Security Documentation

7/30/2019 Security Documentation

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HYPOTHECATIONOF MOVABLE

MACHINERY,LETTEROFCREDIT &

PACKINGCREDIT


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All stores and spare parts

Both present and future

Belonging to the borrower

Being and lying in the borrowers premises or godowns of orrented by the borrower or otherwise used in connection with the

business of the borrower

What constitutes Movable

Machinery?


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Salient Features of hypothecation

of movable machinery

Hypothecation is one of the most popular methods of creation

of charge on movable assets without transferring possession

of the assets

The property is charged with the amount of a debt but neither

ownership nor possession is passed to the creditor

Security remains in possession and control of the borrower

and is charged in favor of the bank through documents

executed by the borrower


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The documents contain a clause that obligates the borrower to

give possession and control of goods on demand. Once

possession is given to the bank, it is akin to a pledge

There is no transfer of interest in the property but represents

an obligation to repay the debt. It evidences an equitable right




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Since the securities are with borrowers, he/she can, in the

normal course of business, sell the same and can purchase

further goods

If a need arises the bank may seize the goods without

intervention of the court, sell the same and appropriate the

proceeds towards the dues including Interest + Expenses

All hypothecation letters should be stamped as per the Stamp

Act




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Letter of Confirmation

Place, Date, Stamp, Name

Declaration regarding Movability of Machinery

Obtained from the Borrower

Advance Account Details, Declaration

Small tin plate with wordings Hypothecated to ..Bank

....Branch should be fixed on each machinery to evidence that

the Plant & Machinery are under hypothecation to the Bank


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Instrument of Hypothecation of

Movable Machinery

Clause 1:Balance due to the Bank

Principal, interest, charges and expenses

Clause 2:Hypothecated machinery

Clause 3:End use of funds

Clause 4:Payable on demand

Clause 5:Interest rate


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Movable MachineryClause 7: Borrower agrees & undertakes :

Not to sell the hypothecated machinery, nor give it to anyone

without prior consent of the bank

Not to open advance a/c with any other bank without prior

consent of bank

Clause 8: Maintenance

Clause 9: Inspection

Clause11:While taking license to occupy any place for

hypothecated machinery which is not his own property,Borrower is required to

Register it in the name of bank.

Handover the receipts for any rent or dues payable to bank

Keep the bank indemnified against all the expenses or losses


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Movable MachineryClause 15:Remove or Dismantle

Borrower is prohibited from removing or dismantling any

moveable machinery in use without the consent in writing

from the bank

Clause17:Hypothecated machinery will be at all time the

absolute property of borrower.

Clause 18:If borrower fails to perform any obligation or in case

of any damage to hypothecated machinery

Bank can obtain possession

At borrower risk & expense

Possession and control shall be apparent and indisputable

The hypothecated machinery can also be sold by the bank


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Instrument of Hypothecationof Movable Machinery

Clause 20:After 48 hrs notice from possession of the

hypothecated machinery without assigning any reason

Bank can recover, receive, appoint receiverof or remove or

sell either by public auction or private contract Borrower undertakes to transfer all relative contracts,

securities, bazaar chits, bills, notes, hundies and documents to

bank

Borrower is bound by banks decision (based on admission,

arbitration or compromise)

Clause 22:Pay, rents, rates, taxes

Clause 28:Default in repayment


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Hypothecation of Movable

machinery

Hypothecation of merchandise

Hypothecated machinery can not be

sold or given on rent

Securities are with borrowers, he/she

can, in the normal course of business,

sell the same and can purchase furthergoods

Usually the credit facility would be

Term loan

Usually the credit facility would be

for Cash Credit (Working capital

requirement)

Valuation traditionally on WDV /historical value

Valuation

Market Value or Cost(whichever is less) net of creditors if

any

Value changes in accordance to

depreciation

If goods not sold for a long period,

might become obsolete or lose value.

