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What is an LC (Letter of Credit)?

A Letter of Credit (LC) is a document issued by a bank that guarantees payment to a seller on behalf of a buyer, provided that certain conditions are met. This financial instrument ensures payment security and mitigates risks associated with cross-border transactions. The issuance of an LC involves specific conditions, like the submission of required documents, which the bank reviews before releasing funds. It provides bank guarantees and incurs fees that are essential for its operation.

Examples of Letters of Credit

International Trade Example: A U.S. company wants to buy machinery from an Indian exporter. The U.S. company requests its bank to issue an LC to the Indian exporter. Once the exporter ships the machinery and presents the required documents to their bank, they receive payment from the issuing bank, ensuring trust and mitigating payment risk.

Domestic Transaction Example: A large retail chain uses an LC to purchase inventory from a local supplier. The LC guarantees that the supplier will receive payment as soon as they fulfill the delivery conditions outlined in the agreement.

Basics of a Letter of Credit Transaction

Applicant

The buyer who requests the LC from their bank. They initiate the process by applying for the LC and specifying the terms and conditions of the trade.

Beneficiary

The seller who receives payment through the LC. They must present all required documents correctly to receive payment.

Issuing Bank

The bank that issues the LC on behalf of the applicant. They verify the buyer's creditworthiness and commit to making the payment when conditions are met.

Negotiating Bank

The negotiating bank in LC that examines documents presented by the beneficiary and facilitates payment. They ensure all paperwork matches LC requirements perfectly.

The process begins when the applicant approaches their issuing bank for an LC. The issuing bank then coordinates with the negotiating bank to establish terms and verify documents before releasing any funds.

Importance of Letters of Credit

Secure Payments

They ensure that sellers receive payments without requiring advance payments, reducing risk for both parties involved in the letter of credit.

Facilitate Cross-Border Transactions

LCs simplify complex international transactions by providing a standardised payment mechanism across different countries.

Secure Business Funding

They provide businesses with necessary funding while verifying creditworthiness, helping companies maintain healthy cash flow.

Financial Assurance

LCs offer security when buyers cannot pay, acting as a guarantee backed by reliable banking institutions.

Advantages of Letters of Credit

Ease International Trade: Simplifies complex transactions across borders by providing a structured framework for payment and documentation.

Foster Global Business Connections: Builds trust between trading partners by removing payment uncertainty and providing bank-backed guarantees.

Provide Flexibility: Customisable terms to suit various transaction needs, including payment timing, shipping requirements, and document presentation.

Parties to Documentary Credit

Commercial/Trade Parties: The buyer and seller form the core of the transaction, initiating and completing the trade deal.

Banks: Issuing and advising banks serve as intermediaries ensuring secure payment and proper documentation.

Related Entities: Shipping lines and insurers support the transaction by handling logistics and risk management aspects.

Types of a Letter of Credit

Sight Credit

A Sight Credit allows instant payment upon presenting the correct documents, providing immediate access to funds for sellers. For example, if a businessman needs quick access to cash after shipping goods, they can use this type of credit.

Acceptance Credit/Time Credit

Acceptance or Time Credit involves bills that are accepted upon presentation and paid on specified due dates. This type allows sellers to receive payments after a set period.

Revocable Letter of Credit

A Revocable Letter of Credit can be canceled or modified by the issuing bank without beneficiary consent, which limits its reliability in ensuring secure transactions.

Irrevocable Letter of Credit

An Irrevocable Letter of Credit guarantees payment once certified by the exporter’s bank. This type provides security for international transactions and is often preferred by exporters due to its reliability.

Confirmed Letter of Credit

A Confirmed Letter of Credit involves both issuing and confirming banks. The confirming bank guarantees payment to the beneficiary, holding equal liability as the issuing bank, ensuring that payments will be honored upon proper presentation.

Back-to-Back Letter of Credit

This type involves issuing a second LC based on the security provided by the first LC. It is commonly used to secure payments for suppliers in international trade transactions.

