Glancing Back…

Recap of 2014
Glancing Back…

The year of 2014 has been tumultuous and that is almost an understatement. The liquidity crunch is being felt all over as the banks are taking an exit. The winding down of the Antwerp Diamond Bank added to the woes. The decision of Export Credit Guarantee Corporation of India to remove automatic cover on loans given by banks to the gem and jewellery industry perplexed all.

Topping that is the overbearing threat of man-made diamonds being sold as naturals is a bane to the whole industry. The confusion of Surat or Mumbai is still looming and it may soon be a reality as the Gujarat Chief Minister, Anandiben Patel has allotted a large plot of land in Surat for the diamond bourse. Basically, the year 2014 was filled with doubts and perplexing news as the lack of transparency in the trade started rearing its ugly head.

But, there were some good news too such as PM Modi coming in power and giving a slight respite in the Union Budget. In addition, the taking off the World Diamond Mark in Turkey and the recovering U.S. market are in the bunch of good news bouquet. With so many newsflashes, Priyanka Desai decided to give you an overview of the top 10 news pieces that have affected the diamond industry in 2014.

Union Budget 2014
Indian Finance Minister Arun Jaitley presented the Narendra Modi government’s first budget, which did not reduce the import duty on gold. The Finance Minister has, however, rationalised the import duty on polished diamonds to 2.5 per cent.

Union Finance Minister, Arun Jaitley in his speech said, "Semi-processed, half cut or broken diamonds are presently exempt from basic customs duty. As against this, cut and polished diamonds and coloured gemstones attract basic customs duty of 2 per cent. To prevent misuse and avoid assessment disputes, the basic customs duty on semi-processed, half cut or broken diamonds, cut and polished diamonds and coloured gemstones is being rationalised at 2.5 per cent. To encourage exports, pre-forms of precious and semi-precious stones are being fully exempted from basic customs duty.”

"We are happy that our recommendation to rationalize import duty on broken diamonds and withdrawal of import duty on semi-precious and precious stones have been accepted. Also rationalisation of import duty on processed diamonds to 2.5 per cent will help the domestic manufacturing sector,” said Vipul Shah, Chairman, Gem and Jewellery Export Promotion Council (GJPEC).

The rationalization of custom duty on imported diamonds and semi-precious stones is expected to reduce classification disputes to a very great degree and prevent unproductive time usage spent in such disputes. While the rationalization will upsurge the raw-material cost marginally, it will more than compensate by the government's initiative to encourage exports and its incentives.

Amendment in lenience condition in the case of re-import of cut and polished diamonds after certification/grading from a foreign laboratory/agency where a alteration not exceeding +- 0.05mm in diameter for round shape diamonds and +-0.07mm in length and breadth for diamonds of other shapes shall be permissible. The acceptable alteration in weight remains unaffected. The classification of ‘micro’, ‘small’ and ‘medium enterprises’ had been revised in the budget to deliver for a higher capital ceiling. Budget 2014 has announced plans for Formation of an Export Promotion Mission along with the State by the Central Govt. to advance the infrastructure for exports in all states. It also projected the launch of a national multi-skill program called Skill India accentuating on employ-ability and entrepreneur skills in youth. Restoration of the Special Economic Zones (SEZs) was presented to make them operative devices of industrial production, economic growth, export promotion and employment generation.

The Union budget fell short at relieving the Indian gem and jewellery industry from its most deep-rooted issues – the 80:20 scheme, and reduction in gold import duties. The industry is not very happy with this. Prior to the budget, the industry rightfully held hopes on two grounds – it had been making representations to the government to ease the hurdles in its growth and secondly this was the maiden budget from the newly formed Narendra Modi Government, a man who is perceived as ‘pro growth’. One is reminded of the times during the Congress government when norms affected gold imports resulting in a shrinking domestic demand, rising fears of gold smuggling and many protests by jewellers to raise their concerns to the government.

Although, the budget has delivered some positivity in imposing 2.5 per cent custom duty on semi processed and half cut, polish, gemstones, diamonds, exempting pre-forms of precious and semi-precious stones from custom duty. It also gave hope that a renewed focus on promotion of exports and reviving the SEZs in the country will lead to some concrete results. But, will this mean the industry is heading for another lean period for the gold jewellery market? Also, what will be the fate of exports and manufacturing and the jobs for artisans?

