MERCHANTING TRADE

• Learning objectives:
 In this chapter you will learn the modalities of
certain methods of international transactions
more specifically dealing with buying from one
country and selling to another foreign country.
 This chapter will also provide guidance on
widening the scope of foreign trade inorder to
enter into a lerger arena of International Trade.

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• 1.1 INTRODUCTION TO MERCHANTING TRADE
• In the case of Merchanting Trade ( also known as Merchandising Trade),
the supplier of goods will be resident in one foreign country, the buyer of
the goods will be resident in another foreign country and the merchant or
the intermediary will be resident in India.
• The merchant will book the order from the buyer, place the order with the
supplier, supervise and coordinate the shipment of goods from the
supplier’s country and deliver the same in buyer’s country.
• The merchant will be receiving payment from the overseas buyer and
making payment to the overseas supplier through an authorised dealer in
foreign exchange in India. The difference between the inward remittance
and outward remittance will be the profit for the merchant.
• No export will be made from India
• No import will be made from India
• Shipment will be made from one foreign country to another foreign
country.

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• The intermediary resident in India will be
supervising and co-ordinating the transaction.
He will procure an order form the buyer in a
country, place a similar order with the supplier
in another country and see the entire
transaction is completed in a successful
manner. He earns a profit on account of his
business.

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• Some times goods may be imported by a buyer in India
from a seller in one country and exported to a buyer in
another country. Such imports will be kept in bond and
then exported. It is also possible that repacking may be
done under customs supervision and then exported.
This is basically to avoid the foreign buyer to know the
source from which goods are being bought and
supplied to them.
• Such transactions are known as Merchanting Trade as
per the Indian Foreign Exchange Management
Regulations.

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• In yet another form of Merchanting trade, goods imported,
in accordance with FTP, may be exported in same or
substantially same form without an authorisation provided
that item to be imported or exported is not restricted for
import or export.
• Export of such goods imported against payment in freely
convertible currency would be permitted against payment
in freely convertible currency. Goods including those
mentioned as restricted for import (except prohibited
items) may be imported under Customs Bond for export in
freely convertible currency without an Authorization
provided that item is freely exportable without any
conditionality / requirement of License/permission.

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• Goods are imported into India kept in customs
bonded warehouse and then exported or
goods are imported into India, kept in customs
bonded warehouse, repacked under customs
supervision and then exported. This is
basically to avoid the ultimate buyer to know
the source of supply of the material identified
by the Indian merchanting trader. Such a
transaction is called merchanting trade or
intermediary trade.
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• Advance remittances are permitted provided the conditions
stipulated in the exchange management regulations are
duly complied with. Upto the value limit of USD 25000
authorised dealers may allow advance remittances without
insisting on a bank guarantee. If this value is exceeded, a
bank guarantee from a bank of international repute
situated outside India should be insisted upon. The
overseas supplier of goods who is asking for the payment in
advance should arrange the guarantee. The guarantee
commission should be borne by him.
• LC can be opened by authorised dealers in favour of
overseas supplier provided a similar letter of credit has
been opened by the buyer in favour of the merchant. Such
cases are dealt by the IBD on a case to case basis.

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• 1.2 INTERMEDIARY TRADE
• This is another form of International trade. Here the
Buyer and Seller are unknown to each other but Trade
through an intermediary Trader. However, there is a
vast difference between this form and the Broker. The
Broker only introduces the Buyer and Seller and leave
them to complete their own method of completion of
the transaction. Whereas the Intermediary Trader
actually completes the Transaction and the Buyer and
Seller may be totally unknown to each other or they
may be known but due to certain reasons cannot
complete the Transaction directly.

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• Export/Import procedure according to the Intermediary Trade method :
• Definition
• (1) A transaction to import goods in the purpose to export to third
countries without changing the goods' original state and the character and
withdrawal the intermediary service fee(Earning as FOB-CIF)
• (2) The intermediary trade is to import goods from third countries when
there is a limitation to procure the domestic goods and to sell the goods to
third countries to expand foreign market continuously.
• (3) A cautious is required if a final importing country is restricting import
from a initial exporting country, there could be a retaliatory act which is a
restriction to import which will evidently lead to a trading policy confusion
for the final importing country.
• (4) For the import ship diversifying goods, a certificate of the country of
origin should be attached.

