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Negotiable Warehouse Receipts (NWRs)

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Warehouse Receipts are documents issued by warehouses to depositors against the commodities deposited in the warehouses, for which the warehouse is the bailee.

Warehouse Receipts may be either non-negotiable or negotiable (means transferable by simple endorsement /signature). Negotiable warehouse receipts are transferred by endorsement and delivery; i.e., either the original depositor or the holder in due course[1] (transferee) can claim the commodities from the warehouse. NWRs   can be traded, sold, swapped and used as collateral to support borrowing.

In India, the term ‘negotiable warehouse receipt’ is defined in Section 2(m) of the Warehousing (Development and Regulation) Act, 2007 (WDR Act), which came into force from 25 October 2010. WDR Act provides for issuance of Negotiable Warehouse Receipts (NWRs)   by the warehouses registered under this Act. Section 2(m) defines a  "negotiable warehouse receipt" to mean a warehouse receipt under which the goods represented therein are deliverable to the depositor or order, the endorsement of which has the effect of transfer of goods represented thereby and the endorsee for which takes a good title;”

A negotiable instrument is essentially a document embodying a right to the payment of money /goods [which implies creating a right in favour of some person] and it may be transferred from person to person. This developed historically from efforts to make credit instruments transferable; that is, documents proving that somebody was in their debt were used by creditors to meet their own liabilities. Thus a promise of A to pay B a certain sum at a specified date in the future could be used by B to pay a debt to C. Thus, free negotiability is an important characteristic of a negotiable instrument. The most common negotiable instruments in use are promissory notes and checks. Negotiable instruments are used for purposes of payment or credit and as security. Sometimes one instrument may perform all three functions.

A negotiable instrument can be transferred to any number of persons before maturity. The means of accomplishing a transfer from one creditor to another is by endorsement. It means writing of a person’s name on the back of the instrument for the purpose of negotiation. If the space available on the back has been completely covered, a piece of paper may safely be attached to the instrument and subsequent endorsement may be made on that paper. There are two modes of negotiation. If an instrument is payable "to order," both endorsement and delivery are required for negotiation. If the instrument is payable "to bearer," (which means pay to the person coming with the instrument) delivery alone suffices. Delivery means the voluntary transfer of the possession of the instrument with the intention of transferring ownership of the instrument to the person to whom it is delivered. An instrument is payable to the order if it is expressed to be so payable, i.e., to be payable to a particular person and does not contain certain words prohibiting transfer or indicating an intention that it shall not be transferable. [Pay to A / Pay to A or order/ Pay to the order of A]. In case the instrument is originally payable to order, but it is endorsed in blank, the instrument will become payable to the bearer. [Pay to A or bearer/ Pay to the bearer]. The law relating to Negotiable Instruments is contained in the Negotiable Instruments Act-1881. It extends to the whole of India except in the state of Jammu and Kashmir. The Act recognizes only three instruments. –a promissory note, a bill of exchange or cheque. But it does not exclude the possibility of other instruments to be added to this list. However the conditions for that are:

Whenever any warehouse feels the need for issuing NWRs either because of demand from its consumers or due to competition, it approaches the WDRA for accreditation. The authority then sends a team of inspectors who judge the warehouse on various parameters like whether the construction has been according to norms, does it have trained staff, is it equipped with modern pest control and fumigation facilities, its net worth, security, fire-fighting and goods weighing facilities. If the team is satisfied with the conditions, then WDRA issues a booklet containing the NWRs. The warehouse then issues these receipts to customers (farmers and people who have stored their produce in the godowns) in place of the normal receipt. As these receipts are recognised by the government, banks can easily grant loans against them. The farmer gets an officially recognised receipt against which he can take loan from bank for further farming activities or alternatively sell his produce to a third person by endorsing the receipt, without even taking physical possession.


Benefits of NWRs

NWRs issued by registered warehouses help farmers to seek loans from banks against NWRs and this way NWRs become a prime tool of trade. NWRs provide farmers with an instrument that allows them to extend the sales period of modestly perishable products well beyond the harvesting season. When delivering the product to an accredited warehouse, the farmer obtains a Warehouse Receipt that can be used as collateral for short-term borrowing to obtain working capital. That way, the farmer does not need to sell the product immediately to ease cash constraints.  This option would be attractive only if the farmer expects that seasonal price increases will make it worthwhile to store the product and sell it later. This way NWRs can avoid distress sale of agricultural produce by the farmers in the peak marketing season when there is glut in the market.

Negotiable warehouse receipts allow transfer of ownership of that commodity stored in a warehouse without having to deliver the physical commodity. These receipts are issued in negotiable form, making them eligible as collateral for loans. It is also beneficial to other stakeholders, such as, banks, financial Institutions, insurance companies, trade, commodity exchanges as well as consumers. NWRs can enhance banks’ interest in lending in respect of farm goods deposited by farmers in the registered warehouses which can increase liquidity in the rural areas and encourage scientific warehousing of goods. WDR Act makes it mandatory for warehouses to register with Warehousing Development and Regulatory Authority (WDRA) for issuance of NWRs.

A Committee was constituted under the Chairmanship of Shri Dinesh Rai for strengthening Negotiable Warehouse Receipts (NWRs) which submitted its report on 15 February 2015.

Holder in due course means any person who possesses the negotiable instrument (NI) in good faith for valuable consideration before the maturity period so that he is eligible to enjoy the benefits of that financial instrument (FI). Good faith implies that he should not have accepted the NI after knowing about the defects in the title to the instrument. If the transferee had noticed the defects in the title of his immediate transferor he will not become a holder in due course. However, notice of defects in the title of any prior party does not affect the title of the holder. Also, consideration [legally valid amount] must not be void or illegal. For eg. debts due on wagering [gambling or bet] contracts cannot have this legal validity.  Holders of instruments given as gifts are not holders in due course.

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