Rohitashva Singhvi

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  • Letter of Credit (LC) Documentation: Key Points, Terms, and Bank Roles

    Letter of Credit (LC) Documentation: Key Points, Terms, and Bank Roles

    In international trade, the Letter of Credit (LC) is a widely used financial instrument that guarantees payment between an importer and an exporter. It offers a secure mechanism that assures both parties about the timely payment of goods and services, as long as specific terms are met. For a successful transaction under an LC, thorough documentation and compliance with its terms are essential. In this post, we will explore the critical aspects of LC documentation, the necessary documents involved, Key Points, Terms, and vital Bank Roles played in ensuring smooth international transactions.

    Must Read: Top 50 Financial Accounting Terms – Rohitashva Singhvi

    What is a Letter of Credit (LC)?

    A Letter of Credit is a promise by a bank (the issuing bank) to pay the seller (beneficiary) on behalf of the buyer (applicant), provided that the seller meets the LC’s stipulated terms and conditions. It minimizes the risk for both parties involved in international trade, making it a cornerstone of global business.

    The following are key participants in an LC transaction:

    1. Importer (Applicant): The buyer who requests the LC.
    2. Issuing Bank: The bank that issues the LC on the importer’s behalf.
    3. Beneficiary (Exporter): The seller who receives payment upon meeting the LC terms.
    4. Advising Bank: The bank that informs the exporter about the LC.
    5. Confirming Bank: In some cases, an additional bank that guarantees payment, offering further security to the exporter.

    Once an LC is issued, it is generally irrevocable, meaning it cannot be modified or canceled without the consent of all parties involved.

    Essential Documents for LC Transactions

    The correct preparation of documents is the cornerstone of a successful LC transaction. The following documents are typically required:

    1. Commercial Invoice

    This document details the goods being shipped, including their quantity, price, and terms of sale. It serves as proof that the exporter has fulfilled the sale agreement.

    2. Bill of Lading

    The bill of lading is a receipt issued by the carrier, confirming that the goods have been shipped. It provides details about the shipment, including the vessel, port of loading, discharge location, and consignee.

    3. Packing List

    A packing list outlines the contents of the shipment. It includes specific details such as the number of items, their weight, dimensions, and how they are packed. This helps in verifying the contents of the shipment against the commercial invoice.

    4. Certificate of Origin

    This document certifies the country of origin of the goods. It is often a requirement for customs clearance, ensuring that the goods comply with trade regulations between countries.

    5. Insurance Certificate

    The insurance certificate serves as proof of insurance coverage for the goods during transit. It ensures that the goods are protected against potential risks such as damage, theft, or loss during transportation.

    6. Inspection Certificate

    The inspection certificate verifies that the goods meet the buyer’s specifications in terms of quality and quantity. This is often issued by a third party after an inspection of the goods before shipment.

    Must Read: Switch Bill of Lading and their types – Supply Chain Management – Rohitashva Singhvi

    Key Terms and Conditions in LC Transactions

    The LC outlines specific terms and conditions that must be adhered to by both parties. The primary terms include:

    1. Amount

    The LC specifies the total amount to be paid by the importer to the exporter.

    2. Expiry Date

    This is the deadline for the submission of the required documents. If the documents are not presented within this period, the LC becomes void.

    3. Shipment Date

    The shipment date indicates the latest date by which the exporter must ship the goods. Delays in shipment could lead to complications or the rejection of the LC.

    4. Presentation Period

    The presentation period is the timeframe within which the exporter must submit the documents to the issuing bank. This period begins after the goods are shipped.

    5. Beneficiary

    The exporter, known as the beneficiary, is the party entitled to receive the payment as per the LC terms.

    6. Issuing Bank

    The issuing bank creates the LC at the request of the importer and is responsible for ensuring payment upon receiving the correct documents.

    7. Advising Bank

    The advising bank is usually located in the exporter’s country and serves as an intermediary that communicates the LC details from the issuing bank to the exporter.

    8. Confirming Bank

    In certain cases, a confirming bank adds its guarantee to the LC, providing the exporter with added assurance of payment.

    Compliance with LC Terms: Avoiding Discrepancies

    Compliance with the specific terms outlined in the LC is crucial. All documents presented by the exporter must strictly conform to the terms of the LC. Any discrepancies, even minor ones, could lead to delays or outright rejection of payment.

    1. Strict Adherence

    It is essential for the exporter to ensure that every detail in the submitted documents matches the LC terms exactly, including spellings, numbers, and descriptions.

    2. Discrepancies

    Common discrepancies include misspellings, incorrect document dates, or mismatches in shipment details. If any discrepancies arise, the issuing bank can refuse to make payment, leading to significant delays.

    3. Amendments

    Should amendments to the LC be necessary, they must be agreed upon by all parties involved (importer, exporter, and banks). These changes could relate to shipment dates, amounts, or other key terms.

