CASESTUDIESInternationalBusiness

CaseIAreaDocumentaryCredit
M/SAutoIndia
Introduction
M/SAutoIndiaisapubliclimitedcompany;theymanufactureSUVs(sportsutilityvehicle),in
technicalcollaborationwithGeneralMotorsofUSA.Thecompanyhasestablishedtheir
manufacturingbaseatRanjangaoninPune.Theyhaveacquiredanareaof250acresandthetotal
projectcostisestimatedatRs1500crores.Aspertheprojections,thecompanyisslatedto
achievea25%marketshareintheIndianmarket,withinaperiodoftwoyears.
Outofthetotalprojectcost,49%isbroughtinbyGeneralMotorsandtherestistiedupwith
financialinstitutions,internationalbanksandIndianbanks.Theworkingcapitalisfinancedbya
consortiumofbanksinwhichGlobalbank,Punebranch,istheleader.Thecompanyimports
manypartsofthecarengineinaCKD(completelyknockeddown)conditionfromGeneral
Motors,Detroit,afterestablishingimportlettersofcreditthroughitsmainbankers,GlobalBank,
PuneBranch.
M/SAutoIndiaapproachedGlobalBank,PuneforopeningofimportletterofcreditasperUCP
ICC600forUSD100,000,onsightbasis,infavourofGeneralMotors,Detroit.
Typeofcredit
Irrevocablenegotiable
Application
UCPICC600
Applicant
M/SAutoIndia,Pune,India
Beneficiary
M/SGeneralMotors,Detroit,USA
IssuingBank
GlobalBank,Pune,India
AdvisingBank
TheAmericanBank,NewYork
NegotiatingBank TheAmericanBank,NewYork
ReimbursingBankInternationalBank,NewYork
Availability
Negotiableatsight
Expiry
AtthecountersofTheAmericanBank,NewYork
Amount
USD100,000
Merchandise
Carengineparts
Quantityandprice50units@USD2000perunit
CircumstancesIssuingBank
GlobalBank,PuneissueditsirrevocablenegotiablecreditthroughitsheadofficeinPunesince
GlobalBankcoordinatedallitsaccountingandcommunicationfunctionsatitsheadoffice.The
BanksheadofficetransmittedthecreditthroughSwiftnetworkasinstructedbyitsPunebranch
toGeneralMotors,Detroit,throughTheAmericanBank,NewYork.

AdvisingBank
TheAmericanBank,NewYorkadvisedthecredittoGeneralMotors,Detroitonreceiptofthe
swifttransmission.
Credit
Alongwithotherconditions,thecreditclearlystatedthatthenegotiatingbankwastoforwardthe
documentsdirectlytoGlobalBanksheadofficeatPune.
Beneficiary
Afterexportoftheconsignment,GeneralMotors,Detroitpresentedthedocumentsunderthe
credittoTheAmericanbank,NewYork.
NegotiatingBank
TheAmericanBank,NewYork,examinedthedocumentspresentedbyGeneralMotorsand
determined that they were in compliance with the terms and conditions of the credit. The
Americanbanknegotiatedthedocumentsandforwardedthedocuments,asperthecreditterms,
totheHOofGlobalBankinPuneandclaimedreimbursementfromInternationalbank,New
York.
ReimbursingBank
International Bank, New York honoured the reimbursement claim by crediting the current
accountoftheAmericanBank,NewYorkanddebitingtheaccountofGlobalBank,Pune,inits
books.
IssuingBankHeadOffice
GlobalBanksHeadOffice,atPune,receivedthedocumentsandafterinternalregistrationofthe
documents,forwardedthedocumentstoitsPuneBranchbyinterofficemail.

