10. The Potential and Scope for Negotiable Warehouse Receipts in India Dinesh Rai Abstract The Paper describes the current status of agriculture warehousing in the country. It points to the need to develop D PRGHUQ ZDUHKRXVLQJ LQIUDVWUXFWXUH LQ WKH FRXQWU\ 7KH FRUH RI WKH 3DSHU LV RQ WKH ODUJH SRWHQWLDO EHQH¿WV RI the Warehousing (Development & Regulation) Act, 2007 and the introduction of negotiable warehousing receipts LQWKHFRXQWU\,WJLYHVWKHYDULRXVEHQH¿WVRIQHJRWLDEOHZDUHKRXVHUHFHLSWVDQGWKHVDOLHQWIHDWXUHVRIWKH$FW The Paper describes the various PPP initiatives taken by the Central Government to develop modern warehousing infrastructure under the National Policy on Handling, Transportation and Storage of Foodgrains 2000, as well as under the Private Entrepreneurs Godown Scheme, 2008. The Paper concludes that with these initiatives there would be rapid growth of warehousing infrastructure in the country. Introduction Warehousing plays a very vital role in promoting agriculture marketing, rural banking and ¿QDQFLQJDQGHQVXULQJ)RRG6HFXULW\LQWKHFRXQW\,WHQDEOHVWKHPDUNHWVWRHDVHWKHSUHVVXUH during the harvest season and maintain uninterrupted supply of agricultural commodities during the off season. Hence, it solves the problems of glut and scarcity, which are the usual problems in agricultural marketing. Though warehousing is an independent economic activity, yet it is closely linked with production, consumption and trade. Development of agro processing and agricultural marketing needs a strong warehousing system. Warehousing is the most important auxiliary service for development of trade and commerce. There has been lack of sustained investment in the warehousing sector. Private sector initiatives have been small and sporadic in the warehousing sector. Besides, most of the private sector warehousing capacities available in the country are of poor quality, small, fragmented and do not meet the requisite infrastructure standards. 160 India Commodity Year Book 2012 Current Status of Warehousing Industry in India The warehousing capacity available in India, in public, cooperative and private sector is about 108.75 million MT. The warehousing capacity available in India, in public, cooperative and private sector is as follows: S. No. 1. 2. 3. 4. 5. 6. Name of the Organization /Sector Storage Capacity in Million MT Food Corporation of India (FCI) Central Warehousing Corporation (CWC) State Warehousing Corporations (SWCs) State Civil Supplies Cooperative Sector Private Sector Total 32.05 10.07 21.29 11.30 15.07 18.97 108.75 The storage capacity available with the FCI and a part of warehousing capacity available with the CWC and the SWCs is used for the storage of foodgrains procured by the Government DJHQFLHV IRU &HQWUDO 3RRO 7KH VWRUDJH VSDFH DYDLODEOH LQ WKH FRXQWU\ LV QRW VXI¿FLHQW WR cater to the procured stocks. As a result, a substantial quantity of foodgrains is stored in Covered and Plinth (CAP). Need for Modern Warehousing in India Due to record levels of procurement in the last four years, several States have been facing a problem of covered storage capacity. In the Rabi Marketing Season (RMS) 2011–12, the Food Corporation of India (FCI) has procured more than 280.31 lakh MT of wheat which is around 30 lakh MT higher than the earlier