RBI eases norms for merchanting trade, allows short-term loans

The Reserve Bank of India (RBI) has released revised guidelines on merchanting trade transactions, under which the total period of completion of trade has been extended from six months to nine months. RBI also allowed authorised dealer banks to offer short-term financing for both export and import transactions of such deals.

Merchanting trade or intermediary trade involves purchase of goods by Indian residents from non-residents and then selling them to another non-resident directly without the goods touching Indian shores.

Although merchanting trade transactions do not contribute to exports from India, they result in net foreign exchange inflows. The technical committee on services / facilities to exporters headed by RBI deputy governor G Padmanabhan, in its report submitted in May 2013, had recommended simplification of the earlier guidelines issued in 2003.

RBI also directed dealer banks to ensure that the goods involved in merchanting or intermediary trade transactions are the ones that are permitted for exports / imports under the prevailing foreign trade policy (FTP), at the time of entering into the contract and that all the rules, regulations and directions applicable to exports and imports are complied with for the export leg and import leg respectively.

Both the legs of a merchanting or intermediary trade transaction are routed through the same AD bank - the bank should verify the documents like invoice, packing list, transport documents and insurance documents and satisfy itself about the genuineness of the trade.

The entire merchanting or intermediary 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.

The commencement of merchanting or intermediary trade would be the date of shipment / export leg receipt or import payment, whichever is first. The completion date would be the date of shipment / export receipt or import payment, whichever is the last.

Short-term credit either by way of suppliers' credit or buyers' credit will be available for merchanting or intermediary trade transactions, including the discounting of export leg LC by an AD bank, as in the case of import transactions.

RBI has asked dealer banks to ensure one-to-one matching in case of each merchanting or intermediary trade transaction and report defaults in any leg by the traders to the concerned regional office of RBI on half yearly basis. The deadline for submission of the report would be 15 calendar days after the close of each half year.

In case of repeated defaults, ie, three cases or more in a year, the dealer banks should restrain the traders from entering into any further transaction in merchanting or intermediary trade and consider recommending caution listing of the trader, to the RBI.

Dealer banks should also ensure that the merchanting traders are genuine traders of goods and not mere financial intermediaries. They should have confirmed orders from the overseas buyers.

Authorised dealer should satisfy itself about the capabilities of the merchanting trader to perform the obligations under the order and the transactions should also result in reasonable profits to the merchanting trader.

Inward remittances 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.

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. If advance for the import leg is demanded by the overseas seller, the same should be paid against bank guarantee from an international bank of repute.

RBI has asked dealer banks to report on outstanding merchanting trade on a half-yearly basis to ensure better monitoring. Reporting for merchanting or intermediary trade for compilation of R-return should be done on gross basis against prescribed codes, it added.