Exports to India: An Overview of Market Opportunities

“A perspective on
CGLG/Ohio India trade
mission 2014”
Prem Behl
Managing Director
CGLG/Ohio India Office
10 April 2014

INDEX
1. India: An Introduction
2. India-US Bilateral Trade
3. India Trade Mission 2014
4. About Exhibitions India Group

• 28 states, 7 union territories
• Area: 3.3 million sq. km.
(1.27 million sq. miles)
• Bordered by:
- China, Nepal, Bhutan (north)
- Afghanistan, Pakistan (north-west)
- Myanmar, Bangladesh (east)
- Sri Lanka (south)
• Coastline: 7,517 km (4,670
miles)
GEOGRAPHIC PROFILE

• Population: 1.2 billion
- 65% in the 15-65 age group
- 30% urban, 70% rural
• Sex ratio: 940 females per
1000 males
DEMOGRAPHIC PROFILE
30%
65%
5%
Distribution by Age Group
0-14
15-65
Above 65
• Literacy rate: 74%
• Languages:
- Officially recognized: 22
- National language: Hindi
- Business language: English
• Religions:
- Hinduism, Islam, Christianity, Sikhi
sm, Buddhism, Jainism and others

• Federal union
• Secular state
• Largest democracy in the world
• Parliamentary form of government
POLITICAL PROFILE
President: Shri Pranab Mukherjee
Prime Minister: Dr. Manmohan
Singh
Government: Led by the United
Progressive Alliance (UPA)

ECONOMIC PROFILE
Gross Domestic Product (GDP), 2012-13
• Nominal: US$ 1.85 trillion,
10th largest in the world
• PPP terms: US$ 4.70 trillion, 3rd
largest in the world
• GDP growth rate: 5 %
• The services sector continues to be a
star performer with a 60% share in
GDP
Per Capita GDP, 2012-13
• Nominal: US$ 1,501
• PPP terms: US$ 3,829
Agriculture
, 14%
Industry, 2
6%
Services, 6
0%
Sectoral composition of Indian GDP:
2012-13

ECONOMIC PROFILE
• During FY 2012-13, India attracted FDI worth US$ 22.42 billion.
• World’s 3rd most attractive destination for investment by MNCs.
World Trade: India is -
• The world’s 19th largest exporter with total exports of US$ 300.4
billion in FY 2012-13
• The world’s 10th largest importer with total imports of US$ 490.7
billion in FY 2012-13
305.9 300.4
489.3 490.7
0
100
200
300
400
500
2011-12 2012-13
India-US Bilateral Trade (in US$ billion)
India's Exports India's Imports

INDIA-US BILATERAL TRADE
Prospects for Export Growth

• From a modest US$ 5.6 billion in 1990, the bilateral trade between India-
US has increased to US$ 63.7 billion in 2013, representing an impressive
1037.5% growth in a span of 23 years.
• Bilateral trade in 2013 (January – December) increased by 2 per cent
over the previous year to US$ 63.70 billion.
Source: US Department of Commerce, US
Census Bureau
36.15
21.50
57.65
40.52
22.10
62.62
41.83
21.87
63.70
0
10
20
30
40
50
60
70
India's exports to USA India's imports from USA Total bilateral trade
India-US Bilateral Trade (in US$ billion)
2011 2012 2013

(US IMPORTS)(US EXPORTS)
Product Percentage
Precious stones & metals 20.0
Textiles 16.2
Pharmaceutical 10.7
Mineral Fuel, Oil 9.7
Organic chemicals 6.6
Machinery 5.0
Lac, Gum, Resins 3.0
Electrical Machinery 2.8
Others 26.0
Product Percentage
Precious stones & metals 22.7
Aircraft, spacecraft, Parts 11.2
Machinery 10.0
Electrical machinery 7.0
Mineral Fuel, Oil 6.4
Optical instruments &
equipment
6.1
Organic chemicals 4.0
Others 32.6
Percentage Share of Major Items (Jan-Nov 2013)

INDIA-OHIO TRADE
Growth in Ohio’s Exports
• India is Ohio’s 21st largest export market in 2013
• Ohio’s exports to India was US$ 388 million in 2013
Industrial
Machinery, 26%
Plastics & Articles
Thereof, 12%
Optic/Medical
Instruments, 11%Chemical
Products, 7%
Electrical
Machinery, 7%
Others, 37%
Ohio’s Top Exports to India

CGLG/OHIO INDIA
TRADE MISSION
2014

CGLG/OHIO INDIA TRADE MISSION 2014
 Mission Participation Fee US$ 900 per person
 Brief Market Research and Appointment Setting
Fee US$3,000 per company
 Grant funding available in many states
 Main goal: To assist SMEs from the Great Lakes
region or Canada looking to export products
and services to India
Website:
http://www.cglg.org/projects/INDIA2014mission/i
ndex.aspx
http://development.ohio.gov/bs/bs_trademission
s.htm
April 22-May 1, 2014

 Multi-sector trade mission to India
 New Delhi, Bangalore and Mumbai
 Customized one-on-one business appointments
with interested distributors, agents and other
prospective business partners set up by the Ohio
India Office (average 3 – 4 appointments per day)
 Brief market overview including industry sector
information and target company profiles
 In-country business briefing
 In-country staff support of Ohio India Office
 Group airport-hotel-airport ground
transportation in all three cities
 Assistance with hotel bookings

Itinerary
April 22 & 23 Depart U.S. for India
Arrive New Delhi, India
April 24 Individual Business
Appointments in New Delhi
Appointments in New Delhi
April 26 & 27 Free Weekend in Agra
Appointments in Bangalore
Appointments in Bangalore
Depart for Mumbai
Appointments in Mumbai
May 1 Individual Business
Appointments in Mumbai
PM: Depart for U.S.

