Sunday, February 6, 2011

Merchanting Trade Resource

AD Category – I bank may take necessary precautions in handling bonafides merchanting trade transactions or intermediary trade transactions to ensure that:

(a) Goods involved in the transactions are permitted to be imported into India and all the rules, regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with for the export leg and import leg, respectively.

(b) The entire merchant trade transaction is completed within a period of 6 months.

(c) The transactions do not involve foreign exchange outlay for a period exceeding three
months.

(d) Payment is received in time for the export leg.

(e) Where the payment for export leg of the transaction precedes the payment for import leg, AD Category – I banks should ensure that the terms of payment are such that the liability for the import leg of the transaction is extinguished by the payment received for the export leg of the transaction, without any delay.

(f)  AD Category – I banks may note that short-term credit either by way of suppliers' credit or buyers' credit is not available for merchanting trade or intermediary trade transactions.

Source :
Master circular
Ap Directive 4 july 19 2003
To summarise
1         Goods to be as per FTP
2         Entire transaction to be completed in six months  .
3         If we make import payment before receiving export payment , the time gap should not exceed three months.
4         No buyers and suppliers credit
5         Defaults/ deviations to be reported to RBI within reasonable period.
6         Form A2 is used and to be reported in appropriate column of R Return.
7      There would be no restriction regarding receipt of advance payment orback to back letter of credit for merchanting trade transactions.



Earlier ECM Extracts---


7c.1
The basic requirements to be fulfilled from the Exchange Control angle in the case of merchanting trade or intermediary trade transactions are that the transactions should not involve foreign



exchange outlay from India except for the normal transit period not exceeding one month; both the legs of the intermediary trade transaction are financed through the opening of Letters of Credit (with drafts drawn under them being of even tenor) and such credits are on back to back terms. If the Letter of Credit to be opened in favour of the overseas supplier is not backed up by a letter of credit from the overseas buyer, an advance remittance for the full value should have been received from the overseas buyer. Authorised dealers are accordingly authorised to open letters of credit on behalf of their clients, who should be genuine traders in goods and not mere financial intermediaries, in accordance with the basic requirements spelt out in this paragraph and to effect remittances under such letters of credit. They should watch foreign currency receipts from these transactions and for this purpose should maintain suitable records.
Advance Remittances to Overseas Suppliers



7C.2
Authorised dealers may allow advance remittances by Indian merchant exporters who are



their customers to the overseas suppliers, provided (a) confirmed orders have been received by them from the overseas buyers, (b) authorised dealer is satisfied about the capabilities of the merchant exporter to perform the obligations under the order, (c) the transactions would result in adequate profit to the merchant exporter and (d) the other conditions stipulated in paragraph 7C.1 are satisfied. Where the amount of advance remittance exceeds US $ 15,000, a guarantee from an international bank of repute outside India should be obtained from the overseas seller. The concerned authorised dealer should also monitor such transactions to ensure that they are completed and proceeds representing cost of goods supplied to the foreign buyer are repatriated to India by the merchant exporter within a period of six months from the date of advance payment.





Claims against Marine Insurance Policies Covering Imports into India and Merchanting Trade



15A.6
Remittances against claims under marine insurance policies covering imports into India may
be allowed by authorised dealers on verification of the certificates regarding ownership of



the goods etc. as laid down in paragraphs A.8 and A.9 of Memorandum GIM. Authorised dealers should specifically confirm on form A2 that the necessary documentary evidence has been verified and conditions laid down in paragraphs A.8 and A.9 of Memorandum GIM are fulfilled.


AP(DIR Series) Circular No.18
September 12, 2002

Premiums on Marine Policies covering
Shipments between Countries outside India
A.4 (i) Premiums on marine insurance policies covering shipments between countries outside India must ordinarily be received in foreign currency, but payment in rupees may be accepted provided a certificate from an authorised dealer in foreign exchange is produced to show that the rupees are derived by a remittance from abroad in an approved manner.
NOTE: Overseas offices of the Insurers may grant marine insurance cover for trade between China and third countries and receive premium/settle claims through foreign currency accounts maintained by their overseas offices without prior approval of Reserve Bank.
  1. Sometimes, firms and companies in India finance merchanting trade i.e. goods shipped from one foreign country to another and financed by an intermediary in India. In some of these cases goods may be purchased on f.o.b./c.& f. terms and/or sold on c.i.f. terms, the marine insurance cover being arranged by the intermediary in India. Insurance companies registered with IRDA may issue policies covering transit risks between the loading and the destination ports in rupees or in any foreign currency in such cases, against payment of premium in rupees by the intermediary, after satisfying themselves that the contract provides for marine insurance being taken by the intermediary.

FEDAI  Rule 4---Deleted in 1999
RULE 4-Merchanting trade
  1. Banks will make remittances or open letter of credit in favour of the overseas suppliers provided an advance remittance for the full value or an irrevocable letter of credit for the full value has been received/ opened in favour of the merchanting trader who is not a more financial intermediary.
  2. Back-to-back letter will be treated as separate transaction and commission as per Rule 3 II.C. shall be charged to the customer.
  3. The banks are allowed to fix Forward Purchase Contract if so desired by the merchant for the difference period of receipt of the proceeds of the on-sale.
  4. If foreign currency remittance are received in advance from the overseas buyer, the banks may at the specific request of merchanting trade customer hold the foreign currency funds in their Nostro account without converting the amount into Indian Rupee till the date of payment to the overseas supplier. Bank shall not apply buying and selling rates of exchange. Commission at 0.25% shall not pay interest on such advance remittances or grant Rupee advances against foreign currency funds thus received.
A.D. (M.A. Series) Circular No.11  May 16, 2000
For removal of doubts, it is clarified that –
The existing procedure to be followed by Indian companies for entering
into collaboration arrangements with overseas collaborators would
continue.
ii) There would be no restriction regarding receipt of advance There would be no restriction regarding receipt of advance payment or back to back letter of credit for merchanting trade transactions.