IssuingBankBranch
OnreceiptofthedocumentsbythePunebranchofGlobalBank,theyexaminedthedocuments
anddeterminedthattheywerediscrepant.Theywere(a)60unitswereshippedinsteadof50
units,therebyoverdrawingthecreditvaluebyUSD2000(b)Inspection certificate byAuto
InspectionCouncil,USAisnotsubmitted,aspercreditterms.GlobalBankcontactedAutoIndia
forwaiverofthediscrepancies.
Applicant
AutoIndiarequestedforcopiesofthedocumentstobeforwardedbyfaxandafterreviewingthe
same,theyrefusedtowaivethediscrepancies.
IssuingBankBranch

GlobalBank,PuneBranchinstructeditsHOtotransmitanauthenticatedswifttoTheAmerican
Bank, New York stating that Global Bank had rejected the documents for the noted
discrepancies,requestingtheAmericanBanksinstructionsastodisposalofthedocuments,and
demandingarefundofthefundsreimbursed.
IssuingBankHeadOffice
TheHOoftheGlobalBanksenttheauthenticatedswiftmessagetotheAmericanBank,New
York,asinstructedbyitsPuneBranch.
NegotiatingBank
OnreceiptoftheswiftnotificationadvisingthatGlobalBankhadrejectedthedocumentsforthe
stated discrepancies, the American Bank informed Global Bank that it did not accept the
rejectionofthedrawingsincetheGlobalBankdidnotcomplywithUCP600subarticle14for
standard examination of documents. Therefore, Global Bank was said to be stopped from
dishonouringitsirrevocableobligation.
IssuingBank
GlobalBank,PuneBranchrespondedbystatingthattheyactedinaccordancewithUCParticle
14, since their action did not exceed five banking days following the day ofreceipt of the
documentsattheirbranchcountersafterwhichtheyscrutinisedthedocumentsanddeterminedto
refusethem.Theymaintainedthatasperarticle14ofUCP600,theynotifiedabouttherejection
ofthedocuments,byswift,notlaterthanthecloseofthefifthbankingdayfollowingthedayof
receiptofthedocuments.TheyhadpointedoutallthediscrepanciesandhadinformedAmerican
Bank,NewYorkthattheywereholdingthedocumentsatthelattersdisposal.
NegotiatingBank
TheAmericanBank,NewYorkrepliedasfollows:
We disagree with your position that you acted in accordance with UCP 600article 14.
DocumentsweredeliveredbycouriertoyourHOasperthetermsofthecredit,onMonday,
January7,2008.YourswiftnotifyingrejectionofthedocumentswasnotsentuntilWednesday,
Jan16,2008thatis,ontheeighthbankingdayafterreceiptofthedocumentsbyyourbank.
IssuingBank
GlobalBank,PuneBranch,respondedbystatingthateventhoughitsHOreceivedthedocuments
onJanuary7,2008;theGlobalBanksPuneBranchdidnotreceivethedocuments untilthe
followingThursday,January10,2008,andtheswiftadvicerejectingthedocumentswassent
withinthetimeperiodpermittedinUCParticle14.
NegotiatingBank
The American Bank, New York, replied that it was not their concern how Global Banks
operationalpolicyimpactedontheirinabilitytocomplywithUCP.TheAmericanBank,New
Yorkstatedthatinaccordancewiththecredittermsandconditions,documentswerenegotiated
bythemandforwardedtoGlobalBanksHObycourier.Thedocumentswere

receivedbyGlobalBankonJan7,2008,andanynoticeofrejectionofthedocumentsshould
havebeengivenwithinthecloseofthefifthbankingdayfollowingreceiptofthedocuments.
GlobalBanksPuneBranchfailedtodoso.Therefore,theAmericanBank,NewYorksposition
wasfirmrelativetoUCP600article14andtheywouldnotrefundthefundsreimbursed.
Questions
1)WasGlobalBank,PuneBranchcorrectinitsargument,asthecreditissuingbank?
2)WasthestandtakenbyTheAmericanBank,NewYorkcorrect,asthenegotiatingbank?

