PROJECT REPORT ON FROEX

MANAGEMENT AND WORKING CAPITAL

AMITY NOIDA

Presented To :- Submitted By:-

MRS. KAMALDEEP KAUR SAMYAK RANJAN

SAMAL

AGBS , NOIDA 3rd SEMESTER.

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PREFACE

Summer training is a very essential part of management program .This gives exposure to corporate environment where a student can understand and learn to tackle with different issues .student get opportunity to enhance their skill in practical life.

Being a management student of AMITY , NOIDA. I also undergone summer training in LG Electronics at greater Noida for 2 months .I have selected FOREX & WORKING CAPITAL MANAGEMENT.

FOREX Management is a very important part of an organization which has to deal with international market. As LG Electronics India mainly deals with import of material and then assembly of such raw material or semi finished goods to produce the finished products, so forex department becomes a very important part of the organization’s working. Main objective of the project is to learn the process of import, the various rules and regulations related to the import transactions that have to be followed during payments or receiving the goods. To work on the various processes over particular period of time and thus gather knowledge about the importing process. Forex cover payment Method, bill of entry, hedging. For first 20 days I worked on bill of entry. It is a account of goods entered at a custom house ,for imports and exports, detailing the merchant , quantity of goods , their type , and place of origin or destination .Through bill of entry , letter is prepared for RBI as a proof of currency where used. Next I learned about different methods of payment made to exporter. Different methods which are used in LG electronics are open account, document against acceptance, letter of credit, buyer’s line of credit and cash in advance. There I learned how to deal with different issues which comes in payment. Hedging is a method by which traders use two counterbalancing investment strategies so as to minimize any losses caused by price fluctuations. Types of hedging are forward contracts, future, options, money market .But the hedging which is only used in LG is Forward contracts hedging. Then I learned about working capital management which is very essential part of an organization for day to day activity.

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The study is limited to only imports of the company. How the company decides on the imports of the company, how they decide upon the method of payment that has to be taken up by the company, and how to averse the risk of fluctuations in the currency rates. The exports part is not included in my study. In this company, I have learned and gained lot of knowledge about finance department as well as day to day activity of a multinational organization.

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ACKNOWLEDGEMENT

This is my first experience in corporate life in LG electronics at greater noida. Here I get familiar with environment and able to understand the different situation with the help of team members of finance department. I got this golden opportunity where I was able to enhance my skills.

I would like to thank Sumendra Jain Head of Finance for providing me with this golden opportunity to undertake my summer internship project in LG Electronics India PVT. LTD.

I also thank my project guide, Mr. Pradeep Panda for his invaluable support, guidance, inspiration and timely monitoring my activities which would help me to complete my project.

I would also like to thank my mentors Mr. Vijay Gaur, Mr. Vijay Gussain, Mr. Kuldeep singh, Mr. Bhagwat Singh and all other finance department for supporting, guiding and providing their valuable time in completing my task on time.

THANK YOU ALL!

SAMYAK RANJAN SAMAL

AMITY,. NOIDA

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INDEX

(1)INTRODUCTION TO LG ELECTRONICS COMPANY ……

(2)FOREX MANAGEMENT 11

2.1 FOREIGN EXCHANGE 2.2 CASH IN ADVANCE 19

2.3 OPEN ACCOUNT .21

2.4 DOCUMENT AGAINST ACCEPTANCE 22

2.5 LETTER OF CREDIT 23

2.6 BUYER’S LINE OF CREDIT 24

2.7 HEDGING 26

2.8 BILL OF ENTRY 27

(4)WORKING CAPITAL MANAGEMENT ….. 38

(5)CONCLUSION …. 40

(6)BIBLIOGRAPHY ... 42

(7)ANNEXURE … 43

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INTRODUCTION TO LG COMPANYLG Electronics India Pvt. Ltd., a wholly owned subsidiary of LG Electronics, South Korea was established in January, 1997 after clearance from the Foreign Investment Promotion Board (FIPB).

The trend of beating industry norms started with the fastest ever-nationwide launch by LG in a period of 4 and 1/2 months with the commencement of operations in May 1997. LG set up a state-of-the art manufacturing facility at Greater Noida, near Delhi, in 1998, with an investment of Rs 500 Crores. This facility manufactured Colour Televisions, Washing Machines, Air-Conditioners and Microwave Ovens. During the year 2001, LG also commenced the home production for its eco-friendly Refrigerators and established its assembly line for its PC Monitors at its Greater Noida manufacturing unit.The beginning of 2003 saw the roll out of the first locally manufactured Direct Cool Refrigerator from the plant at Greater Noida.

In 2004, LGEIL also up its second Greenfield manufacturing unit in Pune, Maharashtra that commences operations in October this year. Covering over 50 acres, the facility manufactures Color Televisions, Air Conditioners, Refrigerators, Washing Machines Microwave Ovens Color Monitors and GSM phones.

