Author : Manoj Gupta - Cell: 9899686676/9350760606
EXPORT BILLS DISCOUNTING
Introduction
After shipment of goods, the exporter may submit the export bill to its bank for discounting/ purchase. This bill discounting facility may be a sub-limit to packing credit or may be a separate limit depends on the banks sanctioning authority.
In bill discounting, bank buys the export bills (i.e. bill of exchange/promissory note) before it becomes due for payment. The transaction is practically an advance against the security of the bill and the discount represents the interest on the advance from the date of purchase of the bill till it is due for payment.
Normally the export order which is already getting credit under packing credit limit will not be covered under bills discounting. Also if the client requests for bill discounting, the amount will be adjusted first against the packing credit limit outstanding against said bill and the balance amount is released to the client.
The export bills may be either backed with Letter of Credit or not. Here a separate disclosure need to done in the sanction letter. Generally bank gives a sub-limit from the overall bill discounting limit. Limits sanctioned for LC backed bills will not normally be allowed to be availed for non-L/C bills. Here we are discussing the export bills not backed by letter of credit.
In one sense it looks to be an unsecured limit as few banks gives bill discounting facility over and above the regular limits sanctioned as per CMA data submitted with the bank. The bank normally does not ask for any collateral. But in such case, the discounting facility is given bill wise i.e. a limit is not sanctioned and it is the pure discretion of the bank whether to allow discounting of a particular bill or not. Here it is important that the client must have good credit history as well as the relation with the bank should be good. In this case the bank has charge on the current assets of the company. It depends basically on requirement of the exporter, relation with the bank, track record, good repayment history and good market reputation.
But sometime banks do not allow the bill discounting facility over and above the regular limits. In those cases while assessing the limits, the bill discounting facility is proposed depending of the Working Capital Gap and the turnover of the company. Here the limits are backed with collaterals and other securities.
Type of export bills and its discounting
D/A Export Bills (Usance Export Bill): A Usance bill is one where credit period is given by the exporter to the importer as per credit terms and export agreement. Importer accepts the bills and pays for the bills on the maturity date.
The exporter draws bills on the importer and submits the same with its bank. The bank will discount the bills and send the same for collection. On due date the exporter need to adjust the limit.
In this case the bank may sanction two separate limits
- Without acceptance by the importer. In this case as and when the exporter sends the materials/goods to importer, it submits the bills to its bank for discounting without waiting acceptance of bills by importer.
- With acceptance by the importer. In this case acceptance by the importer is must before discounting the bills.
D/P Export Bills (At sight/at demand): The exporter draws bills on the importer and submits the same with its bank. The bank will not discount the bills and just send the same for collection to importer bank. As and when the collection is done amount is credited in exporter account. It means bill discounting is not done in the case of export bills drawn at sight. But as per RBI guidelines bank may allow the discounting of bill for the transit period. In this case we call it as "Advance against export bills send on collection basis"
Interest on Post-shipment Credit
1. In the case of advances against demand bills, if the bills are realized before the expiry of the normal transit period (NTP), interest at the prescribed rate shall be charged from the date of advance till the date of realization of such bills. The date of realization of demand bills for this purpose would be the date on which the proceeds get credited to the banks' Nostro accounts.
2. In the case of advance/credit against usance export bills, interest at prescribed rate may be charged only up to the notional/actual due date or the date on which export proceeds get credited to the bank's Nostro account abroad, whichever is earlier, irrespective of the date of credit to the borrower's/exporter's account in India. In cases where the correct due date can be established before/immediately after availment of credit due to acceptance by overseas buyer or otherwise, prescribed interest can be applied only up to the actual due date, irrespective of whatever may be the notional due date arrived at, provided the actual due date falls before the notional due date.
3. Where interest for the entire NTP in the case of demand bills or up to notional/actual due date in the case of usance bills as stated at (2) above, has been collected at the time of purchase/discount of bills, the excess interest collected for the period from the date of realization to the last date of NTP/notional due date/actual due date should be refunded to the borrowers.
Other Important Points
· The bill is to be presented to the bank within a maximum period of 21 days from the date of shipment.
