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CASE
1
THE
MAGIC OF LETTER OF CREDIT:
Mother Choice is a
Murnbai based export organisation specialising in the export of handsmoked
children wear. Its owner is Mrs. Shruti Sharma who possesses post—graduate
qualification in business management. The business is ten years old. It has
nieched a good market for its items in USA and Japan. Only recently, Mrs.
Sharma has upgraded the
technology in her factory. The orders are adequate to keep her busy round the
year. Mrs. Sharma is seen in high spirits these days. She has negotiated a good
order with Dubai based importer M/s Green Channels. Its MD Sheikh AI—Makhdoom,
recently paid a visit to the office and factory of Mother Choice. He instantly
liked the handsmokcd dresses for children. He placed a huge order with Mother
Choice suggesting some changes such as long sleeves and lining and that the
dresses shall not bear stars and crosses.
Sheikh Al-Makhdoom
agreed to open a L/C. The order was placed on 28th August 2003 and the goods were
to he delivered by 1st November 2003. An export contract was signed for US $
30,000 covering 3,000 pieces. On 29th September ’03, the Bank of Oman, the
issuing bank, sent an irrevocable L/C at sight to United Commercial Bank, the
negotiating bank. L/C contained the following terms:
( 1) Shipment:
— Port of departure —
Mumbai.
— Port of arrival —
Dubai.
— Partial shipment —
allowed.
— Transshipment —
allowed.
— Shipment Expiry — 1st
Nov. ‘03
Shipment documents
should be presented to the issuing bank within the validity period of credit i.e.
1st Nov. ‘03.
( 2) Special
instructions:
- Commercial invoice
should mention manufacturer’s name.
- A copy of government
approved inspection certificate.
- Two copies of
negotiable bill of lading along with ten copies of non—negotiable B/L.
-- Shipment to be
effected by United Arab Shipping Co. (UASC) line vessel only.
-- Certificate from the
Masters/Agent of vessel stating that the vessel is allowed by Arab Authorities to
call on Arab ports and is not scheduled to call at any Israeli ports during its
trip to Arab countries.
-- Mother choice is allowed
Red Clause facility.
Mrs. Sharma is informed
by the Production Manager that it would not be possible to ship the goods to
Dubai by 1st NOV. ‘03 because of unexpectedly large volume orders
from their prime buyers from USA and Japan. Mrs. Sharma e-mailed Green Channels
showing her inability to ship the goods by 1st Nov. ‘03 and wanted extension of
time. After much deliberation she was given extension of two weeks and that the
goods must reach Dubai by 15th Nov. ‘03 to take advantage of Idd shopping; to
which Mrs. Sharma agreed. Mother Choice despatched the shipment which reached
Dubai on 14th Nov. ‘03. On collection of shipment, Green Channels found that
six pieces were short and it asked Mother Choice to send six pieces by courier,
to which Mother Choice agreed. In the meantime the exporter collected payment
from United Commercial Bank on presentation of documents.
Sometime in December
‘03, United Commercial Bank informed the exporter that it had not received
payment from Bank of Oman, the issuing, bank and asked Mother Choice to speak
to its buyer Green Channels.
Questions:
1) Did Mother Choice
enjoy safety of payment with irrevocable L/C? Why is it necessary to follow the
terms of L/C?
2) Why do you think the
buyer asked for ten copies of non—negotiable Bill of Lading? What is Red Clause
facility?
3) In your opinion, why
the Bank of Oman did not clear the payment?
Case
– 2
S
TRIKING GOLD WITH EXPORT POLICY LACUNA:
Unprincipled operators
ever ready to collect incentives offered to exporters have pushed their
ingenuity to new heights. A gang of self- proclaimed exporters, operating from
Singapore and Dubai, has been minting money by exploiting the scheme which
offers lucrative incentives against exports out of special economic zones
(SEZs) in the country. Their style of operation is amazing. The gang members,
posing as exporters, import gold, platinum and palladium from Dubai apparently
for manufacturing jewellery. The consignments are supposed to be exported with
value addition. However, the “imported goods” are exported on the following day
and payments are received immediately while the imports are made on letter of
credit, that is on deferred payment terms extended upto a year.
The payments received
out of exports by the Indian operator is put in fixed deposits in Indian banks
for a period of one year (the period of the LC) earning a high rate of interest
as compared to interest offered in foreign countries. The trade is over Rs. 300
crore annually only at Noida SEZ. The earnings of the operators in Dubai and
India run into hundreds of crores in Indian currency. Investigative agencies
are monitoring a few units in the Noida SEZ engaged in this money laundering
game for quite some time. The total trade volume of Noida SEZ is Rs. 4,300
crore out of which Rs 3,000 crore relates to imports of gold, platinum and
palladium.
An importer gets
credits for imports on deferred terms, as mutually agreed upon by the buyer and
the supplier. The importer opens a LC from a bank in India under deferred
payment terms, extended upto a year and the supplier company gets its bills
drawn under the LC discounted from a foreign office of the LC opening bank in India.