The Greater Noida manufacturing unit line has been designed with the latest technologies at par with international standards at Korea and is one of the most Eco-friendly units amongst all LG manufacturing plants in the world

LG has been able to craft out in eight years, a premium brand positioning in the Indian market and is today the most preferred brand in the segment.Various studies have shown that the consumer is well informed on the health

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awareness front. LG was one of the first companies who recognized the emerging change in consumer needs and decided to differentiate their products on the basis of technology which appealed to the consumer on the basis of health benefits. Its vision was to become a 'Health Partner' for its consumers worldwide and therefore formulated its corporate philosophy to make peoples' lives better, convenient and healthier. The CTV range offered by LG has 'Golden Eye' technology, which senses the light levels in the room and adjusts the picture to make it more comfortable for the eyes. The entire range of LG air-conditioners have 'Health Air System', which not just cools, but keeps pollution out. Similarly, microwave ovens have the 'Health Wave System', refrigerators have the 'PN System', which preserve the nutrition in food and washing machines have 'Fabricare System', which takes the health factor down to ones clothes. All the products offered by the company have unique technologies, developed by its R&D departments that give customers a healthier environment to live-in.

LG India has also been taking on a slew of initiatives as a part of Corporate Social Responsibility. LGEIL is proud to have adopted about 24 villages around our Greater Noida facility. LG extends Free Medical Care, which comprises of free check ups and a free distribution of medicines on a daily basis. LGEIL is also generating self-employment opportunities for the people in the form of tailoring, knitting etc. in addition to all this, LG also sends veterinary doctors regularly to these villages. Besides all this, LG India is one of the very few companies in the country that has an internal Energy, Environment, Safety and Health Department. This function caters to activities like Energy Conservation, Environmental Issues, Work Place Fire and Safety as well as Occupational Health for the benefit of the employees.

VISION

LG Electronics pursues its 21st century vision of becoming a true global digital leader who can make its customers worldwide happy through its innovative digital products and services.

LG Electronics set its mid- and long-term vision anew to rank among the top 3 electronics, information, and telecommunication firms in the world by 2010.

As such, we embrace the philosophy of “Great Company, Great People,” whereby only great people can create a great company, and pursue two growth strategies involving “fast innovation” and “fast growth.” Likewise,

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we seek to secure three core capabilities: product leadership, market leadership, and people-centered leade

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FACTS AND FIGURES

LG Electronics, Inc. (KSE: 06657.KS) is a global leader and technology innovator in consumer electronics, home appliances and mobile communications, employing more than 72,000 people working in over 120 operations including 80 subsidiaries around the world. Comprising four business units -- Mobile Communications, Digital Appliance, Digital Display and Digital Media with 2006 global consolidated sales of US $48.5 billion -- LG Electronics is the world's largest producer of CDMA handsets, residential air conditioners, plasma panels, optical storage products, DVD players and home theater systems.

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AN INTRODUCTION TO FOREIGN EXCHANGE

You know that “foreign exchange” exists, and you have an inkling of what the newspapers are talking about when they mention it, but you really don’t understand the basics of what foreign exchange is and how it works. Here, therefore, is a short “primer” on the basics of foreign exchange.

The term “foreign exchange” basically refers to buying the currency of one country while selling the currency of another country.  All nations have their own, different kinds of money (currency). This has existed throughout the ages, probably since the time of the Babylonians.  As trading developed between nations, the need to convert one kind of money to another also developed.  This is how a formal system of foreign exchange arose. As trade between nations developed, Britain, as the nation with the largest and strongest navy, could spread its commercial interests far and wide. It therefore became the most active trading nation, with a vast empire of colonies. As a result, Britain’s currency, the pound sterling, became a benchmark to which other currencies were compared (and exchanged) for most of the seventeenth, eighteenth and nineteenth centuries.  Today, most currencies are compared to the U.S. Dollar, currently the most active and commercially strong trading nation; many currencies are still “pegged” to the U.S. Dollar for their exchange rate.

How exactly are currencies traded?

A company that wants to import goods into the United States has to buy the foreign currency of the country the goods are coming from, in order to pay for them.  The following is an example: an American shoe store may sell a lot of Brazilian shoes, since Brazil is a large exporter of leather goods (about $1.9 Billion per year). The owner of this store would have to buy Brazilian Reals (the currency of Brazil) to pay for a shipment of shoes.  He has a number of choices. First, he could buy the Reals through his bank or a foreign exchange broker at fixed rate of exchange, and then order the shoes. Since he knows the exchange rate, he knows how much the shoes are worth in dollars, and how much his bill (in dollars) will be when he has to pay for the shipment of shoes. When he “takes delivery” of the Reals (that is, he

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tells his bank to pay the Brazilian exporter), his bank will debit him the U.S. Dollar equivalent at the rate agreed upon when he purchased the Reals.

This importer has the second option of waiting until the shoes arrive in the United States, and then buy the Reals to pay for them. He will not know how much he has to pay for this shipment of shoes until he pays for the Reals, rather when he entered into the contract to purchase the shoes.  If the Real got stronger, in other words, became more expensive compared to the dollar, he would pay more for them in dollars than on the day of his contract. He could also pay less if the Real became weaker.  But most businessmen want to protect themselves and the price of their products against higher costs and be able to manage their budgets. 

Knowing the exchange rate of the real when he processed his order with the Brazilian exporter would allow him include that rate into his selling costs.  If he risks that the rate will come down (by not buying Reals ahead of time), and it goes up instead, he may end up with a loss in the price of his shoes. Most businessmen would rather leave this kind of “speculating” to foreign exchange traders!