ABOUT US
The Exhibitions India Group

Exhibitions India Group is:
• A trade promotion organization established in 1987, creating
opportunities for trade, investments, joint ventures, technology transfers
etc.
• An organizer of trade fairs in India with allied businesses in sales
representation, consulting, publishing, conferences, travel & hospitality
and display design
• Headquartered in New Delhi with branch offices in Ahmedabad,
Bangalore, Chennai, Hyderabad and Mumbai
• The only trade fair organizer in India to have both ISO 9001:2008 & ISO
14001:2004 certifications
• Certified for transparency in international transactions by Trace
International, Inc. (USA)
ABOUT US

www.exhibitionsindiagroup.com
ABOUT US

ABOUT US
• Council of Great Lakes Governors (CGLG) India Trade Office:
Set up in July 2012, the CGLG India office works to promote
exports from the State of Wisconsin, USA to India through
market research, business matching, trade show
participation, delegation visits etc.
• Ohio Development Services Agency India Office: Representing
the business interests of the State of Ohio, USA in India since
January 2008. The Ohio India Office assists Ohio companies to
introduce or expand their exports in the Indian market.
Comnet Consultants represents:

ABOUT US
Consultancy Services:
Comnet Consultants provides the following services to companies seeking to
access the Indian market:
• Customized Market Research Reports
• Partner Search: Qualified contacts of potential distributors, representatives,
agents, prospective customers, JV partners etc.
• Due diligence review of potential partners
• Trade mission appointment facilitation and in market support to companies
• Facilitate participation at Indian trade shows
• Other Services:
– Facilitate contact with local law firms, accountancy firms etc.
– Identify local marketing tools such as trade shows, periodicals, etc.
– Monthly Newsletters
– Media Promotion
– HR consulting, etc.

Prem Behl
Managing Director
CGLG/Ohio India Office
217-B, Second Floor, Okhla
Industrial Estate Phase 3, New
Delhi 110020
E-mail: premb@eigroup.in
Phone: +91 11 4279 5000
THANK YOU

Why India?
Spring 2014
A Case for Deeper Economic Partnership

Pakistan
China
Nepal
India
Myanmar
Bangladesh
Afghanistan
Bhutan
POK

26/11 Terrorist Attack on Mumbai

$1.7 Trillion in Infrastructure Required Over Next 5 Years
20,000 Km of
road projects
350,000 MW of
new power plants
Greenfield development
of 25 new airports
Upgrade of 25
existing
airports
A deep water
navy
12 new
port/container
projects
20,000 MW of
nuclear power
A new air force

The Next North Sea
Krishna-Godavari Gas Discovery
Largest Refinery in the World
Jamnagar

The Next North Sea ?
Krishna-Godavari - Exports of U.S. LNG

Organized Retail Enters India
Unshackling India’s Farm-to-Market Supply Chain

Manufacturing Hub of South Asia
Skilled Manpower, a Growing Middle-Class, and a Massive Market

Can India Sustain its Competitive Edge ?
#1 in Generic Pharmaceuticals
IPR Protections will need
strengthening if India is to
become the Innovation Nation of
the 21st Century
Compulsory Licensing looms on
the horizon, which must be
resisted
PHARMACEUTICALS

TELECOM
 10 million new cell phone
users each month!
 But can transparency issues
be overcome as new
spectrum is allocated?
 Will LCR policies trigger
unintended consequences?

 IT is growing at impressive
rates.
 But will India adopt Safety
and Security Testing
barriers that discourage
investment?
 Will the U.S. enact
discriminatory
immigration provisions?
INFORMATION TECHNOLOGY

 Coherent democracy; Pluralist/Secular
WHY INDIA ?
Indo-U.S. Relations Can Shape the Destiny of the 21st Century
 1/5th World’s Population; 2nd largest military in the world
 Common Values: Fighting Terrorism, Trafficking, Narcotics
 Ideological Partner: Nepal, Sri Lanka, Bangladesh, Pak, China
 Common Law Judicial System
 2nd largest number of Doctors, Engineers, PhDs in the world
 100,000 Students to U.S. Each Year
 3 million Americans of Indian Origin
 Politically significant; Politically integrated
 54% of Indian Population is under the Age of 25

NaMo Wave?
≈ 240 and
counting…
28
45
Magic
number: 272
25
29
36
3
38
1
10
1
33
4
8
2
5
?
?
?
0
?

