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ADHOCRACY IS THE NEW GAME OF DOING BUSINESS.
COMMONLY HELD BELIEFS IN TRADING TRANSACTIONS TRASHED.
Tejinder Narang
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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.
GOVERNMENTS --
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.
BANKS--
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--
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.
SURVEYORS--
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.
INSURANCE--
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-
DECISION MAKING
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.
RECENT DEVELOPMENTS--
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.
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