UNIT 1

1. WTO organisational structure, objectives, scope of WTO and role of GATTN,

establishment of WTO and functions.
The World Trade Organization (WTO) is a multilateral organization that regulates and promotes
international trade. The Evolution of WTO into the General Agreement on Tariffs and Trade (GATT),
which was established in 1947 with the anticipation of being replaced by a United Nations (UN)
specialized agency known as the International Trade Organization (ITO). It is a crucial topic in the
Economy syllabus for the UPSC Examination.

The only international organization that deals with trade legislation is the World Trade Organization
(WTO). The WTO Accords, which have been negotiated and ratified by the majority of the world's
trading nations and are recognized by their parliaments, are at its heart.
The World Trade Organization is headquartered in Geneva, Switzerland. The organization's highest
decision-making body is the Ministerial Conference, which meets twice a year and is made up of all
member states. The World Trade Organization (WTO) is made up of 164 countries (160 UN countries,
EU, Hong Kong, Macau, and Taiwan).

SIGNIFICANCE/ SCOPE
i. Administers signed documents: It manages international trade agreements that have been
signed, such as the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement.
ii. Dispute Settlement: It uses its Dispute Settlement Mechanism to resolve disagreements among
its members and to prevent trade wars.
iii. Manages new negotiations: It acts as a platform and coordinator for new global trade
agreements, such as the Doha Round.
iv. Multilateral trading system based on rules: The World Trade Organization (WTO) assures
that global trade is governed by universal rules that are suitable for and recognized all around
the world.
v. Stimulate global growth: Removes trade obstacles, which opens up new markets for the
world's resources, hence encouraging global growth.
vi. A global arbitrator: The World Trade Organization (WTO) acts as a mediator between warring
countries, aiming to bring policies and practices closer together.
vii. Promotes standardization: The World Trade Organization (WTO) and its members establish
standards for trade in commodities, services, and intellectual property (IP) governance,
reducing the gap between the quality produced and the quality demanded.
 OBJECTIVES OF WTO

The WTO has six key objectives:

The six key objectives of the World Trade Organization have been discussed below.

1. to set and enforce rules for international trade,

Establishing and Enforcing Rules for International Trade
The international trading rules by the World Trade Organisation are established under three
separate agreements – rules relating to the international trade in goods; the agreement on Trade-
Related Aspects of Intellectual Property Rights (TRIPS) and the General Agreement on Trade
in Services (GATS). The enforcement of rules by the WTO takes place by way of a multilateral
system of disputes settlement in the instances of violation of trade rules by member countries.
The members are obligated under ratified agreements to honor and abide by the procedures and
judgments.

2. to provide a forum for negotiating and monitoring further trade liberalization,

World Trade organization is the global forum for monitoring and negotiating further trade
liberalization. The premise of trade liberalization measures undertaken by WTO is based on the
benefits of member countries to optimally utilize the position of comparative advantage due to
a free and fair-trade regime.

3. to resolve trade disputes,

Trade disputes, before the WTO, usually arise out of deviation from agreements between
member countries. The resolution of such trade disputes does not take place unilaterally but
through a multilateral system involving set rules and procedures before the dispute settlement
body.

4. to increase the transparency of decision-making processes,

The World Trade Organisation attempts to increase transparency in the decision-making process
by way of more participation in the decision-making and consensus rule, in particular. The
combined effect of such measures helps to develop institutional transparency.

5. to cooperate with other major international economic institutions involved in global

economic management
The global economic institutions include the World Trade Organisation, the International
Monetary Fund, the United Nations Conference on Trade and Development, and the World
Bank. With the advent of globalization, close cooperation has become necessary between
 multilateral institutions. These institutions are functional in the sector of formulation and
implementation of a global economic policy framework. In the absence of regular consultation
and mutual cooperation, policymaking may be disrupted.

6. Safeguarding The Trading Interest of Developing Countries

Stringent regulations are implemented by the WTO to protect the trading interests of developing
countries. It supports such member countries to leverage the capacity for carrying out the
mandates of the organization, managing disputes, and implementing relevant technical
standards.

Other objectives are as follows:

• To improve the standard of living of people in the member countries.
• To ensure full employment and broad increase in effective demand.
• To enlarge production and trade of goods.
• To increase the trade of services
• To ensure optimum utilization of world resources
• To protect the environment
• To accept the concept of sustainable development

PURPOSE OF WTO
The rules embodied in both the GATT and the WTO serve at least three purposes.
• First, they attempt to protect the interests of small and weak countries against discriminatory
trade practices of large and powerful countries. The WTO’s most favored-nation and national-
treatment articles stipulate that each WTO member must grant equal market access to all other
members and those both domestic and foreign suppliers must be treated equally.
• Second, the rules require members to limit trade only through tariffs and to provide market
access not less favorable than that specified in their schedules (i.e., the commitments that they
agreed to when they were granted WTO membership or subsequently).
• Third, the rules are designed to help governments resist lobbying efforts by domestic interest
groups seeking special favors. Although some exceptions to the rules have been made, their
presence and replication in the core WTO agreements were intended to ensure that the worst
excesses would be avoided. By thus bringing greater certainty and predictability to
international markets, it was thought that the WTO would enhance economic welfare and
reduce political tensions.
 STRUCTURE OF WTO

The WTO has 164 members, accounting for 98% of world trade. A total of 22 countries are
negotiating membership. Decisions are made by the entire membership. This is typically by
consensus. A majority vote is also possible but it has never been used in the WTO, and was
extremely rare under the WTO’s predecessor, the GATT. The WTO’s agreements have been ratified
in all members’ parliaments.
• The WTO’s top-level decision- making body is the Ministerial Conference, which meets
usually every two years. Below this is the General Council (normally ambassadors and heads
of delegation based in Geneva but sometimes officials sent from members’ capitals) which
meets several times a year in the Geneva headquarters.
• The General Council also meets as the Trade Policy Review Body and the Dispute Settlement
Body.
• At the next level, the Goods Council, Services Council and Intellectual Property (TRIPS)
Council report to the General Council. Numerous specialized committees, working groups
and working parties deal with the individual agreements and other areas, such as the
environment, development, membership applications and regional trade agreements.
• The administration of the WTO is conducted by the Secretariat which is headed by the
Director General (DG) appointed by the MC for the tenure of four years. He is assisted by the
four Deputy Directors from different member countries. The annual budget estimates and
financial statement of the WTO are presented by the DG to the CBFA for review and
recommendations for the final approval by the GC.

POWERS AND FUNCTIONS OF WTO

• Implementation of Rules for Review of Trade Policy

 The international rules of trade provide stability and assurance and lead to a general consensus
among member countries. The policies are reviewed to ensure that even with the ever-changing
trading scenarios, the multilateral trading system thrives. It also helps in the facilitation of a
transparent and stable framework for conducting business.

• Forum for Member Countries Discuss Future Strategies

The WTO, as a forum, allows for trade negotiations in the multilateral trading system. In the
absence of trade negotiations, growth may stunt, and issues related to tariff and dumping may
go unaddressed. Further liberalization of trade is also subject to consistent trade negotiations.

• Implementing and Administering Bilateral and Multilateral Trade Agreements

The bilateral or multilateral trade agreements have to be necessarily ratified by the parliaments
of respective member countries. Unless such ratification comes through, the non-discriminatory
trading system cannot be put into practice. The executed agreements will ensure that every
member is guaranteed to be treated fairly in other members’ markets.

• Trade Dispute Settlement

The dispute settlement by the WTO is concerned with the resolution of trade disputes.
Independent experts of the tribunal interpret the agreements and give out judgment mentioning
the due commitments of the concerned member states. It is encouraged to settle the disputes by
way of consultation among the members as well.

• Optimal Utilization of the World's Resources

Resources across the world can be further optimally utilized by harnessing the trade capacities
of the developing economies. It requires special provisions in the WTO agreements for the
least-developed economies. Such measures may include providing greater trading
opportunities, longer duration to implement commitments, and also support to build the sue
infrastructure.
• Additionally, it is WTO's duty to review and propagate the national trade policies, and to
ensure the coherence and transparency of trade policies through surveillance in global
economic policy making.
• Another priority of the WTO is the assistance of developing, least-developed and low-income
countries in transition to adjust to WTO rules and disciplines through technical cooperation
and training.
• With a view to achieving greater coherence in global economic policy making, the WTO shall
cooperate, as appropriate, with the international Monetary Fund (IMF) and with the
International Bank for Reconstruction and Development (IBRD) and its affiliated agencies.
• As globalization proceeds in today's society, the necessity of an International Organization to
 manage the trading systems has been of vital importance. As the trade volume increases,
issues such as protectionism, trade barriers, subsidies, violation of intellectual property arise
due to the differences in the trading rules of every nation.
• The World Trade Organization serves as the mediator between the nations when such
problems arise. WTO could be referred to as the product of globalization and also as one of
the most important organizations in today's globalized society.
• The WTO is also a center of economic research and analysis: regular assessments of the global
trade picture in its annual publications and research reports on specific topics are produced
by the organization. Finally, the WTO cooperates closely with the two other components of
the Bretton Woods system, the IMF and the World Bank.

Historical Background, Evolution, Development and Role of GATT in establishing WTO.