Foreign Exchange Products and Services

Spot Contracts Forward Contracts Window Forward Contracts International Check Clearing Foreign Draft Issuance International Wire Transfers Currency Notes

Foreign Exchange Benefits

Buy and sell goods in terms familiar to your customers and suppliers. Manage your company's financial statements. Protect profit margins from currency fluctuations. Increase sales. Maintain your global competitive position.

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FEMA - FOREIGN EXCHANGE MANAGEMENT ACT

This Act was introduced in 1999

To facilitate external trade & payments, for promoting the orderly development and maintenance of foreign exchange market in India, this Act was introduced. It was put forth, to enact a law to consolidate and amend the existing law relating to the foreign exchange. This Act is also meant for managing the foreign exchange as against restricting the dealings in foreign exchange and for the smooth flow of foreign trade.

The management of foreign trade and investment will be done by the RBI and the Government.

TO WHOM IS THE ACT APPLICABLE

The FEMA, is applicable-

To the whole of India.

Any Branch, office and agency, which is situated outside India, but is owned or controlled by a person resident in India.

Any contravention of provisions of FEMA, by all those, who are covered under above two aspects committed outside India.

MAIN FEATURES OF THE ACT

1. The most important feature of the Act is that the definition of a resident and non-resident are almost in line with income tax Law. Therefore there is uniformity in defining the residential status of persons who are liable for income tax and who are entitled for foreign exchange related exemptions, relaxations and amenities.

2. The next feature that a” Person" defined includes even artificial persons like Firm, Company, and HUF etc., which are again coherent with income tax laws. Previously the RBI had powers to determine the residential status of artificial Persons and now the Act has been amended

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3. The Applicability of FEMA is more or less same as FERA.

4. The Act empowers RBI to authorize any person to deal in Foreign exchange or in foreign securities. The RBI may specify the conditions in the authorisation and may also revoke the same in public interest in the cases of:

a. Contravention of provisions of the Act

b. Failure to comply with the conditions in the authorisation.

Except the "Current Account" transactions,  other foreign exchange dealings and payments are still to some extent controlled. All "Capital Account" related transactions are not freely permitted unless specifically allowed under the Law. The restrictions as applicable for "Capital Account" transactions under FERA continue in FEMA also

5. FEMA has brought in export of services also under regulation along the line of goods.

6. FEMA has permitted all current Account transactions unless otherwise specifically prohibited by the RBI. The following are some of the Current Account transactions.

o Any payment in connection with foreign trade, other current business, services and short term Banking and credit facilities in the ordinary course of business.

o Any payment due as interest on loans and as net income from investments.

o Any remittances for living expenses of parents, spouse and children residing abroad.

o Any expenditure incurred in connection with foreign travel, education and medical care of parents, spouse and children.

2. FEMA has not permitted Capital Account transactions unless otherwise provided by Law or unless specific permission is obtained from the RBI. Capital Account transactions are those which have the effect of altering the assets and liabilities. This  includes contingent liabilities  of a person resident in India, or the assets and liabilities of a person resident outside India.

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The RBI has prohibited, restricted and regulated the following Capital Account transactions.

o Transfer or Issue of any foreign Security by a person resident in India.

o Transfer or Issue of any security by a person resident outside India.

o Transfer or Issue of any security or foreign security by any branch office or agency in India, of a person resident outside India.

o Any borrowing or lending in Foreign Exchange in whatever form or by whatever name.

o Any Borrowing or Lending in rupees, in whatever form or by whatever name between a person resident in India and a person resident outside India.

o Deposits between person resident in India and persons resident outside India.

o Export, Import or holding of currency notes.

o Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India.

o Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India.

o Giving of a guarantee or security in respect of any debt, obligation or other liability incurred:

a. by a person resident in India and is owned by a person resident outside India or

b. by a person resident outside India.

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EXPORT-IMPORT PROCEDURE

1 Seller and Buyer conclude a sales contract, with method of payment usually by letter of credit (documentary credit).

2 Buyer applies to his issuing bank, usually in Buyer's country, for letter of credit in favor of Seller (beneficiary).

3 Issuing bank requests another bank, usually a correspondent bank in Seller's country, to advise, and usually to confirm, the credit.

4 Advising bank, usually in Seller's country, forwards letter of credit to Seller informing about the terms and conditions of credit.

5 If credit terms and conditions conform to sales contract, Seller prepares goods and documentation, and arranges delivery of goods to carrier.

6 Seller presents documents evidencing the shipment and draft (bill of exchange) to paying, accepting or negotiating bank named in the credit (the advising bank usually), or any bank willing to negotiate under the terms of credit.

7 Bank examines the documents and draft for compliance with credit terms. If complied with, bank will pay, accept or negotiate.

8 Bank, if other than the issuing bank, sends the documents and draft to the issuing bank.

9 Bank examines the documents and draft for compliance with credit terms. If complied with, Seller's draft is honored.

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10 Documents release to Buyer after payment, or on other terms agreed between the bank and Buyer.

11 Buyer surrenders bill of lading to carrier (in case of ocean freight) in exchange for the goods or the delivery order.

