Case Study 1 - Documentary Credit M/S Auto India
Introduction M/S Auto India is a public limited company; they manufacture SUVs (sports utility vehicle), in technical collaboration with General Motors of USA. The company has established their manufacturing base at Ranjangaon in Pune. They have acquired an area of 250 acres and the total project cost is estimated at Rs 1500 crores. As per the projections, the company is slated to achieve a 25% market share in the Indian market, within a period of two years. Out of the total project cost, 49% is brought in by General Motors and the rest is tied up with financial institutions, international banks and Indian banks. The working capital is financed by a consortium of banks in which Global bank, Pune branch, is the leader. The company imports many parts of the car engine in a CKD (completely knocked down) condition from General Motors, Detroit, after establishing import letters of credit through its main bankers, Global Bank, Pune Branch. M/S Auto India approached Global Bank, Pune for opening of import letter of credit as per UCP ICC 600 for USD 100,000, on sight basis, in favour of General Motors, Detroit. Type of credit Application Applicant Beneficiary Issuing Bank Advising Bank Negotiating Bank Reimbursing Bank Availability Expiry Amount Merchandise Quantity and price - Irrevocable negotiable - UCP ICC 600 - M/S Auto India, Pune, India - M/S General Motors, Detroit, USA - Global Bank, Pune, India - The American Bank, New York - The American Bank, New York - International Bank, New York - Negotiable at sight - At the counters of The American Bank, New York - USD 100,000 - Car engine parts - 50 units @ USD 2000 per unit
Circumstances Issuing Bank Global Bank, Pune issued its irrevocable negotiable credit through its head office in Pune since Global Bank co-ordinated all its accounting and communication functions at its head office. The Bank’s head office transmitted the credit through Swift network as
instructed by its Pune branch to General Motors, Detroit, through The American Bank, New York. Advising Bank The American Bank, New York advised the credit to General Motors, Detroit on receipt of the swift transmission. Credit Along with other conditions, the credit clearly stated that the negotiating bank was to forward the documents directly to Global Bank’s head office at Pune. Beneficiary After export of the consignment, General Motors, Detroit presented the documents under the credit to The American bank, New York. Negotiating Bank The American Bank, New York, examined the documents presented by General Motors and determined that they were in compliance with the terms and conditions of the credit. The American bank negotiated the documents and forwarded the documents, as per the credit terms, to the HO of Global Bank in Pune and claimed reimbursement from International bank, New York. Reimbursing Bank International Bank, New York honoured the reimbursement claim by crediting the current account of the American Bank, New York and debiting the account of Global Bank, Pune, in its books. Issuing Bank Head Office Global Bank’s Head Office, at Pune, received the documents and after internal registration of the documents, forwarded the documents to its Pune Branch by inter-office mail.
Issuing Bank Branch On receipt of the documents by the Pune branch of Global Bank, they examined the documents and determined that they were discrepant. They were (a) 60 units were shipped instead of 50 units, thereby overdrawing the credit value by USD 2000 (b) Inspection certificate by Auto Inspection Council, USA is not submitted, as per credit terms. Global Bank contacted Auto India for waiver of the discrepancies.
Applicant Auto India requested for copies of the documents to be forwarded by fax and after reviewing the same, they refused to waive the discrepancies.
Issuing Bank Branch Global Bank, Pune Branch instructed its HO to...