CaseStudy2ForeignTrade
M/STanejaExports,Mumbai
Introduction
Mr.GurmeetTanejaandMr.RahulKhatriarepartnersofM/STanejaexports,Mumbai.Bothof
themqualifiedfromIIFT,NewDelhiintheyear2002.Theydeclinedlucrativecorporatejob
offers,sincetheyhavedecidedtoplungeintotheworldofinternationalbusiness.
M/STanejaExportsisregisteredasapartnershipfirm,withMr.GurmeetTanejaandMr.Rahul
Khatrisharingtheprofitsintheratioof60:40.
Thepartners hadconductedindepthmarketsurveyinthedomesticaswellas international
marketsregardingthedemandofwomensapparelsincottonandhosiery.Theyhavetakenthe
assistanceofApparelexportpromotioncouncilandthemarketingagenciesinvariouscountries
ofEuropeanUnion.
Onaccountoftheirknowledgeinforeigntrade,theywereabletoquicklyassessthatIndian
exportershavenotsucceededinpenetratingintothehugeapparelmarketofEurope.Theyfound
out that the main reasons were ineffective marketing, improper quality control and non
adherencetotheshippingschedules.Mr.Gurmeetconcentratedonmarketingofthecottonand
hosieryapparelsabroadandMr.Rahulensuredontheprocurementoftherawmaterialsand
timelyexecutionofshipments.
Thefirmhadtakenanindustrialgala,measuring700sqft,at501,MangalDasmarket,Lower
Parel,Mumbai.TheywerepayingamonthlyrentofRs.35,000/fortheofficepremisesandthe
stockofgarmentswaskeptinagodowninthesamegalaarea,forwhichtherentpayablewas
Rs.15,000/pm
The firm was sourcing their raw materials from the south Indian towns of Tirupur and
Coimbatore.Aspertheexportorders,theywereprovidingtherawmaterialsforjobworksin

Mumbaiandsubjectthesamples torigorous quality andspecification checks.Thefirmhad

employed2accountsstaffand3contractworkerstoattendtodailyofficeandgodownactivities.
Thefirmwasabletoachievesteadyimprovementinexportsalesduetothestringentquality
controlmeasuresandtimelyexecutionofshipmentschedules.Thefollowingwerethecredit
facilitiesenjoyedfromM/SInternationalBankofIndia,Fortbranch,Mumbai.

Facility(AmountinLakhs)

2003

2004

2005

5.00
5.00

7.00
7.00

10.00
10.00

2.00

5.00

7.00

Exportsales

20.00

30.00

40.00

Fundbased
a)Exportpackingcredit
b)Foreignbillpurchased/Foreign
billnegotiated
NonFundbased
a)Performanceguarantee

Towardsthesecurityofthecreditfacilities,thefirmhadmortgagedtheresidentialhouse,valued
atRs85lakhs,belongingtoMr.VikramTaneja, fatherofMr.GurmeetTaneja,andstocks
valuedatRs15lakhswasalsohypothecatedtotheBank.Mr.VikramTanejastoodguaranteefor
thefacilitiessanctionedtothefirm.
M/STanejaexportsusedtoavailtheexportpackingcreditfacilityfromInternationalBankof
IndiaandadjustthesamebypurchaseornegotiationoftheexportbillsdrawnontheirEuropean
buyers.Generallythebillscarriedatenorperiodof60days.Mostoftheexportbillsweredrawn
andsendforcollectionthroughinternationalBankofIndia,MumbaiFortBranch,totheforeign
buyersbankers,basedontheconfirmedpurchaseorderofthebuyer.Thebillswerepaidonthe
duedatesandtheconductoftheaccountonthebanksbookswasquitesatisfactory.Basedon
thepasthistoryandtheincreaseinsalesturnoverachievedbythefirm,thebankerswerehappy
toincreasethecreditlimitsfromRs7lakhsin2003toRs17lakhsin2005.
OnJune17,2005,thefirmsubmittedanexportdocumenttoInternationalBankofIndia,Fort
Branch,forEuro53000.00,drawnonM/SStLaurnFashions,Paris.Thedocumentsweredrawn
on60daysDAtermsasperthecontract.Themerchandiseundertheexportwereladiesgarments
incottonandhosiery.Inthecoveringletterofthefirmtothebank,theyhadinstructedthebank

