Post below articles, guidelines have been revised. Please refer article “Revised Guidelines for Merchanting / Intermediary Trade“
What is Merchanting Trade?
The supplier of goods will be resident in one foreign country. The buyer of goods will be resident in another foreign country. The merchant or the intermediary will be resident in India. He will book the order from the buyer, place the order with the supplier, supervise and coordinate the shipment of goods from the supplier’s country and deliver the same to buyer’s country. He will be receiving payment from the overseas buyer and making payment to the overseas supplier through an authorised dealer in foreign exchange in India. The difference between the inward remittance and the outward remittance will be the profit for the merchant. Some times goods may be imported by a buyer in India from a seller in one country and exported to a buyer in another country. Such imports are kept in bond and then exported. It is also possible that repacking may be done under customs supervision and then exported. This is basically to avoid the foreign buyer to know the source from where goods are being bought and supplied to them. Such transactions are known as Merchanting Trade as per the Indian Foreign Exchange Management Regulations.
RBI Regulations
RBI under Master Direction of Import of Goods and Services, has given norms to be followed in case of all Merchanting Transactions. Extract of the relevant section is given below.
C.17. Merchanting Trade
AD Category – I bank may take necessary precautions in handling bonafides merchanting trade transactions or intermediary trade transactions to ensure that:
- 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.
- The entire merchant trade transaction is completed within a period of 6 months.
- The transactions do not involve foreign exchange outlay for a period exceeding three months.
- Payment is received in time for the export leg.
- 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.
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
Buyer's Credit & Supplier's Credit 
I would like to know if establishing of a Usance Letter of Credit by an Indian Bank on behalf of a customer will come under the ‘Supplier’s Credit’. Under Merchanting Trade providing Supplier’s Credit is not permitted. Hence the doubt is specifically related to Merchanting Trade Transaction. Whether a Usance L/C can be established for a Merchanting Trade transaction.
As my interpretation of RBI Mater Circular for Import of Goods and Services and External Commercial Borrowing and Trade Credit, opening a usance lc in case of merchant trade would fall under definition of suppliers credit. And as per Master Circular of Import of Goods and Services, it clearly states suppliers credit is not available in case of Merchanting Trade.
Thus under Merchanting trade banks cannot Open Usance LC. Relevant extract of the both circular has been given below.
Definition of Suppliers Credit as per Master Circular on External Commercial Borrowing and Trade Credit
“Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years.”
Regulation of Merchant Trade as per Master Circular on Import of Goods and Services : Details of the same already given in above article.
WE REPRODUCE BELOW 2 RBI CIRCULARS, WHICH ULTIMATELY STATES THAT SHORT TERM CREDIT IS THE ONE WHICH OVER SIX MONTHS. SINCE MERCHANT TRADE TRANSACTION IS TO BE COMPLETED WITH 6 MONTHS ( 90 DAYS OUTLAY OF FUNDS) SO GOING BY THIS DEFINITION OF OVER SIX MONTHS FOR SHORT TERM CREDIT, USANCE LC FOR MERCHANT TRADE SHOULD BE ALLOWED
A.P. (DIR Series) Circular No.4 July 19, 2003 states
Merchanting Trade Transactions – Clarifications – Short term credit
Attention of authorised dealers is invited to the provisions of A.P.(DIR Series) circular No.25 dated September 27, 2002 regarding simplification of procedure for financing imports into India by way of Suppliers’ or Buyers’ Credit. It is clarified that short term credit either by way of suppliers’ credit or buyers’ credit, as envisaged in the aforementioned circular is not available for merchanting trade or intermediary trade transactions.
However A.P.(DIR Series) Circular No.25 September 27, 2002 states
Imports into India – Short term credit
Attention of authorised dealers is invited to the directions contained in paragraphs A.12 and A.13 of the AP(DIR Series) Circular No. 9 dated August 24, 2000, and the provisions contained in paragraph 4(i) of Schedule to the Reserve Bank Notification No. FEMA3/2000-RB dated May 3, 2000. Accordingly, in terms of the existing instructions, Suppliers’ Credit , viz. short term loans where the credit for imports into India is extended by the overseas supplier for a period of more than six months requires prior approval of the Reserve Bank. Similarly, Buyers’ Credit, viz., where short term loans for payment of imports into India is arranged by the importer from a bank or financial institution outside India for maturity of less than three years also requires prior approval of the Reserve Bank.
Suppliers Credit definition as given in SBI’ s web site under Import Avenue and states as under :-
Suppliers Credit
Suppliers’ Credit essentially represents credit sales effected by the supplier on the basis of accepted bills or promissory notes with or without a collateral security. Any credit facility arranged with recourse to the supplier for financing upto 180 days import into India which is not backed up in the form of any letter/document/guarantee/agreement, etc. issued by the LC opening banks or in any other manner except normal routine commercial transactions like an LC, can be treated as a suppliers’ credit. The underlying commercial contract between the exporter and the Indian importer should provide for drawing of usance drafts with an upper cap of 180 days on the usance period
IN VIEW OF ABOVE USANCE LC FOR MERCHANT TRADE CAN’T COME UNDER RESTRICTED CATEGORY HENCE CAN BE ALLOWED
In the above cited RBI circulars short Term credit is not defined as credit above 180 days. In case of short term credits exceeding 180 days Prior RBI approval is Required. However in case of Merchanting Trade transactions no short term credit is permitted irrespective of the duration i.e., even one day or 180 days or more. Accordingly, I agree with Mr Sanjay Mandavia that usance LCs are not permitted in case of merchanting trade Transactions.
what is the risk to the bank on merchanting trade beside loose control of the goods?