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• Procedure
• (1) Conclude an export contract
• (2) L/C received
• (3) Conclude a import contract
• (4) Export/Import license
• (5) Open L/C
• (6) Sale, shipping and bill of exchange (The initial
exporter).
• (7) Settle import earning or receive export earning
(Through a Authorised Dealer foreign exchange bank).

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• Goods delivery method
• (1) Normally, the goods are directly transport to a final importing country from a initial
importing country when using a intermediary trade and in this case, third parties
documents are quoted for the B/L and the transportation documents excluding the
commercial invoice.
• (2) Seller -- The initial exporter
• (3) Notify Party -- Intermediator (Or the final importer)
• (4) Consignee -- The final importer or the final importing bank
• (5) Examples of clauses quoting third parties' documents
• - The transport documents indicating as the consignor of the goods a party other than
the beneficiary of the credit acceptable.
• (6) If transshipment from a intermediating country, it is usually a case when a
intermediator is reluctant to disclose either party of an initial exporter or the final
importer or to avoid trading policy of the final importing country. In this case, the
intermediator re-prepares B/L and the transportation documents and present them to
a final importer.
• (7) Things to be cautious
• <1> Changing the country of origin is not allowed
• <2> If the goods are quota goods, process based on the exporting country's quota.
• <3> The intermediary trade method is not allowed within the same country.

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• Export performance acknowledging range -- Basis on each
countries' law.
• Transferring L/C to a foreign country
• (1) Transferring L/C to a foreign country has the similar
effect as intermediary trade.
• (2) Condition for transferring -- When transferring, reducing
unit price than the master L/C, reducing delivery date and
increasing insurance coverage rate are possible .
• (3) The 1st beneficiary has the right to request the
difference amount due to unit price reducing by preparing
separate invoice and bill of change, Master L/C ,L/C
transferring application, The other party's consent (Offer).

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• The difference in Intermediary Trade and Merchandising Trade :
• (1) A intermediary trader is a intermediator of the final importer and the
initial exporter which is the subject of a trade contract. In another words,
the intermediator withdrawals the sales difference by selling the
purchased goods, and when there is a dispute in the transaction, the
intermediator becomes the involved party for the dispute.
• (2) Since a intermediary trader is someone who arranges a transaction
between the final importer and the initial exporter to directly engage in
transaction by receiving transaction fee, the trader is not an actual party
involved in trade transaction. Therefore, the intermediator is not the
actual involved party for the dispute when it occurs.
• (3) When engage with intermediary trade, the goods and the shipping
documents are normally passing through a intermediator for a delivery to
the final importing country and with the transaction, the goods and the
shipping documents are directly delivered to the final importer from the
initial exporter.

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• 1.3 MERCHANDISING
• In the broadest sense, merchandising is any
practice which contributes to the sale of
product to a retain consumer.
• At a retail in-store level, merchandising refers
to the variety of products available for sale
and the display of those products in such a
way that it stimulates interest and entices
customers to make a purchase.

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• In retail commerce, visual display
merchandising means merchandise sales using
product design, selection, packaging, pricing
and display that stimulates consumers to
spend more. This includes disciplines and
discounting, physical presentation of products
and displays, and the decisions about which
products should be presented to which
customers at what time.
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• Promotional merchandising:
• The annual cycle of merchandising differs
between countries and even within them,
particularly relating to cultural customs like
holidays and seasonal issues like climate and local
sporting and recreation.
• Merchandising also varies within retail chains,
where stores in places like Buffalo might carry
snow blowers, while in Florida and southern
California might instead carry beach clothing and
barbecue grills all year.

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• Trading Industry
• In Eastern Europe, particularly in Russia, the term
“merchandising” is commonly used within the trading
industry and denotes all marketing and sales stimulation
activities around PoS : design, creation, promotion, care
and training of sales staff.
• A merchandiser is someone who is continuously involved in
business promotion by buying and selling of goods. In Asian
countries, such as India, this term is more synonymous with
activities right from sampling and idea conception to
dispatching of the shipment. It is a job description that
involves leading and working with different departments
within the organization, suppliers and buyers to deal with
timely deadlines and accepted quality levels.
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• Retail supply chain
• In the supply chain, merchandising is the practice of making
products in retail outlets available to consumers, primarily by
stocking shelves and displays. By doing this, retail stores have been
able to substantially reduce the number of employees needed to
run the store.
• While stocking themselves and building displays is often done when
the product is delivered, it is increasingly a separate activity from
delivering the product. In grocery stores, for example, almost all
products delivered directly to the store from a manufacturer or
wholesaler will be stocked by the manufacturer's / wholesaler’s
employee who is a full-time merchandiser. Product categories
where this is common are Beverage, packaged goods, magazines
and books, and health and beauty products. For nationwide
branded goods manufacturers such as Coca-Cola Company and
PepsiCo, their respective merchandiser work forces number in
thousands.

