Navigating Merchant Trade in India: A Complete Guide

Merchant trade has emerged as a dynamic tool in the world of international trade, especially for countries like India, where businesses are increasingly acting as intermediaries between global buyers and sellers. However, understanding the complete lifecycle, documentation, risk mitigation, and regulatory compliance is crucial to success.

In this blog, we walk through the merchanting trade lifecycle, essential documentation, risk management strategies, and banking and regulatory requirements for a smooth merchant trade operation.

Merchant Trade Lifecycle

Understanding the Merchanting Trade Lifecycle

Merchanting Trade Transactions (MTT) involve a simple but critical three-party triangle:

• The Supplier (overseas)

• The Merchant Trader (based in India)

• The Buyer (overseas)

Here’s how the flow typically works:

1. Purchase Agreement: The Indian merchant trader enters into a contract to purchase goods from a foreign supplier.

2. Sale Agreement: Simultaneously, the trader signs a contract to sell the goods to a foreign buyer.

3. Shipment: Goods are shipped directly from the foreign supplier to the foreign buyer without entering Indian territory.

4. Payment Flows:

   • The merchant trader receives payment from the overseas buyer.

   • The merchant trader then makes payment to the overseas supplier.

5. Transaction Completion: The trade must complete (both shipment and payment cycles) within nine months from the first payment date.

This structure allows India-based businesses to earn trading margins without handling the physical goods within India, but it demands precision and compliance at every step.

Documentation Requirements and Sequencing for Smooth Transactions

Successful merchanting hinges on strong documentation — not only for business clarity but also for satisfying banking and regulatory scrutiny. Here's what you need:

Document	Purpose	Stage
Import Export Code	Basic eligibility to conduct international trade	Before starting
GST Registration (if applicable)	General business registration	Before starting
PAN and Bank Current Account with AD Bank	Essential identity and banking compliance	Before starting
Supplier Agreement	Legal contract for sourcing goods	Before transaction
Buyer Agreement	Legal contract for selling goods	Before transaction
Supplier Invoice	Payment basis for purchase	At transaction
Buyer Invoice	Basis for receiving sale proceeds	At transaction
Shipment Documents (Bill of Lading, Airway Bill)	Proof of direct shipment	During shipment
Undertaking/Declaration	FEMA compliance statement (goods not entering India)	Before transaction
Board Resolution (Companies)	Authorisation for executing contracts	Before transaction
FETERs	Mandatory forex transaction reporting by the bank	During transaction

Important sequencing:

• Finalise both contracts (purchase and sale) before shipment starts.

• Ensure buyer advances or payment assurance is in place before paying the supplier, unless otherwise agreed.

• Shipment documents must match contract terms to avoid future disputes.

Typical Risks in Merchant Trade and How to Mitigate Them

Merchanting trade, while offering high-profit potential, comes with its own set of risks that require proactive management. One significant risk is buyer default, where the overseas buyer may fail to pay after the goods are shipped. To mitigate this, traders should secure advance payments, obtain Letters of Credit (LCs), or arrange Bank Guarantees from reputable financial institutions.

Another critical concern is supplier risk, where the supplier may delay or fail to ship the goods as agreed. Conducting thorough due diligence on suppliers and incorporating strong penalty clauses into contracts can help safeguard against such disruptions.

Shipment risk also looms large, as goods could be damaged or lost in transit. Traders should always insist on comprehensive third-party shipment insurance to protect their interests.

Additionally, foreign exchange risk poses a financial threat, with currency fluctuations potentially eroding margins during the transaction cycle. This can be managed by using forex forward contracts to lock in exchange rates at the time of the deal.

Compliance risk is another crucial aspect, as a breach of FEMA or RBI guidelines can lead to penalties and regulatory action. Regular consultations with banks and legal advisors ensure that all merchanting transactions remain fully compliant.

Finally, timeline risk must not be underestimated, as all merchanting trade transactions must be completed within nine months from the date of the first payment. To avoid delays, it is important to set strict internal deadlines, closely monitor the flow of shipments and payments, and maintain clear communication with all parties involved.

Effective management of these risks is essential for building a sustainable and successful merchanting trade business.

Bank and Regulatory Compliance: An International Trade Perspective

Merchant trade is governed by RBI regulations, especially the Master Direction on Export of Goods and Services under FEMA. Banks (Authorised Dealer banks) act as the first line of regulatory checks.

Here are the major compliance points:

• No Physical Import/Export into India: Goods must ship directly from the supplier to the buyer without touching Indian ports.

  
  

• 9-Month Rule: The Entire merchanting transaction (payment and shipment) must be completed within 9 months from the first leg of the transaction.

  
  

• Positive or Break-even Margins: Merchant trade must not result in a loss after factoring in all costs and commissions.

  
  

• FETTERS Reporting: Banks report payments and receipts under specified purpose codes:

  • P0103: Payment to Supplier (Import under MTT)

  • P0802: Receipt from Buyer (Export under MTT)

    
    

• Documentation Audit Trail: Proper maintenance of contracts, invoices, shipment documents, and payment proofs is mandatory. RBI or banks may conduct periodic audits.

  
  

• Special Cases (Agency Commission): Agency commission is generally prohibited in MTTS. However, in exceptional cases where the trade is fully completed without loss, a specific request can be made to the bank for approval of outward remittance of such commission.

Conclusion: Merchanting Trade — High Potential, High Responsibility

Merchanting trade can open lucrative opportunities for businesses to become global trade intermediaries. However, the rewards come with the responsibility of managing documentation, mitigating risks, and ensuring rigorous regulatory compliance.

By mastering the merchanting trade lifecycle, maintaining a sharp focus on paperwork, understanding risk landscapes, and partnering proactively with your bank, you can build a sustainable and profitable merchant trading business from India.