THE MAGIC OF LETTER OF CREDIT:
Mother Choice is a Murnbai based export organisation specialising in the export of handsmoked children wear. Its owner is Mrs. Shruti Sharma who possesses post—graduate qualification in business management. The business is ten years old. It has nieched a good market for its items in USA and Japan. Only recently, Mrs.
Sharma has upgraded the technology in her factory. The orders are adequate to keep her busy round the year. Mrs. Sharma is seen in high spirits these days. She has negotiated a good order with Dubai based importer M/s Green Channels. Its MD Sheikh AI—Makhdoom, recently paid a visit to the office and factory of Mother Choice. He instantly liked the handsmokcd dresses for children. He placed a huge order with Mother Choice suggesting some changes such as long sleeves and lining and that the dresses shall not bear stars and crosses.
Sheikh Al-Makhdoom agreed to open a L/C. The order was placed on 28th August 2003 and the goods were to he delivered by 1st November 2003. An export contract was signed for US $ 30,000 covering 3,000 pieces. On 29th September ’03, the Bank of Oman, the issuing bank, sent an irrevocable L/C at sight to United Commercial Bank, the negotiating bank. L/C contained the following terms:
( 1) Shipment:
— Port of departure — Mumbai.
— Port of arrival — Dubai.
— Partial shipment — allowed.
— Transshipment — allowed.
— Shipment Expiry — 1st Nov. ‘03
Shipment documents should be presented to the issuing bank within the validity period of credit i.e. 1st Nov. ‘03.
( 2) Special instructions:
– Commercial invoice should mention manufacturer’s name.
– A copy of government approved inspection certificate.
– Two copies of negotiable bill of lading along with ten copies of non—negotiable B/L.
— Shipment to be effected by United Arab Shipping Co. (UASC) line vessel only.
— Certificate from the Masters/Agent of vessel stating that the vessel is allowed by Arab Authorities to call on Arab ports and is not scheduled to call at any Israeli ports during its trip to Arab countries.
— Mother choice is allowed Red Clause facility.
Mrs. Sharma is informed by the Production Manager that it would not be possible to ship the goods to Dubai by 1st NOV. ‘03 because of unexpectedly large volume orders from their prime buyers from USA and Japan. Mrs. Sharma e-mailed Green Channels showing her inability to ship the goods by 1st Nov. ‘03 and wanted extension of time. After much deliberation she was given extension of two weeks and that the goods must reach Dubai by 15th Nov. ‘03 to take advantage of Idd shopping; to which Mrs. Sharma agreed. Mother Choice despatched the shipment which reached Dubai on 14th Nov. ‘03. On collection of shipment, Green Channels found that six pieces were short and it asked Mother Choice to send six pieces by courier, to which Mother Choice agreed. In the meantime the exporter collected payment from United Commercial Bank on presentation of documents.
Sometime in December ‘03, United Commercial Bank informed the exporter that it had not received payment from Bank of Oman, the issuing, bank and asked Mother Choice to speak to its buyer Green Channels.
1) Did Mother Choice enjoy safety of payment with irrevocable L/C? Why is it necessary to follow the terms of L/C?
2) Why do you think the buyer asked for ten copies of non—negotiable Bill of Lading? What is Red Clause facility?
3) In your opinion, why the Bank of Oman did not clear the payment?
CASE – 2
S TRIKING GOLD WITH EXPORT POLICY LACUNA:
Unprincipled operators ever ready to collect incentives offered to exporters have pushed their ingenuity to new heights. A gang of self- proclaimed exporters, operating from Singapore and Dubai, has been minting money by exploiting the scheme which offers lucrative incentives against exports out of special economic zones (SEZs) in the country. Their style of operation is amazing. The gang members, posing as exporters, import gold, platinum and palladium from Dubai apparently for manufacturing jewellery. The consignments are supposed to be exported with value addition. However, the “imported goods” are exported on the following day and payments are received immediately while the imports are made on letter of credit, that is on deferred payment terms extended upto a year.
The payments received out of exports by the Indian operator is put in fixed deposits in Indian banks for a period of one year (the period of the LC) earning a high rate of interest as compared to interest offered in foreign countries. The trade is over Rs. 300 crore annually only at Noida SEZ. The earnings of the operators in Dubai and India run into hundreds of crores in Indian currency. Investigative agencies are monitoring a few units in the Noida SEZ engaged in this money laundering game for quite some time. The total trade volume of Noida SEZ is Rs. 4,300 crore out of which Rs 3,000 crore relates to imports of gold, platinum and palladium.
