India is likely to import 6-7 million tonnes (mt) of sugar (raws and whites) in 2009-10, and the private sector is expected to play a dominant role in this trade. It is important that the imports contracted by the mills/traders/buyers should be done with trustworthy sellers, at ruling international prices on the basis of accepted commercial norms.
Many a times co-operative mills/new traders, who are not familiar with the intricacies of international trade of sugar, are lured into contracts that are either defaulted or frustrated as the reliability of the seller is questionable.
Whenever there is news of India importing large volumes of sugar, many spurious sellers from Europe, the US, Thailand, Brazil and elsewhere start offering “corporate bids”.
The format
Such bids are generally quoted almost $100/tonne below the ruling commercial prices of futures exchanges of London and New York. The format of “corporate bids” requests that the buyer first declares the co-ordinates of its bankers to enable the corporate bidder to send the offer.
It also mentions that the seller will furnish a non-operative performance bank guarantee of 3-5 per cent of the total contract value through the bank and that such a guarantee will become operative, when 100 per cent irrevocable letter of credit (LC), fully operative in all respects is received from the buyer.
Such bids/proposals also have a condition of minimum contracting of 50,000-1,00,000 tonnes per agreement. Shipment is spread in three or four lots. Maximum liability of the seller is limited to the value of the performance guarantee.
The prime motive
The first doubt that crops up is that why a seller is keen to heavily under price or discount a commodity and yet be aggressive in selling by furnishing a performance guarantee. The “offerer” also invites the buyer to Brazil or Thailand to physically inspect the cargo and loading operations. But inspecting a cargo at load port is quite different from the arrival of that ship under the designated business contract.
The prime motive behind this deal is to take advantage of the Indian LC to draw dollar pre-shipment credit at low interest rates to finance the procurement of a cargo and then dispose of the cargo at the ruling international price to another/second buyer. Call it a financial engineering, but it is tantamount to a breach of trust of an agreed deal.
Now to get out of the contract with the first buyer, the seller may find discrepancies in the LC vis-À-vis terms of the agreement and may also point out that the LC is short by a certain value, or that there has been some delay in receipt of LC or some silly spelling errors which have rendered the LC non-negotiable.
The seller can even refuse to ship the first lot of, say, 20,000 mt tonnes, until the LC of full quantity (1,00,000 tonnes ) is in his hands.
Bitter truth
The net result is that the Indian buyer gets duped and no sugar arrives at Indian port, neither the LC gets en-cashed nor the performance guarantee can be enforced. The problem in the Indian context is that many brokers and intermediaries get convinced with the genuineness of such “corporate bids” as they are low priced, written in excellent legal and commercial language.
It thus becomes difficult to distinguish between the legitimate and fake sellers. These sellers are in fact worse than roadside hawkers.
For the genuine buyers, it is important that they should only deal with international traders of repute or the members of the International Sugar Organisation, London.
Examine thoroughly
In case, they receive such corporate bids, these should be thoroughly examined/scrutinised by an expert in sugar trade or by a leading international trading company or by public sector undertakings that have been designated to facilitate the imports of the sugar.
Otherwise it remains a paper transaction — a valuable opportunity lost for import of sugar — with lot of money and time lost due to ignorance of this trade and might entail expensive litigation too.
Source : Business Line