Introduction
The World Trade Organization (WTO) is an intergovernmental organization which regulates
international trade.
The WTO officially commenced on 1 January 1995 under the Marrakesh Agreement, signed by 123
nations on 15 April 1994, replacing the General Agreement on Tariffs and Trade (GATT), which
commenced in 1948.
The WTO deals with regulation of trade between participating countries by providing a framework
for negotiating trade agreements and a dispute resolution process aimed at enforcing participants'
adherence to WTO agreements, which is signed by representatives of member governments and
ratified by their parliaments. Most of the issues that the WTO focuses on derive from previous trade
negotiations, especially from the Uruguay Round (1986–1994).
History of the World Trade Organization
GATT
The General Agreement on Tariffs and Trade (GATT), signed on Oct. 30, 1947, by 23 countries, was
a legal agreement minimizing barriers to international trade by eliminating or reducing quotas, tariffs,
and subsidies while preserving significant regulations. The GATT was intended to boost economic
recovery after World War II through reconstructing and liberalizing global trade.
A comparable international institution for trade, named the International Trade Organization never
started as the U.S. and other signatories did not ratify the establishment treaty, and so GATT slowly
became a de facto international organization.
The GATT went into effect on Jan. 1, 1948. Since that beginning it has been refined, eventually leading
to the creation of the World Trade Organization (WTO) on January 1, 1995, which absorbed and
extended it. By this time 125 nations were signatories to its agreements, which covered about 90% of
global trade. The Council for Trade in Goods (Goods Council) is responsible for the GATT and
consists of representatives from all WTO member countries. As of September 2019, the council chair
is Uruguayan Ambassador José Luís Cancela Gómez. The council has 10 committees that address
subjects including market access, agriculture, subsidies, and anti-dumping measures.
GATT Negotiations before Uruguay
Seven rounds of negotiations occurred under GATT (1949 to 1979).
• The first real GATT trade rounds (1947 to 1960) concentrated on further reducing tariffs.
• Then the Kennedy Round in the mid-sixties brought about a GATT anti-dumping agreement
and a section on development.
• The Tokyo Round during the seventies was the first major attempt to tackle trade barriers that
do not take the form of tariffs, and to improve the system, adopting a series of agreements on
non-tariff barriers, which in some cases interpreted existing GATT rules, and in others broke
entirely new ground. Because these plurilateral agreements were not accepted by the full
GATT membership, they were often informally called "codes". Several of these codes were
amended in the Uruguay Round, and turned into multilateral commitments accepted by all the
WTO members. Only four remained plurilateral (those on government procurement, bovine
meat, civil aircraft and dairy products), but in 1997 WTO members agreed to terminate the
bovine meat and dairy agreements, leaving only two.
Uruguay Round (1986–1994)
GATT members recognized, well before the 40th anniversary, that the GATT system was struggling to
adapt to a new globalizing world economy. The eighth GATT round, known as the Uruguay Round, was
launched in September 1986 in Punta del Este, Uruguay, in response to the problems identified in the
1982 Ministerial Declaration (structural deficiencies, spillover effects of certain countries' policies on
world trade that the GATT could not manage, and so on). It was the largest trade negotiating mandate
ever agreed upon: the talks aimed to expand the trading system into several new areas, including
services and intellectual property, as well as reform trade in the sensitive agricultural and textile sectors;
all of the original GATT articles were up for review.
Marrakesh Agreement:
The Marrakesh Agreement is the last act ending the Uruguay Round and officially establishing the
WTO framework, which was signed on April 15, 1994, during a ministerial meeting in Marrakesh,
Morocco. The GATT is still in effect as the World Trade Organizations’ (WTO) umbrella convention
for goods trade, having been amended as a result of the Uruguay Round discussions. However, GATT
1994 was not the only legally binding agreement contained in the Marrakesh Treaty; a long list of
roughly 60 agreements, annexes, judgments, and understandings were accepted.
The agreements are divided into six sections:
i. Agreement Establishing the WTO.
ii. Multilateral Agreements on Trade in Goods.
iii. General Agreement on Trade in Services
 iv. Agreement on Trade-Related Aspects of Intellectual Property Rights
v. Dispute settlement
vi. Governments' trade policies reviews
The Uruguay Round was successful in expanding binding commitments by both rich and developing
countries, as seen by the percentages of tariffs bonded before and after the 1986–1994 talks, according
to the WTO's principle of “tariff ceiling-binding"
Ministerial Conferences
The highest decision-making body of the WTO is the Ministerial Conference, which usually meets
every two years. It brings together all members of the WTO, all of which are countries or customs
unions. The Ministerial Conference can take decisions on all matters under any of the multilateral
trade agreements.
• The inaugural ministerial conference (1996) was held in Singapore. Disagreements between
largely developed and developing economies emerged during this conference over four issues
initiated by this conference, which led to them being collectively referred to as the "Singapore
issues".
• The second ministerial conference (1998) was held in Geneva in Switzerland.
• The third conference (1999) in Seattle, Washington ended in failure, with massive
demonstrations and police and National Guard crowd-control efforts drawing worldwide
attention.
• The fourth ministerial conference (2001) was held in Doha in the Persian Gulf nation of Qatar.
The Doha Development Round was launched at the conference. The conference also approved
the joining of China, which became the 143rd member to join.
• The fifth ministerial conference (2003) was held in Cancún, Mexico, aiming at forging
agreement on the Doha round. An alliance of 22 southern states, the G20 developing nations
(led by India, China, Brazil, ASEAN led by the Philippines), resisted demands from the North
for agreements on the so-called "Singapore issues" and called for an end to agricultural
subsidies within the EU and the US. The talks broke down without progress.
• The sixth WTO ministerial conference (2005) was held in 13–18 December 2005 in Hong
Kong. It was considered vital if the four-year-old Doha Development Round negotiations
were to move forward sufficiently to conclude the round in 2006. In this meeting, countries
agreed to phase out all their agricultural export subsidies by the end of 2013 and terminate
any cotton export subsidies by the end of 2006. Further concessions to developing countries
included an agreement to introduce duty-free, tariff-free access for goods from the Least
Developed Countries, following the everything but Arms initiative of the European Union but
with up to 3% of tariff lines exempted. Other major issues were left for further negotiation to
be completed by the end of 2010.
 • The WTO General Council, on 26 May 2009, agreed to hold a seventh WTO ministerial
conference session in Geneva from 30 November-3 December 2009. A statement by chairman
Amb. Mario Matus acknowledged that the prime purpose was to remedy a breach of protocol
requiring two-yearly "regular" meetings, which had lapsed with the Doha Round failure in
2005, and that the "scaled-down" meeting would not be a negotiating session, but "emphasis
will be on transparency and open discussion rather than on small group processes and informal
negotiating structures". The general theme for discussion was "The WTO, the Multilateral
Trading System and the Current Global Economic Environment."
Role of GATT in establishing W.T.O.
The main role of GATT in the international trade was regulating the contracting parties to achieve the
purpose of the agreement which were reducing tariffs and other barriers, and to achieve the
liberalization in international trade. The role was reflected in following aspects:
Most-favoured nation
Firstly, GATT established a set of standard to guide the contracting parties to participate in
international trade practices. GATT stipulated several of basic principle to conduct the contracting
parties in international business, such as General MostFavored-Nation Treatment (Article II), Non-
discriminatory Administration of Quantitative Restrictions (Article XIII), and General Elimination of
Quantitative Regulations (Article XI) and so on in the “GATT 1947″. Every contracting party should
obey these basic principles when they were involved in trade relations, otherwise they would be
condemned, even be taken revenge by other parties
Tariff reductions and bindings.
Secondly, GATT reduced the tariff on the basis of mutual benefit, accelerate the trade liberalization
after the World War II. GATT’s major contribution was to reduce of tariffs by sponsoring “rounds” of
multilateral negotiations.
Reduction of Discrimination in Tariff
Thirdly, GATT reduced the discrimination in tariff and trade which promoted to reduce other trade
barriers. As stated in the Article II: schedule of concession in “GATT 1947″, “Each contracting party
shall accord to the commerce of the other contracting parties’ treatment no less favorable than that
provided for in the appropriate Part of the appropriate Schedule annexed to this Agreement.”
According to this statement, GATT regulate the contracting parties cannot increase the levels of tariff
as their wish, but some countries used other non-tariff barriers to promote their protectionism.
Providing Benefits to Developing Countries
Fourthly, GATT protected the benefits of the developing countries to a certain extent to international
trade. One of the basic objectives of GATT was that “raising of standards of living and the progressive
development of the economies of all contracting parties, and considering that the attainment of these
objectives is particularly urgent for less-developed contracting parties.” (GATT 1947) In order to
achieve this objective, GATT established some special measures for less-developed countries, such as
provide tariff protect for specific industries, quotas which are with the purpose of balance of payment.
With the increasing number of developing countries jointed the GATT, there were more concern in
the trade position and benefit of less-developed countries, more over with the developing countries’
flight, so GATT established some measures for developing countries so that will benefit the less-
developed countries in export-oriented trade.
Court of International Trade.
Finally, GATT acted as the “court of international trade”, by providing a platform for contracting
parties to negotiation and talk to settle disputes in international trade. One of the objectives of GATT
was to settle the disputes between two or more parties. When two or more parties are involved in the
international trade, it is inevitable that without disputes. Some of the disputes may be solved by the
two parties themselves, however, some disputes could not be solved by themselves, without the help
of the third party, and the disputes may be remaining unresolved for years. So it needed GATT to solve
those disputes which could not solve by parties themselves. Before it was replaced by WTO, in a
certain period, GATT had become a legal mechanism to settle trade disputes among contracting
parties, it provided a platform for contracting parties to settle disputes so that the trade conflicts and
disputes can be solved immediately which would protect the benefit of both parties, and lay the
foundation to achieve the main objective of GATT.

Reasons GATT was replaced by WTO

GATT was replaced by WTO which is the world’s global leading body in the year of 1995, in the day
when Uruguay round took effect. The purpose why WTO was created was to ensure that global trade
start and go on smoothly, freely, and predictably. In order to ensure that the global trading go on
smoothly, freely, and predictably, WTO creates and embodies the legal ground rules for global trade
among WTO members and also offers a system for international commerce. The other purpose of
WTO was formed was to strengthening the GATT mechanism of settling trade disputes. Any issue
that happens between nations will be bringing up to WTO to be solved. First case settled by WTO was
the issue between US and several other countries in 1994.
On January 1, 1995, the World Trade Organization was found to replace GATT after the eighth round
of GATT multilateral negotiation. WTO to replace GATT was an inevitability of history. The
replacement of the General Agreement on Tariffs and Trade (GATT) by the WTO heightened concern
among critics because its stronger enforcement powers represent a further shift in power from citizens
and national governments to a global authority run by unelected bureaucrats. There are such reasons
why GATT was replaced WTO.
Firstly, the major weakness of the GATT was provisional arrangement. It was not an effective
international covenant, and it had no real enforcement mechanism. If the bilateral agreement broke by
one of another country, GATT has nothing could be done. There are some rules that have been set for
enforcement by GATT but it has been dysfunction due to the rule did not have the power to make
other countries or parties to follow the rule or agreement set by GATT.
Secondly, the scope on jurisdiction of GATT was limited only in products transaction. However
with development of globalization, the transactions in services and technologies, and international
investments constitute a high proportion of international trade. Since the GATT only concentrated on
the products transaction, there was a gap for GATT to regulate the transactions in services and
technologies and international investments.
Thirdly, there were some limitations in the disputes settlement systems of GATT. According to
the WTO.org, the major weakness of the disputes settlement systems of GATT was it should have a
positive consensus in the GATT Council to bring the dispute into a panel, and adoption of the panel
report as well.
Fourthly, some rules in GATT were not strict enough, it was hard to execute in real economic
practices. Some contracting parties would construe the rules of GATT in their self interests, and GATT
did not have the necessary means of verification and inspection.
Finally, the historical multilateral rounds of GATT were influenced by the policies of some
larger countries. From the Geneva Round to Uruguay Round, there was national sovereignty existing
in the multilateral negotiation rounds. The multilateral negotiation rounds were influenced by the
Western signatory states, the decision-making right was major handled by the Western countries,
especially United States.
All in all, these factors make the GATT was replaced by WTO was needs of the times and follow the
tide of development economy.

2. MFN Principle

"Most-Favoured-Nation" ("MFN") treatment requires Members to accord the most favorable tariff and
regulatory treatment given to the product of any one Member at the time of import or export of "like
products" to all other Members. This is a founding principle of the WTO.

Under the MFN rule, if WTO Member A agrees in negotiations with country B, which need not be a
WTO Member, to reduce the tariff on product X to five percent, this same "tariff rate" must also be
extended to all other WTO Members. In other words, if a country provides favourable treatment to
one country, it must provide the same favourable treatment to all Member countries. Therefore, the
essence of MFN treatment is non-discriminatory treatment by providing the same conditions given to
one Member to other Members. In the context of trade, it is a principle that prohibits different
treatment given to the same products depending on the country of origin.
The concept of MFN has a long history. Prior to the GATT, an MFN clause was often included in
bilateral trade agreements and, as such, contributed greatly to trade liberalization. However, in the
1930s, countries around the world took protectionist measures because of the impact of the world
depression. Various systems to limit MFN treatment, including trade-restrictive measures by the
British Commonwealth of Nations (commonly known as the sterling bloc) and the French franc bloc,
etc. were introduced. It is generally believed that these limits divided the world economy into trade
blocs and eventually led to World War II. Lessons were learned from this mistake and, in the wake of
World War II, an unconditional MFN clause was included in the GATT on a multilateral basis,
contributing to global trade stability. It was then succeeded by the WTO.

Considering this background, MFN treatment in particular must be recognized as a fundamental

principle for sustaining the multilateral trading system. Regional integration and related exceptions
must be uniformly administered so as not to undermine the MFN principle.

GATT provisions regarding MFN Principle

1. GATT Article I:1 - General Most-Favoured-Nation Treatment

GATT Article I:1 requires WTO Members to extend MFN treatment to like products of other WTO
Members with respect to tariffs, regulations on exports and imports, internal taxes and charges on
imported products, and internal regulations. In other words, "like" products from all WTO Members
must be accorded the same treatment as the most advantageous treatment accorded by a Member to
the products of any one state or territory under the jurisdiction of that Member.

The meaning of "like products" raises an issue. There are only a few determinations in WTO dispute
settlement cases, and determinations made in the former GATT era are used as precedents for
interpretation. According to the Panel on discriminatory tariff treatment of unroasted coffee by Spain
(BISD 28S/102), like products are determined by the following three factors:

(1) physical characteristics of the products,

(2) their end-users, and
(3) tariff regimes of other Members.

Should an importing country extend differential treatment to "like products" of one exporting
country over another - by setting different tariff rates - it would clearly violate GATT Article I:1.
However, GATT Article I:1 violations can also occur when the discrimination against the product of
another Member is less apparent, such as when an importing country accords differential treatment
among products that are considered to be like products. This is often defined as de facto
discrimination. One such case involved Canada's automobile measures.

2. GATT Article III:7 - Non-Discriminatory Administration of Quantitative Regulation Relating

to the Mixture, Processing or Use of Products

GATT Article III:7 stipulates that no internal quantitative regulation relating to the mixture,
processing or use of products in specified amounts or proportions shall be applied in such a manner as
to allocate any such amount or proportion among external sources of supply. This paragraph provides
for MFN treatment in the administration of quantitative restrictions relating to the mixture, processing
or use of products and supplements the disciplines under Article I.

3. GATT Article V - Non-Discriminatory Administration of Freedom of Transit

GATT Article V stipulates that there shall be freedom of transit through the territory of each
contracting party, via the routes most convenient for international transit, for traffic in transit to or
from the territory of other contracting parties and that no distinction shall be made which is based on
the flag of vessels, the place of origin, departure, entry, exit or destination, etc. This is MFN treatment
in freedom of transit, and supplements GATT Article I.

4. GATT Article XIII - Non-Discriminatory Administration of Quantitative Restrictions

In order to ensure fairness among countries in applying quantitative restrictions, GATT Article XIII
stipulates that when imposing quantitative restrictions or tariff rate quotas on any product, they shall
be imposed non-discriminatorily on like products of all countries, and that in applying import
restrictions to any product, contracting parties shall aim at a distribution of trade in such product
approaching as closely as possible the shares which the various contracting parties might be expected
to obtain in the absence of such restrictions, based upon the proportions for a previous representative
period, etc. This supplements GATT Article I.

5. GATT Article XVII - State Trading Enterprises

GATT Article XVII defines "State Trading Enterprises" as:

1) state enterprises established or maintained by a WTO Member; or

2) private enterprises granted exclusive or special privileges by WTO Members that make purchases
or sales involving either imports or exports.
 By making use of their monopolistic status, such enterprises could operate against the principles of
international trade by discriminating against an importing country or imposing quantitative
restrictions, etc. GATT Article XVII requires WTO Members to act in accordance with the general
principle of non-discriminatory treatment, including the MFN treatment obligation (Article
XVII:1(a)), while at the same time, it provides that they must act solely in accordance with
commercial considerations (Article XVII:2(b)).

Exceptions to MFN treatment

1. GATT Article 24 - Customs Unions/ Free trade areas

In order to strengthen economic relation between two countries, regional trade agreements are
permitted for customs unions/free-trade areas under certain conditions. These agreements liberalize
trade among countries within the regions while maintaining trade barriers with countries outside the
region or regions. They may also lead to results that are contrary to the MFN principle because
countries inside and outside the region are treated differently. Thus, countries outside the region could
be disadvantaged. However, completely prohibiting such agreements is considered too severe, and
GATT allows them under strict conditions, which are:

(1) tariffs and other barriers to trade must be eliminated with respect to substantially all trade within
the region; and
(2) the tariffs and other barriers to trade applied to outside countries must not be higher or more
restrictive than they were prior to regional integration.

