UNIT 12 PROCEDURE FOR IMPORT

AND EXPORT TRADE

Structure
Objectives
Introduction
What is Foreign Trade?
12.2.1 Types of Foreign T~ade
12.2.2 Importance of Foreign ~ r a d e
12.2.3 Problims in Foreign Trade
India's Foreign Trade Performance
Regulations Governing Foreign Trade
Export Trade Procedure
Import Trade Procedure
Let Us Sum Up
Key Words
Some Useful Books
Answers to Check Your Progress
Terminal Questions

12.0 OBJECTIVES
After studying this unit, you should be able to: ,

;describe what foreign trade is

i identify the types of foreign trade
e explain the impqrtance and problems of foreign trade
describe the growth of India's foreign trade
tr explain the regulations governing foreign trade
0 identify the documents used in foreign trade

describe export trade procedure

0 explain import trade procedure

12.1 INTRODUCTION
In the previous two units you have leamt what home trade is and how goods reach the
consumers from producers through various intermediaries or channels of distribution. In thir
unit, we shall discuss the nature of foreign trade, how it is different from home trade, the
importance of foreign trade, documents used in foreign trade, and the procedure to be
followed by importers andexporters while importing or exportidg goods.

12.2 WHAT IS FOREIGN TRADE?

-
~ations,'likeindividuals, do not possess everything they need to fulfil their requirements,
Even countrits like the USA, USSR and China, which are rich in natural and human
resources have to look to other countries for supply of some of their requirements. For
instance, consumers in USA obtain their supply of sugar and coffee from other countries.
Moreover, different countries posses's different types of resources. Those which have a
surplus of certain resources find it beneficial to sell the surplus items to some other countries,
and buy other items which they need. Such exchange of goods and services between people ,
across national boundaries is called 'foreign trade' or 'international trade*. Foreign trade can '

be bilateral or multilateral. When there is tr3de between people of any two nations, it is
bilateral: foreign trade is multilateral when people of any country buy from and sell to
people of more than one country.
You will notice-thatthe main difference between home tradk and foreign trade is that while
home trade takes place within a country among people who are 'citizens of that country, the
1
foreign trade takes place beyond the national boundaries of two or more couptries. Besides 1
this, there are other differences which may be stated as follows: 63
Marketing There is little restriction on trade between people within a country. But in case of
i)
foreign trade the restrictions are numerous. A firm requires permission from
Government authorities before goods can be imported or exported.
ii) In domestic trade payment made by the buyer and received by the seller of goods is in
the same units of money. In foreign trade, what the importer pays in his national
currency has to be converted into foreign currency acceptable to the exporter.
iii) Payment can be made either in cash or by cheque on a national bank in the case of home
trade. Payment can be made only through bank in the case of foreign trade.

12.2.1 Types of Foreign Trade

Foreign trade can be divided into three categories. They are:
i) Import Trade
ii) Export Trade, and
iii) Entrepot Trade

When goods are sold to a trader in any foreign country, they are said to be exported to that
country and it is known as 'export trade'. When purchases are made from a foreign
country, goods are said to be imported into the country and it is called import trade. Many
a time goods are imported from one country with the objective of exporting them to some
other country or countries; This is known as entrepot trade. City states like Singapore and
Hongkong are important entrepot trade centres.

12.2.2 Importance of Foreign Trade

Production of goods and services requires different resources like men, materials, money,
machines and management. If we compare the resources possessed by nations it will be
fouild that no country is self-sufficient and there are differences in the quality and quantity
of domestic resources available in different .countries. Indeed, it is this difference in the
relative abundance or shortage of resources in different countries that has given rise to
foreign trade involving exchange of goods and services between countries. Through
international trade, it is possible for a country to avail of goods which it cannot produce or
cannot produce as economically as other countries. Hence, a country's well-being is
determined to a great extent by the nature and extent of its foreign trade. Let us discuss the
importance of foreign trade to people in different countries.
1 Specialisation and emciency of production: Foreign trade leads to specialisaiton in
productive activities undertaken by different countries. Depending on available natural
resources, and development of science and technology, every country can produce only
those goods and services for which it has the greatest relative advantage and efficiency.
No country has facility and resources within its own boundaries for economical
production of all its requirements: Some countries are more suitably placed to produce
certain goods/services economically and sufficiently than other countries. Therefore,
they can specialise in the production of such goods and get the goods they need in
exchange for those goods, For example, India has comparatively greater advantages for
the production of agrobased products such as coffee, tea, sugar, textiles, etc. Similarly
some developed countries such as USA, Japan, Britain, etc. have greater advantages for
the production of industrial machinery, automobiles etc. Some gulf countries such as
Iran, Libya, Iraq, Saudi Arabia, etc. produce crude oil, petroleum, etc, in abundance.
2 Utilisation of resources: Every country possesses some natural resources. The
economic development of a country heavily'depends upon exploitation of these
resources. For example, India has adequate off-shore oil resources. But, it requires
exploitation through sophisticated machines, technology, etc. which we do not h8ve.
Machinery and technology can be imported from the developed countries like USSR,
USA, Japan, etc. This leads to best possible use of natural resources.
3 Facilitates economic development: Rapid econornic development and growth of
national income can be facilitated on the basis of exports and imports. Indeed, it is on
the basis of imports of raw materials and export of manufactured goods that countries
like U.K., Japan etc, have achieved a high rate of economic growth.
4 Equalisation of prices: International uade equalises prices of goods throughout the
world. Whenever the prices of commodities tend to rise in a country, it can increase the
 leve1,of its imports to check the rise in prices. Similarly, whenever prices of products Procedure for Import and
decline, the trend may be cotinteracted by exporting the same. Export Trade

5 Employment ppportunities: Foreign trade facilitates the growth of agricultural as well

as industrial activities which in turn generates more employment in the country.
6 Harmonious relationship between countries: Because of foreign trade every country
may have access to goods that it does not produce at home. Similarly, a country with a
surplus of certain goods can make them available to other countries experiencing
shortage of those goods. This promotes harmonious and cordial relationship among
various countries.