Sir, if an indian importer has imported goods into india bought from overseas supplier and sold goods to other indian buyer. Does it qualifies as Intermediary trade transaction and whether an indian importer who has sold the goods as a trader can avail buyers credit under such transaction?
Revert to Part 1 of the question: Before answering the above question on need to understand Intermediary Trade transaction. Intermediary trade is one mode of international trade in goods, in which transaction is not done directly between producing and consuming countries, but through a third country. The goods can be transported from the export country to the intermediary country, without processing (change of packaging, classification, selection, sorting and so on are not treated as processing) and then sell to import country. The cargo can also be directly transported from the producing countries to consuming countries, not necessarily through the intermediary country. But producing and consuming countries do not have direct trading relationship. Based on the above Indian Import selling to Indian buyer does not fall under definition of Intermediary Trade. Transaction raised in your query falls under high sea sale transaction
Revert on Part 2 of the question: Yes Indian importer can avail buyers credit even against trading of goods. RBI circular on External Commercial Borrowing and Trade Credit has given right of approving buyers credit upto 360 days to AD Banks. AD Banks, based on working capital cycle of the importer (trader / manufacturer) can decide for what tenure such buyers credit can be allowed.
In merchant trade transactions if a party recieve the export proceeds before the due date of import payment can the party be credited and allowed to make payment on due date.If not then in such situation what is the way to keep the funds.
As per RBI Circular, Import of Goods and Services: C17. Merchanting Trade
Answer: Once export leg of payment is received, importer has to immediately make the payment of import leg.There is no way in which these funds can be kept till due date.
Background: For Merchanting Trade, say an Indian Importer is getting 90 days credit whereas incase of export payment term is on sight basis, technically Indian Importer is benefited by way using free funds for 90 days. But this is not allowed as explained above. RBI in it wisdom has mandated that once export payment is received in case of merchanting trade, without any delay import payment has to be made.
We are regular exporters of C/materials from India to Maldives. The product export to Maldives is recently restricted/banned by the DGFT. Hence, we are planning to do merchant trade by procuring the cargo from Malaysia and sell to Maldives. Inorder for procurement, we need to establish a sight L/C to the supplier in Malaysia, but our bank in India declined to issue the LC stating that the export of the product is restricted from India to Maldives hence the merchant trade from a third country is also not permitted to Maldives. Is there any provision to do as per the RBI norms ? We need to open LC to the foreign supplier..
In the above article, point no 1 clearly states the answer.
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.
Today one of our Import customer has approached us with a request to sent an authenticated swift msg. to SCB Dubai from where we have received this collection bill, with an Irrevocable Undertaking for payment of this collection bill amounting $100,000.00 on due date (i.e.90 days D.A. term). For your ready reference detail of this shipping documents are given here under.
1. Drawer : M/s. ABC of Dubai 2. Drawee : M/s. XYZ, India
3. Final Destination : Afghanistan 4. Merchandise : Cycles Parts
5. Country of Origin : China
This customer is enjoying Letter of Credit limit with our branch and they requested to earmark their unavailed LC limit and allow the avalisation of the captioned bill, describing this is a merchanting trade.
There are two part to the query which has to be answered.
1. In merchanting trade has two legs of transaction (Export and Import) and payment terms on boths side has to be known to decide what is allowable as per RBI norms. As only part of the details is available, please refer RBI norms on Merchanting trade (as given above in article) and check whether your transaction is satisfying the same.
2. Availization is as good as LC back transaction without Lc. In Availization, Bank gives an unconditional undertaking to make the payment on the due date on behalf of importer. Now whether you can mark down an Lc limit for giving such undertaking would depend on banks internal policy. I would prefer to have specific availization limit with interchangeability with LC limits.
RBI Guidelines that Suppliers credit is not allowed for merchant trading is for Indian banks.
What if i open LC from Overseas bank??
As per revised guidelines, Buyers Credit and Suppliers Credit is now allowed for Merchanting Trade. Refer Article: Revised Guidelines for Merchanting / Intermediary Trade
we want to import steel from Dubai and export the same from Dubai to Mauritius . We would like to establish the letter of credit for Dubai suppiler .But our bank is insisting on the Advance payment from Maurtitius party for whom we are supplying the steel from Dubai. But our Mauritius party we are offering payment terms as DP 60 days .
In this is case .Is there any notification of RBI that insist Advance remittance or L/C for the export leg mandatory for the opening L/c for the IMPORT LEG …..Advise ?
Sir, I am trying to understand merchanting trade transaction…..My question is……in case of advance remittance to Merchant trader, can he put that amount as Fixed deposit and issue an LC to the exporter? That way his earnings does not relly solely on the price differnces of goods.
Point 8 answers your query : “In case advance against the export leg is received by the merchanting trader, AD bank should ensure that the same is earmarked for making payment for the respective import leg. However, AD bank may allow short-term deployment of such funds for the intervening period in an interest bearing account ;”
Wanted to ask a few questions about this kind of trade.
For example we are an Indian Company and our supplier is in Italywho will be exporting on our behalf to other countries in Europe.
Please confirm :
The packing lists , invoices and all other documents will be under our suppliers name or our name?? I am asking this because it will be our supplier in Italy who will be delivering the goods to the port or to the customers agent directly.
In case supplier name comes, do we need to authorise him as our supplier so that the customer knows it is coming from the company they made the deal with when they receive the documents.
Please explain.
All documents will be in name of Indian Company