record procurement. As on 01.06.2011, the FCI held 65.5 million MT of wheat and rice stock which is the highest level, ever achieved. This is against buffer and strategic norms of 319 lakh MT of foodgrains. Since the year 2007–08, the procurement of foodgrains (Wheat and Rice) by the Government agencies for Central Pool has increased substantially. The procurement of these FRPPRGLWLHV LQ WKH ODVW ¿YH \HDUV LV JLYHQ EHORZ 3URFXUHPHQW RI ZKHDW LQ WKH ODVW ¿YH 5DEL 0DUNHWLQJ 6HDVRQV 506 (Fig. in lakh MT) RMS 2007-08 RMS 2008-9 RMS 2009-10 RMS 2010-11 RMS 2011-12 111.28 226.89 253.82 225.25 280.31 (14.7.2011) 3URFXUHPHQW RI 5LFH ,Q WKH ODVW ¿YH .KDULI 0DUNHWLQJ 6HDVRQV .06 (Fig. in lakh MT) KMS 2006-07 KMS 2007-08 KMS 2008-09 KMS 2009-10 KMS 20010-11 251.07 284.91 336.83 320.00 320.79*(as on 14.7.2011) 7KH ¿QDO SURFXUHPHQW PD\ EH DURXQG ODNK 07 161 Future of Supply Chain Management in Agri Sector 7KH SURFXUHPHQW RI ZKHDW DQG ULFH YLV D YLV WKHLU SURGXFWLRQ LQ WKH ODVW ¿YH \HDUV LQ the country is given below: (Fig. in Million MT) Year Production (Wheat and Rice) Procurement (Wheat and Rice) 2006–07 169.2 36.2 2007–08 175.3 51.4 2008–09 179.9 59.1 2009–10 169.8 54.5 2010–11 178.3 59.2 Therefore, availability and augmentation of storage capacity is one of the main priorities of the Government of India. As per estimates, additional 35 million MT warehousing capacity LV UHTXLUHG LQ WKH QH[W WR \HDUV 7KHUH LV D QHHG IRU VXI¿FLHQW PRGHUQ ZDUHKRXVLQJ capacity to be created in the country to store and preserve the foodgrains procured for the Central Pool. Introduction of Negotiable Warehouse Receipt (WHR) and its Impact on Agri-business )RU WKH ¿UVW WLPH LQ WKH FRXQWU\ WKH *RYHUQPHQW RI ,QGLD KDV LQWURGXFHG D QHJRWLDEOH warehouse receipt system in the country. The Warehousing (Development and Regulation) Act, 2007 has been made effective from 25th October, 2010. As per the provisions of the Act, the Warehousing Development and Regulatory Authority has been set up by the Government from 26th October, 2010. The negotiable warehouse receipt system has been formally launched by Prof. K. V. Thomas, Hon’ble Minister (Independent Charge), for Consumer Affairs, Food and Public Distribution on 26.04.2011 at New Delhi. The main objectives of the Warehousing (Development and Regulation) Act, 2007 are to make provisions for the development and regulation of warehouses, negotiability of warehouse receipts, establishment of a Warehousing Development and Regulatory Authority (WDRA) and related matters. The Negotiable Warehouse Receipts (NWRs) issued by the warehouses registered under this Act would help farmers to seek loans from banks against NWRs to DYRLG GLVWUHVV VDOH RI DJULFXOWXUDO SURGXFH ,W ZLOO DOVR EH EHQH¿FLDO IRU D QXPEHU RI RWKHU VWDNHKROGHUV VXFK DV EDQNV ¿QDQFLDO ,QVWLWXWLRQV LQVXUDQFH FRPSDQLHV WUDGH FRPPRGLWLHV exchanges as well as consumers. Salient Features of Warehousing (Development and Regulation) Act, 2007 5HJXODWLRQ RI ZDUHKRXVLQJ DFWLYLWLHV /LDELOLWLHV RI ZDUHKRXVHPHQ )RUPDW RI ZDUHKRXVH UHFHLSWV 6HWWLQJ XS RI D :DUHKRXVLQJ 'HYHORSPHQW DQG 5HJXODWRU\$XWKRULW\ :'5$ 162 India Commodity Year Book 2012 &RQVWLWXWLRQ RI :DUHKRXVLQJ$GYLVRU\ &RPPLWWHH 3RZHUV RI &HQWUDO *RYHUQPHQW $SSHDOV 2IIHQFHV DQG 3HQDOWLHV Regulation of Warehousing Business