· The bills are realized by the bank through its foreign currency account maintained at a foreign centre.
· Post shipment finance can be off short terms or long term, depending on the payment terms offered by the exporter to the overseas importer. In case of cash exports, the maximum period allowed for realization of exports proceeds is six months from the date of shipment. But in case of exporters covered under Gold Card Scheme the maximum period allowed is upto 365 days.
· In respect of export credit to exporters at internationally competitive rates under the schemes of 'Pre-shipment Credit in Foreign Currency' (PCFC) and 'Rediscounting of Export Bills Abroad' (EBR), banks are permitted to fix the rates of interest with reference to ruling LIBOR, EURO LIBOR or EURIBOR. Bank should not levy any other charges over and above the interest rate under any name viz. service charge; Management charge etc. except recovery towards out of pocket expenses incurred by banks as per IBA guidelines.
· For the period beyond the due date viz. for the overdue period, the prescribed interest rate as applicable to post-shipment rupee export credit (not exceeding BPLR minus 2.5 percentage points) may be applied.
Based on the recommendations of a Working Group (WG) to review the norms for empanelment of statutory auditors for public sector banks and other related issues and after seeking the approval of GoI, it has been decided to revise the guidelines on appointment of statutory auditors in public sector banks with effect from the year 2013-14. The revised eligibility norms for empanelment of SCAs as prescribed by RBI in consultation with the WG have been indicated in Annex 1. The categorization/eligibility norms for empanelment of branch auditors which have been kept unchanged are indicated in Annex 2.
The guidelines/instructions relating to the selection procedure to be followed for appointment of statutory auditors in PSBs and details thereof are furnished in Annex 3. These guidelines will be effective from the financial year 2013-14 and onwards.
Annex 1
Norms of Empanelment for Statutory Central Auditors of Public Sector Banks applicable from the year 2013-14
As on 1 January of the relative year the firm should have
(i) minimum 7 full time chartered accountants, of which at least 5 should be full time partners exclusively associated* with the firm. These partners should have minimum continuous association with the firm i.e. one each should have continuous association with the firm at least for 15 years and 10 years , two with a minimum of 5 years each and one with a minimum of one year. The remaining 2 full-time chartered accountants or partners, as the case may be, should also have a continuous association with the firm for a period of one year*. Four of the partners should be FCAs. Also at least two of the partners should have minimum 15 and 10 years experience in practice. In case the paid Chartered Accountant available with the firm without any break was admitted as a partner of the said firm at a future date, his association with the firm as a partner will be counted from the date of his joining the firm as a paid Chartered Accountant.
*Note:
1. The definition of ‘exclusive association’ will be based on the following criteria:
(a) The full time partner should not be a partner in other firm/s.
(b) He should not be employed full time / part time elsewhere.
(c) He should not be practicing in his own name or engaged in practice otherwise or engaged in other activity which would be deemed to be in practice under Section 2(2) of the Chartered Accountants Act, 1949.
(d) The total compensation@ of the partner from the firm should not be below the following limit:
In case the Head office of the firms located in
(i) Delhi, Mumbai, Chennai, Kolkata, Bangalore and Hyderabad
ACA partner ` 1.80 lakh in a year (` 15000/- per month)
FCA partner ` 3.00 lakh in a year (` 25000/- per month)
(ii) Other places:
ACA partner ` 1.20 lakh in a year (` 10000/- per month)
FCA partner ` 1.80 lakh in a year (` 15000/- per month)
(e) A partner whose total compensation@ from the firm is less than the following will not be treated as exclusively associated with the firm :
Firms having more than 14 partners 1%
Firms having 10 to 14 partners 3%
Firms having 5 to 9 partners 5%
Firms having less than 5 partners 8%
@Total compensation =Sum total of share of profit, remuneration and interest on capital.
2. Out of the 7 full-time chartered accountants, the remaining two chartered accountants/partners (besides the 5 exclusively associated partners) will be treated to be exclusively associated with the firm only if they are continuously associated with the firm for a period of one year as on January 1 of the relevant year. These norms will be made applicable from the financial year 2014-15 i.e. the chartered accountants/partners will have to comply with the norms as on January 1, 2014.
