Online
Deposits Click Here
Loans     Click Here

Introduction: 

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 in 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 will be 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 which goods are being bought and supplied to them. Such transactions are known as Merchanting Trade as per the Indian Foreign Exchange Management Regulations.

Part - A

Exchange Management Regulations

1.  Regulations of RBI

 The Merchant may take necessary precautions in handling merchant trade transactions or intermediary trade transactions to ensure that

a.  goods involved in the transaction are permitted to be imported  into India,

b.  such transactions do not involve foreign exchange outlay for a period exceeding three months, and

c.  all rules, regulations and directions applicable to export out of India are complied with by the export leg and all rules, regulations and directions applicable to import are complied with by the import leg of merchanting trade transactions. It is also required to ensure timely receipt of payment for the export leg of such transactions.

2.  Customer eligibility

 The merchant should be a regular customer of the authorised dealer and that he should be a genuine trader in goods and not a mere financial intermediary. The authorised dealer should also be satisfied that the merchant is capable of completing the transaction successfully and that it will result in accrual of profit in foreign exchange for our country.

3.  Terms of settlement

  Normally the inward remittance from the overseas buyer should be received earlier and the outward remittance to the overseas supplier will be made subsequently. Alternatively, an irrevocable letter of credit should be opened by the buyer in favour of the merchant, and on the strength of this letter of credit the merchant in turn will open a fresh letter of credit in favour of the overseas supplier. The terms of payment under both the letters of credit will be of even tenor.

4.  Advance remittance

 Sometimes advance remittances to overseas suppliers may also be made by the authorised dealer (at the request of the merchant) subject to the following conditions.

a.  The applicant should be a regular customer of the bank.

b.  The authorised dealer should be satisfied about the capabilities of the merchant to perform the obligation arising under the merchanting trade business.

c.  The transaction should result in adequate profit to the merchant.

d.  Documentary evidence should be produced to show that the supplier insists upon advance payment.

e.  Advance remittance amount should not exceed USD 25,000 or its equivalent. If this limit is exceeded, then the overseas supplier should arrange a guarantee issued by a bank of international repute situated outside India.

 f.  It is also necessary that the business be completed as early as possible and in any case within a period of three months from the date of advance remittance.

PART B 

Questions And Answers 

1. What is meant by Merchanting Trade? 

No export will be made from India. No import will also be made into India. Shipment will be made from one foreign country to another foreign country. The intermediary resident in India will be supervising and coordinating the transaction. He will procure an order from the buyer in a country, place a similar order with the supplier in another country and see that the entire transaction is completed in a successful manner. He earns a profit on account of this business. In yet another form goods are imported into India kept in customs bonded warehouse and then exported or goods are imported into India, kept in customs bonded warehouse, repacked under customs supervision and then exported. This is basically to avoid the ultimate buyer to know the source of supply of the material identified by the Indian merchanting trader. Such a transaction is called merchanting trade or intermediary trade. Needless to state that the inward remittance will be received and the outward remittance will be sent through an authorised dealer in foreign exchange in India and a profit to the merchanting trader will accrue in foreign exchange.

2. Can we make an advance payment in the case of merchanting trade transactions?

  Yes. Advance remittances are permitted provided the conditions stipulated in the exchange management regulations are duly complied with. Up to the value limit of USD 25,000 authorised dealers may allow advance remittances without insisting on a bank guarantee. If this value limit is exceeded, a bank guarantee from a bank of international repute situated outside India should be insisted upon. The overseas supplier of goods who is asking for the payment in advance should arrange the guarantee. The guarantee commission should be borne by him.

3. Can we open a letter of credit on account of merchanting trade?

Yes. LC can be opened by authorised dealers in favour of overseas supplier provided a similar letter of credit has been opened by the buyer in favour of the merchant. Such cases are dealt by the IBD on a case-to-case basis.  

4. Which is the remittance form to be completed in such cases - Form A1 or Form A2?

     Form A 2 only.