tfresource

Merchanting Trade Resource

2011-02-06T05:12:00.001-08:00

AD Category – I bank may take necessary precautions in handling bonafides merchanting trade transactions or intermediary trade transactions to ensure that:

(a) Goods involved in the transactions are permitted to be imported into India and all the rules, regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with for the export leg and import leg, respectively.

(b) The entire merchant trade transaction is completed within a period of 6 months.

months.

(d) Payment is received in time for the export leg.

(e) Where the payment for export leg of the transaction precedes the payment for import leg, AD Category – I banks should ensure that the terms of payment are such that the liability for the import leg of the transaction is extinguished by the payment received for the export leg of the transaction, without any delay.

(f) AD Category – I banks may note that short-term credit either by way of suppliers' credit or buyers' credit is not available for merchanting trade or intermediary trade transactions.

Source :

Master circular

Ap Directive 4 july 19 2003

To summarise

1 Goods to be as per FTP

2 Entire transaction to be completed in six months .

3 If we make import payment before receiving export payment , the time gap should not exceed three months.

4 No buyers and suppliers credit

5 Defaults/ deviations to be reported to RBI within reasonable period.

6 Form A2 is used and to be reported in appropriate column of R Return.

7 There would be no restriction regarding receipt of advance payment orback to back letter of credit for merchanting trade transactions.

Earlier ECM Extracts---

7c.1

The basic requirements to be fulfilled from the Exchange Control angle in the case of merchanting trade or intermediary trade transactions are that the transactions should not involve foreign

exchange outlay from India except for the normal transit period not exceeding one month; both the legs of the intermediary trade transaction are financed through the opening of Letters of Credit (with drafts drawn under them being of even tenor) and such credits are on back to back terms. If the Letter of Credit to be opened in favour of the overseas supplier is not backed up by a letter of credit from the overseas buyer, an advance remittance for the full value should have been received from the overseas buyer. Authorised dealers are accordingly authorised to open letters of credit on behalf of their clients, who should be genuine traders in goods and not mere financial intermediaries, in accordance with the basic requirements spelt out in this paragraph and to effect remittances under such letters of credit. They should watch foreign currency receipts from these transactions and for this purpose should maintain suitable records.

Advance Remittances to Overseas Suppliers

7C.2

Authorised dealers may allow advance remittances by Indian merchant exporters who are

their customers to the overseas suppliers, provided (a) confirmed orders have been received by them from the overseas buyers, (b) authorised dealer is satisfied about the capabilities of the merchant exporter to perform the obligations under the order, (c) the transactions would result in adequate profit to the merchant exporter and (d) the other conditions stipulated in paragraph 7C.1 are satisfied. Where the amount of advance remittance exceeds US $ 15,000, a guarantee from an international bank of repute outside India should be obtained from the overseas seller. The concerned authorised dealer should also monitor such transactions to ensure that they are completed and proceeds representing cost of goods supplied to the foreign buyer are repatriated to India by the merchant exporter within a period of six months from the date of advance payment.

Claims against Marine Insurance Policies Covering Imports into India and Merchanting Trade

15A.6	Remittances against claims under marine insurance policies covering imports into India may
	be allowed by authorised dealers on verification of the certificates regarding ownership of

the goods etc. as laid down in paragraphs A.8 and A.9 of Memorandum GIM. Authorised dealers should specifically confirm on form A2 that the necessary documentary evidence has been verified and conditions laid down in paragraphs A.8 and A.9 of Memorandum GIM are fulfilled.

AP(DIR Series) Circular No.18

September 12, 2002

Premiums on Marine Policies covering
Shipments between Countries outside India

A.4 (i) Premiums on marine insurance policies covering shipments between countries outside India must ordinarily be received in foreign currency, but payment in rupees may be accepted provided a certificate from an authorised dealer in foreign exchange is produced to show that the rupees are derived by a remittance from abroad in an approved manner.

NOTE: Overseas offices of the Insurers may grant marine insurance cover for trade between China and third countries and receive premium/settle claims through foreign currency accounts maintained by their overseas offices without prior approval of Reserve Bank.