Difference between Hypothecation

of goods and merchandise


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Letter of Credit


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Definition and Purpose

A Letter of Credit, simply defined, is a written instrument

issued by a bank at the request of its customer, the Importer

(Buyer), whereby the bank promises to pay the Exporter

(Beneficiary) for goods or services, provided that the Exporter

presents all documents called for, exactly as stipulated in theLetter of Credit, and meet all other terms and conditions set

out in the Letter of Credit. A Letter of Credit is also

commonly referred to as a Documentary Credit

Letters of credit are especially useful if you're not well-established, you don't have the best credit, you're dealing with

an overseas company and you want to give assurance that

you'll pay for your products


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Parties involved

Applicant The applicant is normally the buyer of the goods . i.e. the

importer who request his bank to issue a letter of credit in favour

of a named beneficiary against tendering of certain specified

documentsBeneficiary

The beneficiary is normally the seller of goods who receives

payment under documentary credit if he has complied with terms

and conditions thereof A credit issued in favour of the beneficiary to enable him or his

agent to obtain payment once he performed his part of contract

and submitted stipulated documents showing compliance with

the terms and conditions of letter of credit


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Parties involved(cont.)

Issuing Bank The issuing bank or the opening bank is one which issue the

credit , i.e. undertake , independent of the Undertaking of the

applicant , to make payment provided the terms and conditions

of the credit have been complied with.Advising Bank

The advising bank advises the credit to the beneficiary thereby

authenticating the genuineness of the credit

Confirming Bank

A confirming bank is the one which adds its guarantee to the

credit . It undertakes the responsibility of payments / negotiation

/ acceptance under the credit in addition to that of the issuing

bank


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Parties involved(cont.)

Nominating Bank

A Nominating bank is the bank nominated or authorized by

issuing bank to pay , to incur a deferred payment liability , to

accept drafts or to negotiate the credit.

Reimbursing Bank

A reimbursing bank is the bank authorized to honour the

reimbursement claims in settlement of negotiation with the

paying or accepting bank.


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Characteristics

Negotiability

Revocability

Transfer and Assignment

Sight and Time Drafts


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Standard forms of Documentation

Commercial Invoice

Packing List

Bill of lading and other transport documents

Certificate of Origin

Inspection Certificate

Bill of Exchange

Insurance Documents


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Common Defects in Documentation

Letter of credit has expired prior to presentation of draft

Bill of lading evidences delivery prior to or after the date range

stated in the credit

Stale dated documents

Inconsistent description of goods

Insurance document errors

Invoice amount not equal to draft amount

Ports of loading and destination not as specified in the credit

Document required by the credit is not presented


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Functions

Payment Instrument In absence of letter of credit, sight or time drafts used.No Guarantee of Payment.

Letters of Credit Involves Bank in Transaction.

Performance Guarantee In Documentary Transaction no guarantee ofperformance.

Payment by bank would not be released until goodsand document conforms to specifications on letter of

credit. Financial Instrument

Seller can use letter of credit as collateral to financeproduction and exportation of good


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Advantages/benefits

Credit risk eliminated

Reduces exchange rate and

political risk

No Need for Credit Check

Pre-shipment risk avoided

Facilitates financing

Immediate payment

Expert Examination of

Documents

Sources of Supply expand

Financing

No cash tied up

Payment only after compliance

EXPORTER IMPORTER


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Disadvantages

Strict Compliance of

Documentation

Lack of credit facility to

importerinhibits growth

No protection to importer

against exporter shipping

inferior quality goods

and/or a lesser quantity of

goods

ImporterLine of Credit

Outstanding Amount Limit

EXPORTER IMPORTER


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Risks Involved

1. Risk of Beneficiary not shipping goods persists

2. The Letter of Credit as a payment method is costlier than other

methods of payment such as Open Account or Collection

3. The Beneficiarys documents must comply with the terms andconditions of the Letter of Credit for Issuing Bank to make the

payment

4. The Beneficiary is exposed to the Commercial risk on Issuing

Bank, Political risk on the Issuing Banks country and ForeignExchange Risk in case of Usance Letter of Credits


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Case Study

The steps mentioned in the

example

A business called the InCosmetika

from time to time imports goods

from a business called ACME,

which banks with the ABC Bank.

InCosmetika holds an account at

the Commonwealth Bank.

InCosmetika wants to buy

$500,000 worth of merchandise

from ACME, what steps should be

taken to get a LC ?


