Of commodities trade & corruption

In new and scarier forms, entities that own either the whole or a small part of supply chain activity manipulate physical business

In India, check posts, multiplicity of taxes, awarding of supply contracts, granting of licenses, dealing with State procurement agencies, determination of customs policies often increase the chances of dealing with systemic corruption.

A large number of companies camouflage these with payment of consultancy fee whereby the agent takes all these expenses into the books and companies remain clean by the corporate governance standards. 

The scope for corruption may be declining but it is still widespread.

Commodities trade encounters corruption at various stages. A large number of unaccounted cash gets transferred without a trail in the physical market. There is no special authority to check the legality of such practices while there are many such touch points of corruption. Many large trade houses have taken up Trade Practice Compliances as an area of added importance.

This area is responsible for policies and controls for the avoidance of corruption and making sure that the companies refrain from any such business activity that does not uphold the ethical standards.

Last year, one very large US-based trading company got enmeshed in the US anti-bribery law. Some say it may not be the last one …. Others were simply not caught for the time being.

Though large fines are still unheard of here, it has been given a new spin with newfound political shenanigans.

Earlier, the trade-based money laundering allowed an opportunity to earn, move and store proceeds disguised as legitimate trade. Through this process over-invoiced and under-invoiced commodities were imported or exported around the world in restrictive and over licensed countries which allowed companies to make unethical profits.

The practices over the years have changed and more sophisticated methods are being used now. These are purely financial schemes. In these new and scarier forms, manipulations are been undertaken by entities that own either the whole or a small part of supply chain activity of the physical business. Some of them have been caught rigging prices industry-wide.

With several Indian entities entangled in headline grabbing scams, it is clear that commodity wealth not only poisons democracy, it entrenches corrupt elites and worsens inequality – it also hobbles the country.

Published in Business Line dated April 24, 2014

Addressing the hedge gap on commexes

Final expiry date delivered commodity remains unhedged

The product specifications of agricultural contracts on exchanges do not mention the year of production; yet all the safeguards are built to ensure that no old crops are delivered at the exchanges.


Creation of FED (Final Expiry Date) category of stock on commodity exchange forces a situation where liquidity will continue to be only for the near month contracts and far month contracts will hardly be traded.

A recipient of the exchange-delivered FED stocks does not have any hedge facility available. Since the last decade this has created a major “Hedge Gap” in the Indian commodity market, yet the issue remains unaddressed.

There is lot more backwardation these days to actually encourage destocking in the market. If backwardation intensifies, not only will it be less logical to store new inventories, old inventories already financed by the market (therefore hedged from the perspective of producers) will become ever more valuable.

Yet, from the perspective of the commercial users on the other side, the loss associated with the position only grows larger by the day.

Once the FED stocks are delivered, the recipient beneficiary has two choices: First, either to take delivery of the commodity in question, being fully aware of the fact that he can no longer hedge or the second choice is to financially settle the exposure at a big loss. Naturally, the second choice is not an option for most commercial users (e.g. processors), which implies that in this situation one may most likely be exercising the first choice.

This has been a major reason why the real hedgers are not participating on the commodity exchanges in India.

The current arrangement not only leaves the producer holding profitable cash, it also leaves the recipient with an ongoing commodity long in a market environment that no longer allows him to hedge it without significant cost.

One of the recurring issues that arise is lack of clarity over what precisely one is trying to achieve. The doctrine of “hedge interest” needs to be more deeply deliberated at the product designing stage to prevent and curtail the contracts from any misuse.

Published in Business Line on April 9, 2014