Documents under Documentary Credits-Part II

In the previous article, we had studied the Draft or Bill of Exchange in the context of Documentary Credits(DC).   In this article, we shall study the Commercial documents that are dealt with, under the DC.

Commercial Documents:  In any trade transaction, be it domestic, or international, certain documents are necessary to put the transaction through.   One such category of documents is the commercial documents,  of which some of the important ones are discussed below.

Commercial Invoice:  The invoice is a basic document that describes the merchandise involved in the transaction, and gives all other related information.

Normally, the invoice contains the description of the goods, apart from the quantity, quality, the unit price, the total cost, the duties, taxes, if any, any discounts allowed, the net price, etc.   It also contains a reference to the Documentary Credit, under which it is drawn, with the relative order number etc.   It also mentions the destination of the goods, the port of delivery, the shipping marks on the packages etc.

The commercial invoice serves the purpose of conveying the details of merchandise being traded, and enables cross checking of the same, at the buyer’s end, to facilitate the closure of the transaction to the satisfaction of both the buyer and the seller.

Sometimes, the commercial invoice is preceded by what is known as the Proforma Invoice.   The Proforma Invoice is similar to the regualar Invoice, and enables the buyer to know the details of the goods to be supplied, and enables him to take a view of the same and also seek clarifications as required.

Packing List:  This document gives the details of the packages in which the merchandise is packed and shipped.   It also  gives details of goods packed in each package or container, as to its nature, quantity, size, distinctive markings,  etc.

The purpose of this document is to enable the buyer or the importer,  to know at a glance, what has been shipped, and to compare and satisfy himself about the correctness of the contents in relation to the Documentary Credit.   This also facilitates the onward shipment of goods where the ultimate buyer may be  different.   Further, the packing list enables the Customs authorities in the importer’s country to complete their formalities, without problems.

Weight Certificate:  As the name indicates, this document gives the weight of the merchandise according to its classification and division, i.e. either into individual units or groups of units.

Quality Certificate:  The exporter may be required to send a certificate of quality alongwith the other documents to the importer.   This certificate testifies to the fact that the shipped goods are in comformity with the quality as required under the Documentary Credit.   Sometimes, the importer may require independent  certification of quality for the goods. 

Inspection Certificate:  Often the importer, for his own satisfaction, or in order to comply with his country’s requirements, demands a Inspection Certificate from the exporter, for the goods supplied.   This inspection is done before the goods are shipped.

Health Certificate:  This certification is necessary when the object of the trade are live animals and birds.   Invariably, both the exporting and the importing countries  require a health certificate, testifying to the fact that the animals and the birds being traded are healthy and are free of any diseases.

                                                                                     To be concluded

Documents under Documentary Credits-Part I

Introduction:  A Documentary Credit is a financing mechanism widely used in both domestic, as well as international trade.   It is an undertaking of a Bank, on behalf of its customer, to make payment against submission of specified documents by the seller of goods and services.

Documents under Documentary Credits:  There are four types of documents that are dealt with under a Documentary Credit.   They are Financial Documents, Commercial Documents, Transport Documents and Insurance Documents.   Apart from these four, there is another set of documents called the regulatory documents.

 Financial Documents: 

Draft or Bill of Exchange:  This is the most important of the financial documents.   A Draft or a Bill of Exchange may be defined as a financial instrument drawn by one person called the Drawer upon another called the Drawee, demanding payment for the goods or services supplied, in terms of the relative Documentary Credit.

In the specific context of international trade, a Bill of Exchange is drawn by the exporter on the importer making a demand for payment of a specific sum of money for the supply of goods and or services as specified under the relative Documentary Credit.   The Bill of Exchange must also be drawn as required under the Documentary Credit.

The Draft or Bill of Exchange testifies to the fact that there is a commercial transaction underlying this instrument involving the sale and purchase of goods and services.   These goods/services are defined under the Documentary Credit.   There is a specific value of these goods/services.   And they have to be supplied within a specified period.   That makes it incumbent upon the drawee to make payment for the goods/services received under the Documentary Credit, within the specified time.   This specified time for the payment may be immediate, i.e. at sight, which means the drawee has to make good the payment on presentation of the documents, or on demand, or at sight.  

Or the documents may be drawn on usance basis, where the drawee is given time to make payment after a certain number of days, from the date of the Draft.   This method of payment is again divided into two types.   The first being on DP basis,  i.e. documents against payment basis.   Here documents are released to the drawee only upon payment of the Draft.   The second type being DA basis, i.e. documents against acceptance basis.   Here documents are released to the drawee upon acceptance of the Draft by him and to be paid on maturity date, as per the terms of the Documentary Credit.

The Bill of Exchange has legal status, except in certain countries, where it is stated otherwise.   It is an all important documentin a Documentary Credit, that enables the beneficiary of the Credit to demand and receive payment.   It also acts as a receipt for the drawee when acknowledged as such by the drawer.   Hence it is a comprehensive financial instrument that facilitates the international trade transactions by offering the means for compliance of the terms of the Documentary Credit.   It is a medium that brings together the exporter and the importer, and binds them together under a financial pact, that protects the financial interests of both of them.

Looking to the importance of this document, it is imperative that it be drawn properly and worded as per internationally acceptable standards to avoid any misinterpretation, or misunderstanding or even misuse.   It must be specific and unambiguous.

Other Financial Documents:  Among the other financial documents that are noteworty is the Promisory Note.   A Promisory Note is also a financial instrument, in writing, drawn by a person called the Maker, who promises to pay a specific sum of money to the person called the Payee.   The Promisory Note may be payable on demand, called a Demand Promisory Note, or payable after a certain period of time from the date it is drawn, called Usance Promisory Note.   In the context of international trade transaction, the Maker of the Promisory Note is the buyer or the importer, and the Payee of the Promisory Note is the seller or the exporter.

                                                                                           To be concluded

 

« Previous Page