PAYING PRICE OF (INDIAN) RICE EXPORT TO IRAN --FINANCIAL EXPRESS 31st August 2017

http://epaper.financialexpress.com/c/21758146

NEED TO SECURE BASMATI RICE PAYMENTS FROM IRAN

TEJINDER NARANG

 A large volume of basmati rice (hereinafter referred as rice) shipments to Iran is exposed to non-payment/delayed remittance/outright loss.  There are whispers in market of about 125000 tons of rice—value approx. Rs 875 crores, shipped out a few months back, mostly in 6000 containers, is awaiting payments from  Iranian buyers.   

Market players, who are small and medium size entities, contracted rice with Iranian purchasers at @ Rs 65-70000 pmt (or equivalent USD $1015-$1100 CIF)— average value about 25% higher than 2016-17 (see chart).

Reportedly Iranian rice market crashed and buyers have reneged from contracted price. But after protracted negotiations such cargos are being accepted at a discounted value of around Rs44-50000 pmt—which effectively means price cut of about 30% or an outright loss of Rs260 crores—while balance 70% is offered on deferred basis against future purchases by enhancing their invoiced values –as per mutual convenience.  Such a settlement may have variations depending upon understanding between the parties.

Result of non -payment or such a loss means that payments of paddy to farmers could be delayed while suppliers of PP bags, transporters and handling agents at the port may also remain unpaid. Since exporters generally avail pre-shipment credit from banks—ultimately banks are exposed to risk of non-payment, adding to the pile of NPAs.

Iran has a regular requirement of Indian Pusa 1121 (Par boiled) basmati rice –varying between 0.7million tons (mt) to 1 mt annually- depending upon their domestic output. Value wise Indian shipment to Iran touched$ 1.8 billion in FY14-but down to$0.57 in FY17. India ships out about 4mt of such rice in world markets annually without any serious payment problems.

 It is not the first time that shippers face with such issues of delayed/non-payment from Iran. There have been defaults/short payments in past as well. This phenomenon has frequent re-occurrence wherein sellers either suffer total loss or loss of profit.  Even soybean meal cargos in the past faced similar fate. It is immaterial whether buyer is a private party or any govt. entity of Iran.

The distinctive feature of this trend is that the same Iranian buyer fronts new companies as purchasers, while Indian counterparties conclude rice contracts at seemingly advantageous prices. Once shipment is made-- shipping documents are forwarded usually on DP (Documents to be delivered to buyer by the bank against payment) or other terms, but seldom against LC.  

Iranian buyers dither in making payments through banking channels; shipping documents are allowed to stagnate in Iranian banks or are declared deficient while rice is not lifted from destined port. With extended stalemate on non-payment and fear of cargo going bad in quality, sellers rush to Iran to settle the matter, resulting into forced discounting or settlement at arbitrary terms by Indian sellers.

At a time when government is focusing its concerns on farmers, it is important that such an issue may be resolved once for all. APEDA is the Governments’ controlling body for export of basmati rice. Allowing open and free exports of rice to Iran may be reviewed and such exports need to be secured with suitable restrictions.  Put simply—this could be enforced through “canalized payment mechanism” via an authorized official agency e.g. APEDA.

 Procedural format could be –Exporter/Seller may sign contract with a buyer in Iran with stipulation that 100% advance payment to be made to APEDA within 7-10 days of contract; date of receipt of payment by APEDA to be effective date of contract.  APEDA will notify this date to both seller and buyer; custom may clear cargo offered by seller for shipment after receipt of written advice from APEDA of payment having been received from Iran; buyer can nominate its inspection agency and load port inspection to be deemed final. APEDA should effect payment to SELLER after receipt of compliant shipping documents—as agreed in contract and issue a “no objection certificate” to bank of seller so that foreign exchange earnings accrue to the seller/shipper.

In case seller defaults in making shipment, APEDA should remit funds back to buyer at the cost of seller, including any difference in the rate of exchange and it shall not be liable for any quality/quantity/delayed shipment, claims whatsoever. APEDA/DGFT will also announce list buyers and their brand names of rice in Iran, who have earlier reneged from commitments and maintain an abeyance list for them.   Government can also nominate another trading PSU for the said purpose if APEDA is not willing to undertake this commercial activity. Such a payment security system may be tried for atleast two years and depending upon its efficacy, can be reviewed thereafter.

Exports without receiving full payments retard economic activity. WHEN a suitable security mechanism is introduced, fake importers are filtered out; buyers with respectable credentials and financial capabilities will trade with Indian counter parties; transactions are considered clean and above board; probability of disputes will diminish; exports will be truly rewarding with reasonable profits.