12.2.3 Problems in Foreign Trade

Because of cultural and other environmental differences between various countries and the
distance involved, foreign trade involves certain problems which do not arise in connection
with home trade. Let us examine thesc problems in detail.
1 Suitability of the product for the market: Securing information abdut the suitability
of products in the foreign market is a challenging task for every international market$r.
This involves heavy expenditure and requires special skill and knowledge. Besides, the
quality and price of goods must be more attractive as compared with similar products
manufactured abroad. This requires intensive market research on the potential sale of
goods to be exported.
2 Changes in supply and demand conditions: International markets are often subject to
changes in the supply and demand for particular products due to the entry of new
competitors, or increased competition of local producers, or because of changes in
buyers' preferences. These changes cannot be easily anticipated by the exporters.
3 Frequent price changes : The price of products in the international market may be
affected by different factors. The changes may be due to changes in exchange rates of
the currencies of importing and exporting countries, higher import duties, or freight
rates. These factors increase the risks of foreign trade a great deal.
4 Credit risk: International trade which is generally on a large scale involves heavy
amounts to be paid by the importer. The exporters often sell their products on credit and
therefore have to bear the credit risk arising from the buyer's default, bankruptcy, etc.
5 Changes in exchange rate: An additional risk of foreign trade is the risk of changes in
exchange rates. The rate at which the currency of importing countries can be converted
into the currency of exporter may cause losses to the exporter or the importer.
6 Rules, regulations and procedures: Every country imposes certain restrictions in the
export and import of goods to protect its economic and political interests, Besides, the
rules and regulations differ from country to countryaand are changed from time to time.
For example, the provisions of Imports and Exports Control Act, 1947 changes in
export import'policy and the restrictions on trade often create complications and
problems for importers and exporters.
7 'Credit worthiness of importer and reliability of exporters: The value of goods
involved in external trade is fairly high and the exporter has to grant credit facilities to
the importer. Since there is no direct contact between exporter and importer, it is
necessary that the exporter must take steps to verify the credit worthiness of the
importer and importer should check the reliability'of the exporter for supply of goods.
This may take a long time and cause delay in the avalability of g o d s .
8 Transportation and cargo risks: International trade takes place either by land, air or
water transport, and goods have to be transported over long distances. Water transport
occupies a predominant place in transporting goods across the national boundaries
because ships can carry large volumes of cargo at low cost. In spite of d l developments
in transportation, the risks of loss or damage to cargo by fire, storm, collision, leakage,
explosion, spoilage, etc. exist.
9 Time gap: The distance involved is usually greater in transporting goods from one
country to another country, and hence the transit time is longer. This time gap involves
exporter's capital being locked up over a long period.
Marketing 10 Political gnd legal problems: Political risks may arise as a result of changes in
governments or capture of cargo by enemies, etc. Commercial laws may be different
between the trading countries. Moreover, conducting legal proceedings in a foreign
country is complicated and expensive.

12.3 INDIA'S FOREIGN TRADE PERFORMANCE

The pre-independence scene of India's foreign trade was characterised by heavy
dependence of exports of traditional items. Nearly 85% of exports before independence
were made up of raw materials and semi-manufactured products like foodstuffs, raw
cotton, tea, spices, tobacco, Rides and skins and jute nianufactures. The import consisted
of consumer goods and manufactured products.The major parts of India's trade was
confined to Britain and its colony. Since the post independence period, the foreign trade
has undergone a radical change in the composition and market. The exportable items are
shifted from traditional commodities to new commodities. The major items of exports
are gems and jeweller-, readymade garments and cotton fabrics, agro-based products,
machinery and metal manufactures, chemicals , etc. On the import front the major items
are petroleum oil, capital goods, chemical elements, etc. which are essential fo; country's
economic development. The markets for India's export include USA. Japan, Gernlany,
UK, Belgium and other developed, developing and least developed countries. Look at
Table 12.1 which shows the growth of India's foreign trade.

Table 12.1
The Growth of India's Foreign Trade
(Rs. in Crores)
Year Exports Imports Balance of
Trade

1950-5 1 606 608 -2

1960-6 t 642 1122 480
1 970-7 1 1535 1634 -99
1980-8 1 671 1 12549 -5838
1990-91 32553 43 198 -1 0645
1991-92 4404 1 4785 I -3810
1992-93 53688 63375 -9687
1993-94 6975 1 73101 -3350
1994-95 82674 8997 1 -7297
(Provisional)
1995-96 7449 3 86064 - 1 1571
(Apr~l-Doc)
(Provis~onal)

Source: Econo~nicSurvey (1995-96). Government of India, New Delhi.

Note: The difference between the total value of goods exported and imported is called
balance of trade.

