What Are the RBI Rules for Merchanting Trade Transactions in India?
- Author:
- Manoj Sharma
- Verified by:
- Editorial team
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Short answer
A merchanting trade transaction is a deal where an Indian trader buys goods from one foreign country and sells them to another without the goods touching India. From 1 October 2026, RBI's rules sit in Regulation 16 of the FEMA (Export and Import of Goods and Services) Regulations, 2026. The gap between the two remittances must not exceed six months.
| Applies to | Governed by | Deadline | Penalty | Last verified |
|---|---|---|---|---|
| Persons in India who buy goods abroad and sell them to an overseas buyer without the goods entering India, as allowed under the Foreign Trade Policy | FEMA (Export and Import of Goods and Services) Regulations, 2026 (Regulations 16, 18 and 19), RBI A.P. (DIR Series) Circular No. 20 dated 16 January 2026, and Foreign Trade Policy 2023 para 2.39 | The period between the outward remittance and the inward remittance, or the other way round, must not exceed six months unless the AD bank allows more time | No MTT-specific penalty is set in the 2026 Regulations; contraventions of FEMA can attract a penalty of up to three times the amount involved under section 13 of FEMA | 9 Oct 2026 |
What is a merchanting trade transaction under RBI rules?
A merchanting trade transaction (MTT) is a trade where goods move from one foreign country to another foreign country without touching Indian ports, with an Indian intermediary buying and selling them. The Foreign Trade Policy allows this subject to RBI guidelines (FTP 2023, para 2.39). RBI's rules for the payment side are in FEMA Regulations 2026, Regulation 16.
- Two legs: Every MTT has an import leg, where the Indian trader pays the overseas seller, and an export leg, where the trader receives money from the overseas buyer. Regulation 16 refers to these as the outward remittance and the inward remittance (FEMA Regulations 2026, Regulation 16(1)).
- Goods only: The Foreign Trade Policy describes merchanting trade as shipment of goods between two foreign countries, so the rule is about goods, and service exports follow the general export rules instead (FTP 2023, para 2.39).
- Excluded goods: Merchanting trade is not allowed for goods or items in the CITES and SCOMET lists (FTP 2023, para 2.39).
- New framework: From 1 October 2026, RBI's Master Directions on Export and on Import of Goods and Services and the older MTT circulars stand superseded (RBI A.P. (DIR Series) Circular No. 20, 2026, para 4 and Annex).
- Bank role: Your authorised dealer (AD) bank checks the genuineness of each leg and monitors that both legs are completed (FEMA Regulations 2026, Regulation 16(2)).
For a shorter definition, see what is merchanting trade. For the wider law behind these rules, see what is FEMA.
Who do the RBI merchanting trade rules apply to?
The RBI merchanting trade rules apply to any person in India who undertakes merchanting trade in accordance with the Foreign Trade Policy (FEMA Regulations 2026, Regulation 16(1)). They also bind AD banks, which must credit or debit MTT accounts, update EDPMS and IDPMS, and follow up until both legs are complete.
| Who | Covered by Regulation 16 | Why | Best for |
|---|---|---|---|
| Indian trading company buying from one foreign supplier and selling to another foreign buyer | Yes | Goods move between two foreign countries with an Indian intermediary, which matches FTP para 2.39 | Commodity and goods traders |
| Exporter shipping goods from India | No, general export rules apply | The goods leave an Indian port, so the EDF, realisation and EDPMS rules for exports apply | Manufacturers and merchant exporters |
| Freelancer or service exporter | No | Merchanting trade under the FTP covers goods; service exporters follow the EDF and realisation rules for services | Consultants, developers, designers |
| Trader dealing in CITES or SCOMET listed items | Not permitted as merchanting trade | FTP para 2.39 excludes these goods | Traders in wildlife products or dual-use items |
| AD bank handling the trader's account | Yes, as the monitoring party | Regulations 16(2), 18 and 19 set the bank's duties | Bank trade operations teams |
How does a merchanting trade transaction work with an AD bank?
A merchanting trade transaction works through your AD bank, which handles both the payment to the overseas seller and the receipt from the overseas buyer. The bank checks your documents, posts each leg in EDPMS and IDPMS, and closes the entries once both legs are complete (FEMA Regulations 2026, Regulation 16(2) and 18(1)(l)).
- Confirm the goods are allowed. Check that the goods are not in the CITES or SCOMET lists, since FTP para 2.39 excludes them (FTP 2023, para 2.39).
- Read your AD bank's MTT policy. Each AD bank must publish its policy and the main features of its standard operating procedure for export, import and MTT transactions, including documents, timelines and charges (FEMA Regulations 2026, Regulation 19(1) and 19(4)).
- Line up the contracts. Keep the purchase contract with the overseas seller and the sale contract or order from the overseas buyer, because you must give the bank documents that show the MTT is genuine (FEMA Regulations 2026, Regulation 16(1)(c)).
- Make or receive the first leg. Outward remittances go only to the overseas seller and inward remittances come only from the overseas buyer, unless the AD bank allows a third party (FEMA Regulations 2026, Regulation 16(1)(b)).
