Guidelines on settlement mechanism of Merchanting trade Transaction

TRADE

Merchanting trade is a combination of export and import transaction. In case of Import and export movement of goods along with AD code are recorded in either Bill of entry or Shipping Bill. So, import payment and export collection should be settled through the same AD. But in case of Merchant Trade movement of goods takes place outside the territory of Customs and no Bill of entry and shipping bill are generated, so there is no provision of AD code to be incorporated on any document.

In order to have entire episode of the transaction RBI, central bank, incorporated the guideline that both export and import leg should be routed through the same AD. Besides this there are other restrictions imposed to make assure that transaction is happened maintaining all ethical guideline.

1. Both export leg and Import leg should be routed through the same AD: The intermediator should provide banker’s details at the time of executing purchase order to the overseas buyer basis on which the buyer would settle dues against export invoice through the same bank. Simultaneously intermediator would make payment of import dues through the same bank through which they have received their export dues. If there is any mismatch, export dues or import dues won’t be settled depending upon the sequence of transaction.

2. Entire cycle of merchant trade has to be completed within 9 months, there should not be any outlay of foreign exchange beyond four months: The commencement date of merchanting trade shall be the date of shipment /export leg receipt or import leg payment, whichever is first. Similarly, the completion date shall be the date of shipment /export leg receipt or import leg payment, whichever is the last.

Suppose shipment of goods takes place first, in that case import payment would be the last leg and the cycle of merchant trade has to be completed within 9 months from the date of shipment.

If export leg has been received first the import leg payment will the last leg but import payment should be done within 4 months from the date of receipt. Similarly, if import payment i.e. foreign exchange outlay, is done first, the export collection will be the leg last and the cycle date would be 4 months from the date of payment.

3. Advance Import Remittance: Merchanting trader is allowed to make advance import remittance but any payment beyond USD 500,000/-per transaction shall be made against Bank Guarantee/irrevocable letter of credit from an international bank. In case export collection is not received before import payment, AD bank will handle such transactions based on its commercial judgement.

4. Advance Export Collection: In case of advance against the export leg, AD bank should ensure that the same is earmarked for making respective import payment.

5. Letter of Credit: if the merchanting trade is under letter of credit then letter of credit to be opened against confirmed export order and completion of the transaction should be within nine months.

The inward remittance from the overseas buyer should preferably be received first and the outward remittance to the overseas supplier will be made subsequently. Alternatively, an irrevocable Letter of Credit (LC) should be opened by the buyer in favor of the merchant. On the strength of such LC the merchant in turn may open a LC in favor of the overseas supplier. The terms of payment under both the LCs should be such that payment for import LC is required to be made after receipt of payment under export LC. In case export leg payment is received in advance, AD banks need not insist on opening of export LC.

6. Short-term credit: Short-term credit either by way of suppliers’ credit or buyers’ credit will be available for merchanting or intermediary trade transactions including the discounting of export leg LC by an AD bank, as in the case of import transactions.

7. One-to-One matching principal: Since movement of goods takes place outside the customs territory central bank incorporated one-to-one matching principle to ensure that no money laundering is happened.

8. Purpose code: In case of export collection against goods supplied we use purpose P0108 and similarly for import payment towards goods acquired we use S0108. In case of merchanting trade, we use both code for settlement of export leg as well as import leg.

Whenever any inward remittance happened against export invoice, the trader should declare the transaction as Merchanting trade without declaring it as exports. Earlier every merchanting trader used to declare export receipts as an export collection but later on it has been modified basis on the ground that every export collection should have shipping bill details. Post receipt of fund AD banker mark it as a merchanting trade. Post payment of import bills AD banker credited the profit to trader’s account.

9. Margin: In case of direct export proceeds are credited for full amount and similarly in case of direct import entire amount is debited but in case of Merchanting trade only margin (amount of export collection – amount of import payment) is credited.