Check Your Progress A

1 State whether the following statements are True or False.
i) 'selling goods within the national boundaries is called.home trade
ii) Exchange of goods between two countries is called internal trade.
iii) Exchange of goods and services across national boundaries is
called foreign trade.
iv) Foreign trade generates resources and employment
v) External trade is an 'engine' for the development of economy of
a nation
vi) The element of risk involved in foreign trade is much less than
that of home trade.
vii) India imports goods from USSR and pays its own currency to settle
trade balances
viii)Exporters export goods without knowing the credit worthiness of
the importers.
 ixj International trade locks up huge amount of capital in products for a long period Procedure for Import and
x) Before Independence the major part of India's foreign trade was with Britainand Export Trade
its colonies.
2 India purchased Rs.1100 crores of machinery and equipment from the USSR. Equipment
worth Rs. 20 crores was exported to Bangladesh.
a) Tick the correct alternatives from the following after going through the above
statement.
i) Which one is the exporting country?
1 India
2 Bangladesh
3 USSR
ii) Which one is the importing country?
1 USSR
2 Bangladesh
3 India
iii) Which one. is the re-exporting country?
1 Bangladesh
2 USSR
3 India
b) Fill in the blanks after identifying the form of trade:
i) From USSR to India is called ................... for India.
ii) From India to USSR is called ...................for India.
iii) From India to Bangladesh is called ................... for India.
iv) Trade among the above nations is called ....................

12.4 REGULATIONS GOVERNING FOREIGN TRADE

In India, Foreign Trade is mainly governed by Foreign Trade (Development and

Regulation) Act 1992, Foreign Exchange Regulations Act 1973, and the Quality Control
and pre-shipment Inspection Act 1963. To export goods from India and to avail of the
export benefits, exporters have to comply with certain formalities. First of all, let us
discuss some of the important steps required to be taken by businessmen to undertake
export-import business. They should (i) obtain the Reserve Bank Code Number, (ii)
Register with Export Promotion Council. etc. and (iii) Obtain the Import-Export Code
Number.

i) Reserve Bank Code Number: Commercial exports can be undertaken by a firm in

India only after it has obtained the Reserve Bank Code Number. This is a requirement
under the Foreign Exchange Regulation Act (FERA). For obtaining the code number,
the firm has to apply to the Divisional Office of the Reserve Bank having jurisdiction
over the area where the firm is located. There is a prescribed form of application for this
purpose which is to be submitted in duplicate along with the report from the bank where
the firm has opened a current account. The firm is to furnish details about the nature of
j the organisation and products intended to be exported. Besides, it requires the
permanent income-tax account number to be given. In case the firm does not have an
I income-tax account number, it will be required to apply for the 6ame:The Reserve Bank
i is to be intimated within 15 days of the allotment of the income tax account number. On
completion of these formalities, the Reserve Bank will allot the code number to the
firm, if the application is in order. The code number is permanent and there is no need
i
to renew it. The number is to be cited invariably on export forms used for declaration of
I
exports.

1 ii) Registration with Export Promotion Council etc.:The Export-Import Policy,

1L 1992-97 makes it compulsory for exporters to get registered with any Export
i
I Promotion Council (EPC) or specified Commodity Boards, APEDA, MPEDA or
I
I
FIE0 etc. This registration is required for any person wishing to apply for a licence
1 to export or for any other benefit or concessions available under the policy. An
i. application for membership is made to concerned authority in the prescribed form.
\
Be
 Once an exporter hapbeen registered, the registration remains valid for five years.
.
Marketing
, Export of the registered exporters having valid RCMC will only qualify for the
benefits provided in the EXIM policy. Registered exporters have to submit
monthly reports about exports made by them.

iii) Import Export Code' Number : Every prson importing goods for commercial
purposes is required to obtain an Import-Export code number from the Regional
Import-Export Licensing Authority. Customs authority do not allow clearance of
goods to an importer, unless he possesses a valid import-export code number.
Application for allotment of the code number has to be made in duplicate, in the
prescribed form to the Regional Import-Export Licensing Authority. The Code
number allotted to a person is valid for import of any Commodity by the person
subject to restrictions announced from time to time.

12.5 EXPORT TRADE PROCEDURE

When goods are exported to a foreign country, the exporter has to follow the procedure
prescribed by the government. The procedure involved in exporting goods differs from
country to country and depends on the existing policy of that country. The general procedure
for exports from India involves the following stages:
1 Receives enquiry
' 2 Receives 'and scrutinices the order from importer
3 Obtains export licence
4 Manufactures/procures goods
5 Fulfils exchange regulations
6 Books shipping space
7 Gets excise clearance and pre-shipment inspection
8 Backing and marking
9 Appoints clearing and forwarding agents
10 Customs formalities
11 Insurance of goods and ECGC cover
12 Places the goods on board the ship
13 Obtains bill of lading
14 Collects necessary documents and despatches shipment advice to the importer
15 Secures payment
16 Claims the incentives

Receives an Enquiry
The first stage in the export trade is the receipt of an enquiry by the exporter from an
importer or his agent. An enquiry is a request by a foreign buyer for information regarding ,
the specificationsand the price of the gpods he intends to purchase. The reply to an enquiry
is in the form of a quotation or proforma invoice which contains particulars like name and
address of the buyer, full description of the goods offered, price, and terms of sale, and other
details such as validity period of the offer, delivery schedule, payment terms, etc.

Receives and Scrutinises the Order from the Importer

When the importer accepts the quotation, he places an order (also called indent) with the
exporter. The exporter should take care to scrutinise the terms and conditions of sale as
they determine all subsequent actions with regard to the export transaction. It should be
ensured that the contract has been entered into in accordance with the prevailing export
policy and foreign exchange regulations of India, Particular attention has to be paid to
the terms of payment. If the terms and conditions of the order are acceptable, a
confirmation in writing giving the details of the order, terms and conditions, etc, should
be forwarded to the buyer at the earliest.

