RBI's stultifying rules on merchanting trade

The Reserve Bank of India (RBI) has withdrawn its unrealistic restrictions regarding third-party (TP) payments for imports and exports but is yet to amend the impractical conditions regarding merchanting trade.

The latter is the term when the import and export legs of the transaction are completed without the goods actually entering the borders of the importer’s country. Upon instructions of the importer, the seller delivers the goods directly to the ultimate buyer in either his own country or a third country.

Last November, RBI issued a circular allowing authorised dealers to accept payments for exports from a TP, that is,. payment from a person other than the buyer and to remit payments for imports to a TP, that is,. payments to a person other than the seller.

The circular said TP payments for export/import transactions can be accepted if a firm and irrevocable order, backed by a tri-partite agreement, is in place, the payment is received from or made to a Financial Action Task Force-compliant country through banking channels, relevant documents like invoice, bill of entry, GR/SDF/Softex mention about payment from or to a TP and so on.

For imports the facility of payments to a TP was allowed for remittances up to $100,000 only. These instructions ignored the reality where receipt for exports from a TP or payments for imports to a TP are not envisaged or planned upfront for most transactions.

RBI now says in view of the difficulties faced by exporters/importers in meeting the condition, of a “firm, irrevocable order, backed by a tripartite agreement, should be in place” in the said circular, it has been decided that this may not be insisted on in cases where documentary evidence for circumstances leading to TP payments/name of the TP being mentioned in the irrevocable order or invoice has been produced.

This shall be subject to conditions that the Authorised Dealer bank should be satisfied with the bona fides of the transaction, says RBI. Further, to liberalise the procedure, the limit of $100,000 eligible for TP payment for import of goods has been abolished.

Last month, RBI issued revised instructions on merchanting trade. RBI said such 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 foreign supplier.

If the foreign buyer gives an irrevocable letter of credit (LC) in favour of the merchant, an LC in favour of the foreign supplier can be opened on that basis but payment 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 or current account and earmarked for payment to the seller, 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, said RBI.

Few traders can get bank guarantees from suppliers for advance payments. It is not RBI’s business to instruct that a trader must make profit on each transaction or how the trader should use the advance he gets from his customer. There is no reason to stipulate that a payment from buyers must come in before making payments to suppliers under an LC.

It might not be possible every time. Such instructions force our traders to set up outfits in Dubai or Singapore and conduct such transactions from there. RBI must revise its ill-advised instructions on merchanting trade as quickly as possible.

email: tncr@sify.com