    Additional Considerations for LC Transactions

    Beyond the basic terms and documents, there are several other factors to keep in mind when dealing with an LC:

    1. Incoterms

    Incoterms, such as FOB (Free on Board) or CIF (Cost, Insurance, and Freight), define the responsibilities of the buyer and seller. These terms affect who bears the risk and costs of transportation, insurance, and duties.

    2. Insurance

    Adequate insurance coverage is essential for protecting the goods during transit. Both parties must agree on the extent of coverage required.

    3. Currency

    The currency in which the LC payment is made should be clearly specified to avoid fluctuations or misunderstandings in international transactions.

    4. Partial Shipments

    The LC should clearly indicate whether partial shipments are allowed. If permitted, this could offer flexibility to the exporter in case of production or supply chain delays.

    5. Negotiation

    In certain cases, the exporter may need to negotiate with the importer to modify LC terms, resolve disputes, or address concerns before shipment.

    The Role of Banks in LC Transactions

    Banks play a central role in the Letter of Credit process, acting as intermediaries that guarantee the transaction. Their involvement ensures that both the buyer and seller adhere to the agreed-upon terms and conditions.

    1. Issuing Bank

    The issuing bank is responsible for issuing the LC and ensuring that the exporter is paid upon the submission of compliant documents. The bank also assesses the importer’s creditworthiness and provides a payment guarantee.

    2. Advising Bank

    The advising bank notifies the exporter of the LC issuance and verifies its authenticity. This bank acts as an intermediary, facilitating communication between the issuing bank and the exporter.

    3. Confirming Bank

    In some cases, the exporter may request the addition of a confirming bank. This bank adds its guarantee to the LC, providing further assurance to the exporter that they will be paid even if the issuing bank defaults.

    4. Negotiating Bank

    The negotiating bank reviews the documents presented by the exporter and ensures they comply with the LC terms. If the documents are in order, the negotiating bank may make the payment to the exporter or arrange for payment through the issuing bank.

    5. Reimbursing Bank

    The reimbursing bank handles the payment reimbursement to the negotiating bank, ensuring that the exporter receives the agreed-upon amount after meeting the LC terms.

    6. Paying Bank

    The paying bank, which may also be the issuing bank, makes the final payment to the exporter after verifying that all LC conditions have been met.

    Conclusion

    In conclusion, a Letter of Credit is an indispensable tool in international trade that provides security for both buyers and sellers. Proper understanding and adherence to LC documentation, terms, and conditions are crucial for a smooth transaction. Additionally, the involvement of banks ensures the reliability of the payment process, minimizing risks and facilitating global trade. By thoroughly preparing and complying with LC requirements, businesses can ensure successful international transactions and mitigate potential risks.

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  • Switch Bill of Lading and their types – Supply Chain Management

    Switch Bill of Lading and their types – Supply Chain Management

    A complete manual and word of advice as per below details to understand switch bill of lading and their types:

    What it means? A switch Bill of Lading refers to a second set of Bill of Lading issued by the carrier (or its agent) to substitute the original bills of lading issued at the time of shipment.Even though it technically deals with the same cargo, the information on the switch B/Ls, for various reasons put forth below, is intentionally edited and is not meant to be identical to the original B/L it replaces. Just like the original, the switch B/L serves as:

    • A receipt for goods (for the destination agent)
    • Evidence of contract of carriage (contract between shipper and the carrier)
    • Document of title to the goods (consignee will need at least one original to receive the goods)

    In most cases, a switch B/L is used in order to edit the shipper information, i.e. replacing the actual factory details with the trading agent’s. That said, there may be various other motives for requesting a switch B/L. Let’s go deeper in Switch Bill of Lading and their types – Supply Chain Management:

    Reasons to issue a switch Bill of Lading

    Switch B/Ls are only issued against the surrender of the original set and may be required by any of the three parties with direct involvement in the purchase/sale of the cargo: the cargo owner/seller (or an authorized representative), the trading agent, and the end buyer.The reasons for requiring a switch B/L include:

    • The seller (who could be a trading agent) wants to hide the name of the actual exporter from the consignee to prevent the consignee from striking a deal with the exporter directly.
    • The seller does not want the buyer to know the actual country of origin of the cargo.
    • The original B/L may be held up in the country of shipment, or the ship may arrive at the discharge port prior to the original B/Ls.
    • The trading agent prefers to ease his cash flow by first receiving payment from the end receiver before paying the shipper.
    • Goods may have been resold en route as a high sea sale and the discharge port must now be changed to another port.
    • Customs at destination or consignee request for the cargo description to be edited. Eg. “tools” instead of “gardening tools”.
    • The goods were originally shipped in small parcels on separate B/Ls and the buyer prefers to have only one B/L covering all the parcels to facilitate his on-sale. Or vice versa – one B/L was issued for a bulk shipment which the buyer prefers to split into multiple B/Ls covering smaller parcels.