2. Enabling clause

The Generalized System of Preferences (GSP) program is a system that grants certain products
originating in eligible developing countries preferential tariff treatment over those normally granted
under MFN status. GSP is a special measure designed to help developing countries increase their
export earnings and promote development. GSP must have the following characteristics:

(1) preferential tariffs may be applied not only to countries with special historical and political
relationships

, but also to developing countries more generally (thus the system is described as "generalized");
(2) the beneficiaries are limited to developing countries; and
 (3) it is a benefit unilaterally granted by developed countries to developing countries.

3. Non-Application of Multilateral Trade Agreements Between Particular Member States (WTO

Agreement Article XIII)

The WTO Agreement Article XIII provisions were created to deal with accession-related issues.
Ideally, the MFN rule would be strictly applied so that when country B newly accedes to the
Agreement, it is required to confer MFN status on all other Members, and they, in turn, are required to
confer MFN status on country B. However, country A, which is already a Member of the WTO, may
have reasons for not conferring all rights and obligations of the WTO on the new Member B. Because
the WTO only requires the consent of two-thirds of the existing membership for accession, it is
conceivable that country A may, against its will, be forced to grant MFN status to country B. WTO
Article XIII is a way to respect country A's concerns by preventing a WTO relationship from taking
effect between countries A and B. Conversely, WTO Article XIII also provides a means for accession
of country B, even when more than one-third of the membership, like country A, has reasons for not
wanting a WTO relationship with country B (in which case they will object to the accession itself) by
allowing for so-called non-application. It applies when any of the following two conditions are met:

(a) at the time the WTO Agreement went into force, Article XXXV of GATT 1947 (note) had been
invoked earlier and was effective as between original Members of the WTO which were Members of
GATT 1947; or
(b) between a Member and another Member which has newly acceded, the Member not consenting
to the application has so notified the Ministerial Conference before the approval of the agreement on
the terms of accession by the Ministerial Conference.

4. Other exceptions

Other exceptions particular to MFN include

(a) GATT Article XXIV:3 regarding frontier traffic with adjacent countries, and
(b) Article I:2 regarding historical preferences that were in force at the signing of the GATT.
(c) GATT Article XX regarding general exceptions for measures necessary to protect public morals,
life and health, etc., and
(d) GATT Article XXI regarding security exceptions.
(e) It is also possible to obtain a waiver from the MFN principle. Under WTO Article IX:3,
countries may, with the agreement of other Members, waive their obligations under the agreement.
UNIT 3
3. Acceptance and rejection of goods under CISG

ANSWER:

Introduction
The United Nations Convention on Contracts of the International Sale of Goods provides a
uniform text of law for international sale of goods. Preparation of a uniform law for the
international sale of goods began in 1930 at the International Institute for Unification of Private
Law (UNIDROIT) in Rome. After a long interruption in the work as a result of the Second
World War, the draft was submitted to a diplomatic conference in the Hague in 1964, which
adopted two conventions, one on the international sale of goods and the other on the formation
of contracts for the international sale of goods.

There was widespread criticism of the provisions of two conventions of Hague conference. As
a result, one of the first tasks undertaken by UNCITRAL on its origin in was to enquire of
States whether or not they intended to adhere to Hague conventions and the reasons for their
positions. On the basis of responses received, UNCITRAL decided to study the two
conventions to ascertain which modifications might render them capable of wider acceptance
by countries' different legal, social and economic systems. UNCITRAL's success in preparing
a convention with wider acceptability can be seen by the fact that the original eleven States for
which the convention came into force on 1st January 1988 included States from every
geographical region, every stage of economic development and every major legal, social and
economic system.

As on 31st January 1988, an additional four States had become a party to the convention. Many
more States became a party afterwards. The convention is divided into four parts.
• Part I deals with the scope of application of the convention and the general provisions.
• Part II contains the rules governing the formation of contracts for the international sale
of goods.
• Part III deals with the substantive rights and obligations of buyer and seller arising from
the contract.
 • Part IV contains the final clauses of the convention concerning such matters as how and
when it comes into force; the reservations and declarations that are permitted and the
application of the convention to international sales where both States concerned have
the same or similar law on the subject.

ACCEPTANCE AND REJECTION OF GOODS

Acceptance
• The test adopted by s.35 is whether the buyer is "deemed to have accepted" the goods.
The receipt of the goods is not acceptance and the section does not provide that the
mere receipt of the goods shall be deemed to be acceptance. On the other hand, approval
is not always required by the section: in two of the three circumstances set out by s.35
a buyer is deemed to have accepted the goods though he may not have approved them.

• The buyer is deemed to have accepted the goods:

ü when he intimates to the seller that he has accepted them(s.35(1)(a));
ü when the goods have been delivered to him, and he does any act in relation to them
which is inconsistent with the ownership of the seller (s.35(1)(b)); or
ü when, after the lapse of a reasonable time, he retains the goods without intimating to
the seller that he has rejected them (s.35(4)).

• The first of these three cases is obvious and does not need clarification. As regards the
third, it should be noted that indecision on the part of the buyer may lead to the loss of
his right to reject the goods, that is, if he retains them for an unreasonably long time
without intimating that he has rejected them.

• The Act refrains from requiring a fixed period of time within which the buyer has to
intimate his rejection. "Reasonable time" is a flexible requirement which varies
according to the circumstances of the case; the question of what a reasonable time is
always a question of fact.
• The prudent buyer will, as observed earlier, examine the goods as soon as they arrive
at the place of examination and will then decide whether to reject them or to keep them.
Of particular importance is the second case.

• First, this circumstance arises only after the buyer has been afforded a reasonable
opportunity of examining the goods.
• Secondly, "an act inconsistent with 125 the ownership of the seller" is deemed to be an
acceptance of the goods only after the goods have been delivered to the buyer, but the
delivery need not be physical.

• A delivery to a carrier for transmission to the buyer, e.g. under an f.o.b. or c.i.f. contract,
would be sufficient. An act inconsistent with the ownership of the seller is any act by
which the buyer behaves as if he were the owner of the goods.

• Whereas any disposal of the goods, e.g., a resale and dispatcher delivery of the goods
to a sub-purchaser, or the pledging of them as a security, was deemed an act inconsistent
with the ownership of the seller, because thereby the buyer accepts the title to the goods
although he might not have accepted their quality, this no longer reflects the law.

• The Sale of Goods Act now provides that the buyer is not deemed to have accepted the
goods merely because the goods have been delivered to another under a sub-sale or
other disposition. The thrust of the subsection ensures that where a buyer passes on the
contract goods without examination to a sub-buyer, he is not necessarily deemed to
have accepted the goods although there has been a delivery from the prima facie place
of inspection.

• This amendment is rather easier to understand in the context of international sales where
often the buyer is merely the supplier of goods under a sub sale and in situations where
the delivery is affected by the presentation of documents. In the latter example it is clear
that the acceptance of the documents amounts to only conditional acceptance of the
goods themselves.
 • The right to reject is not lost simply because the documents are "sold" on to a sub
purchaser. If the contract is not severable, that is where goods are to be delivered in
instalments which are to be completed before payment is to be made, and the buyer has
accepted part of the goods, he can no longer reject the other part of the goods. This,
however, is subject to s.35A which provides that if a buyer has a right to reject goods
by reason of a breach that affects some or all of the goods, he does not lose his right to
reject the remainder of the goods by accepting some of them.

• The position is different, however, if the seller tenders the wrong quantity of goods. The
buyer is entitled to reject the whole consignment or to accept the contract quantity and
to reject the others, but if he accepts a smaller or larger quantity than he bought he has
to pay for what he accepted. The above is again subject to the proposition that the
section will not apply generally in overseas sales, that a buyer, other than a consumer,
may not reject an excess or shortfall in quantity of goods if that excess or shortfall is so
slight that it would be unreasonable to do so. Where the buyer has bought "assorted"
goods but is tendered only one type of goods he is entitled to accept a reasonable
percentage of the tendered goods and to reject the remainder.

Rejection:
• A buyer who wishes to reject the goods must intimate within a reasonable time to the
seller that he refuses to accept them. This notice should be clear and definite and should
not be contradicted by an act relating to the goods by which the buyer denies the title
of the seller to them.

• No form is prescribed for the notice of rejection, which may be given verbally, by telex,
fax or in writing, but the buyer should make certain that it reaches the seller, otherwise
it is ineffective.

• The buyer who rejects the goods is not bound to return them to the seller unless this is
agreed but, being a bailee, he must exercise reasonable care with respect to them.
 Subject to this obligation, if the goods are rejected for ood reason and in good time, the
risk of loss of, or damage to, the goods is with the seller.

• Unless a different intention of the parties is expressed in the contract or can be gathered
from its terms by necessary implication, the buyer's right to reject the goods is
postponed until the goods arrive and he has a reasonable opportunity of examining
them.

• Inappropriate cases the buyer may reject the goods even before having received them,
that is, if he notices from a provisional invoice or advice note that the seller has
dispatched goods which are not in accordance with the contract. A seller, except in c.i.f.
sales, who has tendered goods not in accordance with the contract may cancel the
original tender and make another tender, but only if he can make the other tender within
the time stipulated in the contract.

• Fulfilment of the following obligations leads to acceptance of goods and failure to

fulfil the obligations lead to rejection of goods.

Obligations of the seller

1. Delivery of goods
• The seller must deliver the goods, hand over any documents relating to them
and transfer the property in the goods, as required by the contract and this
Convention. (Art.30)
• If the seller is not bound to deliver the goods at a particular place, then he is
obliged to hand the goods over to the first carrier for transmission to the buyer
or to place the goods at the buyer's disposal. (Art. 31).
• If the seller is obligated under the contract to arrange for carriage of the goods,
"he must make such contracts as are necessary for carriage to the place fixed
by means of transportation appropriate in the circumstances and according to
the usual terms for such transportation." [Art. 32(2))
• The seller must deliver the goods at the contractually agreed time, or within a
reasonable time if no time is specified. (Art. 33).
2. Handing over of necessary documents: (Art. 34).
Necessary documents must be handed over to the buyer as required by the contract.
If the seller is bound to hand over documents relating to the goods, he must hand them
over at the time and place and in the form required by the contract.
If the seller has handed over documents before that time, he may, up to that
time, cure any lack of conformity in the documents, if the exercise of this right
does not cause the buyer unreasonable inconvenience or unreasonable
expense.
However, the buyer retains any right to claim damages as provided for in this
Convention.

3. Conformity of the goods

• The seller must deliver goods which are of the quantity, quality and
description required by the contract and which are contained or packaged in
the manner required by the contract.
• The goods must be fit for ordinary purposes, must conform to a model or
description and be packaged or contained in the manner usual for such goods
or, where there is no such manner, in the manner adequate to preserve and
protect the goods. (Art. 35).
• The seller is liable for any lack of conformity that exists at the time the buyer
assumes the risk of loss, even if the lack of conformity does not become
apparent until after the risk of loss has shifted. (Art. 36).
• However, if the seller has delivered non-conforming goods before the due date
of delivery, the seller may 'cure' a breach of conformity up until the due date
of delivery by delivering any missing parts, making up deficiencies in
quantity, or delivering replacement goods. (Art. 37).

4. Deliver goods which are free from third party right or claim:
The seller musts deliver goods which are free from any right or claim of a third party.
Unless the buyer agreed to take the goods irrespective of such right or claim of third
party. (Art. 41)
Obligation of the buyer
The buyer must pay the price for the goods and take delivery of them required by the contract
and this Convention.

1. Payment of the price

The buyer's obligation to pay the price includes taking such steps and complying with
such formalities as may be required under the contract or any laws and regulations to
enable payment to be made. (Art. 54).
Where a contract has been validly concluded but does not expressly or implicitly
fix or make provision for determining the price, the parties are considered, in the
absence of any indication to the contrary, to have impliedly made reference to the
price generally charged at the time of the conclusion of the contract for such
goods sold under comparable circumstances in the trade concerned. (Art. 55).

If the price is fixed according to the weight of the goods, in case of doubt it is to
be determined by the weight. (Art. 56).

If the buyer is not bound to pay the price at any other particular place, he must pay
it to the seller:
(a) at the seller's place of business, or
(b) if the payment is to be made against the handing over of the goods or of
documents, at the place where the handing over takes place. (Art. 57).

The buyer is not bound to pay the price until he has had an opportunity to examine
the goods, unless the procedures for delivery or payment agreed upon by the
parties are inconsistent with his having such an opportunity. (Art. 58).

The buyer must pay the price on the date fixed by or determinable from the
contract and this convention without the need for any request or compliance with
any formality on the part of the seller. (Art. 59).

2. Taking delivery (Art.60)

The buyer's obligation to take delivery consists:
 (a) in doing all the acts which could reasonably be expected of him in order to
enable the seller to make delivery, and
(b) in taking over the goods,

3. Examination of goods:
• The buyer must examine the goods, or cause them to be examined, within as
short a period as is practicable in the circumstances.
• If the contract involves carriage of the goods, examination may be done after
the goods have arrived at their destination.
• If the goods are redirected in transit or redispatched by the buyer without a
reasonable opportunity for examination by him and at the time of the
conclusion of the contract the seller knew or ought to have known of the
possibility of such redirection or redispatch, examination may be put off until
after the goods have arrived at the new destination. (Art 38)

4. Provide notice of lack of conformity of goods immediately

The buyer loses the right to rely on a lack of conformity of the goods if he does not
give notice to the seller specifying the nature of the lack of conformity within a
reasonable time after he has discovered it or ought to have discovered it.

