A letter of credit is a written undertaking issued by buyer’s bank to pay a certain sum of money within a stipulated period against a specified set of documents. It is a conditional undertaking. It undertakes to pay a certain amount of money on presentation of stipulated documents and the fulfillment by the exporter of all the terms and conditions incorporated in the L/C. The Letter of credit is a separate and distinct contract from the underlying sale contract, and the bank is not responsible for the fulfillment of the terms of the sale contract. The essential and basic provisions of the sale contract must be incorporated in the letter of credit. In addition, the amount of credit, its expiry date, the tenor of the draft to be drawn, party on whom the draft is to be drawn, the documents to be presented, brief description of the goods, must be Continue reading
International Business Finance
Evaluation of Subsidiary Performance in Multinational Operations
A parent company may employ several criteria to evaluate the performance of its foreign subsidiaries. Sales growth, market share, stability in output, asset growth and returns on investment are some of these criteria. Out of these, Return On Investment (ROI) is the most widely-used criteria-because the interest of the parent company ultimately lies in the Return On its Investment. The ROI as calculated on the basis of reported profit repatriation may however not show the true return from the subsidiary. This is because it may be grossly-distorted, due to the following reasons. (i) The subsidiary’s profits are taxed in the host country and repatriation of profit may be subject to further tax. Therefore, the parent company tries to transfer the money from the subsidiary in various other ways such as high royalty, high interest on loan, high expert fees, etc. As a result the, profit repatriation becomes a grossly understated Continue reading
Indian Depository Receipts (IDRs)
Indian Depository Receipts (IDRs) are transferable securities to be listed on Indian stock exchanges in the form of depository receipts created by a Domestic Depository in India against the underlying equity shares of the issuing company which is incorporated outside India. As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, Indian Depository Receipt is an instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian Depository (say National Security Depository Limited — NSDL), which would in turn issue depository receipts to investors in India. The actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorize the Indian Depository to issue the IDRs. The Indian Depository Receipts would have following features: Overseas Custodian: Foreign bank Continue reading
Depositary Receipts – Definition, History and Types
A Depositary Receipt (DR) is a type of negotiable (transferable) financial security traded on a local stock exchange but represents a security, usually in the form of equity, issued by a foreign, publicly-listed company. The Depositary Receipt, which is a physical certificate, allows investors to hold shares in equity of other countries. One of the most common types of Depository Receipts is the American depository receipt (ADR), which has been offering companies, investors and traders global investment opportunities since the 1920s. Since then, Depository Receipts have spread to other parts of the globe in the form of global depository receipts (GDRs). The other most common type of Depository Receipts are European DRs and International DRs. ADRs are typically traded on a US national stock exchange, such as the New York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on European stock exchanges such as the Continue reading
Export Financing – Financing Export Transactions
Export financing starts after the order from the buyer has been received, the export order has bee accepted, manufacturing for the export order begins, and the shipping documents are issued; and it ends at ports when the goods are cleared. In other words, export finance refers to the financing of the goods from the home port to the foreign port and the inland centers, and remittances accruing from the sale of these goods. Financing of exports is a specialized business demanding the operations of institutions that are engaged in it and have special skills in handling the intricacies of foreign exchange transactions, a network of contracts abroad and a willingness to assume the risks peculiar to it. It follows, therefore, that good financing arrangements are a prerequisite for the success of the export trade. In export trade, where business dealings are carried on between parties who may be separated by Continue reading
Export Bills of Exchange
Export Bills of Exchange are the drafts or bills of exchange, drawn by the shipper of goods or the provider of services in one country, on people in another country who are buying the goods or using the services, that constitute the chief supply of international currency. A draft or a bill of exchange performs two or three functions. A draft payable at first sight is a demand for payment due and a receipt for payment made. A draft payable at some future period after sight becomes a demand for payment by the seller, a promise of payment by the buyer on the agreed date, and a receipt for payment after such payment has been made. The person who makes out the draft (i.e., the person who receives the money) is said to draw the draft and is called the drawer. The person to whom the draft is addressed and Continue reading