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‘Round tripping’ on the wane in India

09 january 2014

The theory is that ‘round tripping’ in diamonds began sometime after 2008 when 2% import duty was imposed by the Government of India. This may well be very far from the truth as the practice has been prevalent in the Indian diamond industry for years. This unhealthy trick has been plaguing the Indian diamond industry for a long time now. It is adversely affecting the reputation of the whole diamond industry. Unfortunately, the loop holes in the import-export policy have been misused by a few unscrupulous businessmen to make money on the sly. However, in reality the Indian gem and jewellery industry is by and large an honest and professionally managed sector ... but for a few ‘bad apples’. This is a universal phenomenon, not necessarily an Indian one for sure.

Controlling ‘round tripping’ has been a very testing and difficult exercise for the government of India. It’s the typical ‘damned if I do and damned if I don’t’ situation that the government finds itself. On the one hand, it strives to support the gem and jewellery industry to become a trading centre and on the other, it has to resort to increasing import duty to stifle diamond ‘round tripping’. The Gem & Jewellery Export Promotion Council (GJEPC) of India has all along been against this practice and supportive of the government’s moves.

For those who came in late, ‘round tripping’ in diamonds (or repeated export and import of same polished diamonds) is wherein traders undertake a series of exports and imports of the same goods for the purpose of receiving greater bank financing. Hypothetically, if a parcel made four round trips it means that for every $1 million worth of polished goods, the exporter got $4 million in financing. Sounds like a good deal provided the trader is able to get square with the bank ploughing back the money into the diamond business and not misusing it by diversifying into other businesses. But just ‘bank financing’ is not the only thing on the traders mind while indulging in ‘round tripping’.

It was after year 2008, when India scraped the 3% import duty and allowed free imports of cut and polished diamonds, that ‘round tripping’ took a monstrous ‘avatar’ (manifestation of an idea or embodiment of a concept). The government’s move was mainly to felicitate some Indian diamond processors who had mining licenses in African countries where they mined, processed and wanted to bring back polished diamonds to India. But, this 0% duty was too attractive for some other diamond traders who went head on to indulge in ‘round tripping’ with gay abandon. After this, there was no stopping them and the country’s imports of polished diamonds began to increase significantly year on year.

In fact, one can trace this matter of ‘round tripping’ going ballistic in the diamond industry in India, to a time when the Indian industry requested the government to change the taxing system. While most other industries were taxed on profit, the diamond industry sought to be taxed on turnover, like the diamond trade in Israel. The government in turn obliged and in 2007 removed all duties on polished diamonds. But that was a step the government as well as the market leaders of the diamond industry regretted later. It was then that ‘round tripping’ caught the fancy of many diamond companies who saw in it a new and easy way to make money. The practice increased to a magnitude when even the top diamond financing banks became jittery.

Due to this, there was imbalance in the country’s trade with imports of polished goods outdoing exports of polished goods, thus adversely affecting the genuine manufacturers of cutting and polishing diamonds in India. Trading seemed to be taking the upper hand and with ‘round tripping’, the government was losing money, as well as its exchequer, which was not adequately filling up. Many traders came under the direct scrutiny of the country’s custom department and raids became the order of the day. Seeing the disparity in imports of rough diamonds, export of polished goods and import of polished goods was wide and unrealistic, the Indian government had to keep the industry under close scrutiny.

Some traders began to indulge in deals in which the same polished goods are traded over and over again for various underhand dealings like raise cheap capital, defraud banks, show a bloated company’s volumes or  even launder money. The practice was blatantly used without any qualms by some diamond exporters. And with the government’s strong stance to support and provide cheap export finance to the industry, even the concerned export financing banks seemed to looked away at their client’s misdeeds. It was normal for traders to export the same goods again and again, even four to five times, and in the process borrow from banks against the receivables at a more favourable rate of interest than available through traditional money lenders.

This is where Dubai comes in. It is a safe haven for the Indian traders who indulged in ‘round tripping’. Dubai does not impose any tax on either import or export of diamonds. It merely acted as a ‘trading ground’ as consumption of polished goods in Dubai was minimal. Anyway, in a given situation, diamonds exported to X in any country is not accepted in toto. In most cases, half the consignment is returned. This aspect was well utilized by traders who exported to Dubai and received almost all back but got provided with all the benefits of an exporter. So, it is not surprising that many Indian diamond companies had and have their offices in Dubai, besides other countries.

