jyoti gujral and piyush

8/6/2019 Jyoti Gujral and Piyush

1/16

1

Regulatory Impediments to Market Based PolicyRegulatory Impediments to Market Based PolicyReforms in Agriculture:Reforms in Agriculture:The Case of NWRsThe Case of NWRs

International WorkshopInternational WorkshopOnOn

Indian Agriculture: Improving Competition, MarketsIndian Agriculture: Improving Competition, Marketsand the Efficiency of Supply Chainsand the Efficiency of Supply Chains

JyotiJyoti GujralGujral

Infrastructure Development FinanceInfrastructure Development Finance

Company LimitedCompany Limited

Piyush JoshiPiyush Joshi

ClarusClarus Law AssociatesLaw Associates


2/16

2

Contents

Current Scenario in Indian Agriculture

Regulated Markets: Showing signs of market failure

Need for market based policy reforms in Agriculture

Negotiable warehouse receipt (NWR) Potential holistic solution

Benefits & impediments to NWR use

Promoting use of NWRs an alternate approach for FCI

Broader Legal & regulatory framework to facilitate NWR based markets


3/16

3

Current Scenario in Indian Agriculture:Farmer in a debt trap

Agricultural activities in India are largely carried out by small and marginal farmers

121 million operational holdings, over 80 percent of which comprise marginaland small holdings of less than 2 hectares (ha). (Census 2001 figures).

R&D, Extension, Market intelligence services by govt. but inadequate

The farmer needs timely credit his credit needs include personal loans.Credit is often provided by the trader (informal money lending system) either by:

holding the farmer produce as collateral; or

in kind i.e. in form of inputs (seeds, fertilizers, supplements etc.)

Storage is either not available or owned by the trader/moneylender who does notencourage the farmer to get credit from other sources.

As a result,

Either the trader sells the farmers produce and deducts the principal and the

interest, (the price received by farmers is therefore discovered under limitedcircumstances - not competitively discovered forcing farmer to sellthrough trader only) or

Farmer is pressurized into distress sales to square off debts soon afterharvesting barely recovering capital and

does not foster emergence of agriculture support service providers extension, market intelligence, credit, inputs, storage etc.

The multiple roles performed by the trader allow him to exploit the farmer, whofinds himself in a debt trap


4/16

4

Regulated Markets:Showing signs of market failure

The current regulatory framework provided by the State APMC Laws has resulted inmarket failure by:

facilitating a supply chain with a large number of intermediaries, therebyreducing the profitability of agriculture

reducing scope for competition due to the licensing regime adopted

high taxation - reducing scope for innovation, diverting trade into informalchannels

APM Laws are inadvertently promoting use of intermediaries by not permitting tradeoutside the market yards. Currently, there is a long (non-value) supply chain with 3-5 intermediaries between the farmer and the consumer.

Two major costs (intermediaries margins and the handling costs) get addedand the farmer gets only 25% -60% of the price that the consumer pays finally.

Further, the APM Laws have resulted in strong incentives for the intermediaries to

act in an anti-competitive manner by restricting licensees and permitting fewtraders to be money lenders, input suppliers, storage owners and processors.

The focus of government is in fact on guaranteeing marketing margins enjoyedby intermediaries and using their regulatory powers to ensure collection ofmarket fees, cess etc., with farmers at the end of the chain receiving whatmight be referred to as a 'residual price'.

Also there further scope for 'unconscionable conduct' in relation to the finalresidual price offered to the farmer by the next intermediary

High taxes make it difficult for the organised sector to compete with theexisting players.


5/16

5

Need for Market Based PolicyReformsin Agriculture

India has been unsuccessfully trying to implement reforms in its agriculturalmarketing sector since the late nineties. Some early initiatives at providingalternative markets were:

National Dairy Development Boards auction market in Karnataka;

Commodity exchanges

Direct markets in AP, Punjab for horticulture produce

Even after a decade, the reforms have resulted in

A handful of attempts to give/seek private market licenses.