MEANS OF PAYMENT

The chief means of payment in foreign trade are:

1) mail or telegraphic transfer of the stipulated amount of money2) cheques3) bills of exchange

ChequesA cheque is a written order given by the customer to his bank to pay a certain sum of money of his current account to the payee named in the cheque. The parties to a cheque are:

1) the drawer who draws the cheque, who orders his bank to be paid2) the payee to whom the cheque is to be paid3) the drawee – it is the bank which pays it

There are two kinds of cheques:a) a cheque to bearer which may be paid by a bank to anyone who

presents itb) a cheque to order must be endorsed by the payee, it means that the

payee must write his name on the back of the cheque before it is paid to him

Bills of exchangeA bill of exchange is a written order requiring the person to whom it is addressed to pay on demand or at a fixed future time a certain sum of money.

The parties of bill of exchange are:

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1) the drawer 2) the drawee to whom it is addressed3) the payee to whom it is to be paid. The payee may be identical

with drawer

METHODS OF PAYMENT:

When deciding which method of payment to use, or combination of methods, the seller must weigh the risks and costs involved. The buyer doesn't want to tie up capital on product that it doesn't yet possess, which means that the seller can lose the sale if its competitors are willing to offer more attractive terms. On the other hand, the seller needs assurances that the buyer won't default on payment once it has received the goods. Companies need to develop an international credit policy that does not impede sales, but protects against loss.Once the seller has determined the risks its company can afford to take, it's time to evaluate the risks associated with the more common methods of payment. Consulting with a qualified international banker at this time can help the seller make an informed selection. Ranked in order of risk from the seller's perspective, from the most secure to the least secure, the more common methods of payment are:

Cash in advance Documentary collection Open account Letter of credit Buyer’s line of credit

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Cash in AdvanceCash in advance is typically considered the safest method of collecting payment for the seller. Cash in advance can take the form of a wire transfer or payment by check. An international wire transfer is the preferred method, because it allows for quick receipt of good funds. Sellers should provide clear routing instructions to the buyer when using an international wire transfer including the name and address of the receiving bank and branch, the bank's SWIFT, Telex, and ABA numbers, and the seller's name and address, bank account title, and account number.

Collecting payment using an international check is a less attractive option than wire transfer because it can result in lengthy delays of final receipt of good funds. If the foreign buyer pays by check, made payable in U.S. dollars and drawn on a U.S. bank, the collection process is the same as any U.S. check. If, however, the check is in a foreign currency or drawn on a foreign bank, the collection process becomes more complicated and can delay the availability of funds. There is also a risk that any check may be returned due to insufficient funds in the buyer's account. This can result in a charge-back and possible overdraft charges in the buyer's account.

STEP BY STEP PROCESS:

(1) Deal is finalized between exporter and importer.

(2) Purchase order is raised by material department.

(3) Payment is made through wire transfer to exporter.

(4) Then exporter ships the goods.

(5) And finally, importer receives the goods.

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CASH IN ADVANCE PROCESS

2. Wire Transfer

1.Purchase Order/Contract

4. Ships goods

3.

5. Goods Received

PAYMENT

IMPORTER

IMPORTER’S BANK EXPORTER’S BANK

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OPEN ACCOUNTAn open account transaction means that the goods are shipped and delivered before payment is due, usually in 30 to 90 days. Obviously, this is the most advantageous option to the importer in cash flow and cost terms, but it is consequently the highest risk option for an exporter. Because of the intense competition for export markets, foreign buyers often press exporters foropen account terms. In addition, the extension of credit by the seller to the buyer is more common abroad. Therefore, exporters who are reluctant to extend credit may face the possibility of the loss of the sale to their competitors.

Key Points

• The goods, along with all the necessary documents, are shipped directly to the importer who agrees to pay the exporter’s invoice at a future date, usually in 30 to 90 days.

• Exporter should be absolutely confident that the importer will accept shipment and pay at agreed time and that the importing country is commercially and politically secure.

• Open account terms may help win customers in competitive markets, if used with one or more of the appropriate trade finance techniques that mitigate the risk of nonpayment.

How to Offer Open Account Terms in Competitive Markets

Open account terms may be offered in competitive markets with the use of one or more of the following trade finance techniques:(1) Export Working Capital Financing,(2) Government-Guaranteed Export Working Capital Programs,(3) Export Credit Insurance, (4) Export Factoring, and(5) Forfaiting.

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STEPS INVOLVED:-

(1) LG AND SUPPLIER FINALISE THE DEAL ABOUT GOODS WHICH ARE TO BE IMPORTED TO LG.

(2) PURCHASE ORDER IS RAISED BY MATERIAL DEPARTMENT.(3) SHIPMENT OF GOODS IS DELIEVERED AT THE PORT.(4) SUPPLIER SENDS THE ORIGINAL DOCUMENT (INVOICE,

BILL OF LADING, AND PACKAGING LIST) TO LG. (5) LG SEND THIS DOCUMENT AT THE PORT FOR CLEARENCE

OF GOODS.(6) LG SEND PAYMENT REQUEST LETTER (INCLUDE

COMMERCIAL INVOICE, LETTER, AIR WAY BILL) TO LG BANK BEFORE PAYMENT DATE.

(7) LG BANK DEBITS THE ACCOUNT AND PAYS IT TO ADVISORY BANK OF SUPPLIER.

