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ADHOCRACY IS THE NEW GAME OF DOING BUSINESS.
COMMONLY HELD BELIEFS IN TRADING TRANSACTIONS TRASHED.
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All trade transactions are conceived with precautionary measures to minimize market risk and maximize profits. For risk mitigation, traders use governments’ policies, services of banks, hedge in future exchanges, appoint surveyors for quality assurance and cover unforeseen events through insurance companies. There is also a financial supervision of the corporates with which many aggressive traders are uncomfortable. If a trader scores 7/10—that means if he conducts 7 profitable deals out of 10 he could be rated excellent. Still loss in one or two deals can wipe out profits earned in seven deals and negligence is attributed to the trader because success has many fathers while failure is an orphan!!
This article trashes commonly held belief that above mentioned intermediaries are nearly foolproof arrangements of success in trade and gives indication of emerging trends.
The biggest risk comes from “acts of Governments” or from various Governments who themselves are staunch votaries of stable and transparent trading regimes. They defy their own professed principles. Recent examples —Are USA and Saudi Arabia not manipulating crude oil prices beyond supply demand equilibrium to hit West Asia and Russia thus destabilizing world’s financial markets? Is USA’s quantitative easing (QE) at zero interest rate not prompting flight of their capital to stock markets of emerging economies in preference to developmental needs to its own economy. With trend reversal, that may spook the emerging economies. Currencies can go into tailspin leading to price volatility and abandonment of agreements.
At national level, has not India’s 80:20 schemes of gold import and export faked CAD, encouraged smuggling and distorted bullion trade? Having perpetual peace clause at WTO on grain subsidies means an indeterminate time to reform leaky PDS and antiquated MSP mechanism. Will that not be inflationary as usual? Is fixing State Advisory Prices (SAP) of Sugarcane irrespective of market realization of the sugar and its by products is not fundamentally flawed? Are we still not fiddling with import duties of edible oil? There could be umpteen judicial interventions that might rattle trade. Governments thus are the most potent known risk factors of unknown nature.
The commonly held perception that a letter of credit (LC) by a first class bank is the safest mode of payment is misplaced. LC is only an assurance from the bank (and not a binding commitment of performance) that the buyer is solvent enough to pay. It simply implies that given stable market conditions and compliance with defined documentation specified under the LC, only then payment of the seller secured.
If prices fall vertically, the probability of buyer finding technical reasons or an alibi for non-compliance with terms of credit is high. In that event seller is at grave risk. At the same time, if prices sky rocket and despite having workable LC – the seller, may, invent pretexts to renege to maximize market driven gains elsewhere. Sellers spend sleepless night when LC is under negotiation due to fear of documentary discrepancies and delayed payments. In FOB business, buyers’ blood pressures rise when their boats are waiting at ports for want of cargos from sellers. If counterparties elect to abandon agreed performance, LC or even “confirmed” LC of millions of dollars becomes a piece of paper.
Future exchanges daily discover prices of a commodity. Profits and losses can be hedged. In India, delivery based exchanges have limitation of volumes and lack of reliable warehousing. Thus quality/ quantities of the commodity always remain a suspect in insect infested insanitary storages. Indian banks do not accept warehouse receipt as a formal negotiable instrument. Indian exchanges need greater depth before they can be fully relied upon for hedging purposes. The recent episode of NCSL has exposed infirmities in warehousing of commodities, which is critical for the working of such delivery-based exchanges.
Contracts generally stipulate quality-quantity final at the load port as evidenced by the surveyor or the inspection agency. Can surveyors be hauled up with damages for any misconduct or wrongdoing if the quality at discharge port is different from the one certified? Far from the truth it is. In fine print of the reports it is clearly stated that they (reports) are based upon the samples collected from the warehouse or at pre-loading stage. What is actually loaded in the ship’s hatches is not in their control or liability. Surveyors fee varies from 50c-70c per ton and thus risk reward ratio does not justify claims of millions of dollars on them. They are enabling agencies and not determining agencies for the morality of the contract or breach of trust between buyer and seller, unless criminal negligence is proven against them.
Insuring goods is a brilliant idea. But claiming losses from insurance is the wretchedness of the worst kind. What the insurance companies write in small prints about the quantum of indemnity when insurance is brokered, none can figure out. The type of documentation, deductibles, exclusions, waiting period, third party liabilities etc. that are to be grappled is a nightmare. Retired insurance officers hired by private trade for insuring cargos and claiming the insured amount find themselves foxed not by the rules alone but by the suspicion on the genuineness of claim. Even if one en-cashes the insured amount, the procedural agony can create sickness in mind of any right thinking individual.
The way forward is the following-
Trading is getting increasingly complex because of rapidity of introduction of newer technologies, including real time based information systems around the world. Nothing can be kept hidden from the counterparty, which was the case before. Finance departments/controllers of trading companies can be “penny wise pound foolish” if they remain inflexible. Unless corporates are speedily decisive, high-risk profile of trade cannot be tamed.
It is also true that opportunities do not knock at one’s door daily. Once missed, they are lost forever and next opportunity cannot be timed. Conventional trading transactions supported by factors indicated above have to re-invent into creative deals for risk management. Alertness and adhocracy is the new game of doing business to which bureaucracies of the governments and corporates are inimical. That must change.
Some of the recent variations are — Traders increasingly taking “positional” deals rather than back to back bargains; optional origin trading instead of only India-centric approach; establishing subsidiaries overseas for stock and sale or forming JVs for risk aversion and for development of brands; suppliers’ or buyers’ credits of 180/365 days for export or import through banking channels; buyers covering demand 4-5 months in advance for price advantage; hedging in future exchanges abroad through offshore companies, barters backed by escrow account arrangements etc. Likewise Indo-Iran rupee payment agreement, from which India has derived tremendous benefit, is another creative mechanism to sustain bilateral trade despite international sanctions.