Obtains an Export Licence

The development and regulation of fareign trade in India is governed by the Foreign
Trade (Development and Regulation) Act, 1992, This act helps in facilitating imports
into and augmenting exports from India. Goods subject to control can not be exported Procedure for Import and
without a valid export licence. In order to obtain an export licence, the exporter has to Export Trade
apply to the Director General of Foreign Trade (DGFT) or Regional Licensing Authority
on the prescribed form. After the Licensing Authority is satisfied; the exporter will be
issued an export licence.

Manufactures/Procures Goods
AS soon as the export order is confirmed, preparations for the production/procurement of the
goods are started. In the case of manufacturer-exporter, a delivery note (in duplicate) is sent
to the works manager or the factory manager. 'The note should kontain the description of the
goods as has been given in the export order, and a copy of the instructions given by the
importer. 'The dates by which the goods must be manufactured. the date by which necessary
formalities are to be completed, and the date of shipment must be clearly intimated to the
works manager. A merchant exporter has either to obtain the required goods from the market
or has to get them from other manufacturers. Thc specifications and instructions to be
intimated to the supplier of goods must be in accordance with those given in the export
order.

Fulfils Exchange Regulations

Every exporter precedent to export of any goods dire~tlyor indirectly to any place
outside India other than Nepal and Bhutan has'to furnish a declaration on the prescribed
form to the Reserve Bank of India. The declaration is made about the full value of
exportable goods or the prevailing market value of the goods. The full value of exports
should be realised on due date for payment or within 180 days from the date of shipment,
whichever is earlier. The documents for foreign exchange formalities include, GR form
in all shipments other than by Post, VPICOD form used for postal channel and SOFTEX
form for Computer Software.

Books Shipping Space

It is the responsibility of the exporteito arrange transport by entering into an agreement with
a shipping company for transporting the goods to the importer. Usually this responsibility is
given to a freight broker or agent who specialises in this job. He possesses full knowledge of
the various shipping lines operating on the specific route and is in a position to obtain the
lowest possible freight rates. The shipping agent on behalf of the exporter gets shipping
order from the Shipping Company. 'The shipping order contains instructions to the captain of
the ship to receive the specific quantity of goods from the exporter mentioned therein. If-the
consignment is very big, the exporter may charter a whole ship or a major part of the ship.
The agre'ement with the shipping company is then known as Charter Party. If it is the
buyer's responsibility to arrange transport, he should be advised of the dates the goods
would be ready for movement.

Gets Excise Clearance and Pre-shipment Inspection

As soon as the goods have been manufactured or procured, steps should be taken by the
exporter to obtain clearance from the excise authorities. This can be done in two ways: (i) he
can pay the excise duty at the time of removing the export consignment from the factory and
then file a claim for refund of the duty after the goods have been exported; (ii) he can secure
clearance by executing a bond on such terms and conditions as the collector of excise may
decide.
At this stage the exporter has to arrange for pre-shipment inspection to ensure conformity
with the prescribed specifications. An Inspector is deputed by the Inspection Agency to
inspect the export consignment. If the goods conform to the prescribed specifications, all
inspection certificate is issued.

Packing and Marking

Packing for exports is a highly specialised job. It provides adequate protection for thegoods.
Marketing Packed goods must be in accordance with requirements of the buyer, shipping company and
the customs authorities. Packed goods should be marked as per the instructions of the
importer. Each package should have distinct shipping marks to identify the consignment
easily. In addition, the gross weight, the tare (the weight of the package itself) and the net
weight along with the measurements should be marked on the package. The marking may be
done in the form of a rectangle, a square, a triangle or a circle as given below:

The package should also have suitable lables for different classes of goods to facilitate the
handling of goods. For fragile goods, handling instructions like handle with care or this side
up could also be marked on the package.

Appoints Clearing and Forwarding Agents

Sometimes, exporters appoint clearing and forwarding agents to look after all shipping and
customs formalities and actual loading of the goods on board the ship. The forwarding
agents are experts in their line of business and offer valuable services to the expoiter on
payment of reasonable charges. In particular, they perform the following functions:
(i) negotiation of shipping contract, (ii) customs formalities, and (iii) loading of goods in the
ship and securing the Bill of Lading. They may also undertake packing and marking of
goods and help in getting the goods insured.

Customs Formalities
The clearing and the forwarding agent takes delivery of the consignment from the railways
and manges for its storage in the warehouse. Thereafter, he takes necessary actioi~to
comply with the customs formalities. He has to prepare the shipping bill which is the main
document required by the customs authorities for the purpose of granting permission for
exports. The shipping bill is a document showing the exporter's name and address,
description of goods such as marks, numbers, quantity and value, etc., the country from
which they are exported, the name of the vessel and the port where goods are to be,
discharged. There are three types of shipping bills: (i) for duty free goods a white shipping
bill, (ii) for dutlable goods, a yellow shipping bill and (iii) When duty drawback is
allowed, a green shipping bill.
Besides the shipping bill, the following other documents are also required to be submitted
for customs clearance: AR-4 form (regarding excise duty payment), G.R. form (declaring
value of goods), original order or letter of credit, commercial invoice, packing list (needed
for ins'pection of goods), and declaration form (a formal announcement by the exporter that
the particulars entered in the shipping bill are in conformity with the export order).
'The exporter or the clearing and forwarding agent in his belialf'is required to present the
required documents. The exporter will be asked to pay the export duty, if any. The customs
house will then direct the examining office or the appraiser to cany out the physical
examination of the goods at the dock. After the exporter has gone through all formalities to
the satisfaction'of the customs authorities, a customs export pass or an endorsement 'let
ship' is issued to the exporter on the duplicate copy of the shipping bill., Then the loading of
goods will take place on the board.

