RBI/2019-20/152 A.P. (DIR Series) Circular No.20
January 23, 2020
To
All Category – I Authorised Dealer Banks
Madam / Sir
Merchanting Trade Transactions (MTT) – Revised Guidelines
Attention of
Authorised Dealer Category-I banks (AD banks) is invited to A.P. (DIR Series)
Circular No.115 dated March 28, 2014 containing directions relating to
merchanting trade transactions.
2. With a view to further facilitate
merchanting trade transactions, the existing guidelines have been reviewed and
the revised guidelines as under, are being issued in supersession of the A.P.
(DIR Series) Circular ibid:
For a trade to be classified as merchanting
trade, goods acquired shall not enter the Domestic Tariff Area.
Considering that in some cases, the goods acquired may require certain specific
processing/ value-addition, the state of goods so acquired may be allowed
transformation subject to the AD bank being satisfied with the documentary
evidence and bonafides of the transaction.
The MTT shall be undertaken
for the goods that are permitted for exports / imports under the prevailing
Foreign Trade Policy (FTP) of India as on the date of shipment. All rules,
regulations and directions applicable to exports (except Export Declaration
Form) and imports (except Bill of Entry) shall be complied with for the export
leg and import leg respectively.
AD bank shall satisfy itself with the
bonafides of the transactions. Further, KYC and AML guidelines shall be
scrupulously adhered to by the AD bank while handling such transactions.
The entire merchanting trade is to be routed through the same AD bank. The AD
bank shall verify the documents like invoice, packing list, transport documents
and insurance documents (if originals are not available, Non-negotiable copies
duly authenticated by the bank handling documents may be taken) and satisfy
itself about the genuineness of the trade. The AD bank may, if satisfied, rely
on online verification of Bill of Lading/ Airway Bill on the website of
International Maritime Bureau or Airline web check facilities. However, the AD
bank shall ensure that the requisite details are made available /retrievable at
the time of Inspection/Audit/investigation of the transactions.
The
entire MTT shall be completed within an overall period of nine months and there
shall 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. The completion date shall be the date of
shipment / export leg receipt or import leg payment, whichever is the last.
Short-term credit either by way of suppliers' credit or buyers' credit may
be extended for MTT to the extent not backed by advance remittance for the
export leg, including the discounting of export leg LC by the AD bank, as in the
case of import transactions. However, Letter of Undertaking (LoU)/ Letter of
Comfort (LoC) shall not be issued for supplier’s/ buyer’s credit.
Any
receipts for the export leg, prior to the payment for import leg, may be parked
either in Exchange Earners Foreign Currency (EEFC) account or in an
interest-bearing INR account till the import leg liability arises. It shall be
strictly earmarked/ lien-marked for the payment of import leg and the liability
of the import leg, as soon as it arises, shall be extinguished out of these
funds without any delay. If such receipts are kept in interest-bearing INR
account, hedging thereof may be allowed by the AD bank at the request of its
customer, as per extant regulations. No fund/non-fund-based facilities shall be
extended against these balances.
In case of discounting of export leg LC
where payment for import leg is still to be made (even if partially), the
proceeds shall be utilized in the manner prescribed at point no. 2 (viii) above.
Payment for import leg may also be allowed to be made out of the balances in
EEFC account of the merchant trader.
Merchanting traders may be allowed
to make advance payment for the import leg on demand made by the overseas
supplier. In case where inward remittance from the overseas buyer is not
received before the outward remittance to the overseas supplier, AD bank may
handle such transactions based on its commercial judgement. It may, however, be
ensured that any such advance payment for an import leg beyond USD 500,000/- per
transaction, shall be made against Bank Guarantee / an unconditional,
irrevocable standby Letter of Credit from an international bank of repute.
Overall prudential limits on allowing such advance payments by a customer may be
fixed by the AD bank.
Letter of Credit to the supplier for the import leg
is permitted against confirmed export order, keeping in view the foreign
exchange outlay of four months and completion of the MTT within nine months and
subject to compliance with the instructions issued by Department of Banking
Regulation on “Guarantees and Co-acceptances”, as amended from time to time.
AD bank shall ensure one-to-one matching in case of each MTT and report
defaults in any leg by the traders to the concerned Regional Office of the
Reserve Bank, on half yearly basis in the format as annexed, within 15 days from
the close of each half year, i.e. June and December;
Merchant traders
with outstanding of 5% or more of their annual export earnings shall be liable
for caution listing.
3. The merchanting traders shall be genuine traders
of goods and not mere financial intermediaries. Confirmed orders must be
received by them from the overseas buyers. AD banks shall satisfy themselves
about the capabilities of the merchanting trader to perform the obligations
under the order. The merchanting trade shall result in profit which shall be
determined by subtracting import payments and related expenses from export
proceeds for the specific MTT.
4. Write-off of unrealized amount of
export leg:
i. AD bank may write-off the unrealized amount of export leg,
without any ceiling, on the request made by the Merchanting trader, in the
following circumstances:
The MTT buyer has been declared insolvent and a
certificate from the official liquidator specifying that there is no possibility
of recovery of export proceeds has been produced.
The goods exported have
been auctioned or destroyed by the Port / Customs / Health authorities in the
importing country and a certificate to that effect has been produced.
The
unrealized amount of the export leg represents the balance due in a case settled
through the intervention of the Indian Embassy, Foreign Chamber of Commerce or
similar Organization;
provided, the MTT is in adherence to all other
provisions except the delays in timelines (either for outlay or completion
period of MTT or both) attributed to reasons mentioned at a, b and c above.
ii. In addition to above, write-off as at (i) shall be subject to following
conditions:
AD bank shall satisfy itself with the bonafides of the
transactions and ensure that there are no KYC/AML concerns.
The
transaction shall not be under investigation under FEMA by any of the
investigating agency/ies.
The counterparty to the merchant trader is not
from a country or jurisdiction in the updated FATF Public Statement on High Risk
& Non-Co-operative Jurisdictions on which FATF has called for counter measures.
5. Third party payments for export and import legs of the MTT are not
allowed.
6. Agency commission is not allowed in MTTs. However, AD banks
may allow payment of agency commission up to a reasonable extent by way of
outward remittance under exceptional circumstances, subject to the following
conditions:
MTT has been completed in all respects.
The payment of
agency commission shall not result in the MTT ending into a loss.
The
Merchanting trader shall make a specific request to the AD bank in this regard.
7. AD bank may approach Regional Office (RO) concerned of the Reserve Bank
for regularization of the MTT for deviation, if any, from the prescribed
guidelines and the MTT shall be closed only after receiving approval from the RO
concerned of the Reserve Bank.
8. Reporting for merchanting trade
transactions under FETERS shall be done on gross basis, against the
undermentioned codes:
Trade |
Purpose Code under FETERS |
Description |
Export |
P0108 |
Goods sold under merchanting /receipt against export leg of
merchanting trade |
Import |
S0108 |
Goods acquired under merchanting /payment against import leg of
merchanting trade |
9. AD banks shall bring the contents of this circular to the notice of their
constituents concerned for strict compliance.
10. The directions
contained in this circular have been issued under sections 10(4) and 11(1) of
the Foreign Exchange Management Act (FEMA), 1999 (42 of 1999) and are without
prejudice to permissions / approvals, if any, required under any other law.
Yours faithfully
(R K Moolchandani) Chief General Manager
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