Merchanting Trade Transactions – Revised guidelines
This circular contains the revised guidelines with respect to Merchanting Trade Transactions. These guidelines will apply to merchanting trade transactions initiated after 17th January, 2014.
Merchanting traders must be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. Handling bank must satisfy themselves about the capabilities of the merchanting trader to perform the obligations under the order. The overall merchanting trade must result in reasonable profits to the merchanting trader.
The highlights of the said guidelines are as under: –
i) For a trade to be classified as merchanting trade the following conditions must be satisfied: –
a. Goods acquired must not enter the Domestic Tariff Area; and
b. The state of the goods must not undergo any transformation.
ii) Goods involved in the merchanting trade transactions (transaction) must be those 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.
iii) The bank handling the transaction must be satisfied with the bonafides of the transactions.
iv) Both the legs of the transaction must be routed through the same bank.
v) The entire transaction must be completed within an overall period of nine months and there must not be any foreign exchange outlay beyond four months.
vi) The commencement date would be the date of shipment/export leg receipt/import leg payment, whichever is first. The completion date would be the date of shipment/export leg receipt/import leg payment, whichever is the last.
vii) 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 a bank, as in the case of import transactions.
viii) In case advance against the export leg is received by the merchanting trader, the bank must ensure that the same is earmarked for making payment for the respective import leg.
ix) Merchanting traders can 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, the bank can provide credit facility based on commercial judgement. However, where the advance payment for the import leg is more than US $ 200,000 per transaction, than advance must be given 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.
x) Letter of credit to the supplier is permitted against confirmed export order keeping in view the outlay involved and provided the completion of the transaction will happen within nine months.
xi) Payment for the import leg can also be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the merchant trader.
xii) The handling bank must ensure one-to-one matching in case of each 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 to the circular, within 15 days from the close of each half year, i.e. June and December.
xiii) The names of defaulting merchanting traders, where outstandings reach 5% of their annual export earnings, will be caution-listed.
