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E-Auction of tea in India

Presentation byBasudeb Banerjee

Chairman Tea Board of India

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Presentation contents

1. Different primary marketing channels for tea in India

2. Role of public tea auctions in the primary marketing of tea

3. Existing manual public tea auction system

4. Present electronic tea auction system

5. Key learnings and proposed electronic tea auction system

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Primary marketing options

Private sale In the form of loose tea in bulk packages directly to the primary buyers

Private sale in the form of consumer packs (tea content not exceeding 1 kilogram in one pack) directly to the primary buyers

Direct export in the form of loose tea in bulk packages and/or in consumer packs to overseas buyers

Dispatch of loose tea and/or packet tea to consignee or commission agent or as a stock transfer (non auction route)

Dispatch of tea in loose form in bulk packages for sale through public tea auction

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Channels of Primary marketing for tea

Tea manufactured from tea leaf by Tea Factory

In the form of loose tea in bulk package

In consumer packs i.e. Packet Tea

To domestic consumer through

Retail outlet

Directly to the primary registered domestic

Buyers(non auction route)

Directly to overseasBuyers (direct export)

To registered consignee or commission agent or

as stock transferTo registered primary

buyers

Directly to overseasBuyers as

Direct export

To domestic consumerThrough our retail

outlet

To semi wholesaler orRetailer for sales

To domestic consumerIn the form of

Loose tea

To merchant packersfor sales to

Domestic consumeras packet tea

Through public tea auction

To domestic consumer through secondary buyers

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Public tea auctions

Public tea auction handles more than 500 million kilograms annually out of the 800 million kilograms available in the form of loose tea in bulk packagesPublic tea auction handle only loose tea in packages, the net content any package is generally between 20 kilograms and 45 kilogramsPackages are in wooden tea chests, jute bags, paper sacks etc.There are five important stake holders in any public tea auction – Auction-Organizers, Seller/Manufacturers, Brokers/Auctioneers, Buyers & Warehouse keepers

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Public tea auction locations in North India

Auction Centre

Auction Organizer Year of starting

Auction held on

Kolkata Kolkata Tea Traders Association

1861 Mondays and Tuesdays

Guwahati Guwahati Tea Auction Committee

1970 Tuesdays and Wednesdays

Siliguri Siliguri Tea Auction committee

1976 Thursdays and Fridays

Jalpaiguri North Bengal Tea Auction Committee

2005 Initially it was weekly but then fortnightly

Amritsar Kangra Tea Planters Society 1964 Fortnightly

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Public tea auction locations in South India

Auction Centre

Auction Organizer Year of starting

Auction held on

Cochin Tea Trade Association of Cochin

1947 Tuesdays and Wednesdays

Coonoor Coonoor Tea Trade Association

1963 Thursdays and Fridays

Coonoor Tea Serve 2003 Wednesdays

Coimbatore Tea Trade Association of Coimbatore

1980 Fridays

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The manual public tea auction system

Despatch of lot-wise teas by the manufacturers to the warehouses approved by the concerned auction organizers

Issue of garden invoice by the manufacturers to the concerned brokers/auctioneers

Issue of Arrival & Weighment Report (AWR) by the warehouse owner addressed to the concerned broker/auctioneer

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The manual public tea auction system

Auction organizer forwards such AWRs to Brokers/AuctioneersCataloging of lots with detailed information like name of the manufacturers/sellers, number and type of packages, gross weight, net weight, grade of tea, date of arrival in warehouse, date of despatch from garden etc.Inspection of tea in the warehouse by the concerned brokers and drawing of samples from the lot stored in warehousePreparation of small packs of trade sample out of total sample drawn in a lot based on the eligibility criteria of the auction buyersDespatch of such trade samples to different eligible buyers by the Brokers

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Existing manual public tea auction system

Brokers carry out tasting of tea to assess its quality for the purpose of valuation (organoliptic) Valuation exercise based also on the existing market trends and quality of the teaIssue of such valuation report in respect of each lot to all the auction buyers by the BrokersOffering and serial bidding of lot-wise tea for sale in the auction hall on the auction day by the brokers/auctioneers as per timings prescribed the auction organizers. Buyers are generally physically present except those availing of proxy bidding rulePublic outcry systemSelection of highest bidder for any lot and declaration of out lots in absence of reasonable bid from the buyers

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Existing manual public tea auction system