Transferable Letter of Credit

A Transferable Letter of Credit allows the primary beneficiary to transfer credit partially or fully to another beneficiary, typically a supplier. However, once transferred, the second beneficiary cannot transfer it further.

Restricted Letter of Credit

A Restricted Letter of Credit specifies a particular bank responsible for payment, limiting its scope compared to unrestricted LCs. This type is often used when specific banks are preferred due to their reliability.

Revolving Letter of Credit

A Revolving Letter of Credit allows reuse after payments or drawings are made. This flexibility is beneficial for businesses requiring multiple shipments or ongoing transactions under one credit arrangement.

Precautions to be Taken

Verify Bank Reliability: The issuing bank must be reliable and well-known to both parties of the letter of credit. This helps minimise risks and ensures the LC will be honored when presented.

Local Bank Verification: It's essential to advise through an Indian bank and confirm the authenticity of the LC. The local bank can verify the legitimacy of the foreign bank and ensure all documents meet local regulations.

Clarify Financial Terms: Make sure to clearly establish who covers all bank charges and confirm freight payment terms as specified in contract agreements. This prevents disputes and unexpected costs during the transaction process.

Import Export Code

The Import Export Code (IEC) is a mandatory document required for all businesses involved in international trade. This code streamlines customs clearance, enables duty benefits, and ensures regulatory compliance. Through platforms like Razorpay Rize, businesses can obtain their IEC within 6-7 days which makes the process efficient and straightforward.

Frequently Asked Questions

HR Policy for Startups- An Overview

In the rush of building a product and acquiring customers, many Indian startups often overlook the importance of formal HR policies. However, these policies are not just about bureaucracy or paperwork. They are tools to ensure consistency, fairness, and legal compliance.

HR policies balance employee rights and company objectives. They prevent arbitrary decision-making, reduce disputes, and clarify expectations for both employers and employees. They also provide frameworks for discipline, rewards, grievance redressal, and professional conduct, creating a workplace where talent can thrive.

While startups face constraints in time, budget, and HR resources, basic HR policies can go a long way in promoting stability, scalability, and a positive employer brand.

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Related Read: Templates for Startup Founders

Why HR Policies for Startups in India are Crucial?

Here’s why every Indian startup should prioritise HR policies from day one:

• Builds a consistent work culture: Written HR policies foster consistency across teams and leadership, even as the company grows or experiences turnover.
  
  
• Reduces misunderstandings: Policies help resolve or prevent conflicts between employees and employers by clearly communicating rights, responsibilities, and processes.
  
  
• Protects against legal risks: Indian labour laws, workplace safety regulations, and anti-harassment laws require compliance; having HR policies ensures your startup stays compliant.
  
  
• Drives employee morale and loyalty: Transparent policies around leave, performance, and compensation demonstrate that the company cares for its people, fostering trust and engagement.
  
  
• Defines company values and culture: HR policies codify expected behaviour and ethics, reinforcing the cultural DNA you want your startup to embody.
  
  
• Streamlines core HR functions: HR teams can better manage recruitment, onboarding, training, payroll, and performance reviews when guided by clear policy frameworks.

Kickstart your entrepreneurial journey with ease. Register your startup with Rize and get expert support every step of the way.

Major HR Policies for Startups

Here are the key HR policies that Indian startups should prioritise:

Leave Policy

A Leave Policy outlines the various types of leave employees can avail themselves of, including:

• Casual leave
• Sick leave
• Paid time off (PTO)
• Maternity/Paternity leave
• Public holidays

Clearly define leave eligibility, accrual, approval processes, and encashment rules to avoid confusion.

Menstrual Leave Policy

Many progressive startups in India now include a Menstrual Leave Policy offering additional flexibility to female employees. Typically, this includes:

• A set number of days of paid leave per month or year specifically for menstrual health.
• A simple, stigma-free process to request this leave.