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OPEN ACCOUNT PROCESS

5. Wire transfer

1.Purchase Order/Contract

2. Ships goods3. Receives goods

4. Provides cash on alater date

IMPORTER EXPORTER

IMPORTER’S BANK EXPORTER’S BANK

PAYMENT

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DOCUMENTARY COLLECTIONS: There are basically two types of method. They are as follows:-

D/A – Documents against Acceptance : The buyer receives the documents after his accepting a Bill of exchange drawn on him for the price, at a given period may be 30, 60, or even 90 days.

D/P – documents against payment means (cash against documents):The specified documents with a copy of the invoice are handed over to the buyer on payment of the full price in cash.

In LG ELECTRONICS, Document against acceptance is used.

DOCUMENT AGAINST ACCEPTANCE:

STEPS INVOLVED:

(1) NEGOTIATION TAKES PLACE BETWEEN SUPPLIER AND LG ABOUT PRICE, PAYMENT AND DEAL IS FINALISED.

(2) SUPPLIER SHIPS GOODS AT IT’S PORT AND COLLECTS THE DOCUMENT (INVOICE, PACKAGING LIST, and BILL OF LADING).

(3) SUPPLIER SENDS THIS DOCUMENT TO its BANK (ADVISORY BANK).

(4) SUPPLIER BANK SENDS THESE DOCUMENTS TO LG BANK.

(5)LG BANK SEND BILL PRESENTATION MEMO (FOR ICICI BANK)/ DOCUMENT ARRIVAL NOTICE (D.A.N) (FOR CITY BANK) Document against acceptance ALONG WITH BILL OF EXCHANGE, INVOICE AND MAKE THE ENTRY OF RECEIVING DOCUMENT IN CHECK LIST.

(6)CHECK THE INVOICE IN SYSTEM THROUGH OPEN AP XL (ACCOUNT PAYABLE.

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(7) IF INVOICE ARE IN OPEN AP, THEY ARE PAYABLE.

(8)SEND ACCEPTANCE LETTER (INCLUDE BILL PRESENTATION MEMO, INVOICE) TO LG BANK TO DEBIT IT’S ACCOUNT.

(9)BANK MAKES THE PAYMENT ON its DUE DATE AND SENDS DEBIT ADVICE TO LG. (THEN ENTRY OF VOUCHER IS MADE IN ERP.)

(10) LG BANK REMITS PAYMENT BY SWIFT (SOCIETY FOR WORLDWIDE INTERBANK FINANCIAL TELECOMMUNICATIONS) TO SUPPLIER BANK.

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Material depart. Raise

the P.O

Supplier generates invoice

Supplier shipped The material.

Supplier submits originalDocs. to his bank.

Supplier’s bank submitIt to lg bank.

Lg bank lodge the bill Presn. memo

Lg accept the bill thru Sending acceptance

Letter.

Bank make the paymenton due date.

Bank send debit advice to lg.

Voucher entry is made.

DA PROCESS

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LETTER OF CREDIT

SUPPLIER BANK CREDIT SUPPLIER’S ACCOUNT. The letter of credit

is issued by the buyer’s bank to the seller’s advising bank. It is an instrument

issued by the bank on the behalf of importer favoring the exporter, which is

being routed through an advising bank confirming that if the

exporter/beneficiary fulfills the terms, and conditions mentioned in the

instrument ie. L/C then the issuing bank guarantees the payment. The

issuing bank has to be in the importers’ country and the advising bank has to

be a corresponding bank of the issuing bank.

The safest and the most reliable method of payment used in international

trade is documentary credit or in other words, Letter of Credit. The letter of

credit takes into account the expectations of both the seller and the buyer

related to performance and payment. the letter of credit authorizes the seller

to draw a specified sum of money under specified terms, usually through the

receipt by the bank of certain documents within a given time, the foreign

buyer applies for issuance of a letter of credit from the buyer’s bank to the

exporter’s bank and is therefore called the applicant: the exporter is called

the beneficiary.

Payment under a documentary letter of credit is based on documents, not on

terms of sale or the physical condition of the goods. The letter of credit

specifies the documents required by the exporter, such as the ocean bill of

lading, invoice, manufacturer’s statement, beneficiary statement. Before the

payment, the bank responsible for payment verifies that the proper

documents conform to the letter of credit requirements.

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LETTER of credit is of following types:

Irrevocable letter of credit

Revocable letter of credit

Confirmed irrevocable letter of credit

Unconfirmed irrevocable letter of credit

Restricted negotiable letter of credit

Revolving letter of credit

Freely negotiable letter of credit

Transferable letter of credit

Non-Transferable letter of credit

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BUYER’S LINE OF CREDIT

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Buyer’s credit is an agreement that arises between the importer’s bank and the importer. It is a form of loan designed to finance a specific transaction involving import of goods and services. Under this the lending bank pays the exporter on presentation of the original documents and shipping details (like bill of lading or airway bill and bill of exchange). The importer and the lending bank works out the deferred payment agreement, which the bank treats as a loan. This is treated as any other loan and the bank charges interest from the importer as per the going rates. A number of formalities have to be completed before the exporter can draw the funds.

Following are the steps for BLC:

(1) The buyer arranges to obtain allocation of funds under the credit line from the borrower.

(2) The delivery period stipulated in the contracts should be such that credit can be drawn from bank within the terminal disbursement date stipulated under the respective line of credit agreements. Also all contracts should provide for pre-shipment inspection by the buyer or agent nominated by the buyer.