(ii) the number of professional staff (excluding typists, stenographers, computer operators, secretary/ies and sub-ordinate staff etc.), consisting of audit and articled clerks with the knowledge in book-keeping and accountancy and are engaged in outdoor audit should be 18.
(iii) the standing of the firm should be of at least 15 years which would be reckoned from the date of availability of one full time FCA continuously with the firm.
(iv) the firm should have minimum statutory central audit experience of 15 years of public sector banks (before or after nationalisation) and/or by way of statutory branch audit thereof or that of statutory audit experience of a private sector bank. In case any of the partner of an audit firm is nominated / elected for a period of at least 3 years or more on the Board of any public sector bank then his / her such experience for a maximum period of three years will be considered as bank audit experience, provided such experience has not been earned by him/her concurrently i.e. when his / her firm was assigned statutory audit of any PSB, select all India financial Institutions or RBI.
(v) the firm should have statutory audit experience of 5 years of the public sector undertakings (either Central or State Government undertaking). While calculating such experience, more than one assignment given to a firm during a particular year or more than one year’s statutory audit (audits in arrears) assigned to the firm will be reckoned, as one year experience only, for the purpose of counting such experience.
(vi) at least two partners of the firm or its paid Chartered Accountants must possess DISA/CISA or any other equivalent qualification.
Annex 2
Norms for the empanelment of audit firms to be appointed as statutory branch auditors for public sector banks (2013-14) Cate-gory | No. of CAs exclusively associated with the firm (Full time) | No. of partners exclusively associated with the firm (full time) (Out of 2) | Profe-ssional staff | Bank audit experience | Standing of the audit firm |
(1) | (2) | (3) | (4) | (5) | (6) |
I. | 5 | 3 | 8 | The firm or at least one of the partners should have a minimum of 8 years experience of branch audit of a nationalised bank and/ or of a private sector bank . | 8 years |
II. | 3 | 2 | 6 | The firm or at least one of the partners should have preferably conducted branch audit of a nationalised bank or of a private sector bank. | 6 years (for the firm or at least one partner) |
III. | 2 | 1 | 4 | The firm or at least one of the CAs should have preferably conducted branch audit of a nationalised bank or of a private sector bank for at least 3 years | 5 years (for the firm or at least one partner) |
Annex 3
PROCEDURE FOR APPOINTMENT OF STATUTORY AUDITORS IN PUBLIC SECTOR BANKS
A. Statutory Central Auditors (SCAs)
1. For the year 2013-14 and onwards, GoI have approved the revision in the norms on the number of SCAs to be appointed in PSB as under:
i) Category “A” Banks (Large Banks viz. Bank of Baroda, Bank of India, Canara Bank, Punjab National Bank, Central Bank of India and Union Bank of India) shall not have more than 6 SCAs. However, in case of SBI the number of SCAs shall not be more than 14.
ii) Category “B” Banks (Medium Banks viz. Allahabad Bank, Corporation Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce, Syndicate Bank and UCO Bank) shall not have more than 5 SCAs, and;
iii) Category “C” Banks (Small Banks viz. Andhra Bank, Bank of Maharashtra, Dena Bank, Punjab & Sind Bank, United Bank of India, Vijaya Bank, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore) shall not have more than 4 SCAs.
Actual numbers of SCAs to be appointed can be decided by respective boards subject to the above limit.
2. As per the existing practice, SCAs appointed will have a tenure of three years after which they will be rested for a period of two years. The appointment of SCAs will be made on an annual basis, subject to their fulfilling the eligibility norms prescribed by RBI from time to time and also subject to their suitability.
3. From the financial year 2013-14, selection of SCAs will be done by the Selection Committee constituted by GoI and the procedure that will be followed by RBI for forwarding the list of eligible audit firms for selection of SCAs by the Selection Committee constituted by GoI is as under :
• After receipt of the list of eligible auditors / audit firms, based on the eligibility norms for empanelment of auditors / audit firms prescribed by RBI from the Office of the Comptroller and Auditor General of India (C&AG), verification of eligibility of audit firms by RBI with respect to their bank audit experience available with RBI will be done by RBI.
