CAN STC/MMTC ---- AFFORD TO “FRONT” IRANIAN RISK TO BOOST INDIAN -IRAN TRADE

(ALSO SEE NEWSPAPER REPORT OF ECONOMIC TIMES 23.10.2013 BELOW)

CAN STC/MMTC AFFORD TO “FRONT”    IRANIAN RISK ?

TEJINDER NARANG

1. Undermining the US /UN sanctions; 
2. Dealing with Iranian counter-parties whose antecedents cannot be verified, except by  referals made by Indian privates; 
3. Extending trade finance; issues relating to deferred or non performance; 
4. Delays and disputes in payments due to quality or market volatility; 
5. Lack of clarity of law or applicability of Iranian law--explicit to none; 100% risk on PSUs.
6. It is not STC/MMTC cup of tea.

Indian Government is considering “fronting” Public Sector Undertakings (PSUs) like STC, MMTC on behalf of private players for accelerating non- commodity exports to Iran under “rupee payment arrangement” managed by UCO bank.   Private firms dealing with Iran for pharmaceutical, automobile, engineering products, chemicals or projects are under surveillance of US and other countries who are endorsing UN sanctions. Any “non-Iranian” business by Indian privates is also tracked by US. Their dollar receivables remain threatened because they are routed via banks in USA.

For mitigation of this perceived risk, Indian authorities have suggested that local firms/industry can “mask” their shipments to Iran under the “cover” of trading PSUs, STC/MMTC. Exports made directly by PSUs will be deemed “Government” shipments and (perhaps) stand insulated from UN sanctions. They certainly cannot be qualified as “dual use purpose”, that is, as a proxy for nuclear proliferation. It remains unclear whether “Office of Foreign Assets Control (OFAC)” of the US that administers/ enforces economic and trade sanctions permits such a masking. If not, then Indian side may need special dispensation from OFAC.

In 2012-13 Iran enjoyed a rupee trade surplus of about $8.3 billion. This cash pile may have further gone up during last seven months. Excessive credit balance needs to be liquidated by Indian exports, which can be positive for both sides. Indian position is perfectly logical but other international players/stake holders will believe it as “circumvention” of sanctions by contrived diversion.

Big businesses may also be pushing the Government for expeditious exploitation of emerging opportunities in Iran with minimal risk. Let PSUs endure Iranian exposure upfront rather than the privates!!

Business model of PSUs

Business model of trading PSUs comprises import/export activity on the government account or private account. Risk of business is fully assigned on back to back basis to any one of these entities. Reward or PSUs commission or service charges are nominal --about 1-1.5% of fob value. 

Under “fronting and masking” formula, PSUs will have to take 100% risk with Iranian counterparties who may be nominated or advised by an Indian private firm as an Iranian buyer. This gives 180 degree shift to risk/reward profile. Higher commission band of 7-10% or more may be required by PSUs. That inflates cost to the Iranian side.  

PSUs cannot deal with a buyer unless its credentials are verified by them with due diligence. Due to numerous debarred entities listed under documented sanctions, new corporate formations of worthiness need to be screened.   Lack of appraisals can be very critical, challenging and controversial for PSUs. 

In short, counterparties in Iran nominated by the associates/private parties cannot  be  ipso-facto deemed as buyers by STC/MMTC. Rice exports on G to G account in 2008 was directed by DGFT for being undertaken “ through” PSUs but got into messy controversary later on.

 Financing

Private party may seek funding/financial assistance from STC/MMTC after contractual liability is taken upon (fronted) by the PSU.  PSUs will be in a bind for refusing the loan amount. Once a PSU signs an agreement with an Iranian buyer, it has to perform. Any pre-agreement promise by the private firm not to seek loan assistance from PSU is redundant because the burden of performance has devolved upon the PSU. Its ability to say “no” to financing to protect its interests gets marginalised.  In Indo-Iranian deals “delays” exist as a matter of routine. Iran or Indian PSUs/its associate may renege from the contract due to such  deferments/quality variations or any other reasons, leaving PSU in lurch with goods that may not be saleable elsewhere or may be disposed of as a distress sale. PSUs will take the first hit.

Contracts of engineering items/chemicals/customised supplies do require third country imports. PSUs may also be compelled to provide funding or letter of credits for such imports—which may then have to be shipped with at least 15% value addition (as permitted by DGFT). RBI stipulations that imported goods require certification of Indian origin, after value addition, is yet to be sorted out.

Payments

Opening of letter of credits (LC) and their payments through UCO bank suffer occasional and inordinate delays. This is despite huge credit balance available with UCO bank. Private parties follow up authorization of “debit advice” through personal visits to Tehran and via other unofficial channels for getting consignment accepted. That may be difficult for PSUs. This is another domain of extended risk.

Law

Will applicability of “Iranian law” to these transactions be acceptable? Or will Iran agree to Indian law or arbitration in India or any third country legalities? How enforcement of award can be ensured? So far private business has been done on the presumptions of Iranian law—that is explicit to none. Disputes can arise from both sides. This is the grey area of gravest concern which has not been effectively tackled so far at the Government or diplomatic level. Agreement on legal protocol by intermediation of Law Ministry is a condition precedent for any further discussions on the subject. 

Not PSUs cup of tea

Any evolution or devolution or movement in Iran-US relationship/pulls and pressures of UN sanctions will always remain a matter of concern. Even if that be set aside for a moment, the position of Indian PSUs remains extremely vulnerable. Under “masking and fronting format” they will be sandwiched between antics of Iranian buyers, banks, customs/litigation etc on one side and the Indian associate /supplier on the other. PSUs work culture and trading environment is incompatible with the system that leaves them to fend for themselves.    It is certainly not their cup of tea. Let them not be sacrificial goats and let the trade be conducted openly without circumvention of sanctions.