1. 1 E-Auction of tea in India Presentation by Basudeb Banerjee Chairman Tea Board of India

2. 2 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

3. 3 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

4. 4 Channels of Primary marketing for tea Tea manufactured from tea leaf by Tea Factory In the form of loose tea in bulk package To domestic consumer through Retail outlet To semi wholesaler or Retailer for sales To domestic consumer In the form of Loose tea To merchant packers for sales to Domestic consumer as packet tea Directly to the primary registered domestic Buyers (non auction route) Directly to overseas Buyers (direct export) To registered consignee or commission agent or as stock transfer Through public tea auction In consumer packs i.e. Packet Tea To registered primary buyers Directly to overseas Buyers as Direct export To domestic consumer Through our retail outlet To domestic consumer through secondary buyers

5. 5 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 packages Public tea auction handle only loose tea in packages, the net content any package is generally between 20 kilograms and 45 kilograms Packages 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

6. 6 Public tea auction locations in North India Auction Centre Auction OrganizerYear of starting Auction held on KolkataKolkata Tea Traders Association 1861Mondays and Tuesdays GuwahatiGuwahati Tea Auction Committee 1970Tuesdays and Wednesdays SiliguriSiliguri Tea Auction committee 1976Thursdays and Fridays JalpaiguriNorth Bengal Tea Auction Committee 2005Initially it was weekly but then fortnightly AmritsarKangra Tea Planters Society1964Fortnightly

7. 7 Public tea auction locations in South India Auction Centre Auction OrganizerYear of starting Auction held on CochinTea Trade Association of Cochin 1947Tuesdays and Wednesdays CoonoorCoonoor Tea Trade Association 1963Thursdays and Fridays CoonoorTea Serve2003Wednesdays CoimbatoreTea Trade Association of Coimbatore 1980Fridays

8. 8 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

9. 9 The manual public tea auction system Auction organizer forwards such AWRs to Brokers/Auctioneers Cataloging 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 warehouse Preparation of small packs of trade sample out of total sample drawn in a lot based on the eligibility criteria of the auction buyers Despatch of such trade samples to different eligible buyers by the Brokers

10. 10 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 tea Issue of such valuation report in respect of each lot to all the auction buyers by the Brokers Offering 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 rule Public outcry system Selection of highest bidder for any lot and declaration of out lots in absence of reasonable bid from the buyers

11. 11 Existing manual public tea auction system Issue of delivery order and tax invoices to the highest bidder by the broker In North India, two types of Buyers are operating, credit buyer and cash buyer Credit 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 tea Receipt of payment towards tea price from the buyers within stipulated prompt date Payment to manufacturer by the broker within prompt date after deducting VAT/SST/CST/ Warehouse charges etc Deposit VAT/SST/CST to the Commercial Tax Department of concerned state government Payment of warehouse charges to the Warehouse owner by the Broker

12. 12 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” system Standardization of processes across auction centers Establish a more robust price discovery mechanism Ensure 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 system Leverage emerging IT technologies available in the market place to drive the above

13. 13 Tea Portal Information Dissemination Electronic Auctioning Demand side information Supply side information Operational information Communication utilities Pre – sale processes Auctioning Post sale processes Reports Present Electronic Tea Auction system

14. 14 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

15. 15 Users login into the indiateaportal system using their unique username & password Present Electronic Auction : Access

16. 16 Broker enters lot information through the ‘AWR Entry Form’ Lot details entered into the system Present Electronic Auction : Pre-Auction Process

17. 17 Broker sets valuation, taster’s comments & ask price using the ‘broker valuation’ form Valuation, comments & ask price for each lot are entered by broker Present Electronic Auction : Pre-Auction Process

18. 18 Broker publishes the catalog for a sale using the ‘publish catalog form’ Broker’s published catalog with each line corresponding to a lot Present Electronic Auction : Pre-Auction Process

19. 19 Buyers set valuation & taster’s comments for lots using the ‘buyer valuation’ form Valuation, comments for each lot are entered by buyer; Lots can be grouped together in case buyer wants the system to provide the average purchase price for these lots Present Electronic Auction : Pre-Auction Process

20. 20 Broker’s auction floor prior to start of auction Auction floor of the broker before the start of the auction Present Electronic Auction : Auction Process

21. 21 Buyers enter bids on their auction floor & view the highest bidder for each lot Lots added by buyer to his ‘My gallery’ 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

22. 22 Brokers view progress of auction Top 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

23. 23 Brokers knock down lots they are prepared to sell Present Electronic Auction : Auction Process

24. 24 Users view the auction results of lots through the ‘Auction results’ page Winning buyer & price Present Electronic Auction : Auction Process

25. 25 Auction organizer views the bid history for lots using the ‘bid history’ form Lot-wise bids entered into the system by buyers Present Electronic Auction : Reporting

26. 26 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 glitches Communication glitches Change Management issues

27. 27 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 status Mindset issue; any form of electronic bidding would entail parallel bidding Lessens ability to hedge prices and increased bidding time, thus leading to “true price” discovery Currently at more than 3 lots per minute Buyer reluctance in raising number of lots to a page Currently resolved Requires buyers to be more prudent Brokers unwilling to show “Asking Price” Can be implemented on the system in a week’s time

28. 28 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

29. 29 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 Issue Buyers insist that knowing the interested party for a lot helps in identifying areas of demand Policy and Change Management Issue Ultimate goal of the system Some amount of technical change on the system required Change management issue Enough data points to prove that it is essentially a supply-demand issue Issues raisedAnalysis / Current status Present Electronic Auction: Issues raised by producers

30. 30 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

31. 31 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 systems Focus on price discovery Build redundancies to accommodate for technology malfunctions Do not underestimate the “change management” requirement Make users pay for operations and maintenance of the system

32. 32 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

33. 33 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

34. 34 Internet 34 Regional offices Auction centres Separate Infrastructure for Tea Portal 34 Separate Infrastructure for Auctions 34 Proposed Electronic Auction Model

35. 35 Order Collector Auction Engine Auction Organizer User office 34 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

36. 36 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

37. 37 Progress so far Advertised in the Economic Times & in the Times of India both on dated: 21st September,2006 inviting Expression of Interest 20 firms responded Consultancy Evaluation Committee (CEC) has been constituted to select Consultancy Firm Meetings of CEC was held on 21 st September,2006,10 th October,2006,16 th October,2006 & 16 th November,2006 Following 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

38. 38 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

39. 39 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

40. 40 Thank You