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presented by Vinita Bahri-Mehra
April 10, 2014
Preparing for Export Success
in India – A Legal Perspective

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U.S./India Exporting at a Glance
+ U.S. Exports to India in C-Y 2012: $41.5 billion (a 7.8% increase)
+ Imports from India in C-Y 2012: $60.52 billion (a 9.5% increase)
+ Total Bilateral Trade in C-Y 2012: $102 billion (a 9.7% increase)
+ India has emerged as the 18th largest export market for U.S.
+ India has emerged as the 12th largest market for Ohio exports
+ India‘s GDP growth for F-Y 2013-2014 5%/6%
+ Indian firms eager to buy American products and services
+ India‘s WTO commitments → resulted in opening of
markets

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Some Success Stories
+2nd largest small car market in the world
+One of three countries that makes its own supercomputers
+2nd largest group of software developers after the US
+100 of the Fortune 500 have R&D facilities in India
+Indian students represent 15% of all international students
in U.S. higher education

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Top 5 Keys to Successful
Exporting to India
1. Strategic Planning – Finding Partners and Agents
2. Due Diligence
3. Geographic Diversity
4. Consistent Follow Up
5. Patience and Commitment

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Why India?
+ India is the 4th largest economy in the world as measured by purchasing
power.
+ India has a consumer base of 1.2 billion people.
+ The youngest population of the world – hence sustainable, long term
growth is assured.
+ Modern (organized) retail converging with the consumption boom will open
up many opportunities for small and mid-size consumer companies.
+ Rapid growth in the number of middle class consumers.
+ Eager and savvy consumer market with growing buying
potential.

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+ 100% foreign investment permitted in most sectors on automatic
basis except:
+ Banking (74%)
+ Telecom services (74%)
+ Civil Aviation (49%)
+ Insurance (49%)
+Retail trading:
+ New – Single Brand up to 100%
+ Multi-Brand – 51%
+ 100% FDI is allowed in cash and carry wholesale
formats, B2B sales.
India‘s FDI Regime

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+ Certain sectors where FDI is prohibited:
+ Atomic Energy
+ Lottery business, Gambling and Betting
+ Agriculture
+ Railway Transport
+ Arms and Ammunition
+ Coal and Ignite
+ Certain sectors where there are minimum capitalization requirements:
+ Non-banking financial services activity (certain activities –
fee based and fund based).
+ Real estate construction and development projects.
India‘s FDI Regime

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Information Technology
+ Software and Services - $50 billion
+ IT-enabled Services - $17 billion
+ E-Commerce - $8.9 billion
Biotechnology
+ $4.5 billion by 2012
Retail
+ $300 billion by 2012
Healthcare
+ $16 billion potential
Energy
Potential Investment Opportunities

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Markets with Significant Export
Potential
+ Airport and Ground Handling
Equipment
+ Computers and Peripherals
+ Education Services
+ Electric Power
Generation, Distribution and
Transmission
+ Equipment
+ Machine Tools
+ Medical Equipment
+ Mining and Mineral Process
Equipment
+ Oil and Gas Field Machinery
+ Pollution Control Equipment
+ Safety and Security Equipment
+ Telecommunications Equipment
+ Textile Machinery
+ Water Treatment

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Investing
in India
Strategic Investor
(FDI)
Financial Investor
(FII or FVCI)
Operate as a Foreign
Company
Operate as an Indian
Company
Acquisition of
shares/business
assets of an existing
Indian Company
Invest in a U.S. company with a services
fulfillment subsidiary in India
Invest in a Caymans or Mauritius company
with a services fulfillment sub in India
Direct investment in an India company from
outside India (Mauritius/Singapore subs)
Direct investment in an Indian company from
outside India through a venture capital fund
registered with the SEBI
Liaison Office
Branch Office
Project Office
Joint Ventures
Wholly owned
Subsidiary
Private
Public
Structuring Investments – FDI

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Other Entry Routes
A. Direct Sales from U.S. (using freight forwarder).
+Key considerations:
+ Use accurate Incoterms 2010 for international sale or, even
better, spell out in detail who is responsible for what.
+ Most common terms:
+ EXW, FOB, CIF, DDU, DDP
+Payment Terms
+ NOT Incoterms!
+ The Incoterms generally indicate WHAT must be paid by
each party not WHEN it must be paid.
+ Do not confuse liability with responsibility.

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Other Entry Routes
+Payment Terms
+ Usually determined in the purchase contract
+ Major options, based upon increasing risk
+ Paid in advance (if exceeds 200,000 additional criteria to be fulfilled
and imports to be made in 6 months).
+ Letter of credit (can be issued up to USD 20 million per transaction
for one year).
+ Documents against payment.
+ Open account (remittance against imports should be completed no
later than 6 months, except for payments withheld for guarantee
performance, disputes, etc.)
+ Interest on import bills allowed if overdue for less than 3
years at rate prescribed for trade credit from time to time.

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+Decide on-Who is the ―importer of record‖?
+Exporting directly can suit high value products or
services. However, winning new customers is likely
to require significant investments in building relations
and several visits.
Other Entry Routes

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Other Entry Routes
B. Technology Collaborations and Trademark License
+ Foreign entities can provide technical know-how and/or license their trademark to Indian
companies against payment of fee and royalty.
+ Key considerations.
+ Protection of Intellectual Property.
+ Registration of trademarks, copyrights and patents (―first to file‖ – jurisdiction).
+ Trade Secrets: No statutory protection of trade secrets or confidential information.
However, several court precedents enforce confidentiality agreement through
mandatory injunctions.
+ Indian IP laws do not provide for automatic assignments.
+ Advantage of lower withholding taxes on royalty income
stream.