An importer gets credits for imports on deferred terms, as mutually agreed upon by the buyer and the supplier. The importer opens a LC from a bank in India under deferred payment terms, extended upto a year and the supplier company gets its bills drawn under the LC discounted from a foreign office of the LC opening bank in India. So the moment the “imported goods” are exported, the importer in Dubai remits the money to its Indian p artner who puts the same in fixed deposit to earn from high rate of interest. As per original payment terms, the payment is to be received on the expiry of the deferred payment period (in this case one year), the supplier gets cash on the day of presentation of documents to the bank abroad extending the suppliers’ credit by agreeing to pay a commission to the bank. For the leading bank, the LC is issued by the bank in India becomes the security and payment is assured at the end of the normal deferred payment period.
In order to discount bills before one year maturity period, the supplier in Dubai pays about 2% charges on the total amount. In comparison he earns an interest of 6% p.a. in the Indian banks through fixed deposits if he remits the same discounted money through “imports” he made from India.
1 ) Analyse the modus operandi of money laundering to take advantage of higher interest rates in India as cited in this case.
2) Suggest measures to plug the lacuna in export policy.
3) How would you assess this money laundering legal or illegal? Give arguments to support your stand.
ADAPTABILITY – KEY TO SUCCESS IN BUSINESS:
McDonald Corporation is perhaps the best known business all over the world. This fast food chain, started its business in US and spread to 91 countries including China and Russia. With a network of 20,000 restaurants worldwide, it serves 3 million people everyday. More than half of its income comes from outside America. It has provided ernployment opportunities to more than two million people.
Success at such a grand scale is possible because McDonald, adapted its business to suit local likes and dislikes. Adaptability is seen in services, products and HR practices. It has given due recognition to legal, social, political, economic and cultural environment. In the Middle East countries McDonald’s restaurants provide separate dining rooms for men and women. has immensely successful business in Japan because Japanese are served Teriyaki Burgers.
McDonald made its entry into India after much hue and cry. Some complained that it will adversely affect the Indian culture and others had reservations because McDonald in the western countries mostly uses beef, something that is not acceptable in India. All these suspicion were put to rest because McDonald adapted its menu to suit local tastes. For non-vegetarian patrons only chicken and mutton are used. For frying only vegetable oil is used. Vegetarian customers have wide selection of dishes with Indian tastes. It has also started serving tea to attract clients because Indians are mostly tea drinkers. Its French Fries are extremely popular both among children and adults. In order to attract children it has installed games and joy-rides.
In India, its HR policies are too obvious. Employment is given to young boys and girls. College students can look forward to part-time employment at McDonald. Its restaurants maintain very high standard of hygiene. Flexi working hours is suitable to female employees. Once staff is selected, training becomes compulsory to make employees familiar with their jobs and McDonald’s philosophy of customer service and quality. To start employees are recruited on contract basis. When they prove t heir caliber through good work, they are continued on the job.
The success of McDonald is an eye-opener to Indian business. There is vast scope to export our delicacies abroad and also to think of opening chain of Indian restaurants to suit tastes of people overseas. The magic word is adaptability.
1) Do you agree adaptability is the magic word to succeed in business overseas? Illustrate your answer?
2) To what would you subscribe phenomenal success of McDonald in India?
3) Identify cultural factors that might be important in a training programmc for food handlers at McDonalds in India?
4) Argue in favour or against the HR policy of McDonald of hiring employees on contract basis?
PROGRESS AT A COST:
Since the introduction of free market economy China has shown remarkable progress in the industrial world. Chinese goods have flooded the global market They are cheaply priced with limited life span but they are favoured by consumers because it does not tax their pockets. An outstanding feature of their acceptability is product innovation.
China has become a breeding ground for foreign MNCs. Practically every large MNC has its branch/subsidiary in China. At the initial stage the going was simple but later foreign companies were compelled to pay price to get their job done. Demand for on-money takes several forms. The most common form of payment involves invitation to Chinese officials to visit overseas. There is marked preference for foreign travel rather than cash or gifts. Some trips are reasonable and bonafide. They are directly related to the promotion, demonstration or explanation of products and services or the execution of a contract with a foreign government agency. It is also reported that a certain bank was reluctant to open letter of credit for its client. The concerned bank official was invited on an overseas inspection tour and the bank opened L/C. Depending on the quantum of business, at times MNC, are asked to sponsor overseas education for children of officials. Refusing to make payments may not only hurt sales but it could mean end of road for the business.
Kickbacks are routine to get permission or license. Import and export licenses that are difficult to get legally, traders are tempted to purchase in black market. In the official circles much stress is put on speed-money because it helps to expedite the work. Speed-money is said to be a Way of life.
An alarming report appeared in the press that said inspection certificates complete with signatures and seals can be purchased for roughly US $ 200. Another report suggested that some imports that would legally enter China through a northern port are redirected through the southern port. This is because for the speed-money, customs officials in a southern province are willing to cut down the dutiable value of imports by as much as 50 per cent.
1) Make a list of different types of on—money and speed—money represented in this case. Will they make or make the progress of the economy?
2) Do you think MNCs face the problem of speed—money wherever they operate? How do they tackle the situation?
3) Are you in favour of more international stringent laws to dual with speed-money? If so, suggest measures?