Banks More Cautious & Stringent
Credit is the lifeline of any business, especially when companies want to go into expansion mode. The first door they usually knock on for credit is that of private and public sector banks. However, it is reported that banks have become more cautious about lending finance to gems and jewellery companies following reports of default in payments.

Says one banking official on conditions of anonymity, “There has been an increase in the number of willful defaulters in the gems and jewelry trade, where the company has the assets to repay the loan but is unwilling to. Private banks have almost 2 per cent of bad loans in this segment, while the percentage would be double in the case of public sector banks.”

Industry people would still prefer to brush off these bad loans as one-off instances rather than label it a growing norm. Established players go for a stable expansion approach and plan their financials accordingly because they are in for the longer run.

Manish Javeri, Head of Financial Services at The Financial Boutique said that banks now do better due diligence before furnishing loans to gems and jewellery companies. At the same time, he pointed out that they are more willing to offer loans to the diamond companies as compared to those trading in bullion. “The diamond industry is faring better than gold. Financial institutions find it safer to lend to diamond traders, especially those who are in the domestic retail segment. This is because they sell to end-customers who pay in cash and hence have better liquidity,” he added.

Financing diamond exporters is a different matter altogether because their customers are based overseas and often remain unidentified. A banking official revealed that banks that extend loans to such players are now demanding higher collateral from the debtors. According to another banking professional, the issue arises when a defaulter is a ‘willful’ one; who will challenge the bank’s decision in court and tie up the cases legally for many months. This is where the stringent due diligence norms come into play. Bank of Baroda chairman and managing director SS Mundra said his bank was cautious in lending to diamond companies, including sight-holders (registered bulk buyers) of global mining companies like De Beers, Alrosa and Rio Tinto because of increasing number of default cases in Surat, Mumbai and Antwerp."After a series of bankruptcies in the diamond sector, we are very cautious in lending to the diamond companies," he added. Not only BoB, some other nationalized and private sector banks in the country and abroad like in Antwerp have taken a cautious approach towards financing diamond companies to check a further rise in their non-performing assets (NPAs).

ABN Amro said it condensed the ratio of its loans to better spread the risk between the bank and diamantaires, as cutters, polishers, manufacturers are renowned, to try to entice new lenders to the industry.

“Clients should have more skin in the game themselves,” said Erik Jens, CEO of the International Diamonds and Jewelry Group at ABN Amro. “We want to balance the risk and reward for all stakeholders in the industry.”

ABN Amro say that while they’ve marginally reduced the size of their total loan book to the industry, that wasn’t the objective of their new terms.

“The stronger companies that have responded to these changes will survive,” Jens. “If margins are eroding there will be companies that won’t be able to step up to these standards, and some companies will indeed go bust. Others will leave the business.” Four diamond traders are reportedly from the same company known as Aarohi Diamonds (HK) Limited, a sister concern of India's Classic Diamonds India Limited, a former DTC sightholder company have been listed as defaulters through an advertisement. We cannot forget the news about Winsome Diamonds and Gitanjali Group, too.

Antwerp Diamond Bank Winds Down
The bustling diamond hub, Antwerp seems to have lost its sheen. The city identified for its diamond trading and Antwerp's diamond dealers, who buy and sell 80 per cent of the world's most precious gemstones, do not have their headrest specifically the, Antwerp Diamond Bank (ADB). The news came as a rude shock after KBC Group, a Belgium-based bank holding company, decided to wind up the loan portfolio and actions of ADB as the group could not complete its sale of ADB to China's Yinren Group.

Brussels-based KBC is the major lender by market value. And, when it was enforced to sell the diamond bank as part of conditions enforced by the European Commission for obtaining state aid in 2008 and 2009, the search for the buyer continued for many years. But at last, the bank publicised last December the agreement to sell it to Yinren. But, due to the delay of submission of the comprehensive files to the Belgian regulator by Yinren, the deal was dissolved. Now, KBC loan book is run down, hence the ADB will wind down.