In any event, the buyer loses the right to rely on a lack of conformity of the goods if
he does not give the seller notice thereof at the latest within a period of two years
from the date on which the goods were actually handed over to the buyer, unless the
time period for such notice is mentioned in the contract by the parties. (Art.39)
4. Rights and duties of buyers and sellers under FOB

• “"Free On Board" (FOB) is a shipping term used in international trade. It means that
the seller's responsibility is to deliver the goods onto a specific ship at a named port
of shipment, which is chosen by the buyer. Once the goods are on board the ship, the
risk of loss or damage to the goods shifts to the buyer, and the buyer is responsible
for all costs from that point onward.
• FOB is beneficial for water-based transportation because it clarifies when the risk
and responsibility shift from the seller to the buyer. It's also cost-effective because
the seller's obligation is to get the goods to the agreed-upon port, and once they are
on the ship, it's considered as if they have been delivered to the buyer's doorstep.
• For example, if 'A' is the seller and 'B' is the buyer, and 'B' wants goods delivered to
their doorstep in the USA, 'A' can transport the goods to a nearby port. At that point,
it's considered as if the goods have been delivered to 'B' because 'A's responsibility
ends at the port. 'B' then takes over responsibility for the goods from the port to their
location in America, including any insurance or damages during that part of the
journey.

ADVANTAGES THAT FOB CONTRACT OFFERS TO THE BUYER

• where there are foreign currency restrictions, especially where the carrier is of the
same nationality as the buyer, since FOB prices are lower than CIF;
• freight being payable in advance, satisfying in this way the carrier;
• where the buyer wants to lower his liabilities in respect of import duties calculated
on the price of the goods, since the FOB price is not at all-inclusive one;
• where the buyer hires a particular type of vessel because of the type of goods being
shipped;
• where the buyer charters the vessel because of purchasing a whole cargo; and,
• also, because it can be used for domestic supply to the loading port, even where the
international sale contract is CIF

TYPES OF FOB
i. FOB Origin; and
ii. FOB destination.
FOB origin means the buyer will take ownership of goods once the goods are shipped in the
vessel. After that, all the liability of goods are transferred to the buyer.
FOB destination, on the other hand, means that the seller will transport the goods to a
destination port provided by the buyer and the ownership of goods is transferred to the buyer
on that destination port.
In the given example, the seller is loading the vessel on port x and his job is done. The
ownership is transferred to the buyer. This is called ‘FOB origin’. However, if the arrangement
was such that the seller needs to transport the goods to port y then it would be called as “FOB
destination”.
Thus, in case of ‘FOB origin’ the freight is paid by the buyer and in the case of ‘FOB
destination, the freight needs to be paid by the seller.

SELLER’S RIGHTS AND DUTIES

1. Bear all cost:
Under the FOB contract, the seller has to bear all cost such as the payment of handling,
transferring the goods to the ship and loading. Furthermore, the seller has to make all necessary
arrangements for the buyer’s account such as making a contract of carriage by sea and insuring
the goods under an insurance contract. Moreover, the seller is not responsible to pay the freight
and cannot be force to provide “freight pre-paid bill of lading” from the carrier. This is because;
the contract of carriage and the freight are made between the carrier and the buyer.
2. Provide documents:
Under the FOB contract, unless otherwise agreed, the seller has to provide the documents such
as bills of lading, which is necessary for the buyer to obtain a possession of the goods. These
documents have to deliver to the buyer in return for payment.
3. Loading:
The main duty of the seller under the FOB contract is loading. The seller must deliver the goods
on board the vessel, at a place where the buyer has already identified as the port of loading and
within the period of shipment which the parties indicated in the contract of sale. Name of the
port in a FOB contract is a condition. For instance, the seller sends the goods to the other port
from the port where it has been identified in the contract of sale. The seller commits a breach
of a condition, so the buyer is entitled to refuse the delivery of the goods.
4. Provide notice:
The seller must give notice to the buyer that this notice may enable him insure the goods during
the sea transit. 1 The notice must be given without delay. Any fail to give notice, makes the
seller still liable on the goods during the sea transit.

BUYER’S RIGHTS AND DUTIES

1. Identify the port of shipment:
Under the FOB contract, the buyer’s duty is identified to the port of shipment. If it is not clean
in the contract of sale, three different alternatives can be chosen:
First, the seller can choose the port of shipment, second the buyer can choose it, and third the
contract is left for ambiguously. The buyer has also provided a suitable ship for loading. He
has to determine a shipping period, place and also must give notice to the buyer of readiness to
the vessel.
2. Duty to pay:
The buyer’s duty under the FOB contract, to pay the price is determined by the contract.
However, there is no such a time in the contract; the buyer must pay the price in due as soon as
the seller delivered the goods according to the contract. Under the FOB contract, the buyers
must pay all cost to the goods, when the goods passed the ship’s rail.

5. Explain the rights of unpaid seller under the International Trade Law.

In international sales transactions the seller normally parts with the possession of the goods
before receiving the purchase price because he wants to dispatch the goods with due expedition.
Even where the sale is on a cash basis, some time will elapse before the buyer's remittance
reaches the seller. Where the sale is a credit transaction more time will pass before the bill of
exchange drawn by the seller on the buyer is settled. Much may happen during that time.

The buyer may become insolvent, he may issue debentures taking priority over ordinary trading
debts, he may amalgamate with a firm that is heavily indebted, or the buyer's country may
prohibit payment in the stipulated currency. It is imperative that the seller should be properly
protected here.The law would fail in its task if it omitted to devise special rules for the
protection of the seller during the vulnerable period which commences when he gives up
possession of the 128 goods and continues until he has received the price.
However, here again, the best protection is the seller's foresight. The seller who parts with his
goods before obtaining the price should insert into the contract of sale a clause reserving the
title in the goods until he receives the purchase price. Section 39(2) entitles the unpaid seller,
who has reserved the property in the goods) to withhold their delivery until the price is paid,
and provides that his rights against the goods shall be similar to and coextensive with the rights
of lien and stoppage in transit which can be claimed by an unpaid seller who has not retained
title in the goods.

Where the seller has failed to reserve the property in the goods, the rights of the unpaid seller
are defined in ss.38-48 of the Sale of Goods Act 1979. These rights, which can be claimed by
implication of the law, are (s.39):

(a) a lien on the goods for the price while he is in possession of them;
(b) in case of the insolvency of the buyer, a right of stopping the goods in transit after he has
parted with the possession of them;
(c) a right of resale, as limited by the Act.

The Act also provides'" a definition of the unpaid seller, who becomes such when the whole of
the price has not been paid or tendered; or

(b) when a bill of exchange or other negotiable instrument has been received as conditional
payment and the condition which it was received has not been fulfilled by reason of the
dishonour of the instrument or otherwise.

The rights of the unpaid seller may likewise be claimed by an agent of the seller to whom the
bill of lading has been indorsed or by a consignor or confirming agent who has himself paid or
is directly responsible for the price or who, for other reasons, is in the position of a seller

6M
Product liability (7)
INTRODUCTION
Product liability refers to the legal responsibility of a manufacturer, seller, or supplier for injuries or
damages caused by defective products they produce or sell. When a product is found to be defective
and causes harm to a consumer, the parties involved in the production and distribution chain may be
held liable for the resulting injuries or damages. Product liability laws are designed to protect
consumers and ensure that they are compensated for injuries caused by unsafe products.

Product Liability under CISG:

The United Nations Convention on Contracts for the International Sale of Goods (CISG) is an
international treaty that establishes a uniform set of rules governing contracts for the international sale
of goods. The CISG primarily addresses contractual obligations between buyers and sellers and
product liability. But there is limited scope for PL.

Scope and Limitations of Product Liability under CISG:

Liability for Non-Conforming Goods (Article 45):

The seller is liable for damages when non-conforming goods cause loss to the buyer (Article
45(1)(b)).
The buyer is entitled to full compensation under Article 74, with limitations based on foreseeability.

Liability of the Seller for Personal Injuries (Article 5):

Article 5 explicitly states that the CISG does not govern the liability of the seller for death or personal
injury caused by the goods.
This exception ensures that such cases are subject to applicable domestic law rather than the CISG.
The policy behind Article 5 is to leave the regulation of personal injury claims to domestic law. It
acknowledges the need for protection under domestic product liability rules for cases involving
personal injury.

Liability of the Seller for Property Damage:

Article 5 does not exclude claims based on the CISG for property damage caused by goods or services
supplied by the seller.
Damages for property damage are recoverable under the CISG, and claims are subject to the
limitations in Article 74.

Domestic Law Claims

The question of whether domestic law claims for property damage are excluded depends on the CISG.
Domestic law claims for property damage are not automatically excluded, but the permissibility of
resorting to concurrent claims depends on whether the applicable law adopts the cumul rule or the
non-cumul rule. Most jurisdictions adopt the cumul rule, which is a rule that allows concurrence of
claims arising from the same facts, typically contract and tort claims, and allows parties to elect one or
more of the claims.
 Pre shipment – disha vn

UNIT 4
6. What are letters of credit? What are the different types?

A letter of credit, or "credit letter," is a letter from a bank guaranteeing that a buyer's payment
to a seller will be received on time and for the correct amount. In the event that the buyer is
unable to make a payment on the purchase, the bank will be required to cover the full or
remaining amount of the purchase. It may be offered as a facility.

Due to the nature of international dealings, including factors such as distance, differing laws in
each country, and difficulty in knowing each party personally, the use of letters of credit has
become a very important aspect of international trade.

Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit.
Because a letter of credit is typically a negotiable instrument, the issuing bank pays the
beneficiary, or any bank nominated by the beneficiary. If a letter of credit is transferable, the
beneficiary may assign another entity, such as a corporate parent or a third party, the right to
draw. The International Chamber of Commerce Uniform Customs and Practice for
Documentary Credits oversees letters of credit used in international transactions.

LETTER OF CREDIT
A letter of credit or LC is a written document issued by the importer’s bank (opening bank) on
importer’s behalf. Through its issuance, the exporter is assured that the issuing bank will make
a payment to the exporter for the international trade conducted between both the parties.

The importer is the applicant of the LC, while the exporter is the beneficiary. In an LC, the
issuing bank promises to pay the mentioned amount as per the agreed timeline and against
specified documents.

A guiding principle of an LC is that the issuing bank will make the payment based solely on
the documents presented, and they are not required to physically ensure the shipping of the
goods. If the documents presented are in accord with the terms and conditions of the LC, the
bank has no reason to deny the payment.

FEATURES / CHARACTERISTICS OF LETTER OF CREDIT

A letter of credit is identified by certain principles. These principles remain the same for all
kinds of letters of credit. The main characteristics of letters of credit are as follows:
1. Negotiability
A letter of credit is a transactional deal, under which the terms can be modified/changed
at the parties’ assent. In order to be negotiable, a letter of credit should include an
unconditional promise of payment upon demand or at a particular point in time.

2. Revocability
A letter of credit can be revocable or irrevocable. Since a revocable letter of credit
cannot be confirmed, the duty to pay can be revoked at any point of time. In an
irrevocable letter of credit, all the parties hold power, it cannot be changed/modified
without the agreed consent of all the people.

3. Transfer and Assignment

A letter of credit can be transferred, also the beneficiary has the right to transfer/assign
the LC. The LC will remain effective no matter how many times the beneficiary
assigns/transfers the LC.

4. Sight & Time Drafts

The beneficiary will only receive the payment upon maturity of letter of credit from the
issuing bank when he presents all the drafts & the necessary documents.

Types of Letters of Credit

The types of letters of credit include a commercial letter of credit, revolving letter of credit,
traveller’s letter of credit, and confirmed letter of credit.

1. Commercial Letter of Credit:

 This is a direct payment method in which the issuing bank makes the payments to the
beneficiary. In contrast, a standby letter of credit is a secondary payment method in
which the bank pays the beneficiary only when the holder cannot.

2. Revolving Letter of Credit:

This kind of letter allows a customer to make any number of draws within a certain
limit during a specific time period.

3. Traveller’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor drafts
made at certain foreign banks.

4. Revocable Letter of Credit

Revocable LC can be modified or revoked independently by the issuing bank or the
buyer without any notice. This type of LC works entirely in favour of the buyer. It is
rarely practiced in modern-day international trade as it does not provide any protection
to the beneficiary or the seller.

5. Irrevocable Letter of Credit

Irrevocable LC is more commonly used as compared to a revocable LC. Irrevocable
LC cannot be revoked or modified without the consent of the issuing bank, the
beneficiary, and the confirming bank. It is a safer option for the seller or exporter as it
assures that the amount mentioned in the LC will be paid if the submitted papers fulfill
the terms and conditions of the agreement. Irrevocable LC further has 2 types:
i. Confirmed Letter of Credit
Confirmed LC is an arrangement where another bank or financial institution
adds its guarantee to the LC. It is used when the seller does not trust the buyer’s
bank or the issuing bank. It gives added assurance to the seller, but the cost of
the LC also escalates. The issuing bank in international transactions typically
requests this arrangement.
ii. Unconfirmed Letter of Credit
Here, there is no added guarantee from another bank or financial institution.
An unconfirmed letter of credit only involves the buyer, the seller and the
 issuing bank or buyer’s bank. Mostly all letters of credit that are commonly
used are unconfirmed letters of credit.