Performance Management, Appraisal, Rewards & Recognition Policy

A well-defined Performance Management Policy ensures that employees understand how their work is evaluated and rewarded. Include:

• Goal-setting frameworks (OKRs, KPIs)
• Appraisal cycles and review processes
• Criteria for promotions and salary hikes
• Recognition mechanisms (awards, bonuses, public appreciation)

Code of Conduct

A Code of Conduct defines acceptable behaviour and ethical standards at the workplace. Cover aspects such as:

• Professionalism and respect
• Anti-discrimination
• Anti-bribery and corruption
• Use of company property
• Conflict of interest
• Disciplinary actions for violations

Employee Joining and Exit Policies

Clearly outline onboarding and offboarding procedures:

• Documents and verification required upon joining
• Probation period terms
• Notice period during resignation or termination
• Final settlement process
• Exit interviews and knowledge transfer

Salary and Other Perks

Document your Salary and Benefits Policy, including:

• Salary structure (CTC breakup)
• Frequency of salary payment
• Statutory benefits (PF, ESIC, gratuity)
• Voluntary benefits (insurance, wellness programs, stock options)
• Reimbursement policies (travel, meals, etc.)

Sexual Harassment in the Workplace Policy

It is mandatory under the POSH Act, 2013, for Indian companies with 10 or more employees to have an Anti-Sexual Harassment Policy. The policy should:

• Define sexual harassment
• Outline the complaints process
• Establish the Internal Complaints Committee (ICC)
• Ensure confidentiality and protection for complainants

Regular Working Hours

A Working Hours Policy defines:

• Standard working hours
• Flexible working options, if any
• Remote work guidelines
• Overtime policies (if applicable)
• Break and meal times

Related Read: Startup India Scheme: Eligibility Criteria and Benefits

 Frequently Asked Questions

What are Intellectual Property Rights?

Intellectual Property Rights (IPR) are legal protections granted to individuals or entities over their original creations of the mind. These include inventions, literary and artistic works, symbols, names, designs, and images used in commerce. The purpose of IPR is to encourage innovation, creativity, and fair competition by rewarding creators for their original work.

IPR find their legal basis in Article 27 of the Universal Declaration of Human Rights (UDHR) and are internationally recognised through treaties such as the Paris Convention for the Protection of Industrial Property and the Berne Convention for the Protection of Literary and Artistic Works, both administered by the World Intellectual Property Organization (WIPO). In India, IPR are protected under various laws, including the Patents Act 1970, Copyright Act 1957, Trade Marks Act 1999, and Designs Act 2000.

Types of Intellectual Property Rights

India recognises several types of Intellectual Property Rights, each serving a specific purpose:

1. Copyright: Protects original literary, dramatic, musical, and artistic works, as well as cinematograph films and sound recordings. Copyright protection is automatic upon creation and lasts for 60 years after the author's death.
2. Patents: Grant exclusive rights to inventors for their novel, non-obvious, and industrially applicable inventions. Patents are valid for 20 years from the date of filing.
3. Trademarks: Distinguish the goods or services of one enterprise from another. Trademarks can be words, phrases, symbols, or designs. Registration is valid for 10 years and can be renewed indefinitely.
4. Geographical Indications: Identify goods originating from a specific geographical location, possessing qualities or reputation attributable to that origin. Examples include Darjeeling Tea and Basmati Rice. GI registrations are valid for 10 years and are renewable.
5. Industrial Designs: Protect the ornamental or aesthetic aspects of an article. Design registration is valid for 10 years, extendable by 5 years.
6. Plant Varieties: Safeguard the rights of plant breeders and farmers under the Protection of Plant Varieties and Farmers' Rights Act, 2001. Registration is valid for 15 years for annuals and 18 years for perennials with provisions for renewal.
7. Trade Secrets: Protect confidential business information that provides a competitive advantage. Trade secrets are not registered but can be protected through contracts and non-disclosure agreements.

What is the need for Intellectual Property Rights?