• List of eligible firms after excluding the firms which are to be continued, rested and denied audit during the relevant year will be prepared by RBI and forwarded to GoI for selection by the Selection Committee.
• After selection, GoI will advise bank-wise names of the selected firms to the respective banks. As per the statutory requirement, banks, in turn, are required to forward the names of the selected SCAS to RBI for its prior approval before their actual appointment.
B. Statutory Branch Auditors (SBAs)
1. The norms for selection of branches of PSBs for statutory audit
from the year 2012-13 and onwards will be based on the following :
(i) For the year 2012-13, statutory branch audit of PSBs may be carried out for all branches with advances of ` 20 crore & above and 1/5th of the remaining branches covering a representative cross section of rural/semi-urban/urban and metropolitan branches, predominantly including branches which are not subjected to concurrent audit, so as to cover 90% of advances of a bank. CPUs/LPUs/and other centralized hubs by whatever nomenclature called would be included in the one fifth of the remaining branches every year.
(ii) In respect of branches below the cut-off point, which are subject to concurrent audit by chartered accountants, henceforth, LFARs and other certifications done earlier by SBAs will now be submitted by the concurrent auditors and such branches may not generally be subject to statutory audit.
(iii) Going forward, in mutual discussions with GoI and SCAs, based, inter alia, on the operational efficiency and robustness of CBS, system driven identification of NPAs, and integrity of MIS,
managements of individual PSBs may decide on the threshold level of advances for the purpose of selecting branches for statutory audit.
(iv) Progressively, the threshold level of advances may be increased so that the number of branches to be taken up for statutory audit is phased down over a period of time.
2. The following procedure will be followed for appointment statutory branch auditors (SBAs) in public sector banks (PSBs):
(i) The list of eligible auditors/audit firms will be prepared by the Institute of Chartered Accountants of India (ICAI) as per the norms prescribed by RBI.
(ii) The above list will be subjected to scrutiny by RBI for identifying the continuing and rested firms and excluding audit firms against whom adverse remarks/disciplinary proceedings are pending or who have been denied audit.
(iii) RBI will, thereafter, forward the final list of all eligible auditors/audit firms to PSBs for selection.
(iv) The PSBs will select the required number of branch auditors/audit firms. Banks will be required to clearly advise the audit firms selected for consideration of appointment that each audit firm can take up audit assignment (branch audit) in one PSB only. The audit firm should give their consent in writing for consideration of appointment in the bank concerned for the particular year and the subsequent continuing years.
(v) The consent given by an audit firm will be treated as irrevocable and request, if any, from audit firms for changing the bank, after giving its consent to the bank concerned will not be entertained.
(vi) After the selection of branch auditors, PSBs will be required to recommend the names of both continuing and selected branch auditors to RBI for seeking its prior approval before their actual appointment, as per statutory requirement.
3. SBAs will have a maximum tenure of four years. The appointment of SBAs will be made on an annual basis, subject to their fulfilling the eligibility norms prescribed by RBI from time to time and also subject to their suitability.
4. The number of eligible auditors / audit firms is more than the number of branches to be audited at the following 33 centres (viz. Mumbai, Kolhapur, Pune, Solapur, Thane, Kolkata, Chennai, Coimbatore, Delhi/ New Delhi, Ajmer, Bikaner, Jaipur, Kota, Udaipur, Ahmedabad, Vadodara, Surat, Hyderabad, Chandigarh, Raipur, Faridabad, Gurgaon, Panchkula, Panipat, Sonipat, Bangalore, Ernakulam, Indore, Nagpur, Ludhiana, Jodhpur, Bhilwara, and Ghaziabad). In such centres, the auditors/ audit firms will be put to a period of compulsory rest for two years after completion of four years of continuous branch audit. In other centres, where the number of eligible auditors / audit firms is less than the number of branches to be audited, the branch auditors on completion of four years of continuous branch audit will be subjected to the policy of rotation.