No person shall commence or carry on the business of warehousing for issuing negotiable ZDUHKRXVH UHFHLSWV XQOHVV KH KDV REWDLQHG D UHJLVWUDWLRQ FHUWL¿FDWH IURP WKH :'5$ DIWHU IXO¿OOLQJ WKH SUHVFULEHG QRUPV LQ UHVSHFW RI WKH FRQFHUQHG ZDUHKRXVH RU ZDUHKRXVHV Requirement for Registration of Warehouses (i) The warehouses should be constructed as per Bureau of Indian Standards (BIS)/ )&,&:& VSHFL¿FDWLRQV (ii) The warehouses should be storage worthy for different goods to be stored. (iii) The warehouses should be equipped with all necessary equipment for weighing, KDQGOLQJ VDPSOLQJ JUDGLQJ ¿UH ¿JKWLQJ DQG LQVHFW SHVW PDQDJHPHQW (iv 7KHZDUHKRXVHVVKRXOGKDYHSRVLWLYHQHWZRUWKFHUWL¿HGE\D&KDUWHUHG$FFRXQWDQW RUFUHGLWZRUWKLQHVVFHUWL¿FDWHIURPDVFKHGXOHGEDQNIRULQGLYLGXDOZDUHKRXVHRU for its organization. (v) The warehouses should have adequate trained staff with expertise and knowledge IRU WKH VFLHQWL¿F VWRUDJH RI JRRGV WR EH VWRUHG LQ WKH ZDUHKRXVHV (vi) Warehouses should have adequate security arrangements. (vii) Any other requirement prescribed by the Authority from time to time. Advantages of Registered Warehouses with the Authority Registered Warehouses (a) may Issue Negotiable Warehouse Receipts on which farmers/depositors may be able to seek loan easily from banks. (b ZRXOG IROORZ FHUWDLQ QRUPVUHTXLUHPHQWV DQG ZRXOG HQFRXUDJH VFLHQWL¿F VWRUDJH (c) will have trained warehousemen. (d) would indicate the quality standards/grades of the commodities stored in their warehouses on the Negotiable Warehouse Receipt. For capacity building in the warehousing sector, the Authority will arrange training of warehousemen and other stakeholders of the warehousing sector through some expert institutions like NIAM, Jaipur and CWC. It will also initiate other developmental plan to SURPRWH HI¿FLHQF\ LQ WKH FRQGXFW RI WKH ZDUHKRXVLQJ EXVLQHVV Future of Supply Chain Management in Agri Sector 163 Advantages of Negotiable Warehouse Receipts over Non-negotiable WHR With the introduction of negotiable warehouse receipts system, there would be following advantages: 1. Increased liquidity in rural areas for farmers. (QFRXUDJHPHQW RI VFLHQWL¿F ZDUHKRXVLQJ RI JRRGV /RZHU FRVW RI ¿QDQFLQJ E\ EDQNV 6KRUWHU DQG PRUH HI¿FLHQW VXSSO\ FKDLQV 5. Enhanced rewards for grading and quality. 6. Better price risk management by farmers. 7. Higher returns to farmers and better services (quality) to the consumers. 8. Avoidance of distress sale of agriculture produce by farmers during the peak marketing season. 7KH QRQQHJRWLDEOH ZDUHKRXVLQJ UHFHLSWV LQ WKH SDVW GLG QRW HQMR\ WKH ¿GXFLDU\ WUXVW of depositors and banks, as there was fear of not being able to recover the loans in events, such as fraud, or mis-management on behalf of the warehouse or insolvency of depositor. The available legal remedies were also time consuming and inadequate. Further, the format of warehouse receipts used in the country was not uniform. Hence, there were impediments LQ WKH QHJRWLDELOLW\ RI ZDUHKRXVH UHFHLSWV FUHDWLQJ GLI¿FXOWLHV WR WKH IDUPHUV DQG RWKHU depositors of goods. Therefore, it was envisaged to establish a negotiable warehouse receipt system for all commodities including agricultural commodities. On the one hand, it will make ZDUHKRXVH UHFHLSWV D SULPH WRRO RI WUDGH DQG IDFLOLWDWH ¿QDQFH