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Other Entry Routes
C. Agency Relationship:
+ Creation:
+ Relationship between Agent and Principal is primarily contractual in nature and governed
by terms of contract entered into between them.
+ The Indian Contract Act, 1872 (Act) provides the framework of rules and regulation that
govern formation and performance of an agency contract.
+ NO WRITTEN CONTRACT: One may be implied, provisions of Chapter X of the Act (i.e.
agency law) will provide the framework for governance of performance of the relationship.
+ Agency contract should contain limitations, termination events, territory, products or goods,
commission structure and time of payment.
+ Depending upon conduct of the parties----exclusivity can be
presumed.

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Other Entry Routes
+ Termination:
+ If Agency is fixed for a term, it can be terminated before the expiring of the term
in accordance with an express reservation in the contract or for sufficient cause.
+ Reasonable notice must be given of termination without case.
+ Right to indemnity and/or the right to compensation to the Agent in the event of
termination of the agency contract is subject primarily terms and conditions of
the agency contract.
+ Unless the contract provides payment or full indemnity, the indemnity payable to
the Agent is generally equitable.
+ No limitation on amount of indemnity/compensation to which an Agent is entitled
– it is the Court, which determines the amount of indemnity/compensation that
may be paid.
+ However, Agent needs to prove he has actually incurred a loss
or that loss is eminent.

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Other Entry Routes
+ Right to indemnity under agency law entitles an Agent to the
following:
+ Commission remuneration and all expenses incurred.
+ Right to lien over Principal property – received by Agent, until amount due to
Agent for commission, disbursements and services in respect for same has
been paid.
+ Statute of Limitation:
+ Agent must bring a suit for claiming compensation and indemnity within a
period of 3 years from the date of cause of action.

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Other Entry Routes
D. Distributor/Franchisee Relationship:
+Relationship between Distributor/Franchisee & Principal is
contractual in nature and governed by the terms of the
contract.
+No specific law in India which governs the payment of
indemnity/compensation to the Distributor/Franchisee and it is
open to parties to determine the conditions and amount of
compensation.
+Avoidance of Permanent Establishment (“PE”) status is
critical.
+Restrictive Covenants (i.e. non-compete and non-solicitation)
difficult to impose post-termination/expiration of
the agreement.

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+ Import/Export Process and Timeline:
+ Assumption: standard container of goods to a large city port in India.)
+ India stands at 134 ranking of 189 economies on the ease of trading across borders.
+ Indicator:
+ Number of Documents to export (e.g. bill of lading, export declaration forms, commercial
invoice): 9
+ Time to Export: 16 days
+ Cost to Export: $1170 per container.
+ Procedures to Export:
+ Document Preparation: 8 days
+ Custom Clearance: 2 days
+ Ports and Terminal Handling: 3 days
+ Inland Transportation: 3 days
Other Entry Routes

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+ BIS/EAR 2011 rules and regulations implementing changes to
Export Controls on India (“Final Rule”)
+ Final rule adds India to country group A:2; the group consisting of countries
adhering to Missile Technology Control Regime.
+ Results in elimination of license requirements to export or re-export certain
controlled products (i.e., classified as EAR99) to India.
+ However, no unlicensed exports to prohibited parties or for prohibited end-
users.
+ Final rule does not impact license requirement for export of
defense articles to India subject to jurisdiction of ITAR and Arms
Export Control Act.
Key Considerations: All U.S. Exports are
Subject to U.S. Export Control Regulations

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+ Labeling is an important element for products being exported to
India. All packets or even containers should carry pertinent
declarations.
+ English or Hindi is the favorable language for labeling.
+ Custom authorities have to ensure that all pre-packaged
commodities (especially those intended for direct retail
sale) have all the legally required information before they
enter the retail market or sold for consumption.
Key Considerations: Labeling and
Marking Requirements

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+Peak rates reduced from 350% (June 1991) to an
average 10% currently for some products.
+India‘s tariffs still very high – range from 12.5% - 150%
based upon classification of goods in accordance with
Harmonized System or HS.
+Exports to India are zero-rated for VAT. All import and
export of goods to/from India are exempted from sales
tax.
Key Considerations: Import Tariffs

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+ Basic Customs Duty (BCD): This duty is levied either as 1) a specific rate
based on the unit of the item (weight, number, etc.), or more commonly, 2)
ad-volorem, based on the assessable value of the item. In some cases, a
combination of the two is used.
+ Additional Customs Duty (ACD): This duty is typically referred to as
Countervailing duty or (CVD) and is levied on the assessed value of goods
plus BCD. It is payable only if the imported product is such as if produce in
India it would be liable for an excise duty.
+ Special Additional Customs Duty (known as Special CVD): Special
CVD tax is applicable on all items (to offset the disadvantage to like Indian
goods due to high excise duty on their input). It is levied at the rate of 4
percent of the BCD and the ACD on all imports.
Types of Custom Duties:

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+ Anti-dumping Duty: This is levied on specified goods imported from
specified countries, including the United States, to protect indigenous
industry from injury.
+ Safeguard Duty: The Indian government may by notification impose a
safeguard duty on articles after concluding that increased imported
quantities and under current conditions will cause or threaten to cause
serious injury to domestic industry.