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• Licensing
• In marketing, one of the definitions of merchandising is the
practice in which the brand or image from one product or
service is used to sell another.
• Trademarked brand names, logos or character images are
licensed to manufacturers of products such as toys or
clothing, which then make items in or emblazoned with the
image of the license, hoping they’ll sell better than the
same item with no such image.
• For the owners of the IP (intellectual property) in question,
merchandising is a very popular source of revenue, due to
the low cost of letting a third party manufacture the
merchandise, while the IP owners collect the merchandise
fees.

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• Merchandising for Children:
• Most prominently seen in connection with films and
games, usually those in current release and with
television shows oriented towards children.
• Merchandising especially with child-oriented films and
TV shows, often consist of toys made in the likeness of
the show’s characters (action figures) or items which
they use.
• Sometimes merchandising from a television show can
grow far beyond the original show, even lasting
decades after the show has largely disappeared from
popularity.

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• Adult-oriented merchandising:
• Related to professional sports teams(and their players).
• A smaller niche in merchandising is the marketing of
more adult-oriented products in connection with
similarly adult-oriented films and TV shows.
• Occasionally shows which were intended more for
children find a following among adults, and you can see
a bit of cross over, with products from that show
oriented towards both adults and children.
• Sometimes a brand of non-media products can achieve
enough recognition and respect that simply putting its
name or images on a completely unrelated item can
sell that item.
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• 1.4 FEMA PRECAUTIONS
• 1. Regulations of RBI
• The Merchant may take necessary precautions in handling
merchant trade transactions or intermediary trade transactions to
ensure that:
 Goods involved in the transactions are not permitted to be
imported into India
 Such transactions do not involve foreign exchange outlay for a
period exceeding three months
 All rules, regulations and directions applicable to export out of India
are complied with by the export leg and all rules, regulations and
directions applicable to import are complied with by the import leg
of merchandising trade transactions. It is also required to ensure
timely receipt of payment for the export leg of such transactions.

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• 2.Customer eligibility
• The merchant should be a regular customer of
the authorized dealer and that he should be a
genuine trader in goods and a mere financial
intermediary.
• The authorized dealer should also be satisfied
that the merchant is capable of completing the
transaction successfully and that it will result in
accrual of profit in foreign exchange for our
country.
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• 3.Terms of settlement:
• Normally the inward remittance from the overseas
buyer should be received earlier and the outward
remittance to the overseas supplier will be made
subsequently.
• Alternatively, an irrevocable letter of credit should be
opened by the buyer in favour of the merchant, and on
the strength of this letter of credit the merchant in turn
will open a fresh letter of credit in favour of the
overseas supplier. The terms of payment under both
the letters of credit will be of even tenor.

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• 4. Advance remittance: subject to following conditions:
 The applicant should be a regular customer of the bank
 The authorized dealer should be satisfied about the capabilities of
the merchant to perform the obligation arising under the
merchanting trade business.
 The transaction should result in adequate profit to the merchant.
 Documentary evidence should be produced to show that the
supplier insists upon advance payment.
 Advance remittance amount should not exceed USD 25000 or its
equivalent. If this limit is exceeded, then the overseas supplier
should arrange a guarantee issued by a bank of international repute
situated outside India.
 It is also necessary that the business be completed as early as
possible and in any case within a period of three months from the
date of advance remittance.

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• 1.5 RBI GUIDELINES TO BANKS:
• In case of a Merchanting trade, FEMA provisions are attracted since
there is export realization and import payment to be made in freely
convertible foreign currency.
• All merchanting trade transactions have to be carried out only
through an Authorized Dealer in Foreign Exchange Category –I
bank. Such banks may take precautions in handling bonafide
merchanting trade transactions or intermediary transactions.
• The merchanting traders have to be genuine traders of goods and
not mere financial intermediaries. Confirmed orders have to be
received by them from the overseas buyers. Banks should satisfy
themselves about the capabilities of the merchanting trade to
perform the obligations under the order. The overall merchanting
trade should result in reasonable profits to the merchanting trader.
• All Banks have to ensure that exports out of India have to be
realized in freely convertible foreign currency whether the goods
are delivered from india or are delivered as part of a merchanting
trade transaction. INR payment should not be accepted.

