Electronic Warehouse Receipts in the context of WDR Act, 2007 B. K. Bal Member, WDRA

1. Electronic Warehouse Receiptsin the context of WD&R Act, 2007 B. K. Bal Member, WDRA

2. WD&R Act - Negotiable Warehouse Receipts � Paper and Electronic 2 The negotiability of warehouse receipts is intended to help farmers through:- easy short-term finance from Banks against, warehouse receipts with underlying goods as collateral, taking advantage of price fluctuations and avoiding distress sales, obtaining better prices for the stored produce at an appropriate time, no need for physical delivery of goods till final transfer of NWR changing several hands, reduction in costs and wastages involved in multiple handling. An NWR may be either in writing (on paper) or in electronic form. Paper NWRs are fraught with several security related concerns, such as, forgery, theft, misplacement, misuse, etc. There have been in the past :- scams concerning stamps for registration, counterfeit currencies, paper share certificates having various risks before introduction of the depository system .

3. Paper and Electronic Receipts to co-exist For paper NWRs : Imperative to put in place an automated IT-enabled system to prevent possible malpractices. Solution to be based on a centralized architecture with registered warehouses connected to the central server either on an online mode, or on an offline mode where internet connections are erratic or unavailable. In an offline mode, data transferred using wireless internet cards, at the end of the day, from a nearby place where internet connectivity is available. In paper receipts: - NWRs to be generated on stationery (printed forms) supplied by WDRA, receipts to be issued serially, queries on warehouse-wise, commodity-wise status, etc. can be made, NWR books to be applied online, banks to access an NWR and have pledge registered, endorsement/transfer, pledge, delivery and discharge of receipts to be reflected online, inspection reports and complaints made available to WDRA�s authorized inspectors, system generated SMSs sent to stakeholders. 3

4. Need to move to EWRsDeficiencies in Current Spot Market promoted by APMCs There is very limited scope for competition in trading of physical goods in a mandi. Once a farmer unloads his trolley in the mandi, he is desperate to sell and carry cash home. Many farmers have taken loans from arhatiyas at sowing time and have an implicit contract to sell through the same arhatiya. Within the mandi, all arhatiyas know each other and do not get into competition. Going to another mandi outside the district is often problematic. There is no facility for farmers to get advance against their produce and sell it later. 4

5. Benefits of EWR System EWRs can break barriers and promote national market in agricultural goods to benefit farmers. EWRs will help farmers : - have access to a large number of buyers nationwide, have better bargaining powers, realize higher prices by selling graded produce, have their prices quoted and immediate payment received, and avoid distress sales by getting loans from banks against warehouse receipts. EWR system will therefore : - enable multiple transfers without physical movement of goods, provide alternate channels of marketing to famers and reduce the cost of intermediation for consumers, facilitate operations for standardization of farm produce, grading, scientific warehousing, packing and logistics, enable consumers (industries, processors, wholesalers, retailers etc.) to procure graded produce at competitive prices at locations of their choice, promote an efficient clearing, settlement and delivery system, bring transparency in trading of agricultural produce. 5

6. Regulation of NWRs by WDRA Section 35 (m) requires the WDRA to regulate and develop electronic system of holding and transfer of credit balances of fungible goods deposited in the warehouses. WDRA is in the process of preparing regulations for operationalization of NWRs which may have following structure: - 6

7. EWR Process Settlement of every trade only by transfer of ownership in EWR with the CRA or by physical transfer of goods. 7

8. How farmers will get NWRs ? Farmers bring farm produce at the Issuer�s warehouse. Warehouseman will do quality assessment, weighment, etc. and issue EWRs. If the farmer does not have electronic account, NWR will be issued in physical form. Thereafter, the farmer can sell such EWR/ NWR on Spot Exchange platform. Spot Exchange will guarantee payment to the farmer and delivery of EWR/ NWR to the buyer. NWR can be converted into EWR, if the farmer has got NWR, but buyer wants EWR. Trading in NWR/ EWR can continue between buyers and sellers, till a buyer wants to lift stock. Buyer will apply for re-materialization and can withdraw goods from the warehouse against such EWR/ NWR. 8

9. Spot Exchanges Spot Exchange: a body corporate incorporated under the Companies Act, 1956 and engaged in assisting, regulating or controlling the business of trading in E-WR. It will launch pan India Electronic Spot Market, where EWRs can be traded. A Spot Exchange to commence business will have a minimum paid-up capital and net worth to be specified in the regulations. It will appoint members, who can trade on their own account as well as enable their clients to participate in trading. Buyers and sellers will be required to open electronic account (Demat account with CPs) for buying and selling of EWRs. Spot Exchange will launch specific contracts, which will be traded on its platform, where terms and conditions of trading, quality specification, place of delivery, etc. will be defined. It shall guarantee delivery of goods against EWRs and payment of sale proceeds to the seller. 9

