Tea auctions need risk mitigation: Ferguson

Consultancy major A F Ferguson has recommended a stock market-like risk mitigation mechanism for tea auctions.

Ferguson was appointed by the Tea Board of India to chalk out a model in the aftermath of the payment default by auctioneer Carritt Moran.

In its interim report, the consultant has suggested two risk mitigation models — cash-and-carry and a payment guarantee model.

If and when implemented, this will mean brokers or auctioneers will have to maintain separate accounts for their business and the auction. They will also have to follow capital adequacy norms and provide for adequate capital in accordance to their auction exposure.

Eventually, participants will have to deposit margin money. The consultant has also recommended that auction centres, separately or collectively, will be put under a clearing house that even banks can manage. Clearing corporations will see that auctions are carried out smoothly.

According to the consultant, payment guarantee could be provided by brokers or buyers. Alternatively, a settlement guarantee fund (SGF) and insurance cover could serve as payment guarantee. SGF is a must for stock market transactions.

In most commodity exchanges and trading systems, the clearing house of the exchange guarantees the transaction on both sides, through a special purpose SGF and insurance cover to protect sellers from the risk of defaults by buyers.

Ferguson has recommended the SGF model in the wake of electronic auction introduced at most of the auction centres. However, this would require a willingness from all the auction stakeholders to contribute on a transaction basis to capitalise the fund.

But the payment guarantee model mooted by Ferguson requires a robust system of electronic commerce, buyer credit rating and instant information sharing among brokers, respective auction organisers and the Tea Board, which is not in place currently.

Electronic auction is currently operational in Coonoor, Coimbatore, Guwahati and Kolkata. Though the commerce ministry wants to route 100 per cent of auction sales through the electronic route, it will be done in phases.

For instance, in Kolkata, dust variety sales through the e-auction route has been made mandatory from June 16, while other varieties would be taken up in phases.

Till e-auction and electronic banking system are in place, Ferguson has recommended the cash-and-carry model as the only risk mitigation model. The cash-and-carry concept has been introduced after the Carritt Moran crisis came to light. In case of Carritt Moran, it was a failure on the part of brokers to pay buyers.

Sources in the Tea Board said the Ferguson report has been circulated to all stakeholders for comments, after which a draft report would be prepared by the consultant. The final report would be prepared after the Tea Board’s comments on the draft report.

Currently, there are seven functional auction centres — four in North India (Kolkata, Guwahati and Siliguri) and another one at Jalpaiguri, which is currently not operational, and four in south India (two in Coonoor, one each in Coimbatore and Kochi).

In 2008, around 538 million kg of tea was sold through public tea auctions, representing around 55 per cent of the domestic tea production.