- Complete the second leg within six months. The gap between the outward and inward remittance must not exceed six months; the AD bank may extend this if you give reasons it accepts (FEMA Regulations 2026, Regulation 16(1)(a)).
- Let the bank close the entries. After both legs are paid and received, the AD bank closes or updates the EDPMS and IDPMS entries for the MTT (FEMA Regulations 2026, Regulation 18(1)(l)).
What does the AD bank check before crediting a merchanting trade receipt?
The AD bank credits or debits your account for any cross-border MTT transaction only after it is satisfied the transaction is genuine (FEMA Regulations 2026, Regulation 16(2)(a)). RBI's 2026 circular also tells AD banks to follow FEMA and the Foreign Trade Policy for merchanting trade and to report doubtful transactions to the Directorate of Enforcement (Circular No. 20, 2026, paras 2 and 3).
- Purchase and sale contracts or orders
- Invoices for both legs
- Transport documents showing the shipment between the two foreign countries
- Any other document listed in your AD bank's MTT policy
Can a merchanting trader pay or receive through a third party?
Yes, but only with the AD bank's approval. The default rule is that payments go only to the overseas seller and receipts come only from the overseas buyer. The AD bank may allow receipts from or payments to a third party on your request, if it is satisfied with the reasons (FEMA Regulations 2026, Regulation 16(1)(b)). See also third-party payments for exports.
What happened to the older RBI merchanting trade guidelines?
The older rules sat in A.P. (DIR Series) Circular No. 20 dated 23 January 2020, which set an overall nine-month window and a four-month cap on foreign exchange outlay (RBI MTT Revised Guidelines, 2020, para 2). That circular, and Circular No. 11 dated 1 October 2025 on the outlay period, are listed as superseded from 1 October 2026 (Circular No. 20, 2026, Annex).
- Up to 30 September 2026: the 2020 circular and later amendments applied
- From 1 October 2026: Regulation 16 of the 2026 Regulations applies
- Transactions started before 1 October 2026 that needed RBI approval are now handled by AD banks under Regulation 20
Which documents and records does a merchanting trade transaction need?
A merchanting trade transaction needs documents that prove both legs are genuine, plus the bank's own records in EDPMS and IDPMS. Regulation 16 does not list the documents one by one. Each AD bank must set out its list of documents, timelines and charges in its internal policy (FEMA Regulations 2026, Regulation 19(1)(a)).
| Record | Who keeps or files it | Rule | Best for |
|---|---|---|---|
| Documents evidencing the MTT (contracts, invoices, transport documents) | Trader gives them to the AD bank | FEMA Regulations 2026, Regulation 16(1)(c) | Traders preparing a new MTT |
| Inward and outward remittance entries | AD bank enters them in EDPMS and/or IDPMS | FEMA Regulations 2026, Regulation 18(1)(e) | Checking whether a leg shows as open |
| Closure of EDPMS and IDPMS entries | AD bank, after both legs are paid and received | FEMA Regulations 2026, Regulation 18(1)(l) | Traders tracking completion |
| FETERS reporting of the foreign exchange transaction | AD bank | FEMA Regulations 2026, Regulation 18(2) | Understanding purpose code reporting |
| Request for extension or third-party payment, with reasons | Trader writes to the AD bank | FEMA Regulations 2026, Regulation 16(1)(a) and 16(1)(b) | Delayed or restructured deals |
What happens if a merchanting trade transaction is not completed on time?
If a merchanting trade transaction is not completed within six months, the trader is outside Regulation 16(1)(a) unless the AD bank has allowed an extension. The AD bank must monitor and follow up with the trader to ensure both legs are completed in the period and manner set (FEMA Regulations 2026, Regulation 16(2)(b)).
- Open entries: The AD bank monitors EDPMS and IDPMS for outstanding entries and follows up with the person undertaking MTT for documents (FEMA Regulations 2026, Regulation 18(1)(f)).
- FEMA penalty: RBI's compounding direction notes that under section 13 of FEMA the amount imposed can be up to three times the amount involved in a contravention (RBI Master Direction on Compounding, para 7.4).
- Bank charges: An AD bank must not levy charges or a penalty on a merchant trader for any regulatory delay or violation by that trader (FEMA Regulations 2026, Regulation 19(3)).
- Escalation: Each AD bank's policy must include an escalation process for customer grievances and an appeal handled at a higher internal level (FEMA Regulations 2026, Regulation 19(2)).
Ask your AD bank for an extension before the six-month gap ends and give written reasons for the delay (FEMA Regulations 2026, Regulation 16(1)(a)). If the bank's decision seems wrong, use its appeal route under its published policy.
What is the timeline for a merchanting trade transaction?