DJDLQVW LW WKURXJKRXW the country. On the other, it will allow banks to improve the quality of their lending portfolio and enhance their interest in lending in respect of goods deposited by farmers in registered warehouses. Learning for India from International Negotiable Warehouse Receipts The Core Group setup by the Government of India in 2004 for drafting the Warehousing (Development and Regulation) Bill had studied and examined the negotiable warehouse systems prevailing in other countries. In the US Warehousing Act, 1916, the licensed warehouses have to meet certain basic requirements in terms of physical facilities, capital adequacy, liquidity, managerial qualities and insurance coverage. The same criteria have been followed while drafting the Warehousing Bill. The provision for accreditation agencies has been made in the Act to verify these basic requirements. The WDRA is also considering establishing a system of independent inspection of warehouses on the lines of the US system. The important features of NWR in Canada have also been incorporated in the Warehousing Act in India. 164 India Commodity Year Book 2012 Scope for Private and Public Partnership in the Warehousing Sector: National Policy on Handling, Storage and Transportation of Foodgrains In order to reduce storage and transit losses of foodgrains at the farm and commercial level, to modernise the system of handling, storage and transportation of foodgrains procured by the Food Corporation of India (FCI) and to bring in additionality of resources through private sector participation, the Government of India had approved a National Policy on +DQGOLQJ6WRUDJHDQG7UDQVSRUWDWLRQLQ-XQHDQGQRWL¿HGWKHVDPHLQWKH*D]HWWHRI India dated 15th July 2000. The Main Objectives of the Policy Were 7R UHGXFH VWRUDJH DQG WUDQVLW ORVVHV DW IDUP OHYHO ZKHUH DERXW SHU FHQW RI WKH total foodgrains production is retained and consumed and also to encourage the IUDPHUV WR DGRSW VFLHQWL¿F VWRUDJH PHWKRGV 7R PRGHUQLVH WKH V\VWHP RI KDQGOLQJ VWRUDJH DQG WUDQVSRUWDWLRQ RI WKH IRRGJUDLQV procured by the Food Corporation of India (FCI). 7R KDUQHVV HIIRUWV DQG UHVRXUFHV RI WKH SXEOLF DQG SULYDWH VHFWRUV ERWK GRPHVWLF and foreign, to build and operate infrastructure for introduction of bulk handling, storage and transportation of foodgrains in the country. Facilities for Central Pool Stocks It was envisaged in the Policy that: )RU VWRUDJH RI IRRGJUDLQV SURFXUHG E\ WKH )&, LQWHJUDWHG EXON KDQGOLQJ IDFLOLWLHV with silos of large capacity for wheat along with testing facilities for quality control would be created at about 20 identical central locations in producing and consuming areas as well as a few port towns. 7KHVHIDFLOLWLHVLQFOXGLQJWKHLQIUDVWUXFWXUHIRUEXONKDQGLQJDWWKHVHFHQWUHVZLOOEH created and maintained in private sector under the overall co-ordination of the FCI. 7KH GHVLJQ RI VSHFLDO WRS ¿OOLQJV DQG ERWWRP GLVFKDUJH ZDJRQV ZRXOG EH GHFLGHG in consultation with the Ministry of Railways. 