5. While allotting branches, banks are required to select auditors/audit firms which are in close proximity to their offices/branches. Banks are also required to have a suitable mix of various categories of auditors / audit firms while selecting the branch auditors keeping in view the size of the branches to be audited.
6. As regards statutory branch audit to be carried out by SCAs, banks will allot the top 20 branches(to be selected strictly in order of the level of outstanding advances) in such a manner as to cover a minimum of 15% of total gross advances of the bank by SCAs.
C. General Guidelines applicable to both SCAs and SBAs
(i) All PSBs are required to have a Board approved policy for appointment of statutory auditors and the same may be hosted on the bank’s web-site. Banks are also required to ensure that the policy framed by the Board in the matter of selection of auditors/audit firms for appointment of auditors is strictly adhered to. Further, the list of firms selected for appointment as statutory branch auditors may be placed
before the ACB/Board of bank before for its concurrence before it is forwarded to RBI for final approval.
(ii) The policy of one audit firm for one PSB will be continued. Accordingly an audit firm will be eligible to be appointed as a central/branch auditor of only one PSB during a particular year.
(iii) Further, an audit firm which takes up statutory central audit assignment in a PSB will not be eligible to be appointed as a statutory central auditor in a private sector/foreign bank during that particular year and vice versa. The policy has been made applicable from the year 2012-13 onwards.
(iv) In order to protect the independence of the auditors/audit firms, banks will have to make the appointments of SCA/branch auditors for a continuous period of three and four years respectively subject to the firms satisfying the eligibility norms each year. Banks cannot remove the audit firms during the above period without the prior approval of the Reserve Bank of India.
The Marwari business model
HARISH DAMODARAN
The Marwaris represent the only business community one would truly call pan-Indian.
For a cluster of Bania/Jain merchant castes originally from the Marwar (Jodhpur), Bikaner and Shekhawati desert tracts of Rajasthan, their sinking roots into the business landscape covering virtually the whole of the country is a remarkable phenomenon.
Till around the 16th century, the Agarwals, Oswals, Maheshwaris and Khandelwals of this belt – loosely clubbed under the appellation of ‘Marwari’ – were confined to their homeland as local traders and money-lenders, if not army provision suppliers and financiers for various Rajput princely regimes.
G.D. Birla and Lakshmi Mittal: Both their grandfathers worked for Tarachand Ghanshyamdas, one of the first ‘great’ Marwari firms.
The latter role was crucial in expanding their footprints to other lands. As ration suppliers and paymasters, they often accompanied Rajput units attached to Mughal armies, which, in turn, opened up avenues for setting up shop all over the Gangetic plains and the Deccan.
From the 18th century, there were Marwari bankers financing even the assorted independent, yet cash-strapped, principalities that had arisen from the ruins of the Mughal Empire. Thus, the Jagat Seths became treasurers to the Nawab of Bengal, just as the firm of Gopaldas Manohardas bankrolled the Kingdom of Benares, and the Ganeriwala and Pittie families ingratiated themselves with the Nizam of Hyderabad. Typically, they lent against the security of ijara or land revenue-farming rights assigned for a particular region.
Desert diaspora
But the real impetus to Marwari outmigration came during British rule. By the early 19th century, they were significantly present across Delhi, the grain markets of Hapur, Khurja and Hathras in western Uttar Pradesh, and the river ports of Farrukhabad, Mirzapur, Patna and Bhagalpur along the Ganges.
This process gathered further steam with the coming of the railways, as the community spread itself to Kolkata and beyond to Bangladesh, and from there, up the Brahmaputra valley into Assam and across the Bay of Bengal into Burma. Within this overall eastward direction, there were sideward forays into Jharkhand, Orissa, northern Bihar, Nepal and the highlands of Jalpaiguri, Darjeeling and Kalimpong. Another large migration stream was to Central India (especially the princely states of Gwalior, Bhopal and Indore, and also Chhattisgarh), Vidarbha and the Maratha hinterland. Some of it spilled over to the Deccan, before trailing off to a trickle at Madras and Mysore.
