The Reserve Bank of India (RBI) has revised the guidelines for merchanting trade. The new ones are more liberal in some ways but restrictive in others.
Merchanting trade is also known as third-country export or intermediary trade transactions. This is where goods bought from a resident in one country (say China) by a trader in another (say resident in India) are sold to a resident in a third country (say Britain) without the goods entering the country of residence of the trader (in this case, India). In such cases, the trader pays the seller in one country and receives his payment from another country.
RBI had allowed these, subject to the condition that the entire transaction be completed within six months. Also, it must not involve foreign exchange outlay for a period exceeding three months and the payment must be had in time from the buyer. The time limit for completing the transaction has now been extended to nine months; for foreign exchange outlay, increased to four months. RBI had not allowed short-term credit, either suppliers' credit or buyers' credit. The revised guidelines allow both, including the discounting of letters of credit (LCs) opened by buyers at banks. All these give more flexibility to traders in such transactions.
RBI has said the commencement of merchanting trade would be the date of shipment, payment receipt from buyer or payment to seller, whichever is first. The completion date would be the date of shipment, receipt from buyer or payment to seller, whichever is last. And, the goods must be permitted for export/import under the prevailing Foreign Trade Policy of India, at the time of entering into the contract. This restriction is debatable because, strictly speaking, the restrictions relating to imports and exports should not apply to goods that do not enter India.
More restrictions abound in the new guidelines. The transactions should result in reasonable profits to the merchanting trader. The inward remittance from the foreign buyer should be received before making an outward remittance to the overseas supplier. If the foreign buyer gives an irrevocable LC in favour of the merchant, one in favour of the foreign supplier can be opened on that basis but the terms should ensure payment to supplier after receipt of payment from buyer. Any advance received by the trader from the buyer should be held in a separate deposit/current account and earmarked for payment to the seller. It should not be made available to the merchanting trader for use, other than for payment to seller or for short-term deployment of funds limited to the payable amount. Any advance payment to seller should be given only against a bank guarantee, says RBI.
The central bank needs to appreciate that merchanting trade is an activity that can help our traders become global players in commodities. It can expose them to international trade practices in a manner that mere exports and imports cannot and help them export more. Such activities need to be encouraged, rather than viewed as activities that need to be permitted with awkward restrictions. The new guidelines betray complete distrust of traders engaged in merchanting trade.
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