Insurance of Goods and ECGC cover

Generally, the shipping companies refuse to carry the goods unless they are insured for loss
or damage in course of transit. Similarly, the commercial banks refuse to finance.or discount
the bills of exchange, unless they are accompanied by the insurance policy. Hence, before
the goods are despatched, they must be insured for the various types of risks involved in'
transit by the exporter. Usually goods are insured for an amount which covers not only the
value of the goods but also a reasonable profit. The commercial and political risks, like
insolvency of the buyer, rebel'lion ,or civil war in the importing country can be covered by
insuring the shipment with the Export Credit Guarantee Corporation (ECGC). This will help
the exporter in securing export finance from banks.
,Places the Goods on Board the Ship Procedure for Import and
Export Trade
Once the customs export pass is secured, the exporter may deliver his goods directly to the
dock or the ship. If the exporter delivers goods to the dock, a dock receipt is given for the
goods. When goods are loaded directly in the ship, the Mate (captain's assistant) of the ship
issues a receipt in acknowledgement of the goods after examining the packing and counting
of the packages. This receipt is called the 'mate's receipt'. The mate issues a clean receipt if
he is satisfied with the packing of the goods. If he is not satisfied he will make a remark to
the effect of the mate's receipt. A mate's receipt with such a remark is considered a 'foul'
or 'claused receipt'. This remark is transferred to the bill of lading when the exporter gets it
in exchange for the mate's receipt. The exporter should, therefore, take proper care in
packing the goods so as to avoid any remarks on the mate's receipt.

Obtains Bill of Lading

A bill of lading is a document by which the shipping company acknowledges the receipt of
goods on board the ship. It contains the terms and conditions on which goods are to be
delivered to the port of destination. It serves as an evidence of the terms of the contract of
afreightment between the exporter and the shipping company. The bill of lading is the
document of title to the goods, without which goods cannot be claimed. Thus, when the
goods arrive at the foreigri port, the bill must be produced before they can be claimed. The
bill can be made out to a certain person only, o c t o order, when it can be endorsed and
passed on, to transfer ownership of the goods to another. However, it is not negotiable,
because the bearer's claim to the goods can never be better than the claim of the person who
passed on the bill to him. If a bill were stolen before being passed on, it would not confer a
legal right to the goods.
The bill of lading mentions whether the freight has been paid or yet to be paid. When the
freight is paid by the exporter, the bill of lading is marked freight paid. When the freight is
payable by the importer of the goods, the bill of lading is marked freightforward.

Collects Necessary Documents and Despatches Shipment Advice t o the Importer

After the goods are placed on board, the forwarding agent returns the following documents
to the exporter: (i) A set of 'clean on board' bill of lading, (ii) a copy of invoice duly attested -
by the customs authorities, (iii) copies of the shipping bill, (iv) export order in original
(v) letter of credit in original (vi) duplicate copy of the AR-form and (vii) duplicate copy of
GR form,
As soon as the exporter receives the above documents, he sends a shipment advice to the
importer, along with the following documents: (i) commercial invoice (ii) insurance policy,
(iii) copies of the bill of lading which are not negotiable, and (iv) the packing list.
Taking the possession of these documents, the importer or his clearing agent arrhges for the
clearance of goods from the customs office in whose custody the goods lie after being
unloaded from the ship. The importer or his clearing agent approaches the shipping
company, pays the dues, if any, and gets the possession of goods after submitting the bill of
lading and other documents needed by the shipping company. The commercial invoice is the
bill stating what goods have been sent, their weights, markings, prices and values. The
importer needs the invoice to see what he owes and to check it with his copy of the indent.
He must have the bill of lading to claim the goods and insurance policy to enable him to
claim from the insurance company the value of damage, if any, suffered by the goods during
the voyage.

Secures Payment
There are a number of alternative methods of securing payment of export dues from the
importer. The method of payment is however, determined by the contract between 9
exporter and the importer. The two most common methods are described beloy: '
i) Documentary bills of exchange: By drawing a'bill of exchange' on the importer, the
exporter gets a promise of payment. The exporter sends the necessary documents to the
importer along with a bill of exchange drawn on him with specific ihstructions that the
documents would be released to the importer only when he accepts the bill of exchanke
or pays it. If the documents are released against payment, the arrangement is known as
documents against payment (DIP). If the documents are to be released against
acceptance of the bill, the arrangenient is known as documents against I
 acceptance (DIA). Normally, under the DIA bills the exporter waits for payment till the
bill is finally paid for. This may take time. But the negotiating banks are very often
willing to discount the bills. This enables the exporter to receive payment immediately
after shipment of goods.
If the exporter wants to get the amount immediately, he can discount the documentary
bills with the local branch of his bank. For this purpose, he has to issue a letter of
hypothecation to the bank. A letter of hypothecation is a letter addressed to a bank
along with the bill drahn on the importer, by an exporter for the g d s shipped by him.
The exporter authorists the bank to sell the goods in case of dishonour of the biH by the
importer.
ii) Documentary credit under letter of credit: A safer and quicker method of obtaining
payment is that of documentary credit whereby the importer arranges for a bank to
open a letter of credit in favour of the exporter. In a letter of credit, the importer's bank
branch gives a written undertaking to the exporter that if the exporter presents certain
documents relating to the shipment of the goods within a fixed period, the bank will
honour the bill of txchange drawn under the credit upto the amount specified in the
letter of credit. In both the cases, the necessary documents along wifh the bill of
exchange drawn on the importer are sent to the importer through the exporter's bank.
The negotiating bank scrutinises the documents and thereafter sends the bill of
exchange, bill of lading, insurance policy and other documents to the importer's bank
for discharge of payment. If the bill is payable at sight, the exporter receives his money
immediiely. If i t is payable certain number of days after sight or date, the bank accepts
it and the exporter discounts it.