(3): The buyer arranges to comply with procedural formalities as applicable in his country and then submits the contract to the borrower for approval. The borrower in turn forwards copies of the contract to bank for approval.

(4) Bank advices of the contract to the borrower, with copy to exporter, indicating approval number, eligible contract value, last date for disbursement, and other conditions subject to which approval is granted.

(5): After all the procedure the payment is done on due date.

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FIN.DEPT.PREPARESREQUEST LETTER

SENDS IT TO LG’S BANK

GETS CONFIRMATION FOR LOAN FROM BANK

OFFER LETTER IS SIGNED & SENDS BACK TO BANK

BANK SENDS AN OFFER LETTER

ON DUE DATE BANKMAKES THE PAYMENT

BANK SENDS ADVICE NOTICE TO LG

BANK DR. OUR A/C ON REPAYMENT DATE

FOR P+INT

BUYER’S LINE OF CREDIT

BILL OF ENTRY

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Types of Bill of Entry :

Bills of Entry should be of one of three types. Out of these, two types are for clearance from customs while third is for clearance from warehouse.

BILL OF ENTRY FOR HOME CONSUMPTION -

This form, called ‘Bill of Entry for Home Consumption’, is used when the imported goods are to be cleared on payment of full duty. Home consumption means use within India. It is white colored and hence often called ‘white bill of entry’.

BILL OF ENTRY FOR WAREHOUSING –

If the imported goods are not required immediately, importer may like to store the goods in a warehouse without payment of duty under a bond and then clear from warehouse when required on payment of duty. This will enable him to defer payment of customs duty till goods are actually required by him. This Bill of Entry is printed on yellow paper and often called ‘Yellow Bill of Entry’. It is also called ‘Into Bond Bill of Entry’ as bond is executed for transfer of goods in warehouse without payment of duty.

BILL OF ENTRY FOR EX-BOND CLEARANCE

- The third type is for Ex-Bond clearance. This is used for clearance from the warehouse on payment of duty and is printed on green paper. The goods are classified and value is assessed at the time of clearance from customs port. Thus, value and classification is not required to be determined in this bill of entry. The columns in this bill of entry are similar to other bills of entry. However, declaration by importer is not required as the goods are already assessed.

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Exim deptt. Enters the data Into the ERP.

Finance departt. Download the Data into excel sheet.

CHA/ importer recieves shipment

EXIM deptt. Sends exchange Control copy to finance deptt.

Finance deptt. Writes the bankRef. no.and date to all BOE sets.

Each set of BOE is submitted toBank with cover letter.

Bank submits the status of BOE to RBI.

After receiving ACK. Finance Deptt. fill SUB. Dt. On ERP.

BILL OF ENTRY PROCESS

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HEDGING

Hedging is a strategy designed to minimize exposure to an unwanted business risk, while still allowing the business to profit from an investment activity. Typically, a hedger might invest in a security that he believes is under-priced relative to its "fair value" (for example a mortgage loan that he is then making), and combine this with a short sale of a related security or securities. Thus the hedger is indifferent to the movements of the market as a whole, and is interested only in the performance of the 'under-priced' security relative to the hedge. Holbrook Working, a pioneer in hedging theory, called this strategy "speculation in the basis,"[1] where the basis is the difference between the hedge's theoretical value and its actual value (or between spot and futures prices in Working's time).

Some form of risk taking is inherent to any business activity. Some risks are considered to be "natural" to specific businesses, such as the risk of oil prices increasing or decreasing is natural to oil drilling and refining firms. Other forms of risk are not wanted, but cannot be avoided without hedging. Someone who has a shop, for example, can take care of natural risks such as the risk of competition, of poor or unpopular products, and so on. The risk of the shopkeeper's inventory being destroyed by fire is unwanted, however, and can be hedged via a fire insurance contract. Not all hedges are financial instruments: a producer that exports to another country, for example, may hedge its currency risk when selling by linking its expenses to the desired currency. Banks and other financial institutions use hedging to control their asset-liability mismatches, such as the maturity matches between long, fixed-rate loans and short-term (implicitly variable-rate) deposits.

WHAT IS HEDGING? WHY DO COMPANIES HEDGE?

Hedging, in commerce, is a method by which traders use two counterbalancing investment strategies so as to minimize any losses caused by price fluctuations. It is generally used by traders on the commodities market. Typically, hedging involves a trader contracting to buy or sell one particular good at the time of the contract and also to buy or sell the same (or similar) commodity at a later date. In a simple example, a miller may buy wheat that is to be converted into flour. At the same time, the miller will contract to sell an equal amount of wheat, which the miller does not presently own, to another trader. The miller agrees to deliver the second lot

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of wheat at the time the flour is ready for market and at the price current at the time of the agreement. If the price of wheat declines during the period between the miller's purchases of the grain and the flour's entrance onto the market, there will also be a resulting drop in the price of flour. The miller must sustain that loss. However, since the miller has a contract to sell wheat at the older, higher price, the miller makes up for this loss on the flour sale by the gain on the wheat sale. Stock and bond traders, export-import traders, and some manufacturers also employ hedging.