Towards the middle of the 19th century, a veritable pan-Indian Marwari business community had emerged – a commercial resource group using the hundi, an indigenous bill of exchange, to move money and goods across the length and breadth of the subcontinent.
The hundi made it possible for a grain dealer from Kanpur to sell in Kolkata without taking cash and risk being waylaid during transit. He could, instead, have the buyer draw a hundi of equivalent amount in his favour and present it to the latter’s agent or drawee at Kanpur, who would make the payment in cash. Alternatively, the seller could transfer the hundi through endorsement to a lender, who would extend the loan at a discount to its value. The same hundi was, then, encashed at par by the lender.
The hundi, in other words, served both as a cashless remittance facility enabling long-distance inland trade and also a source of mobile credit, by virtue of it being freely transferable through successive endorsements before being finally presented to the drawee. It was the lubricant that greased the wheels of commerce, by connecting some 1,700 nationwide produce mandis and 12 nodal money markets handling the bulk of discounting of these bills at the turn of the century.
The first conglomerates
The traditional hundi, alongside the modern-day railways and telegraph, also laid the ground for the birth of large multi- branch Marwari trading firms such as Tarachand Ghanshyamdas – which, in 1870, had offices at Kolkata and Mumbai, Amritsar in Punjab, the Malwa opium belt of Madhya Pradesh and elsewhere, including through related entities.
These firms were magnets for attracting fellow Rajasthani clansmen, who could join as clerks, managers, brokers and partners. G.D. Birla’s grandfather, Shivnarayan worked with Tarachand Ghanshyamdas; so did the grandfather of the global steel czar, Lakshmi Niwas Mittal. Likewise, there was Sevaram Ramrikhdas that employed, among others, the RPG Group patriarch, Rama Prasad Goenka’s grandfather’s great-grandfather, Ramdutt. The Sevaram Ramrikhdas firm’s division resulted in independent offshoots at Kanpur, Mirzapur, Farrukhabad and Kolkata: The Singhanias are descendents of the Kanpur line.
The functional utility of such extensive upcountry networks was soon recognised by British expatriate firms, who started engaging the Marwaris as intermediaries to finance and forward raw jute for their mills or to redistribute cotton piece goods imported by them.
But increasing awareness of the power derived from control over the hinterland supply chain led the community, in due course, to also undermine the operations of the British agency houses themselves. In this, the practical trading skills and financial ingenuity of its members, honed over generations, proved most useful.
‘Desi’ futures & options
In 1905, six Marwaris introduced fatka or futures trading in raw jute that registered meteoric growth at the baras (informal exchanges) of Kolkata’s Burrabazar market.
These contracts – rarely resulting in delivery of the underlying goods, since most purchases and sales got cancelled against each other before maturity date – weren’t taken kindly to by entrenched European interests. Used only to spot buying, they saw their supply-and-demand calculations and produce flows disrupted by the rampant speculation engendered by such trades, which extended to cotton, opium and grain as well.
No wonder, one of their representatives claimed fatka to have been “invented” by Marwaris “deprived of the pleasures of rain gambling”, and only to satisfy “their craving for the gains of chance in a system of contracts purporting to evidence the purchase and sale of jute, but [where] in no single instance has jute ever been delivered”!
That view, in a sense, echoes those of many who even today harbour a suspicious attitude towards futures transactions, which they contrast to ‘legitimate’ business.
Apart from the hundi and fatka, the Marwaris also pioneered trading in indigenous options ( satta), giving the buyers the right, but with no obligation, to buy or sell a certain commodity at a specified future date and price. These could be teji (call) or mandi (put), with the premium paid by the buyer of the option known as nazrana.
The success of Marwari enterprise can, in short, be put down to three components:
Pan-India presence, key to the forging of long-distance networks of trade and finance, extending from the desert towns of Rajasthan to the Brahmaputra valley;
Community resources and connections, which could be leveraged to raise capital or expand the scope and spread of business operations. A firm could open as many branches as the number of brothers, nephews, in-laws, cousins or trusted accountants permitted. Over time, each of these would develop into or further spawn independent firms, facilitating diffusion of entrepreneurship within the community;
Evolving sophisticated trading and financing mechanisms, complementing their ostensibly hardwired talents at sourcing/selling of produce and ability to draw on information or ground-level knowledge not normally accessible to others.