7KH 0LQLVWU\ RI 5DLOZD\V ZLOO DOVR EH FRQVXOWHG ZKLOH GHFLGLQJ WKH ORFDWLRQV DQG the circuits where these wagons would ply. Private Sector Participation 3ULYDWH VHFWRU SDUWLFLSDWLRQ ZRXOG EH VRXJKW DQG HQFRXUDJHG IRU GHYHORSPHQW RI infrastructure for the integrated bulk handing, storage and transportation through – 0HDVXUHVVXFKDV%XLOG2ZQ2SHUDWH7UDQVIHU%227%XLOG2ZQ/HDVH7UDQVIHU %2/7%XLOG2ZQ2SHUDWH%22/HDVH±'HYHORS2SHUDWH/'2-RLQW9HQWXUHV etc. 165 Future of Supply Chain Management in Agri Sector *HQHUDWLRQ RI IXQGV WKURXJK SXEOLF LVVXHV E\ SULYDWH HQWHUSULVH $XWRPDWLF DSSURYDO IRU )RUHLJQ 'LUHFW ,QYHVWPHQW )', XS WR SHU FHQW /RDQV IURP ¿QDQFLDO LQVWLWXWLRQV 1$%$5' H[WHUQDO FRPPHUFLDO ERUURZLQJV The integrated bulk grain handling, storage and transportation facilities to the tune of 5.5 lakh MT have been created through private sector participation at the following locations: Circuit 1 Location Base Depot Moga Circuit 2 Storage Size (MT) 200,000 Location Base Depot Kaithal Storage Size (MT) 200,000 Field Depots Chennai 25,000 Field Depots Navi Mumbai 50,000 Coiambatore 25,000 Hooghly 25,000 Bangalore 25,000 The project had been implemented in 36 months and it had become operational at all the locations and special wagons have also been procured by the Developer-cum-Operator '&2 IRU EXON PRYHPHQW RI ZKHDW IURP EDVH GHSRWV WR ¿HOG GHSRWV Private Entrepreneurs Godown (PEG), 2008 Scheme To meet the situation arising out of high procurement level of wheat and rice as a result of LQFUHDVHLQ0LQLPXP6XSSRUW3ULFH063GXULQJWKHODVW¿YH\HDUVWKH*RYHUQPHQWIRUPXODWHG a scheme for creation of additional storage capacity for foodgrains through private sector participation in 2008. The scheme is known as Private Entrepreneurs Godowns (PEG–2008). A state wise mapping of existing capacities and analysis of additional requirements was XQGHUWDNHQEDVHGRQVXEMHFWLYHFULWHULDE\6WDWHOHYHOFRPPLWWHHVDQGD+LJK/HYHO&RPPLWWHH of the Food Corporation of India (FCI). Under the scheme, the Food Corporation of India would now give a business guarantee of ten years for assured hiring. A capacity of about 15.2 million MT is proposed to be created in 19 States under the Private Entrepreneurs Godown (PEG) scheme through private sector participation and Central and State Warehousing Corporations. To make the scheme more attractive for private entrepreneurs, the guarantee period was LQFUHDVHG IURP ¿YH \HDUV WR VHYHQ \HDUV DQG IXUWKHU WR \HDUV 7KH FHLOLQJ RI UDWH ¿[HG for hiring of godowns has been revised from Rs. 3.80 per quintal per month to Rs. 4.78 per TXLQWDOSHUPRQWK,QDSSURSULDWHFDVHVWKH+LJK/HYHO&RPPLWWHHKDVEHHQHPSRZHUHGWR decide higher rates by recording reasons in writing. The Planning Commission is also keen for augmentation of storage facilities for the storage of foodgrains through Public Private Partnership (PPP). There is a proposal for setting up modern silos with a total capacity of 2.0 million MT in PPP mode. All these efforts will be EHQH¿FLDOIRUFUHDWLQJLQWHJUDWHGPRGHUQZDUHKRXVLQJFDSDFLWLHVLQWKHFRXQWU\)RUPHHWLQJ the capital expenditure on construction of silos, the private entrepreneurs would be eligible for Viability Gap Funding (VGF) under the existing VGF scheme which allows grants of upto 20 per cent of capital cost on the basis of competitive bidding. The FCI would provide 166 India Commodity Year Book 2012 an additional VGF of upto 20 per cent of capital costs. For storage of wheat in these silos, the developer will be entitled to receive a recurring service charge provided he meets the required performance and maintenance standards. Challenges Faced by Financing