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1. InCosmetika goes to The Commonwealth Bank and requests a

$500,000 letter of credit, with ACME as the beneficiary.

2. The Commonwealth Bank can issue a letter of credit either on

approval of a standard loan underwriting process or by

InCosmetika funding it directly with a deposit of $500,000 plus

fees which are typically between 1% and 8% of the face value ofthe letter of credit.

3. The Commonwealth Bank sends a copy of the letter of credit to the

ABC Bank, which notifies ACME that payment is available and

they can ship the merchandise InCosmetika has ordered with the

full assurance of payment to them.

4. On presentation of the stipulated documents in the letter of credit

and compliance with the terms and conditions of the letter of credit,

the Commonwealth Bank transfers the $500,000 to the ABC Bank,

which then credits the account of ACME for that amount.

Case Study


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Samples


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Features of LC

There are three basic features of letters of credit

SIGHT OR TERM/USANCE

REVOCABLE OR IRREVOCABLE UNCONFIRMED OR CONFIRMED


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Types of Credit

Basic types of letters of credit

1.Revocable/Irrevocable

2.Confirmed/Unconfirmed

3. Revolving Credit


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Buyer & Seller Agree

Applicant

Importer/Buyer

BeneficiaryExporter/Seller

5. Product isShipped

1. 1.

10.

Exporters Bank/

Advising Bank/

Confirming Bank9.

Importers Bank/

Issuing Bank

2.

8.Documents

2.Application

7. Documents

3. Letter ofCredit

6.Documents 4.

Confirmed

Letter of

Credit

Confirming Bank

Confirmed Letter of

Credit cycle


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Special types of letters of credit

1.Red clause/Green clause

2.Transferable

3.Back-to-Back

4.Deferred


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Standby letter of credit

Applicant

ApplicantsBank

Beneficiary

Contract

Documents

PaymentDebit

Letter of CreditLetter of Credit

Application

Documents

1

2 8

76

5

3

49


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Packing Credit


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Packing Credit Pre-shipment fund based credit facility for a specific period

extended by the banks to those customers who have received aconfirmed order or LC for export of merchandise, on the terms

indicated.

It is provided for working capital needs like: Procure raw materials, carry out manufacturing process.

carry out manufacturing process and pack goods

Provide a secure warehouse for goods and raw materials.

Ship the goods to the buyer.

Pre-shipment finance is extended in the following forms :

Packing Credit in Indian Rupee

Packing Credit in Foreign Currency (PCFC)


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Eligibility for Getting Packing Credit

An exporter should usually hold an export order or letter of

credit in his own name to perform an export contract.

A ten digit importer exporter (IE) code number allotted by

DGFT.

Exporter should not be in the caution list of RBI.

If the goods to be exported are not under OGL, the exporter

should have the required license /quota permit to export the

goods.


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Running Account Facility

The RBI has permitted banks to grant packing credit advances

even without production of L/C or firm order/ contract underthis scheme Facility subject to the following conditions

L/C or firm order is produced within a reasonable period of

time.

For commodities under selective credit control, banks shouldinsist on production of L/Cs or firm orders within one month

from the date of sanction.

Packing credit may also be given under the Red Clause letter

of credit


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Different Stages of Packing Credit

Appraisal and Sanction of Limits

Disbursement of Packing Credit Advance

Follow up of Packing Credit Advance

Liquidation of Packing Credit Advance

Overdue Packing

Documents Required : DPN

Letter of Continuing Security

Pledge/hypothecation of goods

Undertaking to adjust each PC drawdowns in a time frame

by export proceeds


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Pre-shipment Credit Foreign Currency

PCFC is available to exporters for domestic and importedinputs of goods to be exported at LIBOR related rates of

interest as decided by RBI

To qualify for this purpose, the exporters overdue bill should

not exceed 5% of the average annual export realization during

the preceding three years

Terms & Conditions :

The corporations/exporters having firm export orders orconfirmed L/C are eligible for PCFC, provided they satisfy

other credit norms of the Bank.

PCFC is to be repaid with the proceeds of the export bill

submitted after shipment.


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THANK YOU

Security Documentation

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