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• UNDER FEMA REGULATION GUIDELINES : Banks should ensure that :
• (i)For a trade to be classified as merchanting trade following conditions should be
satisfied ;
• (a) Goods acquired should not enter the Domestic Tariff Area and
• (b) The state of the goods should not undergo any transformation ;
• (ii) Goods involved in the merchanting trade transactions would be the ones that
are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP)
of India, as on the date of shipment and all the rules, regulations and directions
applicable to exports (except Export Declaration Form) and imports (except Bill of
Entry), are complied with for the export leg and import leg respectively ;
• (iii) AD bank should be satisfied with the bonafides of the transactions. Further,
KYC and AML guidelines should be observed by the AD bank while handling such
transactions ;
• (iv) Both the legs of a merchanting trade transaction are routed through the same
AD bank. The bank should 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 ;
• (v) The entire merchanting trade transactions should be completed within an
overall period of nine months and there should not be any outlay of foreign
exchange beyond four months ;

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• (vi) The commencement of merchanting trade would be the date of shipment / export
leg receipt or import leg payment, whichever is first. The completion date would be the
date of shipment / export leg receipt or import leg payment, whichever is the last ;
• (vii) Short-term credit either by way of suppliers' credit or buyers' credit will be
available for merchanting trade transactions, to the extent not backed by advance
remittance for the export lag, including the discounting of export leg LC by an AD bank,
as in the case of import transactions ;
• (viii) In case advance against the export leg is received by the merchanting trader, AD
bank should ensure that the same is earmarked for making payment for the respective
import leg. However, AD bank may allow short-term deployment of such funds for the
intervening period in an interest bearing account ;
• (ix) Merchanting traders may be allowed to make advance payment for the import leg
on demand made by the overseas seller. 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 by providing facility based on commercial
judgement. It may, however, be ensured that any such advance payment for the import
leg beyond USD 200,000/- per transaction, the same should be paid against bank
guarantee / LC from an international bank of repute except in cases and to the extent
where payment for export leg has been received in advance ;

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• Letter of credit to the supplier is permitted against
confirmed export order keeping in view the outlay and
completion of the transaction within nine months ;
• Payment for import leg may also be allowed to be
made out of the balances in Exchange Earners Foreign
Currency Account (EEFC) of the merchant trader ;
• AD bank should ensure one-to-one matching in case of
each merchanting trade transaction and report defaults
in any leg by the traders to the concerned Regional
Office of RBI, on half yearly basis in the format as
annexed, within 15 days from the close of each half
year, i.e. June and December ;
• The names of defaulting merchanting traders, where
outstandings reach 5% of their annual export earnings,
would be caution-listed.
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• 1.6 SPECIAL ECONOMIC ZONES (SEZ)
• Special Economic Zones (SEZs) have been recognized as an
important mechanism for trade and investment promotion,
creation of infrastructure, employment generation, promotion of
regional development, increase in foreign exchange earnings,
improving export competitiveness and transfer of skills and
technology.
• The term special economic zone is commonly used as a generic
term to refer to any modern economic zone. In these zones
business and trades have laws that differ from the rest of the
country. Broadly SEZ are located within a country’s national
borders.
• Modern SEZs appeared from the late 1950’s in industrial countries.
From the 1970s onward, zones providing labor-intensive
manufacturing have been established, starting in Latin America and
East Asia. These zones attracted investment from multinatonal
corporations.

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• The aims of SEZ’s include:
 Increased trade
 Increased investment
 Job creation
 Effective administration
 To encourage businesses to set up in the zone,
liberal policies are introduced. These policies are
typically regarding investing, taxation, trading,
quotas, customs and labour regulations.
Additionally companies may be offered tax
holidays.

