Merchanting needs more RBI realism

The Reserve Bank of India (RBI) has revised its guidelines for merchanting trade transactions, in response to representations from the trade. Yet, even after the revision, the dispensation is short of the expectations.

Merchanting trade is also known as third country export or intermediary trade transactions. These are transactions where goods bought from a resident in one country (say, China) by a trader in another country (say, resident in India) are sold to a resident in a third country (say, the UK) 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 the buyer in another country.

For long, RBI instructions only asked the Authorised Dealers (AD) to take the needed precautions in handling merchanting trade transactions, to ensure the goods involved were permitted for import/export under Indian laws and that such transactions did not involve foreign exchange outlay for a period exceeding three months.

The instructions for this class of trade were revised on January 17, 2004, on the basis of the recommendations of a committee on services to the exporters, headed by a G Padmanabhan. These extended the time limit for completing a merchanting trade, allowed short-term credits, clarified on the date of commencement and completion, and retained the rather debatable restriction that goods must be permitted for import/export under Indian laws. Strict restrictions were, however, imposed on remitting of advance payments to sellers and utilisation of payments received in advance from buyers.

The revised guidelines, issued last week, on March 28, allow advance payment to sellers up to $200,000 without a bank guarantee. For remitting advance payment for the import leg beyond $200,000 a transaction, a bank guarantee or letter of credit (LC) from an international bank of repute will be required, except in cases and to the extent where payment for the export leg is received in advance. An LC favouring the supplier is now permitted against a confirmed export order and payment for the import leg may be made out of the balances in the Exchange Earners Foreign Currency Account f the merchant trader. The other restrictions remain. The names of defaulting merchanting traders, where the dues reach five per cent of their annual export earnings, would be caution-listed.

In the case of imports into India, advance payment can be made up to $500000 without a bank guarantee or standby LC from suppliers by an importer having a good record. Yet, there is no reason not to extend similar facilities to merchant traders having a good record. It is difficult to understand why Indian laws relating to import/export must apply for transactions where the goods do not enter India. Instructions to put the names of merchant traders in a caution list where the dues reach five per cent of their annual export earnings is too harsh -- Indian exporters placed in a similar position are not subject to such treatment. RBI seems to treat merchant traders with more suspicion than necessary.

A more pertinent issue is that in these matters, of merchanting trade and third party payments, RBI first came out with impractical conditions before diluting these, in response to representations from the trade. Better homework is expected from RBI before such instructions are issued in the first place.

email: tncr@sify.com