6. Transferable Letter of Credit

Transferable LC is used when there is a middleman involved or where a company sells
the product of another company/producer. The first beneficiary requests the bank to
transfer the entire payment or part thereof to the second beneficiary. In this
arrangement, the first beneficiary is generally the middlemen or a company who sells
another’s products.

7. Un-transferable Letter of Credit

An un-transferable letter of credit cannot be transferred to another beneficiary. The
beneficiary as per the original letter of credit is the sole beneficiary and the document
cannot be further used to pay any other party.

8. Red Clause LC
In a Red Clause LC the seller or beneficiary is partly paid or is paid an advance before
the goods are shipped and after receipt of documents and a written confirmation from
the seller to the bank. This type of LC acts as an aid to the seller for his working capital
requirements for purchase of raw materials, packaging and processing of goods.

9. Green Clause LC
Green Clause LC is another type of Red Clause LC with some additional features. In
a green clause LC, the seller receives advance payment not only for purchasing raw
material, packaging and processing of goods but also for the cost incurred for pre-
shipment warehousing and insurance.

7. What are the liabilities of carriers of goods by sea under Hauge Visby rules? (5)
Shipping has always been the oldest mode of transport in India. It has also highly benefited
International Trade. In order to flourish International Trade, there must be an involvement in the
transaction of goods by sea between a buyer in one country and a seller in another country. The carrier
plays a very significant and important role in this contract and it is necessary to understand its
involvement in the marine contract in regard to his obligations and immunities.
Delivery of goods is one of the most significant obligations of carriers and a core issue of Carriages of Goods
by Sea. The carrier's obligations under the contract are to be discharged after the delivery of goods is complete.
The law governing the carrier's liability has existed for a considerable period. When goods are shipped on a
chartered vessel for a consignee they face specific difficulties in the incident if the cargo is lost or damaged.
Therefore, the carrier has to be identified as to who the cargo claims can be conducted and establish a defined
term in the contract of carriages

The Hague and Hague/Visby Rules define the “carrier" as including “the owner or the charterer who enters into
a contract of carriage with a shipper".
The carrier has also been identified as the person that has the name in the contract of Carriages of Goods by Sea
that concludes the shipper. The carrier can be clearly identified by a contract as being the ship-owner or the
charterer. However, in some situations, the carrier can either be the charterer, ship-owner, or sub-charterer. It is
all related to the circumstances and commercial position of the vessel.

The Indian Carriages of Goods by Seas Act, 1925 defines a carrier as the owner or the charterer who enters into
a contract of carriages with a shipper.

OBLIGATIONS AND LIABILITIES OF CARRIER (ARTICLE III of THE RULES)

The modern law regarding the laws of Carriages of Goods by Sea has a specific liability regime that is based on
the international conventions which have narrow equity for bargaining powers between the ship-owners or the
carriers and the cargo owners. The Brussel Convention of 1924 which is known as the Hague Rules later
amended by the Visby Protocol and now known as the Hague-Visby Rules of 1968 has been ratified by most of
the countries and based on this international regime the adaptation of national legislation

As said in Maxine Footwear Co Ltd v Canadian Marine Ltd, as per Art III R1 the carrier's duty starts at least
before the loading process till the time the voyage begins.

The main duty of a carrier is to issue a Bill of Lading, and exercise due diligence to keep the ship sea-worthy
and care for the goods without deviating from the agreed route.

Rule 1: The carrier shall be bound before and at the beginning of the voyage to exercise due diligence to:
i. Make the ship seaworthy.
ii. Properly man, equip, and supply the ship:
iii. Make the holds, refrigerating and cool chambers, and all other parts of the ship in which goods are
carried, fit and safe for their reception, carriage, and preservation.
Rule 2: Subject to the provisions of Article IV, the carrier shall properly and carefully load, handle, stow, carry,
keep, care for, and discharge the goods carried or agent

Rule 3: After receiving the goods into his charge, the carrier or the master of the carrier shall issue to the shipper
a bill of lading on demand of the shipper, showing,
i. The leading marks necessary for identification of the goods as the same are furnished in writing by the
shipper before the loading of such goods starts provided such marks are stamped or otherwise shown
clearly upon the goods if uncovered, or on the cases or coverings in which such goods are contained, in
such a manner as should ordinarily remain legible until the end of the voyage.
ii. Either the number of packages or pieces, or the quantity, or weight, as the case may be, as furnished in
writing by the shipper,
iii. The apparent order and condition of the goods

Rule 4: Such a bill of lading shall be prima facie evidence of the receipt by the carrier of the goods as therein
described. However, proof to the contrary shall not be admissible when the bill of lading has been transferred
to a third party acting in good faith.

Rule 5: The shipper shall be deemed to have guaranteed to the carrier the accuracy of the marks, number,
quantity, and weight, as furnished by him at the time of shipment, and the shipper shall indemnify the carrier
against all loss, damages, and expenses arising or resulting from inaccuracies in such particulars. The right of
the carrier to such indemnity shall in no way limit his responsibility and liability under the contract of carriage
to any person other than the shipper.

Rule 6: if the goods received are damaged or lost during transport, you must inform the carrier or their
representative in writing at the destination port either before or when you take custody of the goods. If the
damage is not immediately obvious, you have up to three days to report it. Failure to do so suggests that the
carrier delivered the goods as described in the shipping document.

Furthermore, if there's a concern about loss or damage, both the carrier and the receiver (the person receiving
the goods) should cooperate and provide reasonable assistance for inspecting and counting the goods. This helps
ensure transparency and resolution in case of any issues with the shipment.

Rule 7: After the goods are loaded, the bill of lading to be issued by the carrier, master, or agent of the carrier,
to the shipper shall, if the shipper so demands, be a "shipped" bill of lading, provided that if the shipper shall
have previously taken up any document of title to such goods, he shall surrender the same as against the issue
of the "shipped" bill of lading.
Rule 8: Any clause, covenant, or agreement in a contract of carriage relieving the carrier or the ship from liability
for loss or damage to, or in connection with, goods arising from negligence, fault, or failure in the duties and
obligations provided in this article or lessening such liability otherwise than as provided in these Rules, shall be
null and void and of no effect.

Exemptions –

1. The carrier is not liable for loss, damage or delay resulting from an act of the shipper or his agents,
servants and subcontractors, an inherent defect, quality or vice of the goods, (attempted) rescue or
salvage operations or a cause that could neither be prevented nor avoided.

2. The carrier cannot rely on the exemptions listed for loss, damage or delay attributable to defects in
the means of transportation, including defects in any container supplied by the carrier. The ‘catalogue
of exemptions’ in art 4.1 CGC is not a combination of all the exemptions under the different unimodal
conventions, but instead just a rather short list.

An error in navigation, for instance, is always avoidable, and the consequences thereof should therefore
remain for the account of the carrier. The occurrence of a ‘fire’ alone should not per definition exempt
the carrier from liability. This depends on the question of whether the cause of the fire could be
prevented or avoided.

The perils of the sea or an act of God will often be unavoidable, but surely not if the master obtains a
storm warning in advance. Mutatis mutandis the same then applies for the remaining exceptions. Since
these are exceptions to the general rule of art 3.1 CGC, the carrier bears the onus of proof of the
occurrence of one of the causes listed in art 4.1 CGC, the causal link between that cause and the loss,
damage or delay and, if required, the extent to which the exempted cause contributed to the loss, damage
or delay.

If the carrier succeeds, the onus of proof shifts to the shipper/consignee. Article 4.2 CGC stipulates that
the carrier remains liable if (and to the extent that) the shipper/consignee proves that the loss, damage
or delay is attributable to the use of a defective ship, train, truck, airplane or other means of
transportation. These defects also extend to containers. The carrier cannot escape liability if the loss,
damage or delay is attributable to the use of leaking containers or malfunctioning reefer containers that
he has supplied.
UNIT 5

8. What is the significance of foreign investment? (5)

Foreign investment involves capital flows from one country to another, granting the foreign investors
extensive ownership stakes in domestic companies and assets. Foreign investment denotes that
foreigners have an active role in management as a part of their investment or an equity stake large
enough to enable the foreign investor to influence business strategy. A modern trend leans
toward globalization, where multinational firms have investments in a variety of countries.

Direct vs. Indirect Foreign Investments

Foreign investments can be classified in one of two ways: direct and indirect. Foreign direct
investments (FDIs) are the physical investments and purchases made by a company in a foreign
country, typically by opening plants and buying buildings, machines, factories, and other equipment
in the foreign country. These types of investments find a far greater deal of favour, as they are
generally considered long-term investments and help bolster the foreign country’s economy.

Foreign indirect investments involve corporations, financial institutions, and private investors buying
stakes or positions in foreign companies that trade on a foreign stock exchange. In general, this form
of foreign investment is less favourable, as the domestic company can easily sell off their investment
very quickly, sometimes within days of the purchase. This type of investment is also sometimes
referred to as a foreign portfolio investment (FPI). Indirect investments include not only equity
instruments such as stocks, but also debt instruments such as bonds.

Other Types of Foreign Investment

There are two additional types of foreign investments to be considered: commercial loans and
official flows. Commercial loans are typically in the form of bank loans that are issued by a domestic
bank to businesses in foreign countries or the governments of those countries. Official flows is a
general term that refers to different forms of developmental assistance that developed or developing
nations are given by a domestic country.

Commercial loans, up until the 1980s, were the largest source of foreign investment throughout
developing countries and emerging markets. Following this period, commercial loan investments
plateaued, and direct investments and portfolio investments increased significantly around the globe.
Significance of Foreign Investment (5 Key Points)

Foreign investment, comprising Foreign Direct Investment (FDI) and Non-Direct Investment
(portfolio investment), holds immense significance in the global economy for several reasons:

1. Economic Growth and Development: Foreign investment can act as a catalyst for economic growth.
FDI, in particular, often involves substantial capital inflows, leading to increased production, job
creation, and overall economic development.

2. Technology Transfer: FDI serves as a crucial channel for technology transfer between nations.
When foreign companies invest in a host country, they often bring advanced technologies and know-
how, enhancing local industries' productivity and competitiveness.

3. Access to New Markets: Foreign investment enables businesses to access new markets and
consumers. Multinational corporations (MNCs) can establish subsidiaries or acquire local companies,
expanding their market reach and boosting international trade.

4. Employment Opportunities: FDI and other forms of foreign investment can lead to increased
employment opportunities in the host country, particularly beneficial for reducing unemployment
rates in developing nations.

5. Human Resource Development: Foreign investment contributes to the development of a skilled

workforce through training and knowledge sharing, enhancing the host country's human capital. This,
in turn, fosters long-term economic growth.

Types of Foreign Direct Investment (FDI)

Foreign direct investments can be categorized into four types:

1. Greenfield Investment: This involves establishing a new company or facilities abroad, providing a
high degree of control over foreign activities.

2. Mergers And Acquisitions: This entails transferring ownership of existing assets to a foreign
owner, either through merging two companies or acquiring one by another.
3. Horizontal Investments: It refers to setting up the same type of business in a foreign country as
operated in the home country. This occurs when multinational firms engage in similar production
activities in multiple nations.

4. Vertical Investments: This involves establishing or acquiring different but related business
activities in a foreign country, often fragmenting the production process across countries to reduce
costs. It can be forward (nearer to the market) or backward (towards raw materials).

5. Conglomerate Investments: In this type, a company or individual makes a foreign investment

unrelated to its existing home country business, often involving entry into a new industry or market.

6. Platform FDI: Businesses expand into a foreign country, but the output is primarily exported to a
third country, commonly occurring in low-cost locations inside free-trade areas.