10. Spot Exchanges (Contd�) Spot Exchange will execute an agreement with CRAs, where the record of all such electronic holdings as well as transfer of EWRTs will be kept. There are at present four Spot Exchanges, namely: - National Spot Exchange Limited (NSEL), Mumbai NCDEX Spot Exchange (NSPOT), Mumbai Reliance Spot Exchange, Mumbai National APMC Spot Exchange, Ahmedabad (to commence business) While these Exchanges can apply for registration after meeting requirements under these regulations, it is expected that more such Exchanges will come up in the country. 10

11. Warehouses (Issuers of NWRs) �Issuer� means a warehouseman whose one or More registered warehouses are empanelled with a Spot Exchange for issuance of EWRs through that Spot Exchange. An Issuer shall not register a warehouse with more than one Spot Exchange for issuance of EWRs. Only such warehouses, which are registered with the WDRA as well as a Spot Exchange, can issue EWRs. A warehouse, which is registered with WDRA, but not empanelled with any of the recognized Spot Exchanges, can issue NWR but not EWR. A warehouse which is empanelled with Spot Exchange, but not registered with WDRA, cannot issue NWR and therefore EWR. 11

12. Electronic record keeping of issuance and transfer of E-WRs CRAs are similar to depositories, which are functioning today for stock exchanges as well as commodity exchanges for demat transactions. CRAs may also be set-up by: - a public financial institution, a bank, a �Spot Exchange� or any other exchange under the regulatory jurisdiction of an Authority under an Act of the Parliament, etc. Existing depositories may become CRAs if they fulfill the requirements specified by the WDRA in its regulations. A CRA to commence business should have a minimum paid-up capital and net worth, as may be specified by WDRA in the regulations. Among other things, the CRA should have an automatic data processing system to provide for all information as required to be contained in NWRs and for timely alerts for expiry of declared shelf-life of goods. CRAs will appoint Commodity Participants. Commodity Participants will open electronic account for the beneficiary owners. CPs are similar to DPs in their functionalities. CPs will not be required to get registration from WDRA. But CRAs will be responsible for all actions of the CPs appointed by them for protection of interests of beneficial owners. 12

13. Role of WDRA After notification of EWR regulations, WDRA will initiate the process for recognition of Spot Exchanges and registration of CRAs. These will mainly include: - Recognition of Spot Exchanges, approval of the bye-laws and grant of certificate for commencement of business. Approval of formats for agreements to be entered into by Spot Exchange with Issuers, the CRA and the Commodity Participant. Registration of CRAs (Commodity e�recording agencies - CRA) and grant of certificate for commencement of business. Supervision, oversight, inspection and action in case of default . Simultaneously, WDRA will: - advocate policy for a national network of rural godowns close to production centers for NWRs and financing by banks, promote well regulated system for storage of goods near products and marketing centers all over the country, prescribe reliable quality standards, oversee registered warehouses having a high level of technical and financial performance to promote confidence, promote concessional financing against NWRs including EWRs, follow up with banks on issuance of guidelines on NWR financing for farmers. In the long run, WDRA will advocate a comprehensive legislation to cover all aspects of warehousing under its regulatory framework. 13

14. Finance by Banks against EWRs Indian banks are interested in agricultural lending and have experience of finance against warehouse receipts. EWRs which will have established procedures and systems, should promote confidence of Banks for warehouse receipt finance. Procedurally, EWR holder shall make an application to CRA, CRA shall mark the pledge on an unencumbered EWR, no transfer of EWR under pledge shall be effected without concurrence of pledgee, pledge will be cancelled with the concurrence of the pledgee, where pledgee satisfies CRA on default by pledger, former is entitled to be registered as owner of the pledged EWR or a part thereof. 14

15. Important Issues Spot Exchanges need to obtain licenses under State APMC Acts; hence, in those States where APMC Act is not amended for e-trading and establishment of private market, delivery will be an issue. (Chattisgarh, Uttar Pradesh, Delhi, Tamil Nadu, Haryana, Punjab, Jharkand, Uttarakhand and West Bengal, while no APMC Act in force in Bihar and Kerala). A distinction has to be made between goods and EWRs. Taxes and levies - VAT, mandi cess, etc. - should relate to deposit and delivery of goods and not to EWRs. Once goods are deposited and EWRs issued, trading in such EWRs should be regulated under WDRA�s regulations and guidelines. Since the Government will get tax on final price at the time of physical movement of the goods from the warehouse, there would be no loss of revenue to the Government. It will achieve: - efficiency and transparency of entire trading operation in commodities, promotion of a pan India electronic spot market for commodities in a seamless manner. 15

16. Thank You 16