topresentthedocumentstoStLaurn,Paris,throughtheirbankersviz,CreditLyonnais,Paris.
Theexporterhadsubmittedbillsofexchange,billsoflading,commercialinvoice,packinglist,
inspectioncertificate,certificateoforiginandinthebillofexchangeitwastypedastobeco
acceptedbycreditLyonnais.
TheInternationalBankofIndiatookthedocumentsinitsbooksandsentthedocumentsfor
collectiontoCreditLyonnais,Paris.Induecourse,theyreceivedcommunicationfromCredit
LyonnaisthatthedocumentswereacceptedbyStLaurnandduedateofthedocumentswere
August25,2005.ThebankersinformedtheduedateofthebilltoTanejaexports.OnAugust30,
2005,TanejaExportsinformedthebankersthattheyareyettoreceivethepaymentofthebillfor
Euro 53000.00 in their books. The bank sent a swift message enquiring about the fate and
paymentofthebill.TwodayslaterthebankreceivedamessagefromCreditLyonnaissaying
that the importer, St Laurn, had become bankrupt and they were unable to pay the bill.
InternationalBankofIndiainformedthesametoTanejaExports.Theyarguedwiththebankthat
theyhadclearly mentioned inthebills ofexchangethatthedocumentsweretobereleased
againstthecoacceptanceofthe
Frenchbankonly.ImmediatelytheIndianbanksendamessagetoCreditLyonnaisthatsincethe
billofexchangecontainedthecoacceptanceclausebytheFrenchbank,theyareliabletopay
eventhoughtheimporterhadbecomebankrupt.TheFrenchbankrefutedtheclaimoftheIndian
Bank and intimated that the banks collection instruction did not contain anyco
acceptanceclausebytheFrenchbankandtheyhadactedaspertheprovisionsintheuniform
rulesforcollectionintheICCpublicationNo522.
Sincepaymentswerenotforthcoming,TanejaExportsfiledasuitwiththeNationalConsumer
Forum, New Delhi for deficiency of services by International Bank of India, Mumbai, on
November10,2005.Theyputforththeargumentthatthebankwasdeficientinnotmentioning
aboutthecoacceptanceclauseintheircoveringlettertotheFrenchbankandincaseofnon
coacceptanceby the French bank they would have returned the documents to India and the
exporter could have arranged for an alternate buyer or re import of the merchandise. This
negligence on the part of the bank had caused them total financial loss. After hearing the
argumentsofboththeparties,TheNationalConsumerForumgavethejudgement,onFebruary
6,2006,thattheInternationalBankofIndiawasdeficientandnegligentintheirservicesand
orderedthemtocompensatethevalueoftheexportbillofEuro53000.00(approxRs24lakhs)
alongwith15%interest,tillthedateofpayment.
ThebankwentonappealagainsttheorderoftheconsumerforumintheSupremeCourton
March20,2006.Afterhearingthecounselsofbothsides,theSupremeCourtgavethejudgement
that since the original agreement between the exporter and importer do not have anyco
acceptanceclause bytheimporters banker,thecoacceptanceclause onthebill ofexchange
cannotbebindingontheFrenchBankaswellasontheIndianBank.Thebankruptcyofthe
importeristhereasonforlosstotheexporterandnotthedeficiencyofservicebythebank.The
Supreme Court set aside the judgement of the National consumer forum and passed the
judgementinfavourofthebank,withcosts,onMarch15,2007.

Questions
1)Elaborate the deficiency of service on the part of the bank, pointed out by the National
consumer redressal forum, in the light of the uniform rules for collection ICC publication
No.522.
2)Advisethefirmabouttheprecautionstheyshouldhavetakentoavoidsuchacolossalbusiness
loss.
3)Discuss the remedial measures the bank in India should take to avoid such damaging
judgementsbytheconsumerforums.
4)ElaboratetheSupremeCourtjudgementinthecontextoftheinternationalbankingrulesand
practises,asguidedbytheICCpublications.