So the moment the “imported goods” are exported, the importer in Dubai remits
the money to its Indian p artner who puts the same in fixed deposit to earn
from high rate of interest. As per original payment terms, the payment is to be
received on the expiry of the deferred payment period (in this case one year),
the supplier gets cash on the day of presentation of documents to the bank
abroad extending the suppliers’ credit by agreeing to pay a commission to the
bank. For the leading bank, the LC is issued by the bank in India becomes the
security and payment is assured at the end of the normal deferred payment
period.
In order to discount
bills before one year maturity period, the supplier in Dubai pays about 2%
charges on the total amount. In comparison he earns an interest of 6% p.a. in
the Indian banks through fixed deposits if he remits the same discounted money
through “imports” he made from India.
Questions:
1 ) Analyse the modus
operandi of money laundering to take advantage of higher interest rates in
India as cited in this case.
2) Suggest measures to
plug the lacuna in export policy.
3) How would you assess
this money laundering legal or illegal? Give arguments to support your stand.
Case-3
ADAPTABILITY
- KEY TO SUCCESS IN BUSINESS:
McDonald Corporation is
perhaps the best known business all over the world. This fast food chain, started
its business in US and spread to 91 countries including China and Russia. With
a network of 20,000 restaurants worldwide, it serves 3 million people everyday.
More than half of its income comes from outside America. It has provided
ernployment opportunities to more than two million people.
Success at such a grand
scale is possible because McDonald, adapted its business to suit local likes
and dislikes. Adaptability is seen in services, products and HR practices. It
has given due recognition to legal, social, political, economic and cultural environment.
In the Middle East countries McDonald’s restaurants provide separate dining
rooms for men and women. has immensely successful business in Japan because
Japanese are served Teriyaki Burgers.
McDonald made its entry
into India after much hue and cry. Some complained that it will adversely
affect the Indian culture and others had reservations because McDonald in the
western countries mostly uses beef, something that is not acceptable in India.
All these suspicion were put to rest because McDonald adapted its menu to suit
local tastes. For non-vegetarian patrons only chicken and mutton are used. For
frying only vegetable oil is used. Vegetarian customers have wide selection of
dishes with Indian tastes. It has also started serving tea to attract clients
because Indians are mostly tea drinkers. Its French Fries are extremely popular
both among children and adults. In order to attract children it has installed
games and joy-rides.
In India, its HR
policies are too obvious. Employment is given to young boys and girls. College students
can look forward to part-time employment at McDonald. Its restaurants maintain
very high standard of hygiene. Flexi working hours is suitable to female
employees. Once staff is selected, training becomes compulsory to make
employees familiar with their jobs and McDonald’s philosophy of customer
service and quality. To start employees are recruited on contract basis. When
they prove t heir caliber through good work, they are continued on the job.
The success of McDonald
is an eye-opener to Indian business. There is vast scope to export our
delicacies abroad and also to think of opening chain of Indian restaurants to
suit tastes of people overseas. The magic word is adaptability.
Questions:
1) Do you agree adaptability
is the magic word to succeed in business overseas? Illustrate your answer?
2) To what would you
subscribe phenomenal success of McDonald in India?
3) Identify cultural
factors that might be important in a training programmc for food handlers at McDonalds
in India?
4) Argue in favour or
against the HR policy of McDonald of hiring employees on contract basis?
Case
-4
PROGRESS
AT A COST:
Since the introduction
of free market economy China has shown remarkable progress in the industrial
world. Chinese goods have flooded the global market They are cheaply priced
with limited life span but they are favoured by consumers because it does not
tax their pockets. An outstanding feature of their acceptability is product
innovation.
China has become a
breeding ground for foreign MNCs. Practically every large MNC has its branch/subsidiary
in China. At the initial stage the going was simple but later foreign companies
were compelled to pay price to get their job done. Demand for on-money takes
several forms. The most common form of payment involves invitation to Chinese
officials to visit overseas. There is marked preference for foreign travel
rather than cash or gifts. Some trips are reasonable and bonafide. They are
directly related to the promotion, demonstration or explanation of products and
services or the execution of a contract with a foreign government agency. It is
also reported that a certain bank was reluctant to open letter of credit for
its client. The concerned bank official was invited on an overseas inspection
tour and the bank opened L/C. Depending on the quantum of business, at times
MNC, are asked to sponsor overseas education for children of officials. Refusing
to make payments may not only hurt sales but it could mean end of road for the
business.
Kickbacks are routine
to get permission or license. Import and export licenses that are difficult to
get legally, traders are tempted to purchase in black market. In the official
circles much stress is put on speed-money because it helps to expedite the
work. Speed-money is said to be a Way of life.
An alarming report
appeared in the press that said inspection certificates complete with
signatures and seals can be purchased for roughly US $ 200. Another report
suggested that some imports that would legally enter China through a northern
port are redirected through the southern port. This is because for the
speed-money, customs officials in a southern province are willing to cut down
the dutiable value of imports by as much as 50 per cent.
Questions
1) Make a list of
different types of on—money and speed—money represented in this case. Will they
make or make the progress of the economy?
2) Do you think MNCs
face the problem of speed—money wherever they operate? How do they tackle the
situation?
3) Are you in favour of
more international stringent laws to dual with speed-money? If so, suggest
measures?
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