    Switch Bill of Lading procedure

    The Switch B/L can only be officially requested by the cargo owner or principal. In other words, since the Bill of Lading represents ownership, only the company holding the full set of documents can request for a switch B/L.Advice: the request should only be made if the company has all three original B/Ls in hand, except in the case of a Telex Release.After the request has been made, the switch bill must be approved by the carrier and the freight forwarder, who needs to very meticulously compare the differences between the original B/L and the new and proposed Switch B/L to make sure everything that needs to match, matches.Note: only the carrier or freight forwarder is allowed to sign a Bill of Lading.Once the switch B/L has been approved for issuance, the carrier and/or freight forwarder must make sure that the original set of B/Ls is taken out of circulation and cancelled before the switch B/L can be released. This is important as it ensures that there is only one set of documents in force to prevent problems.

    Switch Bill of Lading example

    When requesting for a switch B/L standard procedure must always be followed to ensure a smooth process. Here’s an example of how a switch B/L may be requested and processed.Consider these three parties:

    • Party A: factory producing the goods
    • Party B: trading agent selling the goods
    • Party C: final buyer/consignee

    The first and original set of B/L will have been issued with A as the shipper and B as the consignee. The cargo owner may later request for a switch B/L listing B as the shipper and C as the consignee.Other changes to the shipment description may be made, but only under the cargo owner’s written authority and only to certain information such as to the condition of the cargo, payment terms, place and date of loading, Incoterms, etc.Any inconsistencies on the switch bill will result in the carrier and his agent (if the agent has issued the switch bills) facing risks of claims from parties who have suffered a loss as a result of these misrepresentations.Switch bills of Lading do not contain any information that indicates that they are not the initial and original B/Ls. However, the consignee or end buyer is at liberty to ask the shipping line whether the bills were switched. Shipping lines are not legally obliged to divulge this information. But it’s common practice for them to do so without disclosing any further details.

    Changes must be reflected across other documents

    When a switch bill is issued, a new invoice and packing list must also be issued to reflect the new changes accordingly and accurately.As per our example, this means showing company B as the supplier and company C as the buyer/consignee. This not only avoids exposing the supplier’s identity but also maintains consistency with the new set of Bill of Lading.

    Possible risks for a shipping agent or freight forwarder

    In recent years, there’ve been multiple cases of fraud under switch bills, which have caught the attention of shipping lines. This highlights increased risks for cargo agents such as:

    • A letter of indemnity (written authorization) issued by the requestor could potentially be legally unenforceable.
    • Differences in the description of the cargo may cause conflict as to the validity of the Bills of Lading as receipts of the cargo shipped
    • One set of Bill of Ladings might incorporate a different voyage charter with a different jurisdiction clause.
    • The original set of Bill of Ladings may have been marked freight payable only for the switch bills to be marked as freight prepaid, thereby affecting owners’ right to lien.
    • Inaccurate statements such as the shipment date, shipper or consignee name, quantity/condition of cargo, etc constitute misrepresentations.
    • Sometimes a different charter party with different freight/demurrage rates is incorporated, which defrauds the receiver.
    • Switch Bills of Lading may be used to draw fraudulently on a letter of credit or to defraud a seller/buyer.
    • In the event several versions of the Bills of Lading are circulating at the same time, the carrier risks delivery to the wrong party and then having to compensate the holders of the true ‘original’ bills.

    For further reference, there are various case studies available online showing how different courts arrive at different verdicts based on the misinterpretations and misuse of the Switch Bill of Lading.

    Tips on how to deal with a switch Bill of Lading

    1. Freight forwarders should verify the reliability of the principal party authorizing the issuance of the second set. Obtain their authority in writing and a signed letter of indemnity (and countersigned by a bank if deemed necessary by the agent) indemnifying the cargo agent for all consequences of issuing the second set of Bills of Lading.
    2. Freight forwarders should also consider whether it is also necessary to obtain written authority from the other parties who may be affected by his action (eg. the ship owner or the shipper or a bank). If a freight forwarder is authorized by a charterer to issue a switch Bill of Lading on behalf of the carrier, written authority by the ship owner must be obtained. Failure to do so will result in the ship owner having a valid claim against the agent for losses resulting from the issuance of the second set without authority.
    3. If the agent has been asked by the principal party to issue the switch bill based on an indemnity from the customer, the agent should get the proper wording from the principal and get the completed indemnity approved by the principal party before issuing it.
    4. It is also advisable to ensure that the cargo agent is covered by their own insurance for the issuance of switch bills. They should provide their insurance company with the exact reason for the issuance of the switch bill of lading.

    Must Read: Letter of Credit Documentation: Key Points Terms and Bank Roles (rohitashvasinghvi.com)

    Source: icontainers.com

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