After NSEL debacle, FMC may make warehouse registration mandatory

Proposal from warehouse regulator being considered to cut risks to stock quality/quantity

The Forward Markets Commission (FMC) is considering a proposal for compulsory registration of all warehouses under spot and futures commodity exchanges with the Warehousing Development and Regulatory Authority (WDRA).

The move comes in the wake of a recommendation by the warehouse regulator after a payment crisis erupted in the National Spot Exchange (NSEL) last month, following complaints and speculation over  quality and quantity of stocks in the warehouses. The exchange has suspended settlement and proposed a 20-week settlement cycle, although it claimed sufficient stocks to cover the liabilities.

“We have written to the FMC after the recent crisis in NSEL. Our recommendation is that people dealing with third-party goods must be registered with WDRA. This ensures that risks to quality and quantity are reduced to a large extent,” a senior WDRA official told Business Standard.

Although the warehouse regulator has been in existence for a few years, most of the warehouses under the NSEL and other exchanges are not registered with WDRA. The official said the NSEL crisis could have been averted had these warehouses been registered. “At present, registration is optional. Warehouses registered under WDRA are subjected to periodic inspections,” he pointed out.

Till date, 350 warehouses across the country are registered with WDRA. Officials said WDRA had some time earlier approached the department of consumer affairs to allow it to regulate spot exchanges as that would have been a natural integration from a spot exchange, which is an advanced form of a mandi with warehouses.

Reining in stocks

At present, registration with WDRA not compulsory

Most warehouses empanelled with exchanges not registered

WDRA registration entails periodic inspection

Penal provisions for violation of stock shortfalls

Doubtful stocks in warehouses at the centre of NSEL debacle

WDRA recognises warehouses’ need to have modern facilities such as pest control and fumigation facilities, fire-fighting equipment, standardised construction and weighing equipment. The receipts issued by such recognised warehouses and cold storages are treated as negotiable instruments and   accepted by the government of India and banks.

WDRA has several private agencies empanelled. Who are authorised to conduct inspections. “We only register after proper inspection. The warehouse manager is responsible for the material. The material has to be there. Otherwise, it is a fraud,” the official said.

Registration with WDRA comes with strict rules on the terms of storage and penal provisions to punish violators. According to the WDRA Act’ 2007, any warehousemen who receive goods less in number, weight or grade than what is mentioned on the receipts “commits an offence and shall be punishable with imprisonment for a term which may extend to three years or with fine which may extend to four times the value of the goods or with both”.

Last year, WDRA had commissioned a study by a three-member panel on the warehouse receipts system followed by the spot exchanges and whether these could be made negotiable instruments under the WDRA Act. The committee studied the system after conducting field visits at the various warehouses empanelled with the exchanges and recommended these warehouses should not be accorded “negotiable instruments” status.

“Though the panel cited technical grounds, it was not satisfied with the state of many of the warehouses — dilapidated, poorly maintained and some even unmanned,” said another official with direct knowledge of the matter.