According to an analyst, circular trading is also used as a conduit to convert black money into white. Black money is sent to Dubai through hawala transaction (an illegal banking system). Here money is deposited there in the bank account of a diamond dealer. A parcel of diamonds is then sold by that company, that’s paid for with the hawala money. The parcel is then re-imported and traded several times. This is done to bring the black money into the system. And once it is done, it is brought back into the country and deployed in the markets in the form of overseas investments, sub-accounts or portfolio investments. However, the 2% import duty by the Indian government has severely hit the business of hawala trading of diamonds. The margin that diamond traders earn for facilitating the transaction and providing a paper trail is only 1%, which is not as attractive for the risk taken.

Also, if you notice that a diamond company has branches all over the world, it doesn’t really mean that they are supplying diamonds in every country. It could just be a ‘pit stop’ for a diamond parcel that travels from one branch office to another in different countries ... at times to three or four branch offices in the guise of ‘export’. So, in each country the value of the polished goods is inflated to cover the borrowing rate in the previous country. So, a single consignment of diamonds can generate four times its value in loans. This is another ‘novel’ round tripping method.  Cash crunch ... what cash crunch?

Having said that, though ‘round tripping’ has brought a bad name to the Indian diamond industry, one should understand that it is widely used by traders in many other countries too. It is essential here to say that ‘round tripping’ is not a ‘Made in India’ product or even an India specific practice. While India is taking steps to stop this trend, there are many countries whose governments support it, but subtly. Is this their way to promote their countries as a trading centre or as a robust and successful industry, for instance Dubai? Besides, ‘round tripping’ is not an illegal method, but the Indian diamond industry considers it a problem as it makes it that much more difficult when ‘outsiders’ use the round tripping ‘route’. Some years ago, here were cases of some unscrupulous businessmen who had entered the diamond business, only to use the industry as a conduit for this type of financing and later disappear.  But, surely the practice is present in the Indian diamond industry and the government’s steps have been successful in controlling and stopping the practice to a large extent, if not totally. The present 2% import tax is not much of a deterrent because if a diamond trader can generate credit and get a return on it higher than 2%, he would still find it worth the while to indulge in ‘round tripping’.

A leading market player feels the woes of the diamond industry like the liquidity crisis is brought upon by the industry players themselves. Besides indulging in ‘round tripping’ to boost turnover and export figures to get low interest finance from banks, they have also diverted to real estate and other businesses that were not in the diamond pipeline resulting in severe cash crunch. Exports and imports of polished showed unrealistic figures and at times, imports of polished goods were even more than exports. This was a classic example of ‘round tripping’ for a country like India, which is a processor and exporter of polished diamonds - all done to misuse bank finance.

When the government of India slapped import duty of 2% in January 2012 on polished diamonds, it was clearly a step to stamp out circular trading. This shady financing pattern is actually facilitated by the Indian diamond industry, due to the changes it sought from the government in terms of taxes and duties. While the government’s move looked like a revenue-generating exercise, it was actually a corrective step of its earlier move to abolish import duty that smoothed the way for circular trading or round tripping in the diamond industry. But, it was not surprising that the market leaders of the Indian diamond industry were happy because the step would have a sanitizing effect on the industry’s darker side. Imposing import duty by the government has, to an extent, curbed ‘round tripping’, but whether it has completely put the lid on this practice is a debatable matter.

The imposition of 2% import duty by the government did pay off. The import-export statistics released by the Gems and Jewellery Export Promotion Council (GJEPC), showed imports of polished diamonds dropped 59% to $944.93 million by value, and 52% to 1.966 million carats by volume in January 2012 compared to same month in year 2011. Not surprisingly, the polished diamond export in January 2012 fell 19% to $1.7 billion and declined by 37% by volume at 3.32 million carats compared to the same month in year 2011. The GJEPC found it a good sign, despite the exports figures declining.

Right now, the ‘round tripping’ in diamonds in the country is definitely on the wane but the syndrome is threatening to take up an epidemic proportion in India if not ‘arrested’ with appropriate steps by the government. Of late, one hears that ‘round tripping’ has caught on in the gold jewellery front and is quite rampant in that sector too. It supposedly began after the Indian government imposed curbs on gold imports. But then, that would be another story and another time.

Aruna Gaitonde, Rough&Polished, Mumbai

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