Sometimes, firms and companies in India finance merchanting trade i.e. goods shipped from one foreign country to another and financed by an intermediary in India. In some of these cases goods may be purchased on f.o.b./c.& f. terms and/or sold on c.i.f. terms, the marine insurance cover being arranged by the intermediary in India. Insurance companies registered with IRDA may issue policies covering transit risks between the loading and the destination ports in rupees or in any foreign currency in such cases, against payment of premium in rupees by the intermediary, after satisfying themselves that the contract provides for marine insurance being taken by the intermediary.

FEDAI Rule 4---Deleted in 1999

RULE 4-Merchanting trade

Banks will make remittances or open letter of credit in favour of the overseas suppliers provided an advance remittance for the full value or an irrevocable letter of credit for the full value has been received/ opened in favour of the merchanting trader who is not a more financial intermediary.
Back-to-back letter will be treated as separate transaction and commission as per Rule 3 II.C. shall be charged to the customer.
The banks are allowed to fix Forward Purchase Contract if so desired by the merchant for the difference period of receipt of the proceeds of the on-sale.
If foreign currency remittance are received in advance from the overseas buyer, the banks may at the specific request of merchanting trade customer hold the foreign currency funds in their Nostro account without converting the amount into Indian Rupee till the date of payment to the overseas supplier. Bank shall not apply buying and selling rates of exchange. Commission at 0.25% shall not pay interest on such advance remittances or grant Rupee advances against foreign currency funds thus received.

A.D. (M.A. Series) Circular No.11 May 16, 2000

For removal of doubts, it is clarified that –

The existing procedure to be followed by Indian companies for entering

into collaboration arrangements with overseas collaborators would

continue.

ii) There would be no restriction regarding receipt of advance There would be no restriction regarding receipt of advance payment or back to back letter of credit for merchanting trade transactions.

AAC by LO--format

2011-01-30T08:13:00.000-08:00

Annex 3
Annual Activity Certificate
(To be submitted as on March 31,…….on or before April 30,………).
To whomsoever it May Concern
This is to certify and confirm that during the period from __________________to ________________, the Branch/Liaison Office/s with PAN No. ---------------------- of M/s__________________ (UIN- ) has/ have undertaken only those activities that have been specifically permitted by the Reserve Bank vide its approval letter/s No/s. ______________________________dated ______________and has/have complied with the terms and conditions specified in the above mentioned letter/s.
_______________________________
(Signature of the Auditor/s)
(Name of the Chartered Accountant)
ICAI Membership No.:
Address:
Place:
Date:

Establishment of Branch / Liaison Office in India---Regulatory requirements

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As On DEC 2010

A Eligibility Criteria for Establishment of Branch / Liaison Office in India

(i) Eligibility Criteria

An application from a foreign entity to establish Branch / Liaison Office in India is considered on the basis of two criteria viz: basic and additional:

Basic criteria

Reserve Bank Route — Principal business of the foreign entity falls under sectors where 100 per cent foreign direct investment (FDI) is permissible under the automatic route.
Government Route — Principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category are considered by the Reserve Bank, in consultation with the Government of India, Ministry of Finance.

Additional criteria

Track Record

For Branch Office — a profit making track record during the immediately preceding five financial years in the home country.
For Liaison Office — a profit making track record during the immediately preceding three financial years in the home country.

Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].

For Branch Office — not less than USD 100,000 or its equivalent.
For Liaison Office — not less than USD 50,000 or its equivalent.

Applicants that do not satisfy the eligibility criteria and are subsidiaries of other companies may submit a Letter of Comfort from their parent company as per B subject to the condition that the parent company satisfies the eligibility criteria as prescribed.
B How to Apply for Liaison office?

Following forms have to be submitted to Reserve Bank Of India.

Form FNC 1 – 3 Copies . _--Duly signed by authorised signatory of foreign entity in home country
Letter from the Principal officer of the Parent Company to RBI as per annxure D

3. The latest audited Balance Sheet of the Parent Company. [If the applicants’ home country laws/regulations do not insist on auditing of accounts, an Account Statement certified by a Certified Public Accountant (CPA) or any Registered Accounts Practitioner by any name, clearly showing the net worth may be submitted]

