Merchanting Trade Transactions – RBI Revised Guidelines
Merchanting Trade Transactions – RBI Revised Guidelines
The Merchanting Trade Transactions guidelines are revised and released by RBI periodically. The latest guidelines were released on 23rd January 2020, and this article provides details on the revised guidelines of RBI notification. In the latest revised RBI guidelines, there are some changes in the definition of the state of goods, specifying exact conditions like strict adherence to KYC (Know Your Customer) and AML (Anti Money Laundering) guidelines, optional verification using Bill of Lading for the genuineness of the trade, etc.
RBI Revised Guidelines
The following are the revisions in the guidelines by RBI:
State of goods traded: The goods could be processed for value addition. This may be allowed if the Authorised Dealer Category-I (AD) bank is satisfied after checking the evidence documents and transaction bonafide.
Following KYC and AML Guidelines: The AD banks must adhere to the KYC and AML guidelines when they check the transaction bonafide.
Verification of Genuineness of Trade: Apart from regular documents like invoices, lists of packed items, and documents for insurance and transport, the AD bank is also given the option (if considered reliable by the bank) to verify using a Bill of Lading or Airway Bill. This is to be done by online verification on the International Maritime Bureau website or Airlines web check.
Short-Term Credit: Short Term Credit (buyers’ credit or suppliers’ credit) may be extended with the same conditions as before, but there is one crucial clause added that the short-term credit should not be issued with a Letter of Comfort (LoC) or Letter of Undertaking (Lou).
Advance against Export Leg: Any advance payment received against export leg can be parked in an Exchange Earners Foreign Currency (EEFC) or an interest-bearing INR account.
- This amount is strictly used only to pay for the import leg and will be paid as soon as the import leg liability arises. In case the merchanting trader has parked the advance in an interest-bearing INR account, hedging may be allowed by the bank as per existing regulations. But fund or non-fund-based facilities cannot be extended against such a balance amount.
Advance Payment for Import Leg: In case the overseas seller makes a demand for advance payment, the merchanting traders may be allowed to make the advance payment for the import leg with an added clause that advance payments over USD 500,000 per transaction will need a Bank Guarantee or unconditional Letter of Credit from a reputable international bank.
Letter of Credit to the Supplier: Apart from allowing a Letter of Credit to the Supplier of import leg only against confirmed export order and only if the Merchanting Trade Transaction is completed within nine months, it is now mandatory to comply with the latest updated instructions on “Guarantees and Co-acceptances” issued by Department of Banking Regulation.
Caution Listing: All Merchanting Traders with outstanding equal to or more than 5% of export earnings per annum will have their names under Caution Listing.
Merchanting Trade Transaction Profit: The formula to determine if a particular merchanting trade does result in a profit is clearly defined and is as follows:
- Merchanting Trade Transaction Profit = Exports proceeds of the Merchanting Trade Transaction – (Import Payments + Related Expenses for the transaction)
- This needs to be checked for every transaction by the AD Banks.
Write-off of Unrealized amount: For the Export Leg, the unrealized amount may be written off by the AD Bank if requested by the Merchanting Trader in the following cases:
- The Merchanting Trade Transaction buyer is declared insolvent along with proof from the Liquidator, who certifies that the amount cannot be recovered from the buyer.
- Auction of the goods exported or Destruction of the goods exported by the authorities in the importing country (by Port or Customs or Health authorities) and certified proof of the same is provided.
- The unrealized amount is the balance due in a settlement case intervened by the Indian Embassy, Foreign Chamber of Commerce, etc.
For all the write-offs of unrealized amounts for the export leg, the AD Banks have to strictly ensure the following:
- No KYC or AML concerns
- Any agencies are not investigating the transaction being written off under India’s Foreign Exchange Management Act (FEMA).
- The country or jurisdiction of the counterparty to the merchanting trader should not be in the updated Financial Action Task Force’s (FATF) Public Statement on High Risk and Non-Co-operative Jurisdictions, where FATF has called countermeasures.
Third-Party Payments: No third-party payments are allowed either in the import leg or in the export leg of the Merchanting Trade Transaction.
Agency Commission: In ordinary circumstances, no agency commission is allowed in any Merchanting Trade Transactions. But in exceptional situations, the AD Banks may allow it provided all the following conditions are met:
- The Merchanting Trade Transaction is completed without any pending issues
- Paying the agent a commission does not result in a net loss in the particular Merchanting Trade Transaction
- The merchanting trader has explicitly requested it
The main differences between the guidelines notified on 23rd January 2020 and the previous notification (28th March 2014) have been tabulated below for better clarity:
| Features | Latest Guidelines | Previous Guidelines |
| State of goods traded | Some transformation may be allowed | No Transformation allowed |
| Following KYC and AML Guidelines | To be scrupulously followed | To be observed |
| Verification of Genuineness of Trade | Option to use Bill of Lading or Airway Bill also | |
| Short Term Credit | Specifically mentioned that a Letter of Comfort or Letter of Undertaking cannot be used. | |
| Advance against Export Leg |
Exchange Earners Foreign Currency (EEFC) account OR Interest-bearing INR account. Hedging may be allowed No fund or non-fund-based facilities |
Interest-bearing account |
| Advance Payment for Import Leg | Bank Guarantee Limit over USD 500,000 | Bank Guarantee Limit over USD 200,000 |
| Letter of Credit to the Supplier | Also, comply with instructions on “Guarantees and Co-acceptances” issued by the Department of Banking Regulation. | |
| Caution Listing | Outstanding 5% or more | Same (mentioned as reached 5%) |
| Merchanting Trade Transaction Profit | Formula specified | Reasonable profit |
| Write-off of Unrealized amount | Conditions Mentioned | Not mentioned |
| Third-Party Payments | No | Not mentioned |
| Agency Commission | No. Conditions Mentioned | Not mentioned |
The latest RBI notification can also be accessed below:
Merchanting-Trade-Transactions-RBI-Revised-Guidelines