Institutions/Banks Warehouse receipts are documents issued by warehouses to depositors against the commodities deposited in the warehouses. The warehouse receipts may be either non-negotiable or negotiable. The negotiable warehouse receipt may be transferred either by endorsement or by physical delivery. Any one, either the original depositor of the goods or the holder of NWR in due course (transferee) can claim the commodities from the warehouse. The Negotiable Warehouse Receipts, backed by the underlying commodities, are an LQWHJUDOSDUWRIWKHPDUNHWLQJDQG¿QDQFLDOV\VWHPVRIPRVWLQGXVWULDOLVHGQDWLRQV7KHRYHUDOO HI¿FLHQF\RIWKHVHPDUNHWVSDUWLFXODUO\LQWKHDJULEXVLQHVVVHFWRULVJUHDWO\HQKDQFHGZKHQ producers and commercial entities can convert inventories of agricultural raw materials or LQWHUPHGLDU\ RU ¿QLVKHG SURGXFWV LQWR D UHDGLO\ WUDGDEOH GHYLFH 6LQFH WKH HQDFWPHQW RI WKH 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. :DUHKRXVHUHFHLSWVFDQEHXVHGE\IDUPHUVWR¿QDQFHWKHLUSURGXFWLRQDQGE\SURFHVVRUV WR¿QDQFHWKHLULQYHQWRULHV)LQDQFLQJDJULFXOWXUDOFRPPRGLWLHVE\EDQNV¿QDQFLDOLQVWLWXWLRQV through NWRs issued by registered warehouses will lead to an increase in the availability RIFUHGLWLQWKHUXUDODUHDVUHGXFHLWVFRVWDQGPRELOL]HH[WHUQDO¿QDQFLDOUHVRXUFHVIRUWKH agriculture sector. Size of Negotiable Warehouse Receipt Market As per a recent study by Union Bank of India, the market potential for warehouse receipt ¿QDQFLQJ LQ ,QGLD ZDV HVWLPDWHG DW Rs. 19,000 crore, the commodity wise details being as follows: S. No. Name of the Commodity Market Value in Rs. Crore 1. Wheat 5109 2. Paddy 4698 3. Potato 1394 4. Soybean 1284 5. Groundnut 1121 6. Mustard 947 7. Gram 932 Future of Supply Chain Management in Agri Sector 167 With the emergence of NWR under WDRA, commodities volume is likely to experience a phenomenal growth. It is also expected that with the introduction of Electronic Warehouse Receipt (EWR) system in the country linked with spot exchanges, the market size of NWR will further increase several times. The Way Ahead–Future Growth Potential The Ministry of Finance has provided for Rs. 2000 crore under RIDF for 2011–12 as additional allocation dedicated to creation of warehousing infrastructure in the public sector and cooperatives. The Department of Economic Affairs, Ministry of Finance, Government RI,QGLDYLGHLWVQRWL¿FDWLRQGDWHGth March, 2011 has included “capital investment in the creation of modern storage capacity including cold chains and post-harvest storage” in the list of infrastructures in the Scheme for Financial Support including Viable Gap Funding under Public Private Partnerships. The WDRA plans to integrate the Primary Agriculture Credit Societies’ (PACS) warehouses under the negotiable warehouse receipt system so that the small and marginal farmers may EH EHQH¿WHG IURP WKLV VFKHPH The WDRA has plans to include temperature controlled warehouses in the purview of the Warehousing Act jointly with National Horticulture Board so that the farmers growing SHULVKDEOH DJULFXOWXUDO FRPPRGLWLHV OLNH SRWDWR RQLRQ HWF PD\ DOVR DYDLO WKH EHQH¿WV RI NWRs issued by the cold storage/temperature controlled warehouses. It is expected that the above measures will lead to rapid growth of the warehousing sector in the country and more private investment in warehouses.