Significance of FDI. IH2 DP SEC2RT

There are many ways in which FDI benefits the recipient nation:

i) Increased Employment: It is also one of the most important reasons why a nation, especially a
developing one, looks to attract FDI. Increased FDI boosts the manufacturing as well as the services
sector. This in turn creates jobs and helps reduce unemployment among the educated youth - as well
as skilled and unskilled labour - in the country. Increased employment translates to increased incomes
and equips the population with enhanced buying power. This boosts the economy of the country.

ii) Human Resource Development: Human Capital refers to the knowledge and competence of the
workforce. Skills gained and enhanced through training and experience boost the education and
human capital quotient of the country. Once developed, human capital is mobile. It can train human
resources in other companies, thereby creating a ripple effect.

iii) Higher Wages: FDI also promotes higher wages. Relatively higher skilled jobs would receive
higher wages.

iv) Development of Backward Areas: FDI enables the transformation of backward areas in a country
into industrial centers. This in turn provides a boost to the social economy of the area. The Hyundai
unit at Sriperumbudur, Tamil Nadu in India exemplifies this process.
v) Provision of Finance & Technology: Recipient businesses get access to the latest financing tools,
technologies, and operational practices from across the world. Over time, the introduction of newer,
enhanced technologies and processes results in their diffusion into the local economy, resulting in
enhanced efficiency and effectiveness of the industry.

vi) Exchange Rate Stability: The constant flow of FDI into a country translates into a continuous
flow of foreign exchange. This helps the country’s Central Bank maintain a comfortable reserve of
foreign exchange. This, in turn, ensures stable exchange rates.

vii) Stimulation of Economic Development: FDI is a source of external capital and higher revenues
for a country. When factories are constructed, at least some local labor, materials, and equipment are
utilized. Once the construction is complete, the factory will employ some local employees and further
use local materials and services. The people who are employed by such factories thus have more
money to spend. This creates more jobs. These factories will also create additional tax revenue for the
Government, that can be infused into creating and improving physical and financial infrastructure.

viii) Creation of a Competitive Market: By facilitating the entry of foreign organizations into the
domestic marketplace, FDI helps create a competitive environment, as well as break domestic
monopolies. A healthy competitive environment pushes firms to continuously enhance their processes
and product offerings, thereby fostering innovation. Consumers also gain access to a wider range of
competitively priced products.

ix) FDI provides Capital: Foreign Direct Investment is expected to bring needed capital to
developing countries. The developing countries need higher investment to achieve increased targets of
growth in national income. Since they cannot normally have adequate savings, there is a need to
supplement savings of these countries from foreign savings. This can be done either through external
borrowings or through permitting and encouraging Foreign Direct Investment. Foreign Direct
Investment is an effective source of this additional capital and comes with its own risks.

x) FDI removes Balance of Payments Constraint: FDI provides an inflow of foreign exchange
resources and removes the constraints on the balance of payment. It can be seen that a large number of
developing countries suffer from balance of payments deficits for their demand for foreign exchange,
which is normally far in excess of their ability to earn. FDI inflows by providing foreign exchange
resources remove the constraint of developing countries seeking higher growth rates.

xi) Technology, Management, and Marketing Skills: FDI brings along with it assets that are
crucially either missing or scarce in developing countries. These assets are technology and
management and marketing skills without which development cannot take place. This is the most
important advantage

What is foreign direct investment? Explain the trends in the international capital flows (3)

Automatic Route:
- Foreign Direct Investment (FDI) up to 100% is allowed in most sectors without needing special
permission.
- No prior approval is needed from the Indian government or the Reserve Bank of India for FDI in
these sectors.
- However, for sectors not covered under the automatic route, you must get approval from the Foreign
Investment Promotion Board (FIPB) before investing in India.

Government Route:
- If you want to invest in sectors not covered by the automatic route, you must get approval from the
Indian government, specifically from the Foreign Investment Promotion Board (FIPB).
- Companies in India that get foreign investment approval from FIPB don't need additional clearance
from the Reserve Bank of India for receiving foreign funds or issuing shares to non-resident investors.

Reporting and Timing:

- Any Indian company that receives FDI, whether through the automatic or government route, needs
to report this in a specific form called FC-GPR.
- This report includes details about the funds received for issuing shares, like shares, debentures, or
preference shares.
- You need to send this report, along with proof of the money coming in (Foreign Inward Remittance
Certificate or FIRC) and information about the foreign investors, to the Reserve Bank of India's
Regional Office within 30 days of receiving the foreign funds.
- Also, you must issue the equity instrument (like shares) within 60 days of getting the foreign money.
The Companies Act of 2013 says this.
- So, you should ideally file the FC-GPR report within this 60-day period.
- Once you've issued the shares or other instruments, you need to submit the required documents in
the FC-GPR form to the bank where you received the foreign funds.
- The bank will then forward these documents to the Reserve Bank of India's Regional Office.
In simple terms, if you want to invest money from abroad in India, you might need approval from the
government (Government Route) in some cases. For all investments, you need to report the details to
the Reserve Bank of India and issue the shares within a specific time frame, usually within 60 days.

Sectors where FDI is not allowed in India:

- FDI is not allowed in certain sectors in India, both under the Automatic Route and Government
Route. These sectors include:
- Lottery businesses, including government and private lotteries, online lotteries, etc.
- Gambling and betting, including casinos.
- Chit funds.
- Nidhi companies.
- Trading in Transferable Development Rights (TDRs).
- Real estate businesses or construction of farmhouses.
- Manufacturing of certain tobacco products.
- Activities/sectors not open to private sector investment, like atomic energy and railway operations,
except for permitted activities.

Note: Foreign collaborations, such as licensing for franchises, trademarks, brand names, or
management contracts, are also not allowed for lottery and gambling activities.

Procedure after investment:

- When a foreign investor invests in an Indian company, the Indian company must follow some steps:
- Within 30 days of receiving the investment, the Indian company needs to report to the Reserve
Bank of India's Regional Office. This report includes details like the investor's name and address, date
of funds received, and more.
- After issuing shares to the foreign investor, another report (Form FC-GPR) should be filed within
30 days with the Reserve Bank of India. This report includes documents related to the investment.
- If shares are not issued within 60 days, the investment amount should be refunded to the foreign
investor.

Filing FLA Return:

- Every Indian company that receives foreign investment has to file an Annual Return of Foreign
Liabilities and Assets by July 15th of each year.

Consequences of non-compliance:
- If someone or a company violates these rules, they can face penalties.
- The penalty can be up to three times the amount involved in the violation (if it can be quantified) or
up to two lakh rupees (if it can't be quantified).
- If the violation continues, there can be an additional penalty of up to five thousand rupees for each
day it continues.
- Alternatively, the person or company in violation can apply to the Reserve Bank for compounding
the violation, which means they can voluntarily seek to settle the matter by paying a penalty.

9. What is technology transfer agreement? Explain the modes of technology transfer. Discuss
the recent developments (4) and describe the legal requirement for technology transfer
agreements.

CONCEPTUAL FRAMEWORK OF TECHNOLOGY TRANSFER

Transfer of technology, as the expression itself connotes, means the conveyance of technology from
one entity to another. Such transfer could be commercial or non-commercial in nature.

Commercial transfer has its overall objective: the making of profit out of technological development.
Whereas non-commercial technology transfers are not strictly for commercial pursuits. It is mostly
done at the governmental level and commonly figures in international cooperation agreements
between developed and developing nations. Such agreements may relate to infrastructure or
agricultural development, or to international cooperation in the fields of research, education,
employment, or transport.

Another distinction as regards technology transfer could be made in the form of vertical and
horizontal transfer of technology.

- Vertical technology transfer represents a flow from laboratory research through developmental
stages and ultimately to commercialization.

- Horizontal technology transfer is essentially the transfer of established technology from one
operational environment to another.

Vertical technology transfer generally originates from individuals, researchers, research institutions
such as in universities and colleges, research laboratories, non-profit organizations, and government
agencies performing scientific research and development.
The United Nations Conference on Trade and Development (UNCTAD) strives to bridge the gap
between the developed, developing, and underdeveloped countries. TT is a major tool used by
UNCTAD particularly to improve the economy of developing countries. However, there are no
internationally accepted standards for technology transfer.

Most definitions of technology transfer do not consider the modes of transfer. Fransman (1986, p. 7)
defines the international ‘transfer of technology’ as a process “whereby knowledge relating to the
transformation of inputs into outputs is acquired by entities within a country (for example, firms,
research institutes, etc.) from sources outside that country”.

Despite its negative inference, UNCTAD (1990) implied the existence of different modes of technology
transfer when it defined it as: “the transfer of systematic knowledge for the manufacture of a product,
for the application of a process or for the rendering of a service and does not extend to the transactions
involving the mere sale or lease of goods”. There are numerous dimensions which can be used to
classify technology transfer. Criteria like vertical and horizontal; formal (market mediated) and
informal (non-market mediated); active or passive role of foreigners; embodied and disembodied;
degree of packaging; direct or indirect; institutional form (intrafirm/integration/investment, pure
market, sales and intermediate forms) can illuminate different aspects of the transfer process.

Also, the division of technology transfer among conventional channels such 20 International
Technology Transfer as foreign direct investments, licensing, joint ventures, franchising, marketing
contracts, technical services contracts, turnkey contracts and international subcontracting, and non-
conventional channels such as reverse engineering and reverse brain-drain, reveal some aspects of
transfer (UNCTC, 1987).

Undoubtedly there are many different classifications which place emphasis on different aspects of the
transfer process. Most attention has been devoted to the examination of formal channels of technology
transfer, that is, direct foreign investments, joint ventures, licensing. These are called formal channels
as technology is an explicit object of exchange.

The need to focus attention on non-market mediated and non-formal modes of technology transfer has
been recognized for some time (Fransman, 1986). By the end of the 1980s networks as a mode of
transfer between market and non-market began to gain in importance. These are embedded forms of
technology transfer, i.e. transfer which is embedded in long-term relationships like subcontracting, co-
operative alliances and other non-equity links.
DRAFTING OF INTERNATIONAL TRANSFER OF TECHNOLOGY AGREEMENTS

Drafting of international transfer of technology agreements, like other international agreements, is a

difficult exercise as it involves various issues which have implications for a long period of time.
Therefore, special emphasis has to be paid to drafting such contracts.

1. BACKGROUND AND RECITAL CLAUSES

Background and recital clauses are the opening clauses of a licensing agreement which provides for
the identity of the parties and manifest the basic purpose or the intention with which parties entered
into agreements. The parties to a contract use recitals to set out a series of statements that they regard
as useful before approaching the body of the contract. The recitals generally include statements
introducing the parties, the licensor's area of expertise and experience in relation to the subject matter
of the agreement, the licensee's needs and purpose for acquiring the technology, intentions as they
relate to the licensing, and their intention to be bound by the terms of the agreement.

2. DEFINITION AND INTERPRETATION CLAUSE

The basic purpose of the definition and interpretation clause is to bring parties to a mutually agreed-
upon meaning for certain contract terms, so as to avoid any future contradiction as to the meaning and
interpretation of any contract term. The terms to be defined in this clause essentially depend upon the
nature and type of the contract entered into. However, there are certain terms in international
commercial contracts which have been standardized to a large extent and they apply uniformly to all
business types. Such contract terms are called boilerplate clauses.

3. CHOICE OF LANGUAGE

Choice of language generally figures in those contracts where parties have different national
languages or languages of commerce. In such cases, it's quintessential that the authoritative
language/s should be decided beforehand. In choosing the language of the contract, consideration has
to be paid to the 'choice of law clause,' 'jurisdiction clause,' etc.

4. REPRESENTATIONS AND WARRANTIES

The representations and warranties clause is a declaration from the party conveying the technology
that it is free from any liens, security interest, or any other encumbrances, and the licensor, under the
provisions of the contract, is the rightful owner of the licensed technology. Further, it is also possible
to include an Indemnity Clause from the licensor to secure a situation of breach in regard to the
Representations and Warranties or where it is found to have been falsely made.

5. FINANCIAL OR PAYMENT AND ROYALTY CLAUSES

In cases where technology is licensed by a university or research institute or by an individual

wherefore along with the commercial exploitation, investment in R&D for further development of the
technology is also a motive, financial provisions are important. Under such situations, the purpose of
the transfer is usually to shift the financial burden for further development of technology from
licensor to licensee. Therefore, because of these reasons, proper drafting of financial clauses is
quintessential for a meaningful transfer of technology.

6. CHOICE OF LAW OR GOVERNING LAW CLAUSE

Choice of law is the most controversial and complex clause in transfer of technology agreements.
International transfer of technology agreements generally involves parties from diverse legal systems
governing the contract. In such a situation, it is imperative for the parties to decide upon the governing
law in regard to the enforcement of the contract, along with deciding upon the forum which has to be
approached in case a dispute arises. The governing law is important as it establishes the rules of
interpretation, validity, and performance of the agreement, as well as the consequences and
corresponding obligations upon the breach of the agreement.

7. PROVISION REGARDING FURTHER DEVELOPMENT AND COMMERCIAL

EXPLOITATION OF THE LICENSED TECHNOLOGY

Provision regarding further exploitation of technology generally figures in vertical transfer of

technology where technology flows from the laboratory or individual to an industry. The main motive
behind such transfer is to commercially exploit technology together with further development and
improvement of it.

8. TERM AND TERMINATION CLAUSE

The term and termination clause define the length of time during which the contract will continue. A
license agreement will state that the term will begin, and the obligations of the parties will take effect
on its effective date and will continue until the date on which the licensee's obligations to pay
royalties expire.
Modes of Transfer

All transfer models can be divided into two major categories. The first category is passive and the
second is active. This classification refers to the level of activity in applying the technology in the
transfer process.

If the technology transfer mechanism presents the technology to the potential user, without assistance
regarding it's application, then the mode is said to be passive. In the passive mode only the knowledge
part of technology is transferred.

The skills surrounding the technology are not transferred. These mechanisms can include presentations
in a report. If, on the other hand the provider of the technology assists with the application of the
technology, then the mode is said to be active. These mechanisms include training, etc. The boundaries
between passive and active are not easy to define and therefore a semi-active mode is also defined.

Passive Mode

The most widely used mechanism in the passive mode is the instruction manual or "cookbook"
approach. This is the only contact between the originator of the technology and the user. Millions of
products are made and sold with transfer occurring in this form. Just think of one's own motor car.
These self-teaching manuals used in this mode all have one thing in common: they presume that the
user has some level of knowledge and competence in the specific technological area.

It is an important point in this mode of transfer. A mechanic can assemble a component perfectly from
an instruction manual. This becomes more intricate when we think of other technologies like
glassblowing, sheet metal work and woodwork. In these areas the skill that lies with the user must be
far greater. This is important to keep in mind if you want to transfer technology. The skill resting in the
user of the technology must be clearly defined by the originator, because this will have a definite impact
on the success of the transfer process.