These traditional strengths have revealed themselves even in more recent times – be it in organised industry, share markets or, for that matter, modern-format retail and e-commerce (the promoters of Big Bazaar, Flipkart, Snapdeal and Myntra happen to be all northern Bania/Jains, if not Marwaris).
This essay now looks deeper at the relevance and limitations of the ‘Marwari way’ of doing business in today’s world:
Having a business presence spanning much of the subcontinent is a feature that has distinguished the Marwaris from other prominent trading communities.
The latter — the Parsis, Sindhis, Gujarati Banias/Jains, Lohanas and Bhatias, Nattukottai Chettiars, Punjabi Khatris/Aroras or Muslim Memons, Khojas and Bohras — have historically had more geographically concentrated inland operations: Some of them had predominantly overseas mercantile or investment interests.
File photo of Ramkrishna Dalmia, seen with a wire recorder device to improve his English.
The ability to draw on extensive pan-Indian bazaar connections made a huge difference during the interwar years, more so with the Great Depression. It tilted the balance against foreign trade, in favour of those whose business activity was largely domestic-focused.
The Marwaris were the ones to make the most out of the disruption of normal trading channels during wartime. The speculative profits earned from fatka and teji-mandi transactions — that rose manifold at the numerous commodities exchanges formed in this period — they partly funnelled into industry. That also included buying out the units of beleaguered European managing agencies, to whom they were previously brokers and financiers.
Dalmia’s exploits
Exemplifying this trajectory was Ramkrishna Dalmia, arguably the greatest Marwari businessman before Independence.
Originally from Chirawa in Jhunjhunu district of Rajasthan’s Shekhawati region, Dalmia went to Kolkata to join his maternal uncle’s bullion business. In no time, the ambitious young man had launched his own operations, starting with gambling on silver prices during World War-I, followed by shares at the Calcutta Stock Exchange and trading in commodities.
Dalmia’s industrial debut was through a sugar mill in 1933 at a site in Bihar’s Rohtas district. Over time, it also housed plants manufacturing cement, asbestos, paper, board, vanaspati, sulphuric acid, chlorine, caustic soda and bleaching powder. These units — besides a foundry, central workshop, power house and a rail feeder line connecting the 3,800-acre complex — became part of a single entity, Rohtas Industries, that may have well anticipated today’s much-touted Special Economic Zones.
But Dalmia did not stop there. In 1937, he challenged the quasi-monopoly of ACC — a combine of 10 cement firms formed only the year before — by commissioning plants at Karachi and Dandot (both now in Pakistan), Charkhi Dadri (Haryana) and Trichy (Tamil Nadu), apart from the Rohtas Industries facility. The ensuing price war lasted till 1941, when the World War boom lifted sentiments.
From speculation, trading and manufacturing, Dalmia’s next port of call was finance. In 1943, he promoted Bharat Bank Ltd. This, along with two insurance ventures (Bharat Insurance and Bharat Fire & General Insurance), provided a captive fund pool, especially for the takeover binge that Dalmia indulged in over the next few years.
The companies he bought — with interests as diverse as flour-milling, sugar, jute and cotton textiles, civil aviation, railways, coal mines, electricity supply and newspapers — belonged mainly to British concerns like Govan Brothers, Andrew Yule and Bennett Coleman, whose owners weren’t too bullish on business prospects in Independent India. By 1948, he also had controlling stakes in Punjab National Bank. The downside
Ramkrishna Dalmia’s case is illustrative on three counts. The first, of course, is the raw drive and venturous spirit of a first- generation entrepreneur it highlights.
The second is the role of kinship and community ties, a valuable resource pool not available to every aspiring tycoon. Dalmia benefited from learning the ropes under an uncle, well entrenched in Kolkata’s Marwari trading circles. Even his initial foray into sugar was with a big land-owning relative in Bihar. All the subsequent ventures involved his brother, Jaidayal and son-in-law, Sahu Shanti Prasad Jain – under the ‘Dalmia-Sahu Jain’ group banner.