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• The objectives of SEZ’s include:
Generation of additional economic activity
Promotion of exports of goods and services
Promotion of investment from domestic and
foreign sources
Creation of employment opportunities
Development of infrastructure facilities

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• The incentives and facilities available to SEZ developers
include:
 Exemption from customs/excise duties for development of
SEZs for authorised operations approved by BOA.
 Income Tax exemption on income derived from the
business derived from the business of development of the
SEZ in a block of 10 years in 15 years under section 80-IAB
of the Income Tax Act.
 Exemption from minimum alternate tax under section
115JB of the Income Tax Act.
 Exemption from dividend distribution tax under Section
115O of the Income Tax Act.
 Exemption from Central Sales Tax
 Exemption from Service Tax

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• The creation of special economic zones by the host
country may be motivated by the desire to attract
Foreign Direct Investment.
• The benefits a company gains by being in a Special
Economic Zone may mean it can produce and trade
goods at a globally competitive price.
• India was one of the first countries in Asia to recognize
the effectiveness of the Export Processing Zone (EPZ)
model in promoting exports, with Asia’s first EPZ set up
in Kandla in 1965. Next Santacruz Electronic Export
Processing Zone (SEEPZ) was set up in Mumbai in 1973.

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• In order to overcome the shortcomings experienced on
account of the multiplicity of controls and clearances;
absence of world-class infrastructure, and an unstable
fiscal regime and with a view to attract larger foreign
investment in India, the Special Economic Zones Policy
was announced in April 2000.
• The Special Economic Zones Act was passed by the
Government of India in May 2005 and came into effect
on 10 February 2006 providing for drastic simplification
of procedures and for single window clearance on
matters relating to central as well as state
governments.
• The remaining part of India not covered by the SEZ
rules is known as Drastic tariff area.

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• The main objectives of the Special Economic
Zones Act 2006 were as follows:
Generation of additional economic activity
Promotion of export goods and services
Promotion of investment from domestic and
foreign sources
Creation of employment opportunities
Development of infrastructural facilities

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• Exports of Indian SEZs have experienced a
growth of 50.5 % of the past eight fiscals from
US$2.5 billion in 2003-04 to about US$65
billion in 2011-12(accounting for 23% of
India’s total exports).

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• Santacruz Electronic Export Processing Zone (SEEPZ) was set up
on 1st May, 1973 as uni-product EPZ exclusively for
manufacture and export of electronic items in an area of 100
acres ( which was later increase to 110 acres) of land leased
through the Maharashtra Industrial Industrial Development
Corporation (MIDC), Andheri (East), which over the years has
become a land mark of Mumbai.
• The objective was of (a) accelerating the progress of
electronics manufacturing in India (presumably encompassing
the technology transfer objective) and (b) to take advantage of
the growing electronics world market (export and foreign
exchange objectives).
• Considering the high potential and the pollution-free nature of
Gem & Jewellery Industry, the Govt. of India decided to permit
manufacture and export of Gem & Jewellery items from SEEPZ
during 1987-88, which soon gave a glamorous twist to SEEPZ.

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• 1.7 REGULATORY REQUIREMENTS FOR SPECIAL ECONOMIC ZONES:
• (I) Compulsory Area Requirements :
• (a) SEZ for multi product shall have a contiguous area of 1000 hectares or
more but not exceeding 5000 hectares.
• (b) A SEZ for a specific sector or for one or more services or in a port or
airport, shall have a contiguous area of 100 hectares or more.
• (c) SEZ for Free Trade Warehousing shall have an area of 40 hectares or more
with a built up area of not less than 1 lakh square metres.
• (II) The developer or Co-Developer shall have at least 26% of the equity
proposing to create business, residential or recreational facilities in a SEZ in
case such development is proposed to be carried out through a separate
entity or a special purpose vehicle being a company formed under the
Companies Act.
• (III)For setting up a SEZ the State Government shall make available certain
facilities in the State to the SEZ units and Developer.
• (IV) The State Government shall, while recommending a proposal for setting
up of SEZ to the Board indicate whether the proposed area falls under
reserved or ecologically fragile area as may be specified by the concerned
authority.

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• (V) The Central Government shall within a
period of 30 days of the communication
received by it grant a formal approval in the
cases where land is in possession of the
developer for providing infrastructural
facilities in the SEZ.

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• 1.8 SUMMARY AND CONCLUSION
• Large Organizations like the multinational
corporations undertake the Merchanting Trades,
Merchandising and SEZ activities.
• At each point, at each stage, you have to carefully
follow complex Laws, Rules, Regulations of the
countries of the Trading Partners, but these
business activities do give benefit of large
volumes and greater leverage in business
transactions of a very high order.
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• We have completed Chapter4

• Next we move to Chapter 5
FOREIGN EXCHANGE
MANAGEMENT

Chapter 4 Import Export Management