The timeline for a merchanting trade transaction is set by one main limit: the period between the outward and inward remittance, in either order, must not exceed six months (FEMA Regulations 2026, Regulation 16(1)(a)). Bank-side reporting has its own steps, and the 2026 rules took effect on 1 October 2026.
| Trigger event | Due date | Filed where | Best for |
|---|---|---|---|
| First leg paid or received (outward or inward remittance) | Second leg within six months, unless the AD bank extends | With your AD bank | Every merchanting trader |
| Remittance on either leg | AD bank enters it in EDPMS and/or IDPMS (no day count stated for MTT) | EDPMS / IDPMS, by the AD bank | Checking your open entries |
| Both legs completed | AD bank closes or updates the entries | EDPMS and IDPMS, by the AD bank | Confirming the MTT is closed |
| MTT started before 1 October 2026 that needed RBI approval | Handled by the AD bank from 1 October 2026 under Regulation 20 | With your AD bank | Traders with legacy deals |
What mistakes do Indian traders make with merchanting trade transactions?
- Old timelines: Relying on the nine-month and four-month limits from the 2020 circular, which is superseded from 1 October 2026 (Circular No. 20, 2026, Annex).
- Wrong payee: Paying someone other than the overseas seller, or accepting money from someone other than the overseas buyer, without the AD bank's approval (FEMA Regulations 2026, Regulation 16(1)(b)).
- Restricted goods: Trading CITES or SCOMET listed items, which FTP para 2.39 excludes from merchanting trade (FTP 2023, para 2.39).
- Late extension: Asking for more time only after the six-month gap has passed, instead of writing to the AD bank with reasons while the deal is still open.
- Thin paperwork: Sending only invoices, without contracts or transport documents that show the goods moved between the two foreign countries, so the bank cannot confirm genuineness (FEMA Regulations 2026, Regulation 16(1)(c)).
- Ignoring entries: Not checking with the AD bank whether the EDPMS and IDPMS entries for both legs have been closed after the deal ends. See what is EDPMS and what is IDPMS.
How did we verify this?
Every rule, deadline and form on this page is linked to its official source, checked on the dates below.
- Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026 (Notification No. FEMA 23(R)/2026-RB, amended up to 22 September 2026), Regulations 1(2), 3, 16, 18(1)(e), (f), (l), 18(2), 19 and 20 (checked 9 Oct 2026)
- RBI A.P. (DIR Series) Circular No. 20 dated 16 January 2026: Export and Import of Goods and Services, Paras 2, 3, 4 and 7; Annex (superseded MTT circulars including No. 20 of 2020 and No. 11 of 2025) (checked 9 Oct 2026)
- RBI A.P. (DIR Series) Circular No. 20 dated 23 January 2020: Merchanting Trade Transactions (MTT) – Revised Guidelines (superseded from 1 October 2026), Para 2 (nine-month completion, four-month outlay) (checked 9 Oct 2026)
- Foreign Trade Policy 2023, Chapter 2 (DGFT), Para 2.39 Merchanting Trade (checked 9 Oct 2026)
- RBI Master Direction: Compounding of Contraventions under FEMA, 1999, Para 7.4 (section 13 of FEMA, up to three times the amount involved) (checked 9 Oct 2026)
Frequently asked questions
Is the six-month MTT limit in Regulation 16 counted from shipment?
No. Regulation 16(1)(a) counts the period between the outward remittance and the inward remittance, or the other way round, and it must not exceed six months (FEMA Regulations 2026, Regulation 16(1)(a)). It does not mention the shipment date. Your AD bank may extend the period if you give reasons it accepts.
Do merchanting trade transactions need an Export Declaration Form (EDF)?
Regulation 16 does not require an EDF for merchanting trade. The EDF in Regulation 3 applies to exporters of goods and services from India (FEMA Regulations 2026, Regulation 3). In an MTT the goods do not touch Indian ports. Ask your AD bank which forms its MTT procedure needs.
Which purpose code is used for the export leg of a merchanting trade?
Your AD bank reports every foreign trade transaction in FETERS using a purpose code. The receipt from the overseas buyer is usually reported under the merchanting purpose code covered in the P0108 purpose code guide. Confirm the code for each leg with your AD bank before the money arrives.
Can merchanting trade be done in CITES or SCOMET listed goods?
No. Para 2.39 of the Foreign Trade Policy 2023 allows merchanting trade subject to RBI guidelines, except for goods and items in the CITES and SCOMET lists (FTP 2023, para 2.39). Check the latest lists with DGFT before you sign a contract for any restricted item.
Who handles merchanting trade cases that needed RBI approval before October 2026?
AD banks handle them. Regulation 20 says AD banks shall handle export, import and merchanting trade transactions undertaken before 1 October 2026 that earlier required RBI approval under the 2015 Regulations and the old Master Directions (FEMA Regulations 2026, Regulation 20). Approach your AD bank first for these cases.
Does an AD bank have to publish its merchanting trade (MTT) policy?
Yes. Every AD bank must put in place a documented internal policy and SOP covering export, import and MTT transactions, and disclose the policy and main SOP features on its website (FEMA Regulations 2026, Regulation 19(1) and 19(4)). The policy should list documents, timelines and charges for each process.
Can an MTT trader get an extension beyond six months from the AD bank?
Yes. The proviso to Regulation 16(1)(a) lets the AD bank allow more time on a request that cites reasons for the delay, if the bank is satisfied with those reasons (FEMA Regulations 2026, Regulation 16(1)(a)). Apply in writing before the limit ends and keep proof of the reasons.