Merchanting Trade Transactions Explained
Goods move between two foreign countries; only the money touches India. The 2026 rules, and what changed from the old Master Direction.
In a merchanting trade transaction (MTT), an Indian trader buys goods from a supplier in one country and sells them to a buyer in another. The goods move directly between the two foreign countries; India sees only the money: an outward remittance to the supplier (the import leg) and an inward remittance from the buyer (the export leg).
Because no goods enter India, there is no bill of entry to prove the import and no shipping bill from Indian customs to prove the export. The AD bank's job is to make sure the trade is real and both legs close on time.
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The Rule From 1 October 2026
Regulation 16 of the FEMA (Export and Import of Goods and Services) Regulations, 2026 reduces MTT to three duties for the trader and two for the bank.
- check_circleThe trade must follow the Foreign Trade Policy, which permits merchanting subject to RBI rules but excludes goods on the CITES and SCOMET lists (endangered species and sensitive dual-use items).
- check_circleThe gap between the outward and inward remittance, in either order, must not exceed six months. The AD bank may extend this on a reasoned request.
- check_circlePayments go only to the overseas seller and receipts come only from the overseas buyer, unless the AD bank allows a third party on a reasoned request.
- check_circleThe trader gives the AD bank the documents that evidence the trade.
- check_circleThe AD bank debits or credits each leg only after satisfying itself the trade is genuine, closes or updates the EDPMS and IDPMS entries, and follows up until both legs are complete.
Old Master Direction vs 2026 Regulations
Most CCFE study material was written against the old Master Direction on Import of Goods and Services. The differences are exactly what a scenario question turns on.
Time limit
Old Master Direction (till 30 Sep 2026)
Whole MTT completed within nine months; foreign exchange outlay not beyond a set period (six months after an October 2025 change)
2026 Regulations (from 1 Oct 2026)
Six months between the two remittances, extendable by the AD bank
Third-party payments
Old Master Direction (till 30 Sep 2026)
Not allowed for either leg
2026 Regulations (from 1 Oct 2026)
Allowed if the AD bank accepts the reasons
Routing
Old Master Direction (till 30 Sep 2026)
Entire MTT through the same AD bank
2026 Regulations (from 1 Oct 2026)
No same-bank rule stated in Regulation 16
Advance for the import leg
Old Master Direction (till 30 Sep 2026)
Above USD 500,000 per transaction, only against a bank guarantee or standby LC from an international bank of repute
2026 Regulations (from 1 Oct 2026)
No fixed threshold in the Regulations; the AD bank's own policy governs
Defaults
Old Master Direction (till 30 Sep 2026)
Reported half-yearly to RBI; caution listing for heavy outstandings
2026 Regulations (from 1 Oct 2026)
Handled within the AD bank's monitoring and follow-up duty
| Point | Old Master Direction (till 30 Sep 2026) | 2026 Regulations (from 1 Oct 2026) |
|---|---|---|
| Time limit | Whole MTT completed within nine months; foreign exchange outlay not beyond a set period (six months after an October 2025 change) | Six months between the two remittances, extendable by the AD bank |
| Third-party payments | Not allowed for either leg | Allowed if the AD bank accepts the reasons |
| Routing | Entire MTT through the same AD bank | No same-bank rule stated in Regulation 16 |
| Advance for the import leg | Above USD 500,000 per transaction, only against a bank guarantee or standby LC from an international bank of repute | No fixed threshold in the Regulations; the AD bank's own policy governs |
| Defaults | Reported half-yearly to RBI; caution listing for heavy outstandings | Handled within the AD bank's monitoring and follow-up duty |
Terms the Questions Use
- Import leg
- The trader's payment to the overseas supplier.
- Export leg
- The receipt from the overseas buyer.
- Outlay of foreign exchange
- The period during which the trader has paid the supplier but not yet been paid by the buyer, so Indian foreign exchange is out of the country.
- Genuine trader
- The old Master Direction's test: the merchant must trade goods against confirmed orders and earn a profit (export proceeds minus import payments and costs), not act as a mere financial intermediary.
Definitions and time limits in the exam format. No signup.
Why Banks Watch MTT Closely
Without physical goods passing through Indian customs, MTT is a classic route for disguised capital movement or trade-based money laundering. That is why both old and new rules put weight on transport documents, the bonafides of the trader and one-to-one matching of the two legs.
In practice a branch checks the invoice, packing list and bill of lading or airway bill, and can verify shipping documents online where available. Both legs are reported to RBI in FETERS; the old Master Direction required gross reporting, never netted.
How CCFE Tests This
Expect a definition question (goods do not enter India) and a numbers question on the time limits. The trap is mixing the overall completion period with the outlay period, or answering with the current six-month gap when the question is framed on the old Master Direction's nine-month completion rule. Read which framework the question assumes.
FAQs
What is merchanting trade under FEMA?expand_more
A transaction in which an Indian trader buys goods from one foreign country and sells them to another without the goods entering India. It has an import leg (payment to the supplier) and an export leg (receipt from the buyer).
What is the time limit for a merchanting trade transaction?expand_more
From 1 October 2026, the gap between the outward and inward remittance must not exceed six months, extendable by the AD bank. Under the old Master Direction, the whole transaction had to finish within nine months.
Are third-party payments allowed in merchanting trade?expand_more
Under the 2026 Regulations, yes, if the AD bank accepts the reasons. The old Master Direction did not allow them for either leg.
Which goods cannot be merchanted?expand_more
The Foreign Trade Policy excludes goods on the CITES and SCOMET lists. The old Master Direction also required the goods to be permitted for export and import under the policy on the date of shipment.
Next steps
Take a full CCFE mock testSee merchanting trade among all six modules.