Issue of delivery order and tax invoices to the highest bidder by the brokerIn North India, two types of Buyers are operating, credit buyer and cash buyerCredit buyer can take delivery of tea from the warehouse before prompt date without payment. But cash buyer is required to pay in cash before taking delivery of teaReceipt of payment towards tea price from the buyers within stipulated prompt datePayment to manufacturer by the broker within prompt date after deducting VAT/SST/CST/ Warehouse charges etcDeposit VAT/SST/CST to the Commercial Tax Department of concerned state governmentPayment of warehouse charges to the Warehouse owner by the Broker

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Background to the Project for e- auction

A report was commissioned by the Tea Board in 2002 in which a private consultant, A.F Ferguson recommended an overhaul of the current manual “out cry” systemStandardization of processes across auction centers

Establish a more robust price discovery mechanismEnsure compliance with government/tea board/tea trade association rules Discontinue certain practices that had evolved over the years e.g. division of lots,

Quantum increase in the transparency of the overall systemLeverage emerging IT technologies available in the market place to drive the above

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Tea PortalTea Portal

Information DisseminationInformation Dissemination Electronic AuctioningElectronic Auctioning

• Demand side information

• Supply side information

• Operational information

• Communication utilities

• Pre – sale processes

• Auctioning

• Post sale processes

• Reports

Present Electronic Tea Auction system

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Present Electronic Tea Auction system

•Development

•Staging •Operations

Management

Data Center•Centralized

hardware•Application

Software

Internet

Cochin•PCs•LAN

Guwahati•PCs•LAN

Kolkata•PCs•LAN

Siliguri•PCs•LAN

Coimbatore

•PCs•LAN

Coonoor•PCs•LAN

Tea Board

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Users login into the indiateaportal system using their unique username & password

Present Electronic Auction :Access

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Broker enters lot information through the ‘AWR Entry Form’

Lot

deta

ils e

nte

red

in

to t

he s

yste

m

Present Electronic Auction :Pre-Auction Process

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Broker sets valuation, taster’s comments & ask price using the ‘broker valuation’ form

Valu

ati

on

, com

men

ts &

ask p

rice

for

each

lot

are

en

tere

d b

y

bro

ker

Present Electronic Auction :Pre-Auction Process

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Broker publishes the catalog for a sale using the ‘publish catalog form’

Bro

ker’

s p

ub

lish

ed

cata

log

wit

h

each

lin

e c

orr

esp

on

din

g t

o a

lot

Present Electronic Auction :Pre-Auction Process

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Buyers set valuation & taster’s comments for lots using the ‘buyer valuation’ form

Valu

ati

on

, com

men

ts f

or

each

lot

are

en

tere

d b

y b

uyer;

Lots

can

be g

rou

ped

tog

eth

er

in c

ase

bu

yer

wan

ts t

he s

yste

m t

o p

rovid

e t

he

avera

ge p

urc

hase p

rice f

or

these lots

Present Electronic Auction :Pre-Auction Process

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Broker’s auction floor prior to start of auction

Au

cti

on

floor

of

the b

roker

befo

re t

he s

tart

of

the a

ucti

on

Present Electronic Auction :Auction Process

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Buyers enter bids on their auction floor & view the highest bidder for each lot

Lots

ad

ded

by b

uyer

to

his

‘M

y g

allery

’

This buyer is currently the top bidder on this lot

Autobid of value ’70.0’ is set on this lot by this buyer

Present Electronic Auction :Auction Process

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Brokers view progress of auctionTop bid (65.0) is greater than the ask price (60.0), hence in blue

Broker has option to sell during

bidding time if high bid is satisfactory

Present Electronic Auction :Auction Process

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Brokers knock down lots they are prepared to sell

Present Electronic Auction :Auction Process

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Users view the auction results of lots through the ‘Auction results’ page

Winning buyer & price

Present Electronic Auction :Auction Process

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Auction organizer views the bid history for lots using the ‘bid history’ form

Lot-

wis

e b

ids e

nte

red

in

to t

he

syste

m b

y b

uyers

Present Electronic Auction :Reporting

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Present Electronic Auctions Current Status –

Electronic auctioning of tea is currently being conducted at 5 of the 6 Auction Centres on a limited scale except for Coonoor

There are different levels of conversion to the electronic platform

Coonoor : 100% live (Both Leaf and Dust)

Other Centers in the South : 100% live on Leaf only

Siliguri in the North : 25% of Leaf only

Kolkata in the North : 0%

Technical/software glitchesCommunication glitchesChange Management issues

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TYPICAL ISSUES : BUYERS

Issues raised by buyers• Parallel bidding versus

sequential

• E-auction is time consuming

• Last second bids not registered

• Broker’s “Ask Price” needs to be displayed on the buyer auction floor

Analysis / Current statusMindset issue; any form of electronic bidding would entail parallel biddingLessens ability to hedge prices and increased bidding time, thus leading to “true price” discovery