Corporations in which individual investors place their money have exposure to fluctuations in all kinds of financial prices, as a natural by-product of their operations. Financial prices include foreign exchange rates, interest rates, commodity prices and equity prices. The effect of changes in these prices on reported earnings can be overwhelming. Often, you will hear companies say in their financial statements that their income was reduced by falling commodity prices or that they enjoyed a windfall gain in profit attributable to the decline of the Canadian dollar.

This will give a brief overview of the different ways in which firms approach this financial price risk and it will introduce the rationale for using derivative products. While there has been a great deal of negative attention paid to derivatives in the mainstream press, the opportunities they provide make derivatives a necessary part of the future of any corporation. Future articles in this series will identify the benefits and drawbacks of individual derivatives structures and explain some of the breakdowns in the application of derivatives by corporate end-users.One reason why companies attempt to hedge these price changes is because they are risks that are peripheral to the central business in which they operate. For example, an investor buys the stock of a pulp-and-paper company in order to gain from its management of a pulp-and-paper business. She does not buy the stock in order to take advantage of a falling Canadian dollar, knowing that the company exports over 75% of its product to overseas markets. This is the insurance argument in favor of hedging. Similarly, companies are expected to take out insurance against their exposure to the effects of theft or fire. By hedging, in the general sense, we can imagine the company entering into a transaction whose sensitivity to movements in financial prices offsets the sensitivity of their core business to such changes. As we shall see in this article and the ones that follow, hedging is not a simple exercise nor is it a concept that is easy to pin down. Hedging objectives vary widely from firm

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to firm, even though it appears to be a fairly standard problem, on the face of it. And the spectrum of hedging instruments available to the corporate Treasurer is becoming more complex every day. Another reason for hedging the exposure of the firm to its financial price risk is to improve or maintain the competitiveness of the firm. Companies do not exist in isolation. They compete with other domestic companies in their sector and with companies located in other countries that produce similar goods for sale in the global marketplace. Again, a pulp-and-paper company based in Canada has competitors located across the country and in any other country with significant pulp-and-paper industries, such as the Scandinavian countries.Companies that are the most sophisticated in this field recognize that the financial risks that are produced by their businesses present a powerful opportunity to add to their bottom line while prudently positioning the firm so that movements in these prices do not pejoratively affect it. This level of sophistication depends on the firm's experience, personnel and management approach. Firms that have good risk management programs can use this stability to reduce their cost of funding or to lower their prices in markets that are deemed to be strategic and essential to the future progress of their companies.Most importantly, hedging is contingent on the preferences of the firm's shareholders. There are companies whose shareholders refuse to take anything that appears to be financial price risk while there are other companies whose shareholders have a more worldly view of such things. It is easy to imagine two companies operating in the same sector with the same exposure to fluctuations in financial prices that conduct completely different policy, purely by virtue of the differences in their shareholders' attitude towards risk.

HEDGING OBJECTIVESSome of the best-articulated hedging programs in the corporate world will choose the reduction in the variability of corporate income as an appropriate target. This is consistent with the notion that an investor purchases the stock of the company in order to take advantage of their core business expertise.Other companies just believe that engaging in a forward outright transaction to hedge each of their cross-border cash flows in foreign exchange is sufficient to deem themselves hedged. Yet, they are exposing their companies to untold potential opportunity losses. And this could impact their relative performance pejoratively.

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If the Air India Management thinks that the rupee will appreciates against the French franc in six months, it may not cover it’s foreign exchange exposure. This is a high-risk approach. It can benefit Air India significantly, if later on the rupee actually appreciates. But the potential cost is very high. If subsequently the rupee depreciates, instead of appreciating as predicted by the Air India Management, the company cost can be very high. Some companies have a policy of partially covering the exposure. This policy covers from subjectivism as there is no sound method of deciding how much to cover and how much to keep uncovered. The firm’s risk remains unlimited in the partially covered exposure. In fact, keeping the foreign exchange exposure totally or partially uncovered tantamount to speculation.

There are four alternatives available to the companies to hedge against the foreign exchange rate exposure:

Forward rates Options

Futures

Money Market

Forward Contracts

Air India may like to eliminate fully its currency risk. Hence it can take a full forward cover against its foreign exchange exposure and entirely hedge it’s risk. It can contract with a bank to buy French franc forward at an exchange rate. Suppose the six month forward rate is INR 6.70/FF 1.00. This means that Air India has a definite cost of INR 6700 million. Irrespective of the actual exchange rate at the end of the six months, its cost will remain INR 6700 million. The advantage of this approach is that Air India management can concentrate on its operations rather than worrying about the foreign exchange loss or gain. Most international companies have the policy of covering 100 % of their foreign exchange risk. Suppose the Air India Management is expecting the French franc to fall. It may therefore its exposure uncovered since it would benefit the company. But the management is not sure that the French franc will fall definitely. Hence instead of going for a full forward cover or keeping the exposure fully uncovered, the Air India management will decide to go for partial forward cover. Suppose it covers 50 percent of its exposure, keeping 50 percent of the exposure uncovered. This is a subjective policy as there is no objective way to determine the appropriate ratio of covered and uncovered exposure.

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Further, this policy implies that Air India would buy INR 3300 million with forward contracts of INR 6.70/FF 1.00 and INR 3300 million exposure is uncovered. If the French franc appreciates, Air India would incur a heavy loss. The partial cover policy is never a win-win situation.