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+ Customs Education Cess: Effective, 2004, India introduced a
new education cess (duty) assessment. The current rate is 3
percent of BCD and ACD.
+ Customs Handling Fee: The Indian government assesses a 1
percent customs handling fee on all imports in addition to the
applied customs duty.
+ Total Duty Payable = BCD + ACD + Special CVD + Education
Cess + Customs Handling Fee.

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Taxation in India
+ Dividends declared can be repatriated freely through an authorized
Indian bank.
+ Dividends are tax-free in the hands of shareholders.
+ A distribution tax of 16 % is payable by company.
+ Corporate income tax rate for foreign companies is 41.2%. For
domestic companies, 30.99%.
+ Withholding tax on royalties/technical fees/interest
income.
+ Domestic tax law – 10% [effective AY 2014-2015, it will
become 25%)

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Taxation in India
+Indo-U.S. DTAA – 10% for right to use of any
industrial, commercial or scientific equipment.
+20% in any other case. (First five years of agreement).
+15% in any other case (subsequently).
+Computed on ―gross amount‖.
+ Currently, tax rate of domestic law could be utilized
as it is less than DTAA.
+Submission of a Tax Residency Certificate (TRC) a must.
+Furnishing of PAN required to receive payments
from India

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Taxation in India
+ Service tax rate is 12.36%.
+ Computed on the ―Gross Amount‖ charged by the service provider.
+ Sales tax rate (CST): Levied at 2%
+ Sales tax rate (VAT): Varies from state to state, depending upon classification
of goods. Two basic rates 5% and 14.5%.
+ Excise Tax: Impose on good manufactured locally varies from 8% to 10-12%.
+ Tax incentives are available during a limited time for 100% Export-Oriented
Unit, under Software Technology Park Scheme and Special Economic Zones
Units, etc.
+ Incentive for acquisition and installation of new plant or
machineries by manufacturing company.

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Taxation in India
+Elaborate Transfer Pricing Regulations
+ These rules govern minimum profit margin to be maintained by the
Indian companies in transaction associated enterprises.
+ Valuations prescribed in case of export of goods to a related party.
+Avoidance of Permanent Establishment (“PE”) status is
critical.

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+Legal Jurisdiction: Drafting choice of law and forum provision
is crucial.
+Remember, certain issues may be subject to a law different
from one agreed upon by parties. For example: IP transfer,
registration, protection in vendor territory, real estate, labor
laws, bankruptcy, enforcement of foreign judgment/award.
+Litigation vs Arbitration
+If the parties want to quickly end disputes arising from the
contract, an arbitration clause is necessary to avoid
lengthy civil procedures.
Contract: Enforcement In India

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Practical Tips:
+ Negotiations: Contract negotiations can be expected to go more slowly
in India – particularly if dealing with India bureaucracy.
+ Different Approach to Communication: Indian parties may not
disagree with you directly about contractual issues. Instead, they may
suggest that the matter be discussed at another time or find some way to
avoid an outright negative response.
+ Flexibility: It is recommended that U.S. companies build considerable
flexibility into their approach so that prices and other contract conditions
can be adjusted.
+ Believe: Relationships and respect. Building a lasting and trusting
relationship is very important for a successful business venture
in India.
Contract: Enforcement In India

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+There are some internal barriers that might provide obstacles
in doing business or establishing business in India. It is
necessary to be cognizant about them in order to be well
prepared. For example:
+ Corruption (FCPA) (PCA)
+ Infrastructure mess
+ High tariffs and protectionist policies
+ Local content requirement
+ Powers of states
+ Slow Reform Process
Practical Advice: Identify the
Obstacles

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Things to Ponder
+ Have knowledge of Indian business and market – Evaluate Product Strategies and
related Pricing.
+ Analyze and identify the region/state most appropriate for your business needs.
+ Do Business in India…the Indian Way: „Think Global, Act Local‟
+ The Indianized Chinese
+ Kellogg's – no to cold cereals?
+ KFC – Tandoori Chicken preferred to the ‗KFC experience‘
+ McDonalds – ‗McVeggie Burger‘ & ‗McAloo Tikki‘
+ Domino‘s – ‗Pepper Paneer‘ & ‗Chicken Chettinad‘
+ Pizza Hut/Pizza Express – spicing it up
+ Due Diligence is the Key.

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Legal Advice
+This presentation is designed to provide an overview of a
number of legal principles and considerations.
+As each legal issue is fact dependent, this presentation should
not be used or viewed as legal advice, and your legal counsel
should be consulted on the application of your particular
factual situation to the current law.
+Copyright: 2014 Kegler, Brown, Hill + Ritter LPA

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Thank You!
Vinita Bahri-Mehra, Director
Asia-Pacific Team Leader
Kegler Brown Hill + Ritter
vmehra@keglerbrown.com
keglerbrown.com/bahrimehra
614-255-5508
614-464-2634 (fax)

April 2014
B E S T P R A C T I C E S F O R E X P O R T E R S
LCs, Guarantees and ECA Financing
STRICTLYPRIVATEANDCONFIDENTIAL

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JPMorgan Chase is licensed under US patent numbers 5, 910,988, and 6, 032 and 137.
© 2013 JPMorgan Chase & Co. All rights reserved.
BESTPRACTICESFOREXPORTERS&IMPORTERS

