News

Mar 12, 2018

GJEPC Vice Chair Colin Shah Clarifies: LOUs Not Used by the Diamond Trade, Round Tripping is Unviable

Less than one per cent of the Indian gem and jewellery industry might raise finance on the basis of LOUs, while round-tripping is clearly unviable due to the high rates of duty on import of cut and polished diamonds, said GJEPC Vice Chairman Colin Shah during an exclusive interaction with gjepc.org. He was discussing some of the issues being talked about in the public domain following the recent incident of alleged fraud said to have been committed by Nirav Modi and Mehul Choksi in the PNB case.

India’s apex body for the gem and jewellery export trade, the more than five decade old GJEPC has always been, and continues to be, committed to a Swachh Diamond Trade, Shah stated.

Expressing the fear that the entire industry could be tarnished because of one rare stray fraud incident, the GJEPC Vice Chairman stressed that there are thousands of exporters who form the backbone of this over US$ 43 billion industry. They contribute 7% to India’s GDP and 15% to its merchandise exports each year, generating employment for over 4.5 million persons and creating value addition in excess of US$ 7 billion annually.

“The vast majority of exporters are not even aware of the LOU based credit facility provided by banks,” Shah averred, pointing out that as per the norms, LOU credit should only be issued based on a credit line, collaterals and due diligence related to credit worthiness.

Putting the discussion on bank lending to gem and jewellery businesses into a context, Shah explained that on an industry turnover of over Rs 5 lakh crore, banking finance only constitutes about Rs 70,000 crore. This, in turn, is a minuscule percentage, or less than 1%, of total bank lending to all industrial sectors, currently estimated at Rs 73 lakh crore.

Bankers who understand the specifics of this industry and have teams who comprehend its many unique features enjoy a healthy, and mutually beneficial relationship with the industry, Shah stated, citing a few examples. He also said that long before the current incident, Council has been in dialogue with both the ministries of Commerce and Finance at the Centre, as well as with the banks, urging for standardisation in lending norms and practices. GJEPC has interacted with all these stakeholders over the past few weeks and stands committed to a clean and transparent finance process.

Shah also addressed two other issues that have been widely discussed – round tripping and the alleged mixing of natural diamonds and synthetic diamonds.

He said quite emphatically that round tripping – multiple bank transactions involving the export, import and further export of the same consignment repeatedly – has been clearly “unviable” given the high import duties on polished diamonds. This was true at the earlier duty level of 2.5%, and all the more so now that it has been enhanced to 5%. To indulge in this practice, a company would pay duty plus bank charges of 7.03% per cycle, as well as incur costs related to transfers, expenses on physical import and export of goods, clearing fees, licence fees etc.

Shah stressed that over the last year in fact, imports of cut and polished diamonds have actually declined by about 14%.

Reassuring consumers, GJEPC’s Vice Chairman said that the process of detecting synthetics that may have been mixed among natural diamonds is now extremely simple. GII, a testing and certification lab supported by the GJEPC, has developed a compact ‘Quick Check’ machine that can identify synthetic CVD diamonds from natural diamonds within a few seconds. Majority of exporters have installed these machines as an additional safeguard, he said, while traders or jewellers can also purchase one or avail of the testing services provided by the GII lab.

GJEPC is proactively working to ensure that the vast majority of diamond traders do not suffer due to what Shah reiterates is one rare stray fraud incident. He further urged the various stakeholders and consumers at large to realise that other countries are waiting to grab market share from India, and encouraging and supporting the Indian industry was clearly in the overall national interest.