What changed
The guidelines were reviewed based on recommendations from the Technical Committee on Services/Facilities to Exporters and feedback from trade bodies. The revised circular consolidates and updates conditions for classifying a transaction as merchanting trade, including stricter timelines and documentation requirements.
What it means for you
Banks must now ensure merchanting trade transactions meet specific criteria: goods not entering India, no transformation, compliance with FTP, and both legs routed through the same AD bank. The overall completion period is capped at 9 months with forex outlay limited to 4 months. Short-term credit and advance payments are permitted under conditions, but banks must verify documents and report defaults half-yearly.
What you must do
- Verify that goods involved are permitted under current FTP and do not enter Domestic Tariff Area or undergo transformation.
- Ensure both import and export legs of each merchanting trade transaction are routed through your bank.
- Check that the entire transaction completes within 9 months and forex outlay does not exceed 4 months.
- Maintain one-to-one matching for each transaction and report defaults to the concerned RBI Regional Office on a half-yearly basis.
- Apply KYC/AML guidelines and use commercial judgement for advance payments over USD 200,000 requiring bank guarantee/LC from an international bank.
Who it affects
All Category-I Authorised Dealer Banks, Merchanting traders and trade bodies, Exporters and importers engaged in merchanting trade
What is the maximum period allowed to complete a merchanting trade transaction?
The entire merchanting trade transaction must be completed within an overall period of nine months, with no outlay of foreign exchange beyond four months.
Can advance payment be made for the import leg before receiving export leg proceeds?
Yes, AD banks may allow advance payment for the import leg based on commercial judgement. However, if the advance exceeds USD 200,000 per transaction, it must be backed by a bank guarantee or letter of credit from an international bank of repute, unless the export leg payment has been received in advance.
What documentation is required for merchanting trade transactions?
AD banks must verify documents such as invoice, packing list, transport documents, and insurance documents. If originals are not available, non-negotiable copies authenticated by the handling bank may be accepted.