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Shivanshu Thaplyal

Shivanshu Thaplyal is a Partner in the Energy, Infrastructure & Resources team. Shivanshu regularly represents clients in the infrastructure sector and advises on corporate/commercial matters and policy and regulatory issues. Shivanshu also has significant experience in corporate transactions and has represented a number of clients in domestic and transnational mergers and acquisitions, takeovers and joint ventures and corporate structuring transactions.

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Warehousing Receipts in India: Past, Present and Future

The need for transforming Indian commodity markets for non-agricultural commodities through the development of regulated warehousing and ancillary infrastructure ecosystem has also been recognised by the Working Group for ‘Development of Regulated Warehousing Ecosystem for Non-Agriculture Commodities’, set up by the DEA.

What are Warehouse Receipts?

A warehouse receipt means an acknowledgement, in writing or in an electronic form, issued by a warehouseman of the receipt for storage of goods at a warehouse. It is a document which can be used in the futures market to guarantee the quantity of goods stored in a designated warehouse. Typically, warehouse receipts are bailment contracts for custody whereby the depositor of the goods is the bailor and the warehouse the bailee.

Historical evolution of warehouse receipts in India

In India, the warehouse receipt system was developed considering the needs of a robust framework for marketing agricultural commodities and expansion of credit to the farming community through commercial banks. Warehousing laws have thus far has been developed only for the purpose of marketing, processing and warehousing of agricultural produce. The All-India Rural Credit Survey, commissioned by Reserve Bank of India (“RBI”) submitted its report in August 1954 recommending, inter alia, an integrated system of rural credit through state participation in the share capital of co-operative institutions and co-ordination between credit and allied economic activities. Subsequently, the Agricultural Produce (Development and Warehousing) Corporation Act 1956 (“APCA”) was enacted, and the Central Warehousing Corporation and various state warehousing corporations were established. The APCA, however, was repealed and the Central Warehousing Corporation was reconstituted under the newly introduced Warehousing Corporations Act 1962. The Central Warehousing Corporation’s primary role included the creation of negotiable instrument for the expansion of credit through commercial banks, as well as assistance in orderly marketing by the introduction of standard grade specifications and warehouse receipts, and establishment of licensed warehouses.

The Working Group of RBI on ‘Warehouse Receipts and Commodity Futures’ in 2005 recommended introduction of a negotiable warehouse receipt system in line with similar instruments in operation in other countries. This led to the enactment of the Warehousing (Development and Regulation) Act, 2007 (“WDR Act”), under which Warehousing Development and Regulation Authority (“WDRA”) was constituted on 26 October 2010.

The present regime vis-à-vis warehouse receipts in India

The warehouse receipts are governed by the provisions of the WDR Act, rules and regulations framed thereunder. The existing framework recognises two kinds of warehouse receipts i.e. (a) negotiable warehouse receipts (“NWRs”); and (b) non-negotiable warehouse receipts. All warehouses issuing NWRs must be registered with WDRA. However, warehouses that do not issue NWRs are not mandatorily required to register themselves with WDRA. Under the existing regime, the warehousemen issuing the warehouse receipts are liable to pay compensation for loss of or injury to the goods. Unless there is a lawful excuse, a warehouseman must deliver the goods mentioned in a warehouse receipt to the holder of the warehouse receipt on demand and on the holder satisfying the warehouse lien, surrendering the receipt and acknowledging in writing the receipt of the goods. Every warehouseman has lien on the goods for the storage and maintenance charges. Furthermore, the warehouseman may withhold delivery of the goods unless the endorsement of any pledge of the warehouse receipts has been cancelled. If the goods are kept in the warehouse beyond the declared period of storage, the warehouseman has the right to recover his charges by selling the goods after prior notice to the owner or endorsee, as prescribed.

As of now, WDRA had a network of 1807 registered warehouses and has two registered repositories, viz., National E-Repository Limited (NERL) and CDSL Commodity Repository Limited (CCRL) for issuing electronic NWRs (“e-NWRs”) to the depositors of agricultural commodities in these warehouses. The repositories have provided access to all stakeholders including warehouses, repository participants, commodity exchanges and banks. With effect from 1 June 2019, no warehouseman can issue physical NWRs and all warehouses registered under the WDR Act must register themselves with one of the repositories to issue e-NWRs. Presently, 143 agricultural commodities have been notified by the WDRA for which e-NWRs can be issued. Some of the key advantages of the e-NWRs include (a) transparent access to the market and trading centres by the farmers and traders; (b) facilitates easy pledge financing by financial institutions; and (c) cost reduction in logistics since e-NWRs can be traded through different buyers without the actual movement of goods.

The way forward

While the Government of India has recognised the need for e-NWRs for the agricultural commodities, non-agricultural commodities such as ferrous and non-ferrous metals, alloys and precious metals are still traded through non-negotiable warehouse receipts, which deprive the traders and manufacturers of non-agricultural commodities a level playing field.

Some of the developed jurisdictions have long back included non-agricultural commodities within the ambit of their NWRs systems. In the United Kingdom (UK), the Financial Services Authority (FSA) has defined commodities as any physical product which is or can be traded on a secondary market and positions in respect of contracts, whether intangibles or intangibles. Commodities which can be traded through NWRs in UK include agricultural products, base metals, other minerals and various precious metals other than gold. The United States of America (USA) allows its banks to engage in commodity trading activities as approved by its Federal Reserve Board. Further, in the United Arab Emirates, Dubai Commodity Receipts (DCRs) are issued by Dubai Metal and Commodity Centre (DMCC), which are applicable for both agricultural and non-agricultural commodities.

The Department of Economic Affairs (“DEA”) and WDRA have received representations from various stakeholders, for notifying non-agricultural commodities for storage in warehouses registered with WDRA and for extending repository services to them as well. Even the Securities and Exchange Board of India has recognised the need for warehouse service providers in respect of non-agricultural goods such as precious metals, gems and stones, metals, minerals and alloys but excluding crude oil, electricity and natural gas in its consultation paper dated 29 November 2018.

The need for transforming Indian commodity markets for non-agricultural commodities through the development of regulated warehousing and ancillary infrastructure ecosystem has also been recognised by the Working Group for ‘Development of Regulated Warehousing Ecosystem for Non-Agriculture Commodities’, set up by the DEA. Some of the key recommendations of the Working Group in its report in October 2019 includes (a) present system of e-NWRs for agricultural commodities can be extended to non-agricultural commodities with certain modifications and such e-NWRs can have longer validity; (b) processes such as Know Your Customer (KYC)/ Know Your Depositors (KYD) documentation, processes involved in the generation of e-NWRs, delivery of goods etc., involved in warehousing for the non-agricultural commodities may be commodity neutral; and (c) regulatory changes in the short term and legislative changes in the long term to allow WDRA to expand its services towards regulating warehousing for non-agricultural commodities.

In view of the foregoing, the present system of e-NWRs for agricultural commodities could also be extended to the non-agricultural commodities without any drastic changes to the legislative framework which would be a step forward in relation to traceability of non-agricultural commodities and to that extent, needs a cogent effort by the policymakers to develop the present system e-NWRs as per global practices.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house



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