the balance sheet of the company and compare the balance sheets of last three years

and take out the various ratios and financial position of the company.

I was also asked to review the problems in logistics work flow and major problems

related to its applications in garment industry of India.

CHALLENGES FACED

The biggest challenge which I felt was analyzing the balance sheet of the company,

which is not at all easy. It was all new things. In college what we learnt was basics. But

after dealing with balance sheet, logistics and documentation, I got the real experience of

industry.

EXPERIENCE

It was great learning experience. Got the theoretical as well as practical knowledge, each

and everything was taught in detail and was explained very clearly. How the things are

done, how the various procedures during export import takes place, what all documents

are required in the pre shipment and post shipment stages, why an exporter needs finance

and credit for the export, where the investment is done.

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CHAPTER 6

BIBLIOGRAPHY

INTERNET:

http://www.eximguru.com/exim/guides/export-finance/

ch_8_bank_guarantees.aspx

http://apparel.indiamart.com/lib/garments/indian07251998. html

http://www.teonline.com/apparel-garments/industry- overview.html

http://apparel.indiamart.com/

http://www.india-exports.com/apparel.html

http://apparel.indiamart.com/lib/garments/indian07251998. html

http://www.cygnusindia.com/Industry%20InsightApparel %20Retailing%20 n %20India- Executive%20Summary%20&%20TOC- March%202004_.pdf

http://hotdocs.usitc.gov/docs/pubs/research_working_pape rs/PUB3401.PDF

www.google.com

BANK MANUALS

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