If you give someone who does not know how to drive a motor car, that technology, it will be useless to
the person, because it cannot be used.

Semi-Active Mode'
In the semi-active mode there is intervention from a third party in the transfer process. This is usually
in the form of a transfer agent. In the semi-active mode the role of the transfer agent is limited to that
of adviser. Very often in the semi-active mode, the transfer agent only screens information in the
relevant field of interest and passes it on to the final user.

He therefore ensures the relevance of the information, because of his knowledge, not only about the
user's needs, but also because of his knowledge about the technology. The role of the transfer agent is
therefore one of communicator between the technology and the user. If his role is beyond this, then the
mode of transfer becomes active.

The most widely used source of technical information is in the form of written technical documentation
and therefore the passive mode of transfer is the most widely used. Because of this, care should be taken
in the writing of these documents.

Very often data banks and published material are searched in order to obtain information on relevant
subjects. Experience has shown that what the first would-be user wants to read is a non-technical
description of the technology. Because the reader will be trained in one or more technical disciplines,
it will be easy for him to judge the relevance of the document. Because of the increasing amount of data
this becomes more relevant.

This is a time-consuming effort and often it is 'outsourced' to a transfer agent. He will then be
responsible for identifying relevant information and transfering it to the user. The transfer agent can be
in the form of one or several people working in a team, each within their own field of expertise.

An additional benefit of using a transfer agent, is that the user of the technology may have interpreted
the problem incorrectly and this is leading them along the wrong path in their search for a solution.
Here the agent can be of help because of his knowledge of the user's needs.

The passive and semi-active modes are therefore recognized by the fact that no third party participates
in the application of the technology. Only limited assistance in identifying relevant technologies is
experienced in the semiactive mode.

Types of Technology Transfer Agreements (for 6 Marks)

Technology transfer agreements help bridge the gap between companies, research institutions, and
entrepreneurs, facilitating the utilization and commercialization of valuable intellectual assets. Some
common types of technology transfer agreements are as follows:
• Licensing Agreements: Licensing agreements play a fundamental role in transferring
technology and intellectual property. These contracts involve the licensor presenting the
licensee with the ownership to use, create, or sell a specific technology. They can be exclusive
or non-exclusive, deciding whether the licensee has exclusive rights or if multiple parties can
access the technology. Also, essential elements of licensing agreements comprise the license
scope, royalty payments, ensuring quality control, confidentiality, and specifying mechanisms
for settling disputes.
• Research and Development (R&D) Agreements: Research and Development contracts
facilitate cooperation between research institutions, academic organizations, and private
companies in collaborative research and growth activities. These agreements summarize the
collaboration provisions, including cost and revenue sharing, ownership of resulting intellectual
property, publication ownership, and the agreement's terms. They promote expertise,
knowledge, and resource sharing to develop the latest technologies or improve existing ones.
• Joint Venture Agreements: Joint venture agreements involve the creation of a separate legal
entity by numerous individuals to jointly develop, manufacture, market, or distribute a
technology or product. These agreements leverage the strengths and resources of all
participants. Key aspects covered in joint venture agreements include ownership structure,
profit sharing, decision-making processes, technology transfer terms, and mechanisms for
resolving disputes. They enable risk-sharing and provide opportunities to access new markets
or capabilities.
• Manufacturing and Distribution Agreements: Manufacturing and distribution agreements
focus on transferring technology for producing and commercializing a specific product. These
agreements enable the technology owner to license manufacturing and distribution rights to
another party with the necessary capabilities and resources. Important considerations within
these agreements encompass quality control, pricing, volume requirements, intellectual
property protection, termination clauses, and exclusivity arrangements.
• Franchise Agreements: Franchise agreements are a distinctive type of technology transfer
contract where the franchisor allows the franchisee to run a business using the franchisor's
specified industry model, trademark, and technology. These agreements summarize the
provisions for using intellectual property, obtaining training and support, territorial ownership,
financial responsibilities, advertising provisions, and the duration of the franchise. Franchise
agreements streamline rapid business expansion and market penetration while guaranteeing
brand consistency.
• Material Transfer Agreements (MTAs): Material transfer agreements facilitate the exchange
of tangible research materials, such as biological samples, chemicals, or prototypes, between
organizations for research or development purposes. These agreements specify the recipient's
rights and obligations, including restrictions on use, ownership of resulting intellectual
 property, publication requirements, confidentiality, liability, and provisions for returning or
destroying the materials. MTAs are commonly used in scientific collaborations and technology
development projects.

10. Discuss the various factors affecting international investment. (4)

foreign direct investment (FDI) means companies purchase capital and invest in a foreign country. For
example, if a US multinational, such as Nike built a factory for making trainers in Pakistan; this
would count as foreign direct investment.
In summary, the main factors that affect foreign direct investment are
◦ Infrastructure and access to raw materials
◦ Communication and transport links.
◦ Skills and wage costs of labour
◦
Factors affecting foreign direct investment WLTTSPCECA
1. Wage rates
A major incentive for a multinational to invest abroad is to outsource labour intensive production to
countries with lower wages. If average wages in the US are $15 an hour, but $1 an hour in the Indian
sub-continent, costs can be reduced by outsourcing production. This is why many Western firms have
invested in clothing factories in the Indian sub-continent.
• However, wage rates alone do not determine FDI, countries with high wage rates can still attract
higher tech investment. A firm may be reluctant to invest in Sub-Saharan Africa because low wages
are outweighed by other drawbacks, such as lack of infrastructure and transport links.

2. Labour skills
Some industries require higher skilled labor, for example pharmaceuticals and electronics. Therefore,
multinationals will invest in those countries with a combination of low wages, but high labour
productivity and skills. For example, India has attracted significant investment in call centres, because
a high percentage of the population speak English, but wages are low. This makes it an attractive
place for outsourcing and therefore attracts investment.

3. Tax rates
Large multinationals, such as Apple, Google and Microsoft have sought to invest in countries with
lower corporation tax rates. For example, Ireland has been successful in attracting investment from
Google and Microsoft. In fact it has been controversial because Google has tried to funnel all profits
through Ireland, despite having operations in all European countries.
4. Transport and infrastructure
A key factor in the desirability of investment are the transport costs and levels of infrastructure. A
country may have low labour costs, but if there is then high transport costs to get the goods onto the
world market, this is a drawback. Countries with access to the sea are at an advantage to landlocked
countries, who will have higher costs to ship goods.

5. Size of economy / potential for growth

Foreign direct investment is often targeted to selling goods directly to the country involved in
attracting the investment. Therefore, the size of the population and scope for economic growth will be
important for attracting investment. For example, Eastern European countries, with a large population,
e.g. Poland offers scope for new markets. This may attract foreign car firms, e.g. Volkswagen, Fiat to
invest and build factories in Poland to sell to the growing consumer class. Small countries may be at a
disadvantage because it is not worth investing for a small population.
China will be a target for foreign investment as the new emerging Chinese middle class could have
very strong demand for the goods and services of multinationals.

6. Political stability / property rights

Foreign direct investment has an element of risk. Countries with an uncertain political situation, will
be a major disincentive. Also, economic crisis can discourage investment.
For example, the recent Russian economic crisis, combined with economic sanctions, will be a major
factor to discourage foreign investment. This is one reason why former Communist countries in the
East are keen to join the European Union. The EU is seen as a signal of political and economic
stability, which encourages foreign investment.
Related to political stability is the level of corruption and trust in institutions, especially judiciary and
the extent of law and order.

7. Commodities
One reason for foreign investment is the existence of commodities. This has been a major reason for
the growth in FDI within Africa - often by Chinese firms looking for a secure supply of commodities.

8. Exchange rate
A weak exchange rate in the host country can attract more FDI because it will be cheaper for the
multinational to purchase assets.
However, exchange rate volatility could discourage investment.
9. Clustering effects
Foreign firms often are attracted to invest in similar areas to existing FDI. The reason is that they can
benefit from external economies of scale - growth of service industries and transport links. Also, there
will be greater confidence to invest in areas with a good track record. Therefore, some countries can
create a virtuous cycle of attracting investment and then these initial investments attracting more. It is
also sometimes known as an agglomeration effect.

10. Access to free trade areas.

A significant factor for firms investing in Europe is access to EU Single market, which is
a free trade area but also has very low non-tariff barriers because of harmonisation of rules,
regulations and free movement of people. For example, UK post-Brexit is likely to be less attractive
to FDI, if it is outside the Single Market.
Evaluation
There are many different factors that determine foreign direct investment (FDI) and it is hard to
isolate individual factors, given there are many different variables. It also depends on the type of
industry. For example, with manufacturing FDI, low wage costs tend to be the most important, as they
are a labour intensive industry. For service sector FDI, macro-economic stability and political
openness tend to be more important.
Also, it depends on the source of FDI, American firms may value political openness more than
Chinese firms. Or American firms may have a preference for countries where English is spoken more.

6m

UNCTAD (6)- history

The United Nations Conference on Trade and Development (UNCTAD) is the UN’s leading
institution dealing with trade and development. It is a permanent intergovernmental body
established by the United Nations General Assembly in 1964. UNCTAD supports developing
countries to access the benefits of a globalized economy more fairly and effectively.
It provides economic and trade analysis, facilitates consensus-building and offer technical
assistance to help developing countries use trade, investment, finance and technology for
inclusive and sustainable development.
History of UNCTAD
The UNGA called upon for a joint action of developing countries from Asia, Africa and South
America was the Conference on problem of developing countries, held in Cairo in July 1962
to discuss the international conference within the framework of the UN on all ‘’ vital questions
related to international trade, primary commodity trade and economic relations between
developed and developing countries. Later, in the same year, the UNGA decided to convene a
conference on trade and development, and established a preparatory committee for it, which
eventually lead to the formation of UNCTAD.

Initial Period: the 1960’s and the early 70’s

UNCTAD I
The Historic conference was held from 26 March to 6 June 1964, and attended by the
representatives of 120 countries. There was an agenda of six items which were the following;
Ø Expansion of International Trade and its significance for economic development
Ø International Commodity Problems
Ø Trade in Manufacturers and Semi Manufacturers
Ø Improvement of invisible trade of developing countries
Ø Implications of regional economic groupings
Ø Institutional arrangements to expand international trade.

UNCTAD II (New Delhi)

Certain points known as the “points of crystalization” were discussed for adoption of concrete
measures in UNCTAD II such as manufacturers, financing, shipping, commodity policy etc.

UNCTAD III (Santiago, 1972)

The basic mission of UNCTAD III was to promote the implementation of the most essential
objectives and commitments of the International Development Strategy for the Second UN
Development Decade.

The period of systematic turbulence, the 1970’s:

UNCTAD IV (1976, Nairobi)
By the time UNCTAD IV took place, the price of the commodities fell down. The conference
was mainly dominated on the discussions for Integrated Programe for Commodities (IPC).

UNCTAD V (1979, Manila)

At UNCTAD V, an attempt was made by the developing countries to initiate wide range
negotiations primarily on the line of the New International Economic Order.

The “second cold war” and the global recession: the 1980’s:
UNCTAD VI (1983, Belgrade)
An attempt was made to revive with “North South Dialogue” to reactivate development in the
south and reinforcing industrial recovery in the industrialized countries.

UNCTAD VII (1987,Geneva)

Constitution of a Common Fund for Commodities and Global System of Trade Preferences

Global Uncertainty: period from mid-1980’s to mid-1990’s:

UNCTAD VIII
Discussed on how to meet the large and growing financial needs of the transition countries
without diverting development resources.

Period of Reform: Mid 1990 Onwards:

UNCTAD IX (1996)
The main theme of UNCTAD IX was the opportunities and dangers that globalization and
liberalization posed for sustainable development. The conference confirmed the responsibility
of each country for its own development and the supremacy of market principle in managing
economies.
UNCTAD X (2000, Bangkok)
The Conference discussed about various developmental strategies which in major discussed
about economic globalization.

From UNCTAD XI held at Sao Paulo in 2004 onwards, UNCTAD has continued to play a
crucial role in emphasizing development in International Trade and Investment.

Structure of UNCTAD
The Conference
Periodic Sessions held in every 4 years. There have been 15 conferences as of now.

The Trade and Development Board (TDB)

To carry out the functions of conference between sessions, a 55 member TDB was established
as the executive body of the Conference, to take action in implementing Conference decisions
and to ensure overall consistency of UNCTAD’s activities with agreed priorities

UNCTAD Secretariat
The principle activities of the UNCTAD Secretariat are to service the conference, the TDB and
the deliberations of any subsidiary bodies. They are also engaged in technical cooperation and
research.
It consists of four divisions. They are;
• Division on globalization and development strategies
• Division in International Trade in Goods, Services and Commodities
• Division on Investment, Technology and Enterprise Development
• Division for Services Infrastructure for Development and Efficiency
UNCITRAL (4)
The United Nations Commission on International Trade Law is the core legal body of the
United Nations system in the field of international trade law. A legal body with universal
membership specializing in commercial law reform worldwide for over 50 years,
UNCITRAL's business is the modernization and harmonization of rules on international
business.
The United Nations Commission on International Trade Law (UNCITRAL) was established
by the General Assembly in 1966 (Resolution 2205(XXI) of 17 December 1966). In
establishing the Commission, the General Assembly recognized that disparities in national laws
governing international trade created obstacles to the flow of trade, and it regarded the
Commission as the vehicle by which the United Nations could play a more active role in
reducing or removing these obstacles.

