Revised Guidelines for Merchanting / Intermediary Trade

Further to article published below, RBI received suggestion from merchanting traders and trade bodies, based on which guidelines on merchanting trade transactions have been further reviewed on 28th March 2014 and with effect from 17th January 2014. Summary of the changes are given below.

  1. For atradeto be classified as merchanting trade followingconditionsshould be satisfied.
    1. Goods acquired should not enter the Domestic Tariff Area and
    2. The state of the goods should not undergo any transformation
  2. Goods involved in the merchanting trade transactions would be the ones that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively ;
  3. AD bank should be satisfied with the bonafides of the transactions. Further, KYC and AML guidelines should be observed by the AD bank while handling such transactions ;
  4. Both the legs of a merchanting trade transaction are routed through the same AD bank. The bank should verify the documents like invoice, packing list, transport documents and insurance documents (if originals are not available, Non-negotiable copies duly authenticated by the bank handling documents may be taken) and satisfy itself about the genuineness of the trade ;
  5. The entire merchanting trade transactions should be completed within an overall period of nine months and there should not be any outlay of foreign exchange beyond four months ;
  6. The commencement of merchanting trade would be the date of shipment / export leg receipt or import leg payment, whichever is first. The completion date would be the date of shipment / export leg receipt or import leg payment, whichever is the last ;
  7. Short-term credit either by way of suppliers’ credit or buyers’ credit will be available for merchanting trade transactions, to the extent not backed by advance remittance for the export lag, including the discounting of export leg LC by an AD bank, as in the case of import transactions ;
  8. In case advance against the export leg is received by the merchanting trader, AD bank should ensure that the same is earmarked for making payment for the respective import leg. However, AD bank may allow short-term deployment of such funds for the intervening period in an interest bearing account ;
  9. Merchanting traders may be allowed to make advance payment for the import leg on demand made by the overseas seller. In case where inward remittance from the overseas buyer is not received before the outward remittance to the overseas supplier, AD bank may handle such transactions by providing facility based on commercial judgement. It may, however, be ensured that any such advance payment for the import leg beyond USD 200,000/- per transaction, the same should be paid against bank guarantee / LC from an international bank of repute except in cases and to the extent where payment for export leg has been received in advance ;
  10. Letter of credit to the supplier is permitted against confirmed export order keeping in view the outlay and completion of the transaction within nine months ;
  11. Payment for import leg may also be allowed to be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the merchant trader ;
  12. AD bank should ensure one-to-one matching in case of each merchanting trade transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI, on half yearly basis in the format as annexed, within 15 days from the close of each half year, i.e. June and December ;
  13. The names of defaulting merchanting traders, where outstandings reach 5% of their annual export earnings, would be caution-listed.
  14. The merchanting traders have to be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. AD banks should satisfy themselves about the capabilities of the merchanting trader to perform the obligations under the order. The overall merchanting trade should result in reasonable profits to the merchanting trader.
  15. It is clarified that the contents of this circular would come into effect in respect of merchanting trade transactions initiated after January 17, 2014.

 

As per RBI Circular Dated 17th January 2013

In earlier article “Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade” we had discussed the guidelines for Merchanting Trade. RBI had set a committee under the Chairmanship of G Padmanabhan to examine the gaps / inadequacies / lacunae in the financial system / procedure. Based on the recommendations of the committee, RBI has revised the guidelines for Merchanting Trade and Intermediary Trade.

Take aways from revised guidelines

  1. Merchant tradeTrade Credit product like Buyers Credit, Suppliers Credit and LC discounting for export leg is now allowed.
  2. Overall tenure increased from 6 months to 9 months. Foreign exchange outlay from 3 months to 4 months
  3. Both Legs of the transaction to be routed through same AD bank.
  4. Commencement Date (whichever is first of the below) and Completion Date (whichever is last of the below) for calculating tenure of 9 months.
    1. Date of Shipment
    2. Export Leg Receipt
    3. Import Leg Payment
  5. One to One Matching of transaction to be done by bank and incase of default to be reported to RBI. Incase of repeated defaults (3 or more cases in a year), Bank should restrain trader from entering into any further transaction.
  6. The inward remittance from the overseas buyer should preferably be received first and the outward remittance to the overseas supplier will be made subsequently. Alternatively, an irrevocable Letter of Credit (LC) should be opened by the buyer in favour of the merchant. On the strength of such LC the merchant in turn may open a LC in favour of the overseas supplier. The terms of payment under both the LCs should be such that payment for import LC is required to be made after receipt of payment under export LC. The export LC should be issued in the name of original merchanting trader in India and import LC should be favouring the original supplier. In case export leg payment is received in advance, AD banks need not insist on opening of export LC.
  7. In case advance against the export leg is received by the merchanting trader, the advance payment may be held in a separate deposit / current account in foreign currency or Indian Rupees. The amount required for import leg should be earmarked till the payment of import and should not be made available to the merchanting trader for use, other than for import payment or short-term deployment of fund limited to the import payable, with the same AD for the intervening period.
  8. Advance for import leg should be paid against bank guarantee from an international bank of repute.
  9. Trade instrument like Back to Back LC and Transferable LC will be used more actively by Merchant Traders.