OPTION:

A contract in which the writer of the option grants the buyer of the option the right purchase from or sell to the writer a designated instrument for a specified price within a specified period of time.

The writer grants this right to the buyer for a certain sum of money called the option premium. An option that grants the buyer the right to buy some instrument is called a call option. An option that grants the buyer the right to sell an instrument is called a put option .The price at which the buyer an exercise his option is called the exercise price, strike price or the striking price.

FUTURES:

A future contract is an agreement between two parties to buy or sell an asset at a certain specified time in future for a certain specified price.It is similar to forward contract.

But contrary is in the way the markets are organized , profiles of gains and losses , kinds of participants in the markets and the ways in which they use the two instruments.

MONEY MARKET

Financial market are a funding technique ,which permit a borrower to access one market and then exchange the liability for another type of liability.the global financial market presents borrowers and investors with a wide clarity of financing and investment vehicles in terms of currency and type of coupon-fixed or floating. floating rates are tide to an index which could be the London interbank borrowing rate(LIBOR) US Treasury bill rate etc.this helps investors’ exchange one type of asset for another for a preferred stream of cash flows.

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WORKING CAPITAL MANAGEMENT

Decisions relating to working capital and short term financing are referred to as working capital management. Working capital management involves the relationship between a firm's short-term assets and its short-term liabilities. The goal of working capital management is to ensure that a firm is able to continue its operations and that it has sufficient ability to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable, and cash.

Decision criteriaBy definition, Working capital management entails short term decisions - generally, relating to the next one year period - which are "reversible". These decisions are therefore not taken on the same basis as Capital Investment Decisions (NPV or related, as above) rather they will be based on cash flows and / or profitability.

One measure of cash flow is provided by the cash conversion cycle - the net number of days from the outlay of cash for raw material to receiving payment from the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable, and cash. Because this number effectively corresponds to the time that the firm's cash is tied up in operations and unavailable for other activities, management generally aims at a low net count.

In this context, the most useful measure of profitability is Return on capital (ROC). The result is shown as a percentage, determined by dividing relevant income for the 12 months by capital employed; Return on equity (ROE) shows this result for the firm's shareholders. Firm value is enhanced when, and if, the return on capital, which results from working capital management, exceeds the cost of capital, which results from capital investment decisions as above.

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Management of working capitalGuided by the above criteria, management will use a combination of policies and techniques for the management of working capital. These policies aim at managing the current assets (generally cash and cash equivalents, inventories and debtors) and the short term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for the business to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials - and minimizes reordering costs - and hence increases cash flow; see Supply chain management; Just In Time (JIT); Economic order quantity (EOQ); Economic production quantity (EPQ).

Debtors management. Identify the appropriate credit policy, i.e. credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa); see Discounts and allowances.

Short term financing. Identify the appropriate source of financing, given the cash conversion cycle: the inventory is ideally financed by credit granted by the supplier; however, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring".

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SALES MNGTRISK CUSTOMER STRATEGY MNGTCONTRACT MNGTSALES ORDERPROCESSINGCREDIT CHECKORDER FULFILLMENTBILLINGCUSTOMER SERVICECASH COLLECTIONRECEIPT AND ALLOCATIONOF CASHCASH MNGT

REVENUE MNGT

SUPPLY CHAIN STRATEGY

PRODUCT RANGE MANAGEMENT

FORECASTING SALES ORDER FORECASTING

PRODUCT SCHEDULING

RAW MATERIAL PLANNING

PRODUCTION PLANNING

PRODUCTION

WAREHOUSING

DISTRIBUTION

PURCHASING STRATEGY

BUDGETING & FORECASTING

ORIGINATING & REQUIREMENTS

SELECTING & NEGOTIATING

ORDERING CONTRACTING

RECEIVING & EVALUATING

DISCREPANCY MNGT

INVOICE PROCESSING

PAYMENT ISSUENCE

CASH MNGT

SUPPLY CHAIN MNGTEXPENDITURE MNGT.

TOTAL WORKING CAPITAL MNGT

A/R INVENTORY A/P

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CONCLUSION Project was mainly focused on basic concepts of import system in FOREX and working capital management in LGEIL .This FOREX Management include bill of entry, payment method & hedging techniques.

I have studied about rules that comes under the act of FEMA and also the techniques used to reduce the fluctuation risk . As per the policy , LG hedges minimum 20% & maximum 50% of NET OPEN EXPOSURE.

They keep on monitoring the exchange rates and traps the best possible existing rate for the payments to the vendors. The management keeps a very good relations with some of the bank for future exchange rates, which will help them in taking the forward contract at the best possible rate.

In foreign exchange , RBI wants to know where Indian currency is used when it goes out of country in import or export system.so letter is made after getting bill of entry when goods has been received and then it is send to RBI.

I have also studied the working capital management and procedure to prepare a cash flow of the company.Thus overall project was very useful for me for understanding the corporate going process.

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BIBLIOGRAPHY

REFERRED BOOKS:

Introduction to Financial Management – IM PANDEY

International financial management – P G Apte

International Finance – Chandra

Financial management – M.Y.KHAN AND P.K.JAIN

WEBSITES:

www.lgindia.com

www.alibaba.com

www.tradegoods.com

www.forexcapital.com

www.easy-forex.com

www.thehindubusinessline.com

www.yourdictionary.com

www.export911.com

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