Dematerialisation and Settlement of Warehouse Receipts

NSDL, the first depository in the country was established in the year 1996 to remove the difficulties arising out of use of physical (paper) certificates for settlement of trades on stock exchanges and improving settlement efficiency. The depository system has successfully met its objectives. On the basis of the success of demat, rolling settlements were introduced and today, India is one among the few countries that have T + 2 rolling settlement system. With the increase in activity in the commodities futures market and establishment of national level screen-based multi-commodities exchanges, need for an efficient settlement system in that market is felt. Broadly, a commodity futures contract may be settled either by cash or by delivery of commodity depending upon the terms of the trade, demand of the buyer and rules of the exchange. If the trade is expected to be settled by way of delivery of commodity, the clearing house of the commodity exchange will receive warehouse receipts from the seller instead of actual commodities and pass such warehouse receipts over to the buyer. In case of national commodity exchanges, buyers and sellers could operate from different parts of the country and if warehouse receipts are in physical form, the warehouse receipts have to be delivered across the country from the seller to the buyer which could lead to systemic inefficiencies. Warehouse receipts are title documents issued by warehouses to depositors against the commodities deposited in the warehouses. These documents are transferred by endorsement and delivery. Either the original depositor or the holder in due course (transferee) can claim the commodities from the warehouse. Warehouse receipts in physical form suffer all the disadvantages of the paper form of title documents. Some of these limitations are as follows:
y y

Need for splitting the warehouse receipt in case the depositor has an obligation to transfer only a part of the commodities; Need to move the warehouse receipt from one place to another with risk of theft/mutilation, etc. if the transferor and transferee are at two different locations; Risk of forgery.

Drawing lessons from the depository system for securities, NSDL and national level multi-commodity exchanges have worked out a scheme to extend depository services for settling trades in commodity futures. Investors trading in commodity futures may follow the steps enumerated below to avail of depository services for receiving and delivering warehouse receipts. How to open a demat account for warehouse receipts? The securities demat account cannot be used for warehouse receipts. A separate account exclusively for warehouse receipts has to be opened. The agreement to open such account is different from the agreement used for securities account. Can demat account be opened with any Depository Participant (DP)?

NSDL has enabled all its DPs to extend these services. But, national multi-commodity exchanges have empanelled some DPs for this purpose. A demat account can be opened only with such empanelled DPs. Who will issue warehouse receipts that can be dealt in NSDL depository system? Warehouses, that have entered into an agreement with NSDL and multi-commodity exchange, will issue depository eligible warehouse receipts. At present, NSDL has agreements with two multi-commodity exchanges viz., National Commodity & Derivatives Exchange Limited (NCDEX) and Multi Commodity Exchange of India Limited (MCX) and about 20 warehouses that hold Thirty Five commodities in their custody. An accountholder who wants warehouse receipt balances in its demat account, will have to quote the demat account number specifically opened for this purpose. Warehouse will credit warehouse receipts in the demat account using "corporate action" facility offered by NSDL. The balances so created can be used for transfer or settlement of commodity futures trade. What are the commodities for which warehouse receipts can be credited in demat accounts? At present, warehouse receipts for Thirty Five commodities deposited with the 20 warehouses can be credited to demat accounts. These commodities are Barley, Castor Seeds, Chana, Chilli, Coriander, Cotton Seed Oil Cake, Furnace Oil, Gold, Guar, Guar Gum, Gur, Jeera, Lemon Tur , Maharashtra Lal Tur, Maize, Masoor Grain Bold , Medium Staple Cotton, Mentha Oil, Pepper, Potato, Rapeseed Mustard, Raw Jute, Rubber, Sesame Seed, Silver, Soya Bean Seeds, Soya Meal Cold, Steel Long, Sugar, Turmeric, Wheat, Yellow Peas, Yellow Soyabean Meal, Black Pepper and Cardamon. How to give delivery of warehouse receipts in the depository system? Procedure for giving delivery of warehouse receipts is similar to giving delivery in securities market. Warehouse receipts may be transferred to the Clearing Member's account using Delivery Instruction Slip (DIS). However, in place of ISIN, Commodity Identifier (C-Id) will have to be quoted. How to claim delivery of commodities against warehouse receipts credited in the demat account? Commodities described in the warehouse receipts can be claimed for delivery by making a request in "Physical Delivery Request Form" for the desired quantity. Such request will reach the Registrar electronically through depository system. Registrar will send the details of the accountholder, including his/her signature, to the warehouse to enable the warehouse to release the delivery. The accountholder needs to submit to the warehouse, the acknowledgment given by the DP for the purpose of taking delivery. Warehouse may deliver the commodity after satisfying itself based on the details given in the "Physical Delivery Request Form" acknowledgment and details of accountholder given by the Registrar. The securities in the depository system are identified with ISIN number.

How will the commodities be identified? The commodities in the NSDL Depository system are identified by a 12 digit commodity identifier [(C-Id), similar to the ISIN] and a commodity descriptor. The CId will include details of the commodity and its quality grade. The commodity descriptor describes the commodity more specifically, including the location in which the commodities are deposited. e.g. C-Id for Guar Seed deposited in VCO warehouse is INC000000223. The commodity descriptor for the said C-Id is 'NCDEX VCO WAREHOUSE JODHPUR GARSEDJDR GAR9116 METRIC TON 15SP04 '. The descriptor includes details related to the commodity exchange, warehouse, name of commodity, grade of commodity, expiry date (validity) and unit of measurement. How can the buyer of warehouse receipt in demat form know the details of quality, location of the warehouse, etc.? These details can be known by looking at the Commodity descriptor.