Gray Area / Open to Interpretation

  1. Transaction should result in reasonable profit.
  2. Defining words like Genuine Trader, Financial Intermediaries, Reasonable Profit & Original Suppliers.
  3. Capability of Merchanting Trader to perform the obligation under the order.

References

  1. RBI Circular: Merchanting Trade Transactions – Revised GuidelinesDated : 28-03-2014
  2. RBI Circular: Merchanting Trade Transactions: Dated : 17-01-2014
  3. RBI Master Direction –  Import of Goods and Services: Dated: 31-03-2016
  4. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
  5. Report of the Technical Committee on Services / Facilities to Exporters: Refer Chapter 4:  Dated: 29-04-2013
  6. Old Article: Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade
  7. RBI Circular : Merchanting Trade to Nepal and Bhutan: Dated: 30-042015
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18 thoughts on “Revised Guidelines for Merchanting / Intermediary Trade”

  1. By reading of the circular, it doesn’t say that a LC or advance payment is a must for export leg. It is just an alternative suggested to banks. What is important is that inward remittance has to be received first and then outward payment to be done. However banks are insisting for having an LC or advance payment on export leg and they are not issuing import LC without that. Is the interpretation of bank true?

    1. Other than highlighted above in article, one more grey area of this circular is that it does not clarify on DA (Document against Acceptance) and DP (Document against Payment) mode of payment and its modus-operandi. Thus it is left interpretation of banker. If banks does not agree on your view, ask them to take a clarification by RBI regional office.

      My Opinion: Banks interpretation is not correct. As per circular, lc and advance payment are alternative given and how it can work and not the only options. Merchant Trade is free to us any mode of payment, subject to below condition is satisfied.

      “The inward remittance from the overseas buyer should preferably be received first and the outward remittance to the overseas supplier will be made subsequently.”

  2. I am in confusion for determination of period of 4 Months for foreign currency outlay. How this 4 months shall be calculated whether it is from the start of first transaction or from the first outlay of foreign currency.
    Please give your valuable suggestions.

    1. If customer avails buyers credit in such case what is the date to be consider for cash outlay. Buyers Credit due date or buyers credit drawdown date

  3. Thanks sir for your prompt reply. May i get the reference for this clarification as i need to convince my banker for this interpretation.

    1. It is based on my interpretation of circular. I have searched through Master Circular for Import of Goods and Services since 2001 and it has been always part of it. Earlier it was 3 months, which was increased to 4 months on 17 January 2014.

  4. I wanted to understand what happens in a reverse scenario – ie. ABC UK enters into a contract with Indian customer for supply of equipment. Thereafter, ABC UK sub-contracts the work to ABC India – who manufactures the equipment in India and directly supplies to Indian customer (of ABC UK). The fee is paid by Indian customer to ABC UK. ABC India to get compensated from ABC UK as per agreed terms. Let me know if the above is fine from exchange control regulations perspective.

  5. is there a restriction for banker to open an lc post shipment for merchanting trade or to be more specific is there a guidelines which states the change of hands can happen in sea ?
    will appreciate if anyone can answer the query ?

      1. Thank you for your reply.
        Bt in case of buyers credit for calculating diff which period ti be taken… Buyers credit draw down date to export receipt OR Buyers credit repayment date to export receipt.??
        Please guide

  6. My query is as below:
    We have taken supplier credit.
    Discounting date is say 01.01.2015
    Final maturity is : 30.04.2016
    Export proceeds received on 01.04.2016.
    Can we take supplier credit till 30.04.2016???

  7. I want to know in Merchant Trade can involve 4 party. In my case i am the importer and exporter is my Indian customer. How can we deal with different bank. Import leg cleared by me and export leg is cleared by my Indian customer and goods directly go to China to Africa.

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