Only a couple of states have attempted contract farming over a few hundredthousand acres.

Some retail initiatives that appeared promising have yet to integrate farmersfully through backward integration.

The commodity exchanges have failed to provide accessibility to the small andmedium farmer to the national market, who even today remains dependent

for marketing his goods to the middleman. The middlemen either buy the goods from his doorstep (mostly at peak

harvest period i.e. distress conditions), or in the nearest mandi which thefarmer visits in a highly non-transparent manner or again in distress saleconditions.

There is an urgent need to introduce a new market mechanism that is efficient andhas the power to link the farmer in a remote area with national and international

markets profitably .


6/16

6

Negotiable Warehouse Receipt (NWR)Model with potential to offer a Holistic Solution

The Negotiable Warehouse Receipt (the NWR), is an instrument introducedrecently under the Warehousing Development & Regulation Act (WDRA or Act)which has the potential to provide an alternate market channel that can link thefarm gate to the national markets.

Warehouse receipts (WR) are documents issued by warehouses to depositors againstthe commodities deposited in the warehouses, for which the warehouse is thebailee. These documents are transferred by endorsement and delivery.

Negotiable warehouse receipt is a negotiable instrument. It is in the nature of anactionable claim representing a right to a commodity.

With the warehouse receipt based trading:

Farmers can store their produce in the nearest registered warehouse

Farmers can take the NWR to the nearest physical market (the spot market)or virtual market (the spot exchange). The farmer can sell the NWR to atrader. The trader can sell the NWR to another trader in a distant market.

Thus, even though the receipts are handled by several intermediaries, thephysical goods need not move until the final delivery and this would greatlyreduce the costs / wastages associated with multiple handling.

The grading of commodities and scientific storage by an accredited warehouse(i.e. a third party) provide credibility to the receipts and facilitates paperbased trading.

Thus, WRs can help the farmer to improve profitability addressing his need forcredit, by allowing him to sell at the right time at the right place..


7/16

7

Negotiable Warehouse Receipt (NWR)Benefits

Better prices for their goods

Loans at low interest rates

More and easy credit on the same produce

Reduced storage losses

Farmers

Reduced cost of lending

Reduced riskLenders

Increase in trade

Reduced costs of transactionTraders

Assured quantity and quality of buffer stock

Cost saving

Rural DevelopmentGovernment

Higher capacity utilization

Higher chargesWarehousemen

Increased business

Lower reinsurance premiums

Boost for new types of products

Insurancecompanies


8/16

8

Negotiable Warehouse Receipt (NWR)Key Impediments... 1

Indian agriculture scenario remains riddled with a plethora of laws that are outdatedand continue to provide incentives to promote a system that has clearly failed.Current policy & regulatory framework is impeding growth

Minimum Support Price (MSP) Regime: The high levels of Government intervention reduce seasonal price variability

to a level where private parties are reluctant to store or use warehousereceipts. For example, millers often find it easier to let Government do thestorage and procure their raw materials on a hand to mouth basis.

The current FCI procurement is through the traditional mandis with thecommission agent/traders strongly entrenched in it and there is no role at allcurrently for the warehouse receipt based systems.

MSP and monopoly procurement encourage farmers to neglect quality controland offload produce onto the State.

Thus, the continued procurement mechanism associated with FCI wouldpropagate the existence of old incentive system and may result in no/low

usage of WRs and reduce prospects of private sector investment in storage.

Sales Taxation: Present taxation regimes provide for the payment of mandi fee,cess and sales taxes levied either by the States or, in the case of inter-Statemovement, by the Government of India.

As long as they exist and are chargeable on goods changing hands inwarehouses, no secondary market for warehouse receipts will develop.

This results in diverting sales to informal channels, discourage marketing

innovations in the formal sector and makes it difficult for organized sector tocompete with the existing traders.