The third element was the extent to which Dalmia’s business operations remained grounded in the bazaar. The ‘speculative’ phase did not end with putting up factories. Rather, the proclivity for playing the market — including diverting public issue proceeds from one company to finance the activities of others, or booking fictitious losses on share transactions between group entities — only rose with time.
The above three facets — inherent risk-taking disposition, ability to leverage community resources, and overwhelming bazaar orientation even after entry into the ‘modern’ industrial sphere — can be said to apply to Marwari enterprise broadly, with their associated strengths and weaknesses.
In Dalmia’s case, his adroit speculative skills eventually got the better of him. As details emerged of how deposit and premium monies from banks and insurance firms controlled by the group were used to fund acquisitions — of Bennett Coleman, among others — he had to suffer the ignominy of a two-year jail term in 1956, just like Satyam Computers’ Ramalinga Raju some five decades later.
Even before that, the Dalmia-Sahu Jain empire was partitioned among his brother’s and son-in-law’s families, for reasons still shrouded in mystery and intrigue. Many of the erstwhile group’s concerns, including Rohtas Industries, have since folded up, while the surviving ones, save Bennett Coleman, cannot really be considered in the top league.
The route ahead
That links up with two major limitations of Marwari, or even Indian, enterprise in general.
The first has to do with entrepreneurial zeal and ‘animal spirits’, which, in most family-owned businesses, tends to disappear along with the founding patriarchs. The Bangurs, Modis, Singhanias, Shrirams and Dalmias represent this trend in varying degrees.
The same possibly holds for the Birlas as well: Among its various factions today, only the $ 40 billion Aditya Birla Group can measure up to, if not surpass, the vision of G.D. Birla. And that happened because his grandson, Aditya Vikram, chose to tread an independent path. In the seventies — when most others, particularly Marwaris, were happy doing business domestically — he established viscose staple fibre, spun yarn, carbon black and palm oil refining units all across South-East Asia. The latter’s son, Kumar Mangalam, has gone one step further, in aiming for global leadership in the industries where the group is active: Viscose and acrylic fibre, carbon black, aluminium and cement. That calls for no less ambition and animal spirits, even if more evolved and organised than innately present in first-generation entrepreneurs.
The second limitation flows from an inability to transcend the bazaar that provided the basis for capital accumulation for most Marwari firms (unlike for say, an Infosys or Dr Reddy’s Laboratories). But innovativeness in trading and financing – where there’s probably not much JP Morgan, Goldman Sachs or even Walmart can teach our Banias — is inadequate and certainly cannot substitute for knowledge of the factory floor and production processes.
Weakness on the latter front may not have mattered in a closed domestic economy, where the trader-industrialist’s choice of industry was dictated more by the profits it offered and the availability of licenses at that point of time. It was both theoretically and practically feasible, then, to straddle diverse industries and operate suboptimal capacity plants using borrowed, outdated technologies. These could be ‘managed’ even from a distance, without going too much into the technical details of manufacture.
The partha system of accounting devised by the Marwaris was perfectly suited for this purpose. Under it, every group firm provided informed estimates of how much it cost to manufacture a given quantity of their product. Based on it and the expected profits corresponding to the sale price, the promoters sitting at their gaddis in Kolkata or Mumbai compared the unit’s actual daily earnings to the normative partha cash flows. If substantial deviations occurred, a trouble-shooter was sent to check out the ground situation and report back. In extreme cases — rare in a protected economic environment — it led to a shake-up of the plant team or closure of the business.
The above detached approach has limited relevance in the post-liberalisation era, where the success of Lakshmi Mittal, Kumar Mangalam Birla or Anil Agarwal owes largely to their focusing on particular industries and building global-scale state-of-the-art plants.
While their in-born talents in buying and selling or having connections from relatives already in business will always stand the Marwaris in good stead, that by itself is not enough in today’s world where other things are increasingly mattering more.
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