Para 6.4.4 — GOODS_MANUAL

6.4.5 Letter of Credit 1. Parties to the LC: The purchaser forwards a request to its bank (called issuing bank) in their prescribed format, along with all relevant details, including an authenticated copy of the contract. Based on this, the issuing bank opens the LC, promising to pay the specified amount to the supplier’s (beneficiary’s) bank based solely on the documents presented by the supplier as specified in the LC conditions, without physically ascertaining the shipment of goods. The issuing bank arranges with a bank in the supplier’s region (called advising bank) to notify the supplier and his bank of the availability of the LC. Since the supplier may not be comfortable with the issuing bank, it may ask a bank he trusts (called confirming bank) to add a guarantee to ensure payments by the issuing bank.

2. Risks Involved: a) Commercial Risk: Non-payment due to buyer's financial distress. b) Global Risk: Political instability, currency fluctuations, import/export restrictions, disruptions in international logistics. c) Documentary Risk: Discrepancies in submitted documents or interpretation of documents and LC conditions by various parties involved. d) Bank Risk: Bank insolvency or non-performance. e) Fraud: Shipment may not be physically dispatched or dispatched in damaged condition or with inadequate packaging

6.4.4 Air Freight Charges Goods that are required to be airlifted are to be dispatched on a 'charge forward basis'. All air freight charges, which are shown on the relevant consignment note as chargeable to the consignee, are to be paid to the Airline in Rupees. Some organizations need to import sophisticated instruments, tools, and kindred goods. These are small in size and very delicate/fragile in nature. Such goods invariably need to be airlifted. But, quite naturally, form a small part of the Air Cargo carried by Aircraft. For such imports, procuring entities may engage Air Freight Consolidators, who consolidate the small air cargo of different customers and airlift them from one airport to another. The hiring of Airfreight Consolidators' services should be done transparently, following standard principles of public procurement.

5. Types of LC: a) Revocable LC: This can be modified or cancelled without notice. b) Irrevocable LC: This cannot be amended, modified, or cancelled after issue without agreement and notice to the seller. Generally, the irrevocable LC is opened so that the supplier is fully assured of his payment on fulfilling his obligations in terms of the contract. c) Confirmed LC: An intermediate bank in the supplier’s country (called confirming bank) adds its confirmation at the request of the seller, guaranteeing that payment would be made as per LC conditions, even if the issuing bank or seller’s bank demurs. d) Unconfirmed LC: There is no additional confirmation beyond the issuing bank. e) Transferable LC: The seller can transfer part of the LC to another party (e.g., as a payment to his supply chain). f) Back-to-Back LC: An intermediary (second beneficiary) is involved in this. g) Revolving LC: This covers multiple transactions over an extended period. It is specifically used for repeated shipments of the same product between the same buyer (importer) and seller (exporter).

4. Charges and Costs: a) Opening Charges: These are incurred by the procuring entity and include both commitment fees (charged for the LC’s validity period) and usance fees (if the LC allows deferred payment). b) Advising Fee: This is paid by the issuing bank to the advising bank and is included in charges to the procuring entity. c) Confirming Bank's Fee: If applicable, paid to the confirming bank by the supplier. d) Extension/ Amendment Fee: This fee applies when an LC needs to be extended or amended due to changes in delivery dates, terms, or other conditions. The party requesting the extension or amendment (purchaser or seller) pays this fee. e) Retirement Charges: The supplier’s (beneficiary) bank levies these charges on the supplier to handle payment from the issuing bank. f) Other Charges: Reimbursements for foreign trade law-related obligations, if any, to be borne by the party of that country. For example, if there are specific legal requirements related to foreign exchange regulations or documentation in the exporting country, the Seller may need to cover these costs. If there are specific taxes for foreign exchange remittances, then the purchaser may bear such charges.

3. Precautions: a) Care should be taken to ensure that all details in the LC (such as product description, quantity, payment terms, documents to be produced, LD clause, and shipping terms) are accurate and identical to those shown in the contract to avoid discrepancies. b) Frequent amendments can lead to delays and complications. Suppliers may use their own delays in supplies by asking for unnecessary amendments to LC (or contract). c) Provisions of Uniform Customs and Practices for Documentary Credits (UCP 600)106 should be adhered to while opening the LC for import into India. d) The seller must present documents in time within the tenure of the LC to receive payment and the documents submitted must match the LC requirements.

Chapter 6: Forms of Securities, Prices, Payment Terms and Price Variations 6. Deduction of Liquidated Damages (LD): The delivery schedule and LD clause (including the amount of LD) are part of the LC conditions. If the documents submitted (inspection certificate and dispatch documents) show that these conditions of LC are violated, LD, as per the LC conditions, is deducted from the payment made to the supplier. In case the delivery date of the contract is extended to take care of a delay in supply, for which the supplier is responsible, the tenure of the LC is also to be extended, but the expense incurred for such an extension (of LC) is to be borne by the supplier.