The ADB was a foundation of investment for 80 years to the linkage of businesses that trade, cut and polish in the Belgian port city. It's probable that bank loans will be in dearth for the industry that relies on debt to acquire rough diamonds that are polished and used in exquisite jewellery.

ADB accounted for more than 10 per cent of the $15 billion diamond finance market, eliminating capitals from a market that was constricting lending terms. The institution's decease may deteriorate Antwerp's strong position in the global diamond industry as it contests with traders in lower-cost cities like Mumbai and Dubai.

According to reports, around 80 per cent of diamantaires in Antwerp are of the Indian origin. The wind-down is surely going to be a big worry for the Indian diamond industry. Following this news, the market was filled with rumours that diamantaires are offering discounts of 5 per cent to 20 per cent. The Gem and Jewellery Export Promotion Council (GJEPC) looked into the matter and stated that, “The news articles stating diamantaires offering discounts of 5 per cent to 20 per cent following the wind down of ADB, is not only false but also baseless with news being reported without substantial understanding of the functionary guidelines of bank’s trade with the diamond industry and without adequate and right feedback from the industry pertaining to the issue. Closing of ADB does not have any immediate direct impact on the trade neither has it created an overnight liquidity crunch as stated in the news reports. Any international bank while closing down provides an adequate time period for their clients for repayment of loans and does not demand an overnight settlement. In case of ADB it provides a minimum period of one year to their clients in India and similar if not more period to the clients in Antwerp and other centres which is adequate for the trade, and gives no reason to emerge in a havoc scenario as wrongly stated.”

Rise in Man-made Diamonds Mixed in Parcels of Naturals
In the last few weeks of 2013, there had been concerns amongst industry members about the undisclosed mixing of man-made diamonds with natural diamonds. These concerns have arisen as a consequence of media reports as well as a few instances of actual undisclosed mixing being detected. There have been two instances of the same as described below:

a) Dalumi Diamond India Pvt Ltd detected purchase of a parcel of 19 stones, totalling 6.35 carats of undisclosed man-made diamonds.
b) Narola Gems detected purchase of a parcel of44.29 cts of undisclosed man-made diamonds (Size: 0.50 cts, Color: J to L, Quality: VVS to VS2)
As one would imagine, the GJEPC council seized of the matter and proactively taken several steps to deal with the issue. The Council and BDB has been monitoring this carefully as they had conducted seminar on Synthetic diamonds in Surat and Mumbai to create awareness amongst the members. Stating the facts as well as the actions being taken by the Council, Sabyasachi Ray, Executive Director, GJEPC shares, “The Council and BDB immediately attended the cases and initiated investigations which are still going on vide which explanation has been called from the parties involved. Based on the result of such investigations, the legal team of GJEPC and BDB will initiate actions as per the constitution of both the bodies. Similarly the parties who are the victims had been directed to file for adequate complaints and were advised to proceed as per the law of land.”

To ensure consumer confidence, the industry needs to make sure that consumer confidence in the industry is maintained through segregation of the natural and man-made diamonds value chain and disclosures at every step. “India is taking the lead in dealing with the situation and hence to proactively understand the likely issues as well as formulate strategies, the Council had formed a Natural Diamond Monitoring Committee along with the various trade associations like GJEPC, BDB, GJF and MDMA in August 2013,” he added. The mandate of the NDMC is as follows: To protect the overall interests of the Natural Diamond industry; to enhance consumer confidence by encouraging proper disclosure and preserve trust factor within the industry; to ensure proper segregation of Natural Diamonds & Synthetic Diamonds; to formulate policies in order to avoid any scenario of Synthetic diamonds being misrepresented & passed off as Natural Diamonds in course of the business transactions.

Further, to understand the landscape of man-made (synthetic or lab-grown) diamonds and the likely impact on the industry and potential solutions to deal with them, they have appointed experts – A. T. Kearney (Global Management Consulting Firm) and Bonas & Co (DTC Brokers), to assist the council in the project of ‘Establishing the current status, prepare a framework/guideline for the industry members to trade in natural and Synthetic Diamonds’.

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