Negotiable warehouse receipts (or NWRs), backed by the underlying commodities, are an integral part of the marketing and financial systems of most industrialised nations, observes Dinesh Rai in one of the essays included in ‘India Commodity Year Book 2012,’ edited by Sanjay Kaul (www.anebooks.com).
Adding that the overall efficiency of these markets, particularly in the agri-business sector, is greatly enhanced when producers and commercial entities can convert inventories of agricultural raw materials or intermediary or finished products into a readily tradable device, he reminds that since the enactment of the WDRA or the Warehousing (Development and Regulation) Act, 2007, the warehouse receipts have become fully negotiable instruments. “They can be traded, sold, swapped, used as collateral to support borrowing, or accepted for physical delivery. The NWRs issued by the warehouses registered with the WDRA provide secure collateral for banks by assuring holders of the existence and quality of agricultural commodities deposited in the warehouses.”
Another essay on warehouse receipts, written by Rajnikant Patel, argues that National level spot exchanges have the potential to help NWRs achieve their full potential by issuing electronic WRs. He suggests that, in the interim, regulation be framed to allow for the issuance of electronic WRs, but mandating that a warehouse in respect of which an electronic WR is sought to be issued has to become a registered warehouse with the national level spot exchange and comply with its various requirements including that of record-keeping and regular inspection.
An instructive section in Patel’s essay is about international experience in WRs. For instance, in the US, the warehouse receipt system is organised under the Warehousing Act of 1916 in terms of which licensed warehouses have to meet and maintain certain key criteria and the grain handling staff must also be licensed, one learns. The integrity of the system is enhanced by the presence of performance guarantees, which are usually posted as insurance bonds, informs the author.
In the UK, the Financial Services Authority (FSA) permits commodities as part of trading book, notes Patel. He adds that the FSA requires banks to have a trading book policy statement, which may be devised in conjunction with the bank’s internal auditors. “Detailed instructions are given to banks for calculating capital charge on commodity positions. Banks also act in various capacities as dealers, brokers, and clearing members on commodity exchanges.” And, in Dubai, the commodity receipt system is web-based, owned and managed by the Dubai Metal and Commodity Centre.
Patel is of the view that, if the benefits intended from introducing NWRs are actually to be realised and made available to the farmers, a comprehensive national level legislation regarding warehouses is necessary. Such a legislation, he says, will also make the regulatory requirements of establishing a network of warehouses more manageable and thereby promote greater corporate involvement and consequent bank financing of the procurement, storage, and trading of agricultural goods.
Handy reference with insightful essays.