Seller
Most Protection
Least Protection Most Protection
Least Protection
Buyer
CASH IN ADVANCE
LETTER OF CREDIT
DOCUMENTARY COLLECTION
OPEN ACCOUNT
International sales add complexity and risk
 Buyer (relationship standing, credit position)
 Geo-political risks in buyer‘s country
 Economic risks
 Regulations (OFAC, sanctions, local law)
Factors to consider
 Commodity price volatility
 Financing requirements (both of buyer and seller)
 Cost of bank services
 Taxes, duties and tariffs
Most common payment methods
1

J.P. Morgan – Classical and Export Finance Products
Trade Channel ●
 Electronic / Web-based
system for managing all
global trade needs through a
single portal
 Automation and process
streamlining
Classical Trade
Export Finance
Standby Letters of Credit ●●
 Performance / Bid /
Advanced Payment Bonds
 International SBLC and
Local Guarantee re-
issuance
 Intellectual property
protection
 Collateralization options
Import Letters of Credit ●●●
 Classical and private label
import LCs
 Documentary collections
and open account payment
processing
Export Letters of Credit ●●●
 Advising & Negotiation
 Confirmations (country risk
mitigation)
 Letter of Credit Discounting
Export Credit Agency Backed Financing ●●●
 US Ex-Im Guaranteed Financing
 Multi-lateral Agency Backed Financing
Legend: Issues Addressed
● Credit Risk Mitigation
● Liquidity & Working Capital Management
● Legal & Compliance
● Technology Integration
2

Agenda
Page
3
Export Letters of Credit 3
Standby Letters of Credit & Guarantees 8
Export Credit Agency Financing 17

Commercial Letter of Credit: Process
Advising/Confirming Bank
2.LCApplication
1. Sales Contract
3. Issue Letter of Credit
5. Shipment of Goods
4a.PaymentGuarantee
7. Documents sent
8c. Payment sent
4.Confirms&AdvisesLC
8a.Releasesdocuments
6.PresentsDocuments
Beneficiary
8b.Sendsfunds
8d.PaymentSent
Buyer/Applicant
Issuing Bank
Seller/Beneficiary
4
EXPORTLETTERSOFCREDIT

Commercial Letter of Credit: Characteristics
 Commercial Letters of Credit:
 Facilitate the exporting or importing of goods
– Sellers of goods get paid for the goods that they sell
– Buyers of goods ensure they receive what they ordered
 Provide a source of financing
 Offer the most protection to the seller/exporter
 Three independent ―agreements‖ underpin a letter of credit
 Sales Contract between buyer and seller
 Application and Reimbursement Agreement between buyer/applicant and issuing bank
 Letter of Credit between issuing bank and beneficiary
 Banks deal in documents only – buyer‘s recourse for problems with goods (commercial dispute) is to the sales contract
 Documents presented under an LC must comply with the terms and conditions stated therein, otherwise there is no obligation
to honor
Characteristics
5

Commercial Letter of Credit: Types
Confirmed Unconfirmed
Payment - TimePayment - Sight
Implication: Constitutes a definite undertaking of confirming
bank. Independent of the issuing bank‘s obligation
 Removes Issuing Bank risk
 Reduces Country risk (political, economic, FX)
 Confirmation expedites payment
 Payment obligation moves to beneficiary‘s domicile
Implication: No obligation to ―pay‖ at sight or ―accept‖ and pay
at maturity time drafts. Further, no obligation to pay at
maturity credits that provide for ―deferred payment‖
 Purpose: Authenticate issuer‘s credit
Acceptance: Payment made at some specified time after
presentation of conforming document(s)
 Provides short term financing—up to 12 months tenor
 Defined in LC
 Accepting bank obligated to pay at maturity
 Can be discounted to exporter for earlier payment
Deferred:
 Commitment to pay on a specified date
Payment effected when documents are presented which are
in compliance with the terms and conditions of the credit
 Payment may or may not occur immediately
 If payable in the US
 If payable in a foreign country
 LC terms may contain special provisions about timing
6

 Ensure LC is workable
 Match LC terms to contract/sales terms
 Check for appropriate Incoterms
 Check names and addresses
 Validate merchandise description
 Confirm that shipping/delivery dates are workable
 Read all document requirements & conditions
 Exporter should be able to prepare/obtain all
documentation easily
 No buyer controlled documents
 LC should have only what is necessary
 Be aware of third party documents
 Legalization of documents
 Bills of lading
 Inspection requirements
 Other third party certificates
Commercial Letter of Credit: Managing Documents
Documents Discrepancies
 Discrepant documents
 Cause payment delays
 Cause payment rejections
 Eliminate your risk protection
 Add extra time and cost to the transaction
 Most common discrepancies
 Late Shipment
 Late Presentation
 Credit Expired
 Credit Overdrawn
 Missing Documents
 Beneficiary‘s options if documents are discrepant
 Correct documents
 Cable for authority to honor on approval basis
 Request payment under reserve/guarantee
 Do not send documents on collection
7