Letter of Authority from the Parent Company in favour of local representative.
Two copies of the English version of the Memorandum and Articles of Association (Charter Documents) of the Parent Company attested by Indian Embassy/Notary Public in the country of registration.
KYC of parent Company, Bankers' Report from the applicant’s banker in the host country / country of registration showing the number of years the applicant has had banking relations with that bank
Board resolutions . wherever requred
Copy of the Certificate of Incorporation / Registration attested by the Notary Public in the country of registration
A decalrtiion that The BOs / LOs shall obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up of their office in India and report the same in the Annual Activity Certificate

Scope of activities permitted and other procedural guidelines regarding functioning of a Branch Office / Liaison Office in India

(i) Permitted activities

Permitted activities for a Branch / Liaison Office in India would be as under:

Liaison Office

Representing the parent company / group companies in India.
Promoting export / import from / to India.
Promoting technical/ financial collaborations between parent / group companies and companies in India.
Acting as a communication channel between the parent company and Indian companies.

(ii) Applications for additional offices or undertaking additional activities.

Requests for establishing additional BO / LOs may be submitted to the Reserve Bank in the same manner, as indicated in Annex A.
Fresh FNC form, duly signed by the authorized signatory of the foreign entity in the home country should be submitted. However, the documents mentioned in form FNC need not be resubmitted, if there are no changes to the documents already submitted earlier.
If the number of Offices exceeds 4 (i.e. one BO / LO in each zone viz; East, West, North and South), the applicant has to justify the need for additional office/s.
The applicant may identify one of its Offices in India as the Nodal Office, which will coordinate the activities of all of its Offices in India.
Requests for undertaking activities in addition to what has been permitted initially by the Reserve Bank may be submitted through the designated AD Category -I bank to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai, justifying the need with comments of the designated AD Category - I bank.

(iii) Extension of validity of the approval of Liaison Offices

Requests on letter head of LO for extension of time for continuance of LOs [other than those from entities in the Insurance sector, banks, NBFCs and Construction and Development sectors (excluding infrastructure development companies)] may be submitted to the AD Category - I bank concerned under whose jurisdiction the LO / Nodal Office is located before the expiry of the validity of the approval.
Applications from foreign banks and insurance companies will continue to be directly received and examined by the Department of Banking Operations and Development, Reserve Bank and Insurance Regulatory and Development Authority (IRDA) respectively, as hitherto.
No extension would be considered for LOs of entities which are NBFCs and those engaged in Construction and Development sectors (excluding infrastructure development companies). Upon expiry of the validity period, these entities have to either close down or be converted into a Joint Venture (JV) /Wholly Owned Designated AD Category-I bank should ensure submission of all the above mentioned documents by the BO / LO before considering the request for closure of the BO / LO and subsequent remittance, if any, to the Head Office.

Designated Authorised Dealers may allow remittance of winding up proceeds in respect of Offices of banks and insurance companies, after obtaining copies of closure permission from the sectoral regulators along with the documents mentioned above.

D Restriction on Liaison office

No commercial operations can be carried out by a liaison office in India.
It can neither borrow, nor lend money
It can not open any other bank account but a special account that only allows inflows from abroad.
Office expense must be met from inward remittance in special account opened by liaison office.
It must file regular returns to the RBI. Such returns must
include Audited Annual accounts and an activity report for the year.

Annex D

[Annex to A. P. (DIR Series) Circular No. 23 dated December 30, 2009]

Format of the Comfort Letter

The Chief General Manager-in-Charge,
Reserve Bank of India,
Foreign Exchange Department,
Foreign Investment Division,
Central Office, Fort,
Mumbai- 400001.

Dear Sir,

Sub: Application for establishment of Branch / Liaison Office in India by our subsidiary / group company, M/s_________________________

You may kindly refer to the application made by our subsidiary / group company, M/s_____________________________to your office for establishing Branch / Liaison Office in India.

2. In this connection, we, ______________________(the parent company) undertake to provide the necessary financial support for our subsidiary / group company's operations as a Branch / Liaison Office in India. Any liability that may arise due to the functioning of the Branch/Liaison Office in India will be met by us (the parent company), in case of inability on part of the Branch/Liaison Office to do so.

3. We are also enclosing the financial background of our company in the form of our latest Audited Balance Sheet / Account Statement certified by a Certified Public Accountant.

Yours faithfully,
( )
Authorised Representative of the parent company

for any clarifications , please contact on tradefinance.teacher@gmail.com

these are indicatives, for exact requirments. please contact your banker (AD)