Reverse Bank of India by circular dated January 23, 2020 has issued the revised guidelines of Merchanting Trade Transaction (MTT).
In Indian Context, the trade is called Merchanting Trade when,
(i) The supplier of goods will be resident in one foreign country
(ii) The buyer of goods will be resident in another foreign country
(iii) The merchant or the intermediary will be resident in India.
In simple terms, Merchanting transaction is one which involves shipment of goods from one foreign country to another foreign country involving an Indian Intermediary. Hence, it is also called Intermediary Trade.
For ease of understanding, buyer and seller is referred as Company.
(1) Company X of France places an order on Company Z in India for supply of certain spares and makes payment for the same.
(2) Company Z, which trades in such spares, then places a purchase order with Company Y of Singapore
(3) Company Z makes payment to Company Y in Singapore. This is the import leg of the transaction.
(4) It also requires Company Y of Singapore to directly export the goods to Company X in France. Here one can note that the goods ordered with Indian company will not enter the boundary of India but will be directly exported to Company A by Company Y on behalf of the Indian Company Z. This is the export leg of the transaction.
(5) The Company X makes payment to Company Z in India now Merchanting Trade is completed.
As per A.P. (DIR Series) Circular No.115 March 28, 2014, or a trade to be classified as Merchanting trade following conditions should be satisfied:
? Goods acquired should not enter the Domestic Tariff Area and
? The state of the goods should not undergo any transformation
Considering that in some cases, the goods acquired may require certain specific processing/ value-addition, the state of goods so acquired may be allowed transformation subject to the AD bank being satisfied with the documentary evidence and bonafides of the transaction. A.P. (DIR Series) Circular No.20 January 23, 2020
The AD bank may, if satisfied, rely on online verification of Bill of Lading/ Airway Bill on the website of International Maritime Bureau or Airline web check facilities. However, the AD bank shall ensure that the requisite details are made available /retrievable at the time of Inspection/Audit/investigation of the transactions.
Any receipts for the export leg, prior to the payment for import leg, may be parked either in Exchange Earners Foreign Currency (EEFC) account or in an interest-bearing INR account till the import leg liability arises. It shall be strictly earmarked/ lien-marked for the payment of import leg and the liability of the import leg, as soon as it arises, shall be extinguished out of these funds without any delay. If such receipts are kept in interest-bearing INR account, hedging thereof may be allowed by the AD bank at the request of its customer, as per extant regulations. No fund/non-fund-based facilities shall be extended against these balances.
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 500,000/- per transaction, the same should be paid against bank guarantee/LC from an international bank of repute