Agenda
Page
8

 Standby Letters of Credit and Guarantees are instruments of security issued by J.P. Morgan in favor of a beneficiary. J.P.
Morgan can issue SBLCs or bank guarantees in support of contractual obligations.
 Standby Letters of Credit (SBLCs) are intended to be used as secondary security. The underlying contract is the primary
security. This differs from commercial LCs which are the actual vehicle for payment in a trade transaction.
 Financial SBLCs support a financial obligation, including any investment evidencing an obligation to repay borrowed
money
 Performance SBLCs support an obligation to perform, including losses arising from default in completion of the
underlying contract.
 Guarantees are an independent undertaking by the issuer to make payment to the beneficiary on behalf of its customer, the
applicant.
 Payment is made on formal demand subject to the occurrence of a pre-defined event that results in nonperformance by
the applicant of the underlying contract.
 Guarantees are most commonly issued subject to local legislation and provide an issuer commitment that is legally
independent of the underlying contract.
Standby Letters of Credit and Guarantees: Introduction
Characteristics
9
STANDBYLETTERSOFCREDIT&GUARANTEES

Standby Letters of Credit: Financial
Types
 Credit Guarantees
 These are issued to financial institutions in favor of beneficiaries requiring some form of lending or financing whereby
the issuing bank will fulfill a specified monetary obligation in the event of default by the obligor.
 Advance Payment Guarantee
 This protects beneficiaries when an advance payment is to be made towards the applicant, ensuring that the payment
is refunded if the applicant does not fulfill the terms of the contract.
 Payment Guarantee
 Issued as a security for any payment obligations the applicant may have towards the beneficiary. In the event of
payment default by the applicant, the beneficiary can claim payment under the guarantee.
 Rental Guarantee
 These are issued in favor of landlords as security towards unpaid rent or other costs incurred by the tenant during the
tenancy period. Many European countries have standard wording for these guarantees. They are normally required to
be issued by a local bank.
10

 Bid or Tender Bond
 This is a safety mechanism that discourages companies
from submitting frivolous bids. The beneficiary
(contractor) is protected in the event the applicant:
– Withdraws from the tender before its expiry
– Attempts to amend the tender
– Refuses to sign the contract when awarded the
tender
– Fails to furnish the required performance bond or any
other guarantee.
 Bid bonds are also used to guarantee that the applicant
(bidder) has the finances and capabilities to undertake
the contract. Unsuccessful bidders will have their
guarantees returned while those bidders winning the
contract will see their bid bond expire upon issuance of a
performance bond.
 Performance bond
 Requested upon winning the contract, a performance
bond guarantees the performance of the applicant under
the contract from beginning to end. The bank issuing the
guarantee undertakes to pay a certain sum of money to
the beneficiary should the applicant default and not
comply with their contractual obligations.
 Retention bond
 A type of performance bond that guarantees
reimbursement of payment and correction of defects
after a contractual obligation (i.e., job or project) has
been completed and full pay
 Maintenance / Warranty bond
 This helps protect the beneficiary from a defect or
malfunction after the project has been completed. This
guarantee is generally valid till the end of the warranty
period stipulated in the contract between the two parties.
 Customs and tax deferment guarantee
 Importers are allowed to defer paying import duty and
import tax by establishing an account with the local tax
authorities if they importer issues a guarantee to the
local tax authorities. This tax deferment guarantee is
generally valid for long periods of time or until it has been
cancelled and returned by the authorities.
 Shipping guarantee
 This indemnifies a shipping company (beneficiary)
against any liability when imported goods are released to
a particular consignee (applicant) without access to title
documents such as the bill of lading. The indemnity
covers the cost of goods as well as freight, legal and
other costs. The shipping guarantee will remain in force
until the original bill of lading has been provided to the
guarantor or otherwise cancelled by the beneficiary.
 Airway release
 Similar to the shipping guarantee, airway releases allow
for the release of cargo or goods received by a freight
forwarder at the airport on behalf of a consignee. Unlike
shipping guarantees, airway releases may be cancelled
upon providing proof of payment of the import invoice.
Standby Letters of Credit: Performance
Types
11

Standby Letters of Credit: Process
Issuing Bank
Contract/Bid
Applicant
Beneficiary3. Event of default (outside of SBLC)Applicant
12

 Determine who the issuing bank will be and obtain an appropriate application form
 Determine the amount and currency of the letter of credit
 Determine the expiry date of the letter of credit
 Determine if a special format is required by the beneficiary and if so, provide a copy of that format with the application form
 Determine the draw conditions meet your transaction requirements and are acceptable to the beneficiary. The requirements should
be clear and consistent with the underlying contract
 Determine details (beneficiary's name and address, accountee's name and address, contract number etc.) are accurate
 Should the LC contain special terms and conditions:
 Automatic Extension or Expiry Notice terms (determine if notice and extension period is sufficient)
 Transfer terms
 Automatic increase/decrease schedule or terms
 Know the rules that will govern the SBLC. Should be either:
 Uniform Customs and Practices (UCP) 600
 International Standby Practices (ISP) 98
 Determine date the Letter of credit must be delivered to the beneficiary
 Determine how the letter of credit will be delivered (SWIFT, overnight courier, messenger, beneficiary pick-up, etc...) and provide the
necessary contact information
 Arrange for the letter of credit to be returned to the issuer immediately after the project / transaction is complete to avoid any delays
in cancelling the letter of credit
Standby Letters of Credit: Process
Process notes
13

