Stake holders in India’s export trade have set up a mechanism for payment of freight and its related charges to shipping lines and other logistics intermediaries. This was aimed to curb “profiteering” in the exchange rate when the payments are made in Indian rupees.
The Standard Operating Procedure (SOP), a first-of-its-kind mechanism for payment of freight and freight related charges for exports, was chalked out at the behest of N Sivasailam, special secretary (logistics) in the Department of commerce.
“The issue was dealt with by the State Bank of India, shipping lines, exporters and other industry associations, after which a circular has been issued on February 18 and converted into a trade notice. It deals with how exchange of foreign exchange (FE) rate needs to be determined and this has now been agreed transparently amongst all of us. You may find a paisa up or down, but you will now not find profiteering on foreign exchange,” Anil Devli, CEO, Indian National Shipowners’ Association (INSA), said.
“This is about how the freight will be paid. It’s an innocuous looking trade notice which will have major implications. We have done it in order to bring transparency,” Sivasailam told BusinessLine.
“Freight forwarders will be majorly affected with this because they cannot charge anything extra; they have to attach the original invoice raised by the shipping line while billing the exporter,” said a shipping industry executive.
The issue was flagged by the exporters. They told the Logistics Department that the exchange rate quoted by the shipping line, their agents or trade intermediaries for the payment towards freight and freight related charges, in their invoice, was higher (about Rs 2-3 more) than the prevailing market exchange rate. This was the case if the exporter chose to pay in rupees.
Whereas, when the invoice is raised in the FE (foreign exchange), by the trade intermediaries towards freight, the amount of FE demand (or equivalent rupees) exceeds the amount payable in FE (or equivalent rupees) to the shipping line invoice towards container freight.
Certain services provided within the trade eco-system are also being billed as freight charges in FE by trade intermediaries in contravention of prevailing regulations.
This, according to exporters, was “having implications for logistics costs of export trade”.
Provisions of the new mechanism
The SOP will ensure that the country’s liability for payment in FE is limited to freight cost and the outgo should be limited to what’s actually payable to shipping lines. All other incidental charges for services rendered are to be invoiced and payable in rupees only.
The SOP mandates the shipping line or freight forwarders / intermediaries to issue an invoice in freely convertible foreign currency as per the contract entered between them, for freight and freight related payments like basic freight, BAF (Bunker Adjustment Factor) and CAF (Currency Adjustment Factor).
On receiving the invoice, exporters can either approach their authorised dealer Bank to negotiate and finalise the conversion rate for foreign currency payment through their rupee account.
Exporters also have the option for paying freight and freight related surcharges in foreign currency through their Exchange Earners Foreign Currency (EEFC) account to the foreign currency account of shipping lines in accordance with FEMA rules.
For payments through freight forwarders (FFs), the invoice amount raised by them on the exporters in FE or rupees, should be equivalent to the invoice received by them from the shipping lines.
The exporters have to pay only the freight and freight related charges like BAF, CAF, etc. in foreign exchange. The FFs have to raise separate invoice in rupees for the services rendered over and above the shipping line charges.
Other operational expenses, like D&D (Demurrage and Detention), THC (Terminal Handling Charge), IHC (Inland Haulage Charges) and other local charges have to be invoiced in rupees.
The above payment mechanism will be enforced for Full-Container-Load (FCL) cargo, arranged by the exporter or facilitated by FF’s, on origin to final destination basis.
In the case of Less-than-Container-Load (LCL) cargo, including transshipment in foreign locations, FFs can levy an all-encompassing charge only in rupees since the charge includes the payments in FE including freight and transshipment service charges at foreign ports based on shipping line / port or service provider invoices, wherever applicable, according to the SOP. Ends/