Counter Trade in International Trade
When goods pay for goods, FEMA's money trail breaks. Here are the forms of counter trade and how a bank settles one today.
Counter trade is any arrangement in which a sale is paid for, wholly or partly, with goods or commitments to buy goods rather than with money alone. It appears when the buyer is short of hard currency, when a government wants to protect its foreign exchange, or when a large purchase is made conditional on the seller putting business back into the buyer's country.
For a bank, counter trade is awkward because FEMA is built around money moving against each shipment. If goods pay for goods, there is no inward remittance to close the export entry and no outward remittance to match the import. That is why Indian exchange control has always required a specific route for it.
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The Forms of Counter Trade
- Barter
- A direct exchange of goods for goods under one contract, with no money changing hands. The simplest and least common form today.
- Counter-purchase
- Two linked contracts: the exporter sells for money and separately agrees to buy goods from the importing country within a set period.
- Buy-back
- The supplier of plant or machinery agrees to take part of the plant's output as payment. Common for capital equipment and turnkey projects.
- Offset
- A large purchaser, usually a government buying defence or aircraft, requires the foreign seller to invest, source or transfer technology locally for a share of the contract value.
- Switch trading
- A third party buys the unused credit balance in a bilateral clearing arrangement and converts it into goods or cash elsewhere, usually at a discount.
- Compensation
- Partial payment in goods and the rest in money under one contract.
How Indian Exchange Control Has Handled It
Escrow account counter trade
Position
RBI would consider proposals to adjust imports into India against exports from India through a US dollar escrow account in India, at international prices, with no interest on balances and no credit facilities against them
Rule
Superseded MD on Export, para A.7
Counter trade with Romania
Position
Proceeds in the escrow account had to be used for imports from Romania within six months of credit
Rule
Superseded MD, para A.10; circular listed as superseded from 1 Oct 2026
Border barter with Myanmar
Position
Discontinued from 1 December 2015 and replaced with normal trade settled in permitted currency or through the Asian Clearing Union
Rule
Superseded MD, para A.9
Set-off of receivables and payables
Position
The AD bank may allow export receivables to be set off against import payables with the same overseas buyer or supplier, or their group or associate companies, within the realisation period
Rule
2026 Regulations, Reg 7
Repayment of state credits
Position
Exports against repayment of state credits granted by the erstwhile Soviet Union follow RBI's specific directions
Rule
2026 Regulations, Reg 14
| Route | Position | Rule |
|---|---|---|
| Escrow account counter trade | RBI would consider proposals to adjust imports into India against exports from India through a US dollar escrow account in India, at international prices, with no interest on balances and no credit facilities against them | Superseded MD on Export, para A.7 |
| Counter trade with Romania | Proceeds in the escrow account had to be used for imports from Romania within six months of credit | Superseded MD, para A.10; circular listed as superseded from 1 Oct 2026 |
| Border barter with Myanmar | Discontinued from 1 December 2015 and replaced with normal trade settled in permitted currency or through the Asian Clearing Union | Superseded MD, para A.9 |
| Set-off of receivables and payables | The AD bank may allow export receivables to be set off against import payables with the same overseas buyer or supplier, or their group or associate companies, within the realisation period | 2026 Regulations, Reg 7 |
| Repayment of state credits | Exports against repayment of state credits granted by the erstwhile Soviet Union follow RBI's specific directions | 2026 Regulations, Reg 14 |
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Case: Rice for Fertiliser
A Kakinada rice exporter ships USD 2 million of rice to an African buyer who is short of dollars. The buyer offers to settle by supplying USD 1.5 million of rock phosphate, which the exporter also needs for its fertiliser blending unit, with the balance paid in cash.
Under the courseware's frame, this would go to RBI as an escrow proposal. From 1 October 2026 the AD bank looks first to Regulation 7. The exporter's USD 1.5 million import payable is owed to the same overseas party that owes it the export receivable, so the bank can allow the two to be set off, provided this happens within the 9-month realisation period or any extension it grants. The remaining USD 0.5 million must be realised in money. The bank documents the set-off and closes both the EDPMS and IDPMS entries. Regulation 7 would also cover phosphate shipped by the buyer's overseas group or associate company. If it came from an unrelated company, or were imported by a different Indian entity, set-off under Regulation 7 would not fit; the bank would look at Regulation 8 on third-party receipts and payments, which needs it to be satisfied of the transaction's bona fides.
How the IIBF Exam Tests This
Expect definition-matching (which form has the supplier take back the plant's output?) and a regulatory question on how a counter trade is settled. The trap is answering from the escrow-account rules: they sat in the Master Direction that was superseded on 1 October 2026. The 2025 courseware will still describe the escrow route.
FAQs
What is the difference between barter and counter-purchase?expand_more
Barter is one contract exchanging goods for goods without money. Counter-purchase is two linked contracts, each settled in money, where the exporter commits to buy goods from the importing country.
What is buy-back in counter trade?expand_more
The supplier of plant or equipment agrees to accept part of that plant's output as payment, often over several years.
Does RBI allow counter trade?expand_more
The superseded Master Direction allowed it through a US dollar escrow account with RBI approval. From 1 October 2026, the AD bank can allow export receivables to be set off against import payables with the same overseas party or its group under Regulation 7 of the 2026 Regulations.
Is barter allowed at the India-Myanmar border?expand_more
No. RBI discontinued border barter with Myanmar from 1 December 2015 and moved it to normal trade.
Next steps
- Set-Off and Write-Off of Export Duesarrow_forward
- Merchanting Tradearrow_forward
- High Sea Salesarrow_forward
- Trade Theoriesarrow_forward
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