The Commission carries out its work at annual sessions, which are held in alternate years at
United Nations Headquarters in New York and at the Vienna International Centre at Vienna.
Each working group of the Commission typically holds one or two sessions a year, depending
on the subject-matter to be covered; these sessions also alternate between New York and
Vienna. In addition to member States, all States that are not members of the Commission, as
well as interested international organizations, are invited to attend sessions of the Commission
and of its working groups as observers. Observers are permitted to participate in discussions at
sessions of the Commission and its working groups to the same extent as members.

Activities of UNCITRAL

UNCITRAL is
• Coordinating the work of active organizations and encouraging cooperation among them.
• Promoting wider participation in existing international conventions and wider acceptance of
existing model and uniform laws.
• Preparing or promoting the adoption of new international conventions, model laws and
uniform laws and promoting the codification and wider acceptance of international trade terms,
provisions, customs and practice, in collaboration, where appropriate, with the organizations
operating in this field.
• Promoting ways and means of ensuring a uniform interpretation and application of
international conventions and uniform laws in the field of the law of international trade.
• Collecting and disseminating information on national legislation and modern legal
developments, including case law, in the field of the law of international trade.
• Establishing and maintaining a close collaboration with the UN Conference on Trade and
development. • Maintaining liaison with other UN organs and specialized agencies concerned
with international trade.

Technical barriers to trade. (2)

Tariff & Quotas (4)

Pre-shipment inspection. (3)
Disha’s vn

Bound 4

The World Trade Organisation stands for the removal or reduction of trade barriers. It identifies
two important trade barriers – quota and tariff. Quota is a trade policy tool where a country
stipulates that only a limited quantity of a particular commodity can be imported during a year.

According to WTO, quota is more dangerous than tariff as it restricts the quantity of imports
severely. Hence WTO asks members to remove quota and impose tariff up to a permissible
level. This permissible maximum level is often referred as bound rate. Bound rate is the
maximum rate of duty (tariff) that can be imposed by the importing country on an imported
commodity.

Here, each country commits itself to a ceiling on customs duties (tariff) on a certain number of
products. These rates vary from country to country and commodity to commodity. But no
country can raise duties above the bound rate it has committed, and the rate of customs duty
actually applied may be lower than the bound rate. For a member country like India, the bound
rate will be maximum for the commodities it produces less or in which India is not a prominent
producer. On the other hand, the bound rate will be low if India is a major producer of a
commodity. The purpose of setting such a tactic is to compel countries to reduce tariff and
promote trade. For example, if India is a net importer of a commodity its bound rate will be
high. But India will not impose such a high rate as it will injure the consumers.

The Bound tariff rate is the most-favored-nation tariff rate resulting from negotiations under
the General Agreement on Tariffs and Trade (GATT) and incorporated as an integral
component of a country’s schedule of concessions or commitments to other World Trade
Organization members. If a country raises a tariff to a higher level than its bound rate, those
adversely affected can seek remedy through the dispute settlement process and may obtain the
right to retaliate against an equivalent value of the offending country’s exports or the right to
receive compensation, usually in the form of reduced tariffs on other products they export to
the offending country.

Bill of lading 4
Carriage by rail 4

Import export licensing 3

Investment of NRIs in India. (8)

A non-resident Indian (NRI) has a unique position under the Indian foreign investment law.
This
is natural considering the important role an NRI can play in the development of India through
investments. The link that an NRI has with India has led to a number of investments in India
by
NRIs since liberalization.

The focus of Indian policy has been therefore to encourage NRI investment. Certain checks
have
also been placed on such investment to ensure the fairness of all transactions with Indian
assets.
The Foreign Exchange Management Act, 1999 (FEMA), Regulations issued there under (the
Regulations), the Foreign Direct Investment Policy of the Ministry of Commerce (the FDI
Policy) and the Master Circular issued by Reserve Bank (the Master Circular) govern all
forms
of foreign investment in India. The FDI Policy is reissued every 6 months while the Master
Circular is reissued annually.

Non-Resident Indian (NRI) means a person who has gone out of India or who stays outside.
India, in either case for or on taking up employment outside India, or for carrying on outside.
India a business or vocation outside India, or for any other purpose, in such circumstances as
Would indicate his intention to stay outside India for an uncertain period. Simply, it means a
person resident outside India who is a citizen of India or is a Person of Indian Origin. (As per
Notification No. FEMA 5/2000-RB dated May 3, 2000).

An NRI:
(i) is an individual;
(ii) is a person resident outside India;
(iii) has been or is an Indian citizen or a person of Indian origin (PIO). A person includes an
individual.

A person resident outside India is any person who is not resident in India. A person resident in
India is any person residing in India for more than 182 days during the course of the
preceding
financial year but does not include a person who has gone out of India to pursue employment
or
do a business or for any other purpose, in such circumstances as would indicate his intention
to
stay outside India for an uncertain period.

NRIs can invest in India as under:

1. Investment under Automatic Route with repatriation benefits
2. Investment with Government approval
3. Other investments with repatriation benefits
4. Investments upto 100% equity without repatriation benefits
5. Other investments by NRIs without repatriation benefits.

1 AUTOMATIC ROUTE OF RBI WITH REPATRIATION BENEFITS

NRIs can invest in shares/convertible debentures of Indian companies under the Automatic
Route without obtaining Government or RBI permission except for a few sectors where FIPB
permission is necessary, or where the investment can be made only upto a certain percentage
of
paid up capital.

2 INVESTMENT WITH GOVERNMENT APPROVAL

Investments not eligible under the Automatic Route, are considered by the Foreign
Investment Promotion Board (FIPB), a high Powered inter-ministerial body under the
chairmanship of Secretary, Department of Economic Affairs, subject to sectoral limits/norms.
These investments also enjoy full repatriation benefits.

3 OTHER INVESTMENTS WITH REPATRIATION BENEFITS

1. Investment in units of domestic mutual funds
2. Investment in bonds issued by public sector undertakings
3. Purchase of shares of public sector enterprises being disinvested by GOI.
4. Investment in government dated securities (other than bearer securities) or Treasury Bills
5. Investment in Non-Convertible Debenture

4 INVESTMENT UPTO 100% EQUITY WITHOUT REPATRIATION BENEFITS

1. Capital contribution to any proprietary or partnership concern:

NRIs can invest by way of capital contribution in any proprietary or partnership concern in
India
provided the firm or the proprietary concern is not engaged in any agricultural/plantation
activities or real estate business or print media on non-repatriation basis subject to certain
conditions.

2. New issues of shares/debentures of Indians companies:

NRIs have been granted general permission to subscribe to the shares/convertible debentures
of
an Indian company on non-repatriation basis, and general permission is also available to an
Indian company to issue shares or convertible debentures by way of new/rights/bonus issue to
NRIs on non-repatriation basis provided that the investee company is not a chit fund or a Nidhi
company or is not engaged in agricultural/plantation activities or real estate business (real estate
business excludes business of township, construction of residential /commercial premises,
roads,
bridges etc.) or construction of farm houses or dealing in Transfer of Development Rights.

5. OTHER INVESTMENTS BY NRIs WITHOUT REPATRIATION BENEFITS

(i) Investment in Non-Convertible Debentures

(ii) Money Market Mutual Funds
(iii) Deposits with companies
(iv) Commercial Papers
(v) Investment in Non-Convertible Debentures by way of public issue in listed company

Foreign collaboration and investment policy in India (5)

tasks collectively with the participation of the resident and non-resident entities. The
central concept of foreign collaboration is joint participation between host and foreign
countries for the establishment of an organic form of enterprise in the host country
involving profit-seeking relationships. It is an inflow of foreign capital and technology
for the host country which is backed by commercial considerations of profit and private
expectations.

CLASSIFICATION OF FOREIGN COLLABORATION

As no country is self-sufficient, all countries are reliant on one another to satisfy their needs.
Interdependence between countries is a common phenomenon. A foreign partnership is
extremely beneficial in addressing resource shortages and obtaining advanced technology at a
low cost.

Due to the consequences of liberalization, privatization, and globalization, foreign

participation in the Indian market is rapidly rising. Indian companies are interested in foreign
counterparts since the foreign market may provide them with technical and market expertise.

1. Financial Collaboration: The in-flow of foreign investment takes place in the

host country. The foreign company lends finance by:
• Purchasing ownership shares
• Giving long-term loans
• Giving credit facility
2. Technical Collaboration: The inflow of foreign technology takes place in a
foreign country. Integration of foreign technology with domestic technology.
Various services are provided by the foreign company such as professional
services and expertise, installation of automated machinery in developing
 countries, and many more. Helps to remove the existing technological gap and
inflow of modern technology in the domestic country.
3. Marketing Collaboration: The in-flow of foreign goods and services takes
place in the host country. Integration of the foreign and the domestic market.
The foreign country agrees to take part in the sale of goods by the domestic
country.
4. Management Consultancy Collaboration: The in-flow of foreign
management consultancy takes place in the domestic country. Provide training
or teaches various management skills for production, financing, marketing, and
personnel management.

FOREIGN COLLABORATION IN INDIA

In India, foreign collaboration agreements are being made between Indian and foreign
companies through the sale of technology, spare parts, and the use of foreign brand names for
its final products. Foreign capital in India is governed by the Foreign Exchange Management
Act, 1999 and rules and regulations made by RBI.

FOREIGN COMPANIES MAY TAKE PLACE IN THREE FORMS:

1. Collaboration between the Indian and Foreign private companies;

2. Collaboration between the Indian government companies and foreign private
companies;
3. Collaboration between the Indian Government and a foreign government.

Government Policy of Foreign Collaboration:

The policy followed by the Government of India on Foreign Collaboration and foreign

private investment is based mainly in the approach adopted in 1949. The basic policy

followed is to welcome foreign private investment on a selective basis in those areas which

are advantageous to the Indian economy. The conditions under which foreign capital or

foreign collaboration is welcome include.

(i) All undertakings (Indian or Foreign) have to conform to the general requirements of the

Industrial polity of the Government.

(ii) Foreign enterprises are to be treated at par with their Indian counterparts.

(iii) Foreign enterprises were given freedom to remit profits and repatriate capital, subject to

foreign exchange considerations.

The Industrial Policy 1991 prepared a specified list of high technology and high investment

34 priority industries (Annexure III) in which automatic permission will be available for

foreign direct investment up to 51 per cent foreign equity. Thus this new policy faced Indian

industries from official controls for fully exploiting opportunities for promotion of foreign

investment.

Thus it is felt that foreign investment and foreign collaboration would bring advantages of

technology transfer, marketing expertise, product diversification, introduction of modern

managerial techniques and new possibilities for export promotion for Indian Industries.

Procedure for Setting up Foreign Collaboration:

As per the Government Policy and Foreign Exchange Laws prevailing in India, proposals for

foreign investment and technical collaborations would require Government approval. Later

on, with adoption on New Industrial Policy, 1991 and subsequent amendments of laws

regulating foreign collaborations and industry, this procedure has been simplified further.

With the enactment of FEMA, foreign collaborations and investments have become much

more easier.

Investment and Policy of Foreign Collaboration:

In recent years, lot of changes have been brought in the foreign investment and foreign

collaboration policy for creating a more favourable fiscal environment for foreign

collaborations and investment virtually in every sector of the economy excepting those

selective industries reserved for the public sector.

The obstacles that once stood in the path of foreign collaborations are becoming thing of the

past. The procedures for approval from the Government are now being simplified

continuously in order to make foreign investments more attractive and beneficial.

Foreign Collaboration and MNCs:

In India, collaboration with Indian industrialists is a common form of participation of MNCs

in Indian industry. In India, foreign collaboration agreements are being made between Indian

and foreign companies through its sale of technology, spare parts and use of foreign brand

names for its final products.

In India, almost all the new industries in the large and medium scale category, set up in the

post-independence period, had some foreign collaboration agreement.

During 1980s, liberalisation process resulted a considerable spurt in foreign collaborations.

Accordingly, out of the total 12,760 foreign collaboration agreements approved during the

period between 1948 and 1988, 6,165 agreements (i.e., 48.3 per cent) were approved during

the period between 1981 and 1988.

Again with the liberalisation of foreign investment policy announced during the post-1991

period, the number of foreign collaborations in India increased considerably.

During the period from August 1991 to November 1993, total number of foreign

collaboration proposals approved by the Government was 3,467, including 1,565 proposals of

foreign equity valued as Rs 122.9 billion. Again during the period 1991 to 2005, total actual

inflows of Foreign Direct Investments was to the extent of $32.29 billion (Rs 1,31,385 crore)

and till 2013-14, total inflow of FDI stood at $ 173.28 billion.

Favourable Impact of Foreign Collaboration:

Foreign Collaborations have some favourable impacts on Indian economy. Initially, Indian

industries were concentrated on consumer goods sector only. Foreign collaborations in Indian

industry have helped the sector to diversify its production spectrum which includes steel,

light and heavy engineering, petroleum refinery, man-made fibre manufacture, automobile,

chemical, pharmaceuticals and several other types of industrial products.

Without the support of technical knowhow and skills made available from foreign companies

through such foreign collaborations approvals, the development of such basic industries

would have been difficult. Thus the gain from foreign collaboration in Indian industries is

realised both in terms of increase in physical output, training of technicians, technology

transfer and development of skills of modern management.

Overseas corporate bodies. And their investment (4)