IPR registration is crucial for several reasons:

1. Promotes innovation by providing incentives to creators and inventors
2. Drives economic growth by encouraging investment in research and development
3. Protects creators' rights, ensuring they can reap the benefits of their work
4. Supports ease of doing business by enabling technology transfer through licensing and joint ventures
5. Fosters creativity and enables informed consumer choices by distinguishing genuine products from counterfeits

IPR Registration Eligibility Criteria in India

To be eligible for IPR registration in India, your intellectual property must meet certain criteria:

• Copyright: The work must be original and fixed in a tangible medium of expression.
• Patent: The invention must be novel, non-obvious, and industrially applicable.
• Trademark: The mark must be distinctive and not confusingly similar to existing marks.
• Design: The design must be new, original, and not previously disclosed.
• Geographical Indication: The product must have a specific geographical origin and possess qualities or reputation attributable to that origin.
• Plant Variety: The variety must be novel, distinct, uniform, and stable, as outlined under the Protection of Plant Varieties and Farmers’ Rights Act, 2001.

Required Documents for IPR Registration in India

The documents required for IPR registration vary depending on the type of intellectual property:

• Copyright:
  
  • Application Form IV
  • Copy of the work(literary, artistic, musical, etc.)
  • Identity and address proof of the applicant
  • Power of Attorney (if applicable)
• Patent:
  
  • Form 1: Application for grant of patent
  • Form 2: Complete or provisional specification
  • Form 3: Statement and undertaking under Section 8
  • Form 5: Declaration as to inventorship
  • Form 26: Power of Attorney, if applicable
  • Abstract of the invention
  • Drawings, if necessary
• Trademark:
  
  • Application Form TM-A
  • Representation of the trademark(logo, word, label, etc.)
  • Affidavit claiming prior use, if applicable
  • Goods/services description
  • Power of Attorney (if applicable)
• Design:
  
  • Application Form 1
  • Representation of the design
  • Power of Attorney (if applicable)
  • Priority document
• Geographical Indication:
  
  • Form GI-1: Application for registration of a GI
  • Statement of case describing the GI and its uniqueness
  • Proof of origin
  • Map of the geographical area
  • List of authorised users
  • Power of Attorney, if applicable
• Plant Variety:
  
  • Application Form PV-1
  • Technical Questionnaire
  • Denomination of the variety
  • Photographs/illustrations
  • Seed/propagating material
  • Power of Attorney (if applicable)

Step-by-Step Procedure for IPR Registration in India

The IPR registration process in India generally involves the following stages:

1. Filing: The applicant submits the required application form, documents, and fees to the appropriate authority (Copyright Office, Patent Office, Trade Marks Registry, or Geographical Indications Registry).
2. Examination: The application is examined by the concerned office for compliance with legal requirements and substantive criteria.
3. Publication: If the application is found to be in order, it is published in the official journal for public viewing and opposition, if any.
4. Grant: If no objections are raised or the objections are successfully overcome, the IPR is granted, and a registration certificate is issued.

Note: The specific steps may vary slightly depending on the type of IPR, but the overall process follows this general flow.

What is the fee for IPR Registration?

The fees for intellectual property registration in India vary depending on the type of IPR and the nature of the applicant (individual, small entity, or large entity). Here are some indicative fees:

Note that these fees are subject to change, and additional fees may apply for certain actions like expedited examination or renewal.

Benefits of IPR Registration in India

Intellectual property registration offers several benefits to creators and businesses:

• Legal exclusivity: Prevents unauthorised use or copying of your intellectual property
• Brand protection: Enhances brand reputation and helps differentiate your products/services in the market
• Monetisation: Enables licensing and commercialisation of your intellectual property
• Business value: Increases the value of your business and attracts investors
• International expansion: Facilitates the protection of your intellectual property in other countries through international agreements

Registering your IPR in India secures your research and development investments, fostering innovation and economic growth.

Conclusion

IPR registration is a vital step in protecting your intellectual creations from misuse or infringement. It provides legal rights and recognition, encouraging innovation and creative growth. Each category of IPR—patents, trademarks, designs, copyrights, and GIs—requires specific documentation and follows a structured process. Properly filed IPR ensures exclusive rights and helps in commercialising your ideas effectively. Hence, securing IPR is essential for safeguarding and leveraging your intellectual assets in India.

Frequently Asked Questions: