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Negotiable Warehouse Receipt Essay Sample

Negotiable Warehouse Receipt Pages
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* The Negotiable Warehouse Receipt (the “NWR”), is an instrument introduced in 2007 under the Warehousing Development & Regulation Act (“WDRA or Act”) which has the potential to provide an alternate market channel that can link the farm gate to the national markets. (Pattnaik, 2010) * Warehouse receipts (WR) are documents issued by warehouses (licensed warehouseman) to depositors against the commodities deposited in the warehouses, for which the warehouse is the bailee. These documents are transferred by endorsement and delivery. (Gujral and Joshi, 2009) * Negotiable warehouse receipt is a negotiable instrument. It is in the nature of an actionable claim representing a right to a commodity. (Gujral and Joshi, 2009) * 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 a trader. The trader can sell the NWR to another trader in a distant market. * Thus, even though the receipts are handled by several intermediaries, the ‘physical goods’ need not move until the final delivery and this would greatly reduce 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 paper based trading. * Thus, WRs can help the farmer to improve profitability addressing his need for credit, by allowing him to sell at the right time at the right place. (Gujral and Joshi, 2009)

BENEFITS OF NWR:

(Gujral and Joshi, 2009)

KEY IMPEDIMENTS:
Indian agriculture scenario remains riddled with a plethora of laws that are outdated and continue to provide incentives to promote a system that has clearly failed.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 warehouse receipts. For example, millers often find it easier to let Government do the storage and procure their raw materials on a hand to mouth basis. * The current FCI procurement is through the traditional mandis with the commission agent/traders strongly entrenched in it and there is no role at all currently for the warehouse receipt based systems. * MSP and monopoly procurement encourage farmers to neglect quality control and offload produce onto the State. * Thus, the continued procurement mechanism associated with FCI would propagate the existence of old incentive system and may result in no/low usage of WRs and reduce prospects of private sector investment in storage. (Gujral and Joshi, 2009)

* 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-State movement, by the Government of India. * As long as they exist and are chargeable on goods changing hands in warehouses, 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 to compete with the existing traders. (Gujral and Joshi, 2009)

* 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 to obtain licenses from the APMC having jurisdiction over the respective market area. Since these licenses are for a period of one year and need to be renewed thereafter, this causes uncertainty and hinders investments in storage especially 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 respective APMC. The Act would apply in case of warehouse receipts based trading. If a person buys from a WR based market system and transports such goods they may be confiscated by APMC officials unless backed by valid licenses and papers to prove that mandi fees, cess etc has been paid. (Gujral and Joshi, 2009)

* State Warehousing Acts:
* Regulate warehouses in some states that intend to store certain identified commodities as per the prevalent legislation and generally cover agricultural goods. * In fact the multitude of agencies that grant licenses make it even more difficult for any player to scale up operations for a pan India warehousing business. (Gujral and Joshi, 2009)

* 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. (Gujral and Joshi, 2009)

* Essential Commodities Act:
Large scale private investment in storage and marketing 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 by the Government against hoarding of stock directly affects the warehouses that have to comply with all Government orders issued in respect of storage of goods and stock limits. * In respect of various essential commodities, the State Governments have issued Dealers Licensing Orders, which require a person to obtain license before buying or storing specific commodities. In such license, the Government also specifies stock limits. * These powers prevent more efficient players from expanding their market share and could render producers less competitive. (Gujral and Joshi, 2009)

* 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 farmers in the futures trading is limited due to uncertainty in policies. * In February 2007, GoI banned futures trading in rice and wheat. Further, in May 2008, four more commodities such as potato, gram (Chana), soya oil, and rubber have been added to the list of banned commodities. * Uncertain regulatory environment affects the commodity exchange business and though the physical / spot markets continue trading, the key potential drivers of the warehouse receipt business are affected. * Trading in options is banned in India under the FCRA whereas it is an important and safe tool of hedging for farmers. (Gujral and Joshi, 2009)

REFERENCES:

1. Pattnaik, B. B. (2010, Feburary 8th). Recent Developments on Warehouse Receipt System In India. [PowerPoint slides]. Presented at Global Meet on Green Revolution II. 2. Gujral, J. and Joshi, P. (2009). Regulatory Impediments to Market Based Policy Reforms in Agriculture: The Case of NWRs. [PowerPoint slides]. Presented at International Workshop On Indian Agriculture: Improving Competition, Markets and the Efficiency of Supply Chains.

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