Lotus Chemicals Pvt. Ltd., a newly incorporated company, plans raw material purchases of ₹400 crores in FY 2025-26. Out of this, 80% will be routed through Letters of Credit (LC), of which 40% will be imports. The lead t

CS Professional · Strategic Management and Corporate Finance · PYQS · June 2026
Lotus Chemicals Pvt. Ltd., a newly incorporated company, plans raw material purchases of ₹400 crores in FY 2025-26. Out of this, 80% will be routed through Letters of Credit (LC), of which 40% will be imports. The lead time, transit time and usance period are as follows: Domestic: Lead time - 1 month; Transit - 1 month; Usance - 1 month Import: Lead time - 60 days; Transit - 30 days; Usance - 90 days (i) Calculate the total LC limit required for the year. (ii) Breakdown the LC requirement into domestic and import components, considering the effective credit cycle.

Answer & Explanation:

Answer 3(a) (i) Total Letters of Credit (LC) Limit required for the year: Estimated raw material purchase = ₹400 crore LC purchases/Total LC Limit = 80% of ₹400 crore = ₹320 crore (ii) Domestic vs. Import LC Requirement 1. Domestic LC Share of domestic = ₹320 crore - ₹128 crore = ₹192 crore Effective cycle = Lead (1 month) + Transit (1 month) + Usance (1 month) = 3 months LC exposure for domestic = ₹192 crore × (3 ÷ 12) = ₹48 crore 2. Import LC Share of imports = 40% of ₹320 crore = ₹128 crore Effective cycle = Lead (60 days) + Transit (30 days) + Usance (90 days) = 180 days = 6 months LC exposure for imports = ₹128 crore × (6 ÷ 12) = ₹64 crore Total LC Limit (with effective credit cycle) = ₹48 crore + ₹64 crore = ₹112 crore

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