Currently at more than 3 lots per minuteBuyer reluctance in raising number of lots to a page

Currently resolvedRequires buyers to be more prudent

Brokers unwilling to show “Asking Price”Can be implemented on the system in a week’s time

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• Lower Price realization compared to manual auctions; hence Producers are not willing to sell through the e-auctions

• E-auctions will make the role of the broker irrelevant

Have asked them not to keep e-auctioning as the last activity of the day

Initiated a Producer appreciation program

Kept the supply chain unchanged

Decision to “sell” still retained with the broker

Issues raised Analysis / Current status

Present Electronic Auction:Issues raised by brokers

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• Highest bidder name during an auction should not be displayed

• Drive greater price discovery: have all lots up for auction at the same time

• Lower price realization and % sold in e-auctions than manual auctions

• Policy IssueBuyers insist that knowing the interested party for a lot helps in identifying areas of demand

• Policy and Change Management IssueUltimate goal of the systemSome amount of technical change on the system required

• Change management issueEnough data points to prove that it is essentially a supply-demand issue

Issues raised Analysis / Current status

Present Electronic Auction:Issues raised by producers

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Changes required in the present electronic auction system

Suggestion received to separate Tea Portal and E-Auction

Present features of tea portal to continue Separate platform for e-auction for continuous

availability Use existing hardware with upgrades

Develop new software

Use opportunity to develop new business model

Be sensitive to change management but firm with auction principles of competition and price-discovery

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LESSONS IN HINDSIGHT

Drive the auction system by your vision of what it should be and do not be driven by an overwhelming desire to get a consensus

Do not replicate existing manual systemsFocus on price discoveryBuild redundancies to accommodate for technology malfunctions

Do not underestimate the “change management” requirement

Make users pay for operations and maintenance of the system

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Salient Features of proposed auction system

• Registered users only

• Multiple users with hierarchy

• Anywhere access

• Concurrent auctions from all centres

• Concurrent auctions by all auctioneers

• Uninterrupted availability

• Split second response

Proposed Electronic Auction

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Salient Features of proposed auction system

• Optimal market timings

• Standard contract descriptor

• Uniform price increments

• Price discovery

• Uniform lot size

• Automatic matching

• Audit trail

Proposed Electronic Auction

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Internet

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Si SiRegional

offices

Auction centres

Separate Infrastructure for Tea Portal

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Si Si

Separate Infrastructure for Auctions

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Proposed Electronic Auction Model

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Order Collector

Auction Engine

Auction Organizer

User office

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Central Back-office

Transactions

1. Order Entry

2. Order Confirmation

3. Order Modification/ cancellation

4. Market viewing by price, quantity, etc.

5. Transaction confirmation

Process flow

Proposed Electronic Auction

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Central Back-office

1. Contract note to buyers

2. Bill for buyers to pay

3. Delivery order

4. Issue Memorandum of sale

5. Download data

Buyer

1. Buyers to pay funds

2. Take delivery from warehouse

3. Download data

Auctioneer

Process flow

Proposed Electronic Auction

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Progress so far

Advertised in the Economic Times & in the Times of India both on dated: 21st September,2006 inviting Expression of Interest20 firms respondedConsultancy Evaluation Committee (CEC) has been constituted to select Consultancy FirmMeetings of CEC was held on 21st September,2006,10th October,2006,16th October,2006 & 16th November,2006Following firms short-listed:

1. M/s.Metal Junction 2. M/s.NSE-IT Ltd 3. M/s.Global Agri System (P) Ltd 4. M/s.CMC Limited 5. M/s.NCDEX

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Progress so far

Draft discussion paper was forwarded to all the stake holders including auction organizers, Producers’ Associations, Traders’ Associations, brokers etc.

Fifteen stake holders have furnished their views on the draft discussion paper so far

CEC is finalizing the document on Request For Proposal for handing over the same to the five short listed firms with the request to submit technical & financial deed separately in sealed envelope

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Progress so far

Recently held Inter-Governmental Group of FAO on tea at Nairobi, Kenya highlighted need to make the primary marketing of tea more efficient

Colombo and Mombasa also have plans to introduce e auctions

Collaboration with the East Africa Tea Trade Association the Colombo Tea Trade Association and the respective Tea Boards

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Thank YouThank You