Claims the Incentives

An exporter is entitled to claim certain benefits like duty drawbacks, excise rebate;
special import licences; tax concessions etc. These incentives are offered by the
government to promote exports. The last step in export procedure is to claim these
incentives from the government.

Check Your Progress B

Fill in the blanks.
i) Export ol'goods l'ro~n11idiuis subject lo control under the ...................
ii) Taking the whole ship or tii;~jorpart of the ship from the shipping company toexport !
...................
the goods is c~~lled I
!
iii) The Mate issues ...................when he is satisfied with packing, etc. of the goods to be
'
1
exported.
iv) ...................ii giver1 when an exporter delivers goods directly at the dock. I '

v) Preship!ncnt inspection :~ndquality control of the goods are done by ...................

vi) When [lie f~+eiplit is paid by the exporter the bill of lading is marked ...................

12.6 IMPORT TRADE PROCEDURE I

h-nport triidc procedure differs Trom country to country depending upon the satisfactory
1.equiremen1sand trade practices in force. The general procedure of import trade in India
involvcs the I'olluwing stages:
I Trade Enquiry
2 Obtains 311lmport Licence
3
/

Obtairis boreign Exchange

4 Places the Orderllndent
5 Arranges Letter of Credit
6 Gets Shipping Documents procedure for Import and
7 Clears the Goods Export Trade
8 Makes Payments

Trade znquiry
The intending importer makes trade enquiry from the possible exporters. His enquiry is
based on the details of the goods required by him viz., quality, design, size, etc. and seeks
information regarding the availability of goads, the price at which they would be available
and the t e n s and conditions regarding delivery and payment. In response to his enquiry, the
importer may receive a number of quotations which will contain particulars as of the goods
available in ready stock, their quality, size, design, etc. The different quotations will also
specify the price at which the goods should be available and the terms and conditions of
sale. Once quotations from different suppliers have been received, a thorough comparison
should be made of the various quotations before taking the decision to import.

Obtain an Import Licence

In order to obtain an import licence, the intending importer makes an application in the
prescribed form, to the Licencing Authority. When the licensing authority is satisfied
with the claims, he issues the licence. The import licence is issued in duplicate. 'The first
copy is presented by the importer to the customs authority at the time of clearance of
goods and the second copy is used for obtaining foreign exchange from Reserve Bank of
India. Although raw materials, intermediates, capital goods and other items announced
by the c,entral government may be imported freely under Open General Licence (OGL)
scheme.

Obtains Foreign Exchange

After obtaining the import licence, the importer makes arrangements for obtaining the
necessary amount of foreign currency. In India, the Reserve Bank of India (RBI) is
authorised by the Government to regulate the use of exchange. Every importer has to
produce import licence along with the prescribed application form under the Exchange
Control Act. The exchange bank of the importer endorses and forwards the application to the
Exchange Control Department of RBI. The RBI sanctions the release of the amount of
foreign exchange to the importer after'scrutinising the application on the basis of the
existing Government policy.

Places the Orderhndent

After obtaining the import licence and requisite amount of foreign exchange, the next step is
to place the order or indent for import of the goods. An indent is a form of order sent abroad
for goods to be imported. The indent contains Full details regarding the goods to be imported
and the terms and conditions regarding price, shipment, delivery, the method of payment,
etc. An indent may be 'open', 'closed' or 'confirmatory'. When the selection of goods and
other details are left to the agent's discretion in the foreign country, it is called an 'open
indent'. A closed indent contains full particulars of the exact goods required. When an
order is placed subject to the confirmation by the importer's agent, it is called confirmatory '

indent. Every importer is free to place the order directly or through the intermediaries,
specialised in such'tradc. These specialised agencies are called indent houses. An indent
house refers to an import agent or import firm,which impons goods on orders received from
importers. The indent house serves as middlemen between the importers and exporters. They
charge certain percentage of commission for their services from the importer. If the importer
wants to make use of services of an indent house, he has to enter into an agreement with the
indent house for the supply of specified goods. For this purpose there are certain special
forms which the indent house fills up and the importer signs, In India many of the big indent
houses have their offices in port'towns like Bombay, Madras, Calcutta, etc.
Marketing
Arranges Letter of Credit
Depending upon the terms of payment, the importer may have to arrange a letter of credit to
be issued by his bank in favour of the exporter. All the terms and conditions agreed upon
between the importer and exporter are generally spelt out in the letter of credit. The
importer's bank issues the letter of credit authorising the correspondent bank in the
exporter's country to buy the bill drawn by the exporter on the importer, or to accept the bill
drawn on the bank itself. The importer's bank may require adequate amount to be deposited
by the importer so as to cover the amount for which the letter of credit is issued. But such a
deposit may not be insisted upon if the importer is an established person or a firm well
known to the bank or it maintains a satisfactory deposit account with the bank.
A bank may issue any of the following types of letter of credit.
1) Revocable letter of credit: It can be withdrawn or altered or revoked at the discretion
of the issuing bank without the prior consent of the exporter.
ii) Unconfirmed irrevocable letters of credit: It cannot be cancelled or altered or
withdrawn by the issuing bank prior to the date of expiry, without the consent of the
exporter and is thus much safer.
iii) Confirmed irrevocable letters of credit : The irrevocable letter of credit shall be
by a bank. With a confirmed irrevocable
more safe if it is confirmed or g~~aranteed
credit, the bank must pay the exporter, whatever happens to the importer or the
foreign bank.
b

Gets Shipping Documents

After receiving order and the letter of credit, the exporter ships the goods and intimates the
importer that the goods have been despatched. The exporter draws a bill of exchange on the
importer's bank for the full value of goods payable to him. The bill of exchange,
accompanied by all the shipping documents viz. commercial invoice, bill of lading,
insurance policy, and the certificate of origin (if needed), are forwarded to the importer's
bank by the exporter's bank. Under the letter of credit arrangement, the importer's bank will
handover the documents to the importer who would take steps for getting the goods cleared
from the customs authorities. In the absence of a letter of credit, the bank will follow the
instructions of the exporter in the matter of delivering the documents to the importer. If the
bill of exchange is marked D/A (documents against acceptance), the documents will be
delivered to the importer on the acceptance of the bill. If the bill is marked DIP (documents
against payment), the documents will be delivered to the importer only on payment of the
amount of the bill.

Clear the Goods

After taking possession of the documents of title to the goods, the importer waits for the
arrival of the ship. When the ship arrives at the port of destination, the importer arranges
clearance of the goods from the customs office in whose custody the goods lie after being
unloaded from the ship. This requires a number of formalities to be completed. The importer
may appoint a clearing agent for that purpose. Clearance of goods requires the following
steps to be taken: (i) get the bill of lading endorsed by the shipping company for delivery of
the goods or a delivery order issued by the shipping company (ii) pay the necessary amount
of port trust dues representing the cost of services rendered by the dock authorities in
connection with the loading of goods (iii) fill up a 'bill of entry' containing all particulars
relating to the imported goods and the customs duty to be paid. After import duty has bcen
paid, the importer has to submit the 'bill of lading ' 'port trust dues receipt' and 'biH of
entry' to the shipping company for release of the goods. In case the importer is not in a
position to pay the customs duty in full immediately, he may apply to the customs
authorities to get them placed in the bonded warehouse. The importer can pay duty for part
of the goods as and when he wants to get delivery.
I

Makes Payments
The mode of payment for import depends upon the agreement between the impoiter and the
exporter. If the documents have been received against acceptance (D/A bills), the importer
has to honour the bill of exchange on the due date. After the bill is paid, the importer
transaction comes to a close. In case of documents against payment (D/P bills), the importer
pays immediately or within a short period after presentation, because the importer gets
possession of the documetlts of title to the goods only on payment of the bill.
 Check Your Progress C
Procedure for Import and
1 State whether the following statements are True or False. Export Trade
i) Import,trade procedure does not differ from country to country.
ii) RBI issues foreign exchange in our country.
iii) An indent is an order to import goods.
iv) An indent house serves as middleman between the importer and
exporter.
v) Letter of credit is issued by the bank only when bill of exchange is
produced.
vi) In the absence of letter of credit, the bank follows the instructions of
the exporter to deliver the documents.
vii) On dutiable goods, the duty is paid immediately and on bonded goods
the duty is not paid in instalments.
viii) Certificate of origin is sent to the importer to take the possession of goods
imported.
ix) Revocable letter of credit cannot be altered or cancelled without the
consent of the exporter.
x) Clearing agents and indent houses perform similar functions.

12.7 LET US SUM UP

Exchange of goods and services across national boundaries is called 'foreign trade' or
'international trade'. The main difference between home trade and foreign trade is that the
people involved in the former are citizens of the same country, whereas those involved in
the latter are of different nationality. Besides, there is little restriction on trade between
people within a country. But there are numerous restrictions on foreign trade. In domestic
trade, payment is made and received in the same units of money. In foreign trade, what the
importer pays in his national currency has to be converted into the currency acceptable to the
exporter. Moreover, payment can be made in hometrade either in cash or by cheque or a
national bank. In foreign trade payment can be made only through a bank,
Foreign Lrade can be divided into three categories: Import trade (purchase made from a
foreign country), Export trade (goods sold to a foreign country), and Entreport trade (goods
'
imported from one country for export to other countries). .
The importance of foreign trade to people in different countries may be attributed to
(i) specialisation and efficiency of productive activities of different countries (ii) utilisation
of natural resources in different countries, (iii) economic development on the basis of
exports and imports (iv) equalising the prices of goods all over the world (v) creating
employment opportunities and harmonising relationship between different countries.
The problems of foreign trade are (i) difficulty of securing information about the suitability
of products in the foreign market, (ii) difficulty of anticipating changes in supply and
demand conditions abroad, (iii) risks of frequent changes in prices in international markets,
(iv) credit risk to be borne by the exporter, (v) risk of fluctuation in exchange rates
(vi) differences in the rules, regulation and procedms in different countries, (vii) ensuring
the credit worthiness of importer an! reliability of exporter, (viii) risks of loss or damage to
cargo in course of transportation, (ix) time gap between export and receipt of payment, and
(x) political and legal problems.
Before Independence, India was largely an importer of manufactured goods and exporter of
raw materials. With industrial development since Independence India's foreign trade has
undergone a radical changd in its composition and is no longer confined in Britain and its
colonies.
To export goods fiom India and to avail of the export benefits, exporters were to comply
with certain formalities like: obtaining the Reserve Bank Code Number, registration with
Export Promotion Council, and obtaining the Export-Import Code Number.
T h e general procedure involved in connection with exports from India are: receiving
enquiry; receipt and scrutiny of the order fiom the importer; obtaining export licence;
manufacturing or procuring goods; fblfilling exchange regulation; booking of shipping
space; getting excise clearance and pre-shipment clearance; packing and marking;
Marketing appointing clearing and forwarding agents; completing customs formalities; insurance of
goods and ECGC cover; placing goods on board the ship; obtaining the bill of lading;
collection of necessary documents and despatch of shipment advice to the importer;
securing payment either by means of documentary bills of exchange or documentary
credit under letter of credit; and claiming the incentives for export from government
authorities.
The procedure for import trade in India consists of: making trade enquiry from exporters;
obtaining import licence; securing sanction and release of foreign exchange; placing the
order or indent; arranging letter of credit; receipt of shipping documents; clearing the goods
after getting the bill of lading endorsed by the shipping company and delivery order issued,
payment of port trust dues etc. filling up the bill of entry; and making payment against the
exporters bill and accepting the bill to obtain the documents of title to the goods.