Bank Guarantee: Process
Issuing Bank
Contract
2. SBLC Issuance
3.BankGuaranteeIssuance
1.SBLCApplicationand
ReimbursementAgreement
Applicant
Beneficiary
J.P. Morgan International
or Local Bank
4. Event of default (outside of BG)6.Noticeofdraw
7a.Payment
7c.Payment
5.Drawing
6a. Notice of draw
7b. Payment
Applicant
14

Bank Guarantee: Process
 Obtain a copy of the required guarantee format from your customer prior to issuance in a language that is acceptable to you and your
bank for review
 Identify whether the beneficiary requires the local guarantee be issued by a specific bank
 Determine how you will facilitate the issuance of the local guarantee (back to back letter of credit, cash collateral, local bank credit
facility)
 Engage the bank to review the required guarantee format. Most large banks will have an in-country correspondent that may be able to
review and comment on the format and local requirements
 Determine the required currency, amount and tenor of the guarantee
 Verify the draw conditions meet your transaction requirements
 Verify the details (beneficiary's name and address, accountee’s name and address, contract number etc.) are accurate
 Know the rules that will govern the guarantee. Typically local guarantees are subject to that country’s laws; however, the preference is
for the guarantee to be issued subject to the globally accepted ICC’s Uniform Rules for Demand Guarantees (URDG) 758
 Determine date the local guarantee must be delivered to the beneficiary
 Determine how the local guarantee will be delivered (through an agent, messenger, beneficiary pick-up, etc...) and provide the
necessary contact information
 Arrange for the local guarantee to be returned to the issuer immediately after the project / transaction is complete to avoid any delays
in cancelling the guarantee
Process notes
15

 Excessive Conditions:
 Including copies of commercial documents as
requirements for a drawing
 Allowing for both Transfers and Assignment of Proceeds
 Inclusion of contract or lease terms
 Excessive Restrictions:
 Specifying a particular date or short window for time for
drawing that would impede beneficiary‘s ability to draw
 Rules/Local Law:
 US
– LCs issued to the EPA or similar State and Federal
Agencies must be issued in accordance with State or
Federal Regulations which contain the format of the
LC, which is not subject to change
– JPM will not issue LCs for specific types of LCs
subject to the laws of certain states based on prior
case law or legal requirements
 OTHER
– SBLC states it is subject to the URDG (which is for
guarantees), laws of a foreign country, or doesn‘t
state any governing rules or law
 Non-documentary Terms:
 Avoid text such as, ―This Letter of credit will expire on the
first to occur of completion of all contract terms or the
expiration date‖ Completion of all contract terms is a
non-documentary condition and the LC will remain
available until it expires
 Stating that the beneficiary must do something (such as
send a notice) without indicating a document which
evidences such action.
 Ambiguity:
 LC contains language that it is subject to UCP600 and
ISP98
 Guarantee contains language that it is subject to
UCP600 and URDG758
 Stating conflicting information within the text of the LC
– Example: stating partial drawings are permitted, but
including the full amount of the LC within the quoted
demand statement
SBLC and Guarantee: Best Practices
Things to avoid
16

Agenda
Page
17

Export Credit Agencies and the Trade Finance Spectrum
 ECAs provide a broad array of products from smaller/short term facilities to larger/long term facilities
 Different ECAs offer different schemes but all predicated on insurance or guarantee cover to banks offering short-to-medium
term trade finance instruments (L/Cs, Guarantees, Promissory Notes, Bills) through to medium-to-long term export finance
loans
 Product focus of the ECA reflects national industrial composition
 Product focus of bank reflects ECA appetite, regional strength and client drivers
Cover in the event the
exporter fails to
indemnify the bank on
bonding facilities.
Some ECAs‘ schemes
operate as an upfront
pro rata risk share to
provide capacity to the
market for SME
exporters or additional
capacity where banks
are full on lines for
larger exporters
Bank Guarantee Cover
Cover in the event of
loss from receivables
discounting.
Program driven by
suppliers and can
operate through
L/C, drafts, PNs, accoun
t receivables
discounting, typically 1-5
year space
Supplier Credits
loss from L/C Issuance,
L/C Confirmation and/or
L/C Discounting.
Short to medium term
cover for funded and
unfunded facilities with
more products being
offered by ECAs post
2008 crisis and with
advent of Basel III.
L/C Cover
loss on working capital
facilities extended by a
bank to an exporter to
support export activities.
Working Capital Cover
borrower default (due to
economic/ political risk)
on loans extended to
finance procurement of
goods.
ECA issues guarantee
or insurance to lender
on principal and interest
obligations of borrower
under a loan agreement.
Typically 5-12yrs, or
longer for some goods.
Buyer Credits
Short-term:
Trade Products
Medium-term:
Supply Chain Finance
Long-term:
Export Finance
18
EXPORTCREDITAGENCYFINANCING

Lena Eliopoulos Daren Maloney
Vice President Senior Vice President
Global Trade Services Commercial Banking
312-954-5453 614-248-9785
Yelena.eliopoulos@jpmchase.com Daren.p.maloney@chase.com
Contacts
J.P. Morgan Contacts
19
EXPORTCREDITAGENCYFINANCING

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