9/16

9

Negotiable Warehouse Receipt (NWR)Key Impediments 2

Agriculture Produce Marketing Act: Warehousing is a regulated activity under APM Laws and for commencement of

warehousing activity in any location within a notified area, it is essential toobtain licenses from the APMC having jurisdiction over the respective marketarea. Since these licenses are for a period of one year and need to be renewedthereafter, this causes uncertainty and hinders investments in storageespecially by organized players.

The APMC Laws mandate trading of agricultural produce in the designated

market yards in its jurisdiction, only by licensed traders of the respectiveAPMC. The Act would apply in case of warehouse receipts based trading. If aperson buys from a WR based market system and transports such goods theymay be confiscated by APMC officials unless backed by valid licenses andpapers to prove that mandi fees, cess etc has been paid.

State Warehousing Acts: Regulate warehouses in some states that intend to store certain identified

commodities as per the prevalent legislation and generally cover agriculturalgoods.

In fact the multitude of agencies that grant licenses make it even moredifficult for any player to scale up operations for a pan India warehousingbusiness.

Dynamic Tariffs in Imports: The Government of India is likely to use tariffs as a tool in protecting domestic

producers which is likely to increase uncertainty over the value of collateral,diminishing the potential usefulness of warehouse receipts.


10/16

10

Negotiable Warehouse Receipt (NWR)Key Impediments 3

Essential Commodities Act: Large scale private investment in storage andmarketing has been absent due to certain restrictive provisions of the EC Act and

control orders issued thereunder

Storage of goods is sometimes construed as hoarding and any order issued bythe Government against hoarding of stock directly affects the warehouses thathave to comply with all Government orders issued in respect of storage ofgoods and stock limits.

In respect of various essential commodities, the State Governments have

issuedD

ealers Licensing Orders, which require a person to obtain licensebefore buying or storing specific commodities. In such license, theGovernment also specifies stock limits.

These powers prevent more efficient players from expanding their marketshare and could render producers less competitive.

Forward Markets (Regulation) Act, 1952 (FMR Act): The government uses futures trading as one of the instruments to contain rise

in prices of agricultural commodities. The participation of traders and farmersin the futures trading is limited due to uncertainty in policies.

In February 2007, GoI banned futures trading in rice and wheat. Further, inMay 2008, four more commodities such as potato, gram (Chana), soya oil, andrubber have been added to the list of banned commodities.

Uncertain regulatory environment affects the commodity exchange businessand though the physical / spot markets continue trading, the key potentialdrivers of the warehouse receipt business are affected.

Trading in options is banned in India under theFC

RA whereas it is animportant and safe tool of hedging for farmers.


11/16

11

Negotiable Warehouse Receipts (NWRs)Facilitating growth of warehouses

Promoting growth of warehouses: Warehouses are critical to any system of agricultural financing based on

negotiable warehouse receipts or non negotiable warehouse receipts as theagricultural commodities have to be stored in a safe and certain location inorder to enable development of a warehouse receipt system.

Promoting the spot exchanges and NWR would provide the required boost tothe warehousing sector once the farmers and traders see the additionaladvantages.

Promoting use of NWRs as a procurement tool forFCI: It may be possible to reduce the cost of the public food programme if FCI

were to accept warehouse receipts in lieu of physical stocks and store foodgrains in rural godowns till they are required to be moved for distribution.

A functioning warehouse receipt system obviates the need for government tobuild physical inventories to support prices as they could just purchasewarehouse receipts when the prices fall below a certain minimum.


12/16

12

NWRbased markets address market failure

Growth of national spot exchanges: The spot exchanges create an avenue for a direct market linkage among

farmers, processors, exporters and end users with a view to reducing the costof intermediation and enhancing price realization by farmers. They alsoprovide the most efficient spot price inputs to the futures exchanges.

They bring home the advantages of an electronic spot trading platform to allmarket participants in the agricultural and nonagricultural segments.

The spot exchanges can most effectively use negotiable warehouse receipts todevelop national markets. A pan India electronic market removes the inherentinefficiencies in the APMCs market and has proved that farmers realisation hasincreased by 4-6% despite paying the market fees/cess etc. to the APMCs.