12.8 KEY WORDS

Bill of Entry: A document showing the details of goods imported. The custom authorities
determine the amount of import duty on this basis.
Bill of Lading: A document issued by the shipping company acknowledging the receipt of
goods on board the ship and containing the terms and conditions on which goods are to be
taken to the port of destination.
bonded
Z
Warehouse: An agreement between shipping company and the exporter for
transportatiofi of goods to another port.
Certificate of Origin: A document showing place of origin sent to the importer in order to
enable him to take advantage of preferential treatment as regards customs duties.
Commercial Invoice: The bill prepared by the exporter showing details of their weights,
markings, prices and values, despatched viz., together with any other charges that may be
due to the exporter such as freight and insurance premiums paid by him.
Charter Party: A contract of affreightment for chartering a whole ship or a major part of it.
Contract of Affreightment: An agreement between shipping company and the exporter for
the transportation of goods to another port.
DIA: A method of receiving payment from the importer whereby the documents are released
to the importer on acceptance of a bill of exchange.
Documentary Credit: A method of receiving payment from the importer whereby the
importer arranges for a bank to issue a letter of credit in favour of the exporter.
DIP: A method of receiving payment from the importer whereby the documents are to be
released by the bank to the importer on payment of the account due.
Dock Receipts: A document issued by the dock authorities when the exporter delivers
goods directly to the dock.
Drawback:,Getting refund of import duty.
Entrepot Trade: Import of goods by one country for exporting fo another country.
I
G.R. Form: A form prescribed by Reserve Bank of India to ensure that the foreign
exchange receipts in respect of exports are received in India within 180 days of the
shipment.
Indent: An order sent abroad for the import of goods.
Indent House: A firm which arranges the import of goods on behalf of various importem.
I
Letter of Credit: A document or order issued by a banker authorising some other banker to
pay upto the amount stated in the letter to a party named therein or his order.
 Procedure for Import and-
better of Hypothecation: A letter signed by the exporter authorising the bank to deal with Expcrt Trade
the goods in case the importer fails to accept or honour the bill.
Mate's Receipt: A document issued by the captainlmate (captain's assistant) when an
exporter loads goods directly in the ship.
Shipping Bill: A docurnenl showing the description of goods, the country from which they
are exported, the name of the vessel and the port where goods are to be discharged.
Shipping Order: A document issuea by the shipping company containing instructions to
the captain of the ship to accept goods mentioned therein for shipping from the exporter.

12.9 SOME USEFUL BOOKS

Mathew, M.J. 1985. International Trade, Policies and Prospective~in Developing
Economy, Sri Ram Book Company: Jaipur.
Verrna, M.L. 1988. Foreign Trade Management in India, Vikas Publishing House Private
Limited: New Delhi.
Varshney, R.L. and B. Bhattacharya. 1984. International ~ a r k e t i nManagement:
~ An
Indian Perspective, Sultah Chand & Sons: New Delhi.
Trerarne, Williams D. 1985. Commerce. Longman: New Delhi.

12.10 ANSWERS TO CHECK YOUR PROGRESS

A 1 (i) True (ii) F.alse (iii) True (iv) False (v) True
(vi) False (vii) False (viii) False (ix) True (x) True
2 (a)(i)3 (ii)3 (iii) 3
(b) (i) export trade (ii) import trade (iii) re-export trade
(iv) foreign trade
B (i) Import Export Controls Act (ii) Charter Party
(iii) clean receipt (iv) dock receipt (v) inspector from the inspection agency
(vi) freight paid
c (i) False (ii) True (iii) True (iv) True (v) True
(vi) True (vii) True (viii) False (ix) False (x) False

2 1 TERMINAL QUESTIONS
1 Define foreign trade. How does it differ from home trade?
2 "Foreign trade is an engine of economic growth in a country." Discuss this statement
keeping in view the Indian context and state other advantages of the foreign trade.
3 India's foreign trade has undergone a radical transformation since Independence. Do
you agree with this view? Substantiate your view with facts.
4 What is a Letter of Credit? How does it help'in financing foreign trade? ~ a m e ' t h e
shipping documents required to be submitted along with a documentary letter of credit?
5 What documents must accompany an export shipment? Describe them briefly.
6 Distinguish between
a) Bill qf Lading and Shipping Bill
b) Bill af Lading and Charter Party
c) Mate's Receipt and Shipping Order
7 Explain the stages through which an export transaction has to pass and describe thc .
various documents involved.
8 Describe the procedure for import of goods.
Marketing 9 State the functions performed by clearing and forwarding agents in relation to import
and export of goods.
L O Write short notes an:
a) Bill of Entry
b) Documents against Payment .
c) Documents against Acceptance
d) Certificate of Origin

/ Yote: These questions will help you to understand the unit better. Try to write answers for them. But dop
not submit your answers to the university. These are for your practice only.
NOTES