National spot exchanges address market failure in three ways: First, it improves the overall efficiency of the supply chain as it reduces

handling costs; second, it offers advantages relating to information, price formation and

standardization; and finally

it provide access to finance and remote markets to the small farmers.


13/16

13

Negotiable Warehouse Receipts (NWRs)Need for broader legal & regulatory framework

Given the web of regulations governing the agriculture sector there is a need forbroader regulatory reform and for facilitating the emergence of more market basedgovernment and private sector initiatives.

Enacting a comprehensive Warehousing Law: Though warehousing activity is not defined under any Schedule of the

Constitution of India, still commencement of warehousing activity needslicenses from various authorities.

Regulation of warehouses by APMCs results in requirements of separateapprovals for establishing warehouses in different locations even within thesame state.

Additionally, many states have State Warehousing Acts that further regulatethe establishment of warehouses that intend to store agricultural commoditiesthat are notified or specified under the State Warehousing Act.

This translates into a staggering licensing and regulatory compliancerequirement for the development of any national network of warehouses thatare of a uniform minimum standard.

Consequently, in order that the benefits intended from introducing NWRs areactually realised and made available to the farmers, it is necessary that acomprehensive national level legislation regulating warehouses be formulated.For this it is recommended that WDRA be suitably amended and be made intoa comprehensive warehousing law.


14/16

14

Negotiable Warehouse Receipts (NWRs)Need for broader legal & regulatory framework

Integrating National SpotE

xchanges under WDRA: National Spot Exchanges have the potential to help NWRs achieve its full

potential. At present the growth of the National Spot Exchanges is adverselyaffected as they have to register with the relevant APMCs to be permitted totrade.

WDRA must free them from the undue intervention by the APMCs. Under theWDRA when they integrate the accredited warehouses, they would simply bethe platform for EWRs and not traders or markets who need a license from

the APMCs. WDRA can frame rules authorizing and registering spot exchanges as being one

of the authorized platforms for issuing and trading of electronic warehousereceipts and thereby take them out of the ambit of the APM Laws.

Integrating CommodityExchanges under WDRA: FMC should encourage physical settlement through the use of warehouse

receipts and should be made mandatory where possible. The use of warehouse receipts to fulfill margin requirements should be

encouraged.

Contracts that envisage delivery through warehouse receipts should be givenfast track approval.

Cash settlement may be disallowed until warehouse receipts becomeentrenched in the cash market.

The Authority must recognise the standards adopted by the Commodity

exchanges and permit their warehouse to issue NWRs.


15/16

15

Negotiable Warehouse Receipts (NWRs)Clarifications required

Need to Clarify Impact of Negotiability of a Warehouse Receipt Confusion exists whether each transfer of a NWR by virtue of its endorsement

as a negotiable instrument would attract APMC market fee, sales tax, etc., asthere is a change in title to the underlying goods

or whether APMC market fee, sales tax etc. would arise only at the point theultimate holder of the NWR seeks to take physical delivery of the goods at thewarehouse based on the NWR.

Need to Clarify Position of WRs under Sales Tax: There is no clarity under theWDRA on the issue of: whether there would be a charge imposed on each stage of a transaction of a

negotiable warehouse receipt;

what shall be the situs of such charge; and

what steps need to be taken in order to bring some clarity in the relevantlegislations in relation to the above mentioned issues.

Need to resolve implication of Storage Orders andEssential Commodities Act: The ECA mandates that commodities that have been identified as being

essential commodities can only be traded and stored by licensed holders.

Need to resolve confusion w.r.t position of NWR under Forward ContractRegulation Act: Confusion exists since FCRA states that any transaction involving transfer of

document of title and not of actual physical delivery becomes a forward

contract, and therefore transfer of NWRs without physical possession of goodswould become a forward contract.


16/16

16

THANK YOU

jyoti gujral and piyush

Documents