Photo: Indranil Bhoumik/Mint
Photo: Indranil Bhoumik/Mint

Online auctions spark clash over the electronic shift in tea trading

Over the past seven years, the Tea Board has phased out open outcry auctions, replacing them with fast-paced online trading that would weed out inefficiencies

If only for the sake of symbolism, Sale 25—or the first pan-India tea auction, which was to be held at all six auction centres on Thursday—should have gone through without disruptions. But—held up by technical snags—it didn’t, leaving key stakeholders in the tea industry wondering what next.

For the Tea Board of India, the regulator, this was to be a major step to remove entry barriers.

Buyers from anywhere in India were for the first time allowed to take part in any of the auctions held simultaneously at six centres—Kolkata, Guwahati, Siliguri, Kochi, Coonoor and Coimbatore—without having to be represented by a local agent.

The aim, as the Tea Board has previously said, is to broaden and deepen the market. This wouldn’t have been possible when hoary tea auctioneers still wielded the gavel.

But over the past seven years, the industry regulator has phased out open outcry auctions, replacing them with fast-paced online trading that would weed out inefficiencies.

“If only they could create an Amazon for tea auctions," says an auctioneer, referring to the global online retailer. This person asked not to be named.

“But why not?" asks Viresh Oberoi, managing director and chief executive officer of Mjunction Services Ltd, which runs India’s biggest business-to-business e-commerce portal.

“Why must tea be shipped to central warehouses and sold through auctions at six different centres? Why can’t people sell tea directly from their gardens?" asks Oberoi, whose firm looks to leverage technology to solve “legacy problems" in tea trading.

Mjunction has recently launched a tea-trading platform that allows buyers and sellers to participate in online auctions. Initial results are exciting, according to Oberoi, and the platform is being scaled up.

Until Thursday, buyers had to register themselves at each centre to take part in the auctions—an inefficiency, according to Oberoi—and most buyers would operate through local agents and proxies.

Apart from managing the post-auction logistics of taking delivery of tea and dispatching them, these agents would also provide trade financing—one industry practice no one is complaining about.

For at least three months in a year, there is no production, but supplies cannot be suspended. So to stock up for the lean months, traders need funds.

But the process is slow—tea gets locked up in warehouses for weeks even when there are no shortages, says Oberoi.

By introducing the pan-India auction, the Tea Board is clearly looking to build direct contact between buyers and sellers, snipping out intermediaries other than buyers’ agents.

But according to a leading tea exporter, this move was “completely unnecessary". Though it is unlikely to alter the auction mechanism immediately, it is an “irritant", which has “only complicated matters", this person said, asking not to be identified.

There are many tax-related doubts among participants, according to the auctioneer cited above. The Tea Board has promised to sort them out within a reasonable length of time for the pan-India auction to succeed, but until the clarifications come through from the Union commerce ministry, participants are sceptical, this person added.

Much of the resistance stems from the timing, says the owner of a leading tea company in Assam. “You don’t want to deal with new norms and uncertainties when the second flush has just started to arrive, and people are chasing the most expensive variants of tea," he says, adding that it should have been introduced at the beginning of the plucking season, around February-March.

That apart, the new regime may also disrupt the practice of auctioneers and brokers making loans to small growers against their crop. It envisages buyers paying sellers directly through the online platform, which means brokers would no longer be comfortable making advances to growers, according to the planter cited above, who also asked not to be named.

Santosh Sarangi, acting chairman of the Tea Board, didn’t return calls or reply to text messages.

But as tea auctions get transformed, albeit incrementally, auctioneers such as J. Thomas and Co. Pvt. Ltd, the biggest among 20 competitors, are faced with the question whether they too need to reinvent the way they ply their trade to remain relevant.

Disruptors such as Mjunction are a threat, they don’t have legacies to deal with and they are looking to build a business franchise out of “legacy problems", as Oberoi puts it. “The industry itself should have addressed them ten years ago," he says.

The process of price discovery in tea is far more complex than most other commodities, says Krishan Katyal, chairman of J. Thomas. There are a lot of variables—not just demand, supply and quality—that determine the price of tea, according to Katyal, an industry veteran.

Auctioneers evaluate every lot of tea with their deep understanding of the product and pricing potential, says Katyal, adding that they are crucial to the system because of their domain knowledge and perspective.

It is an “evolved industry" and transaction costs are small, says the exporter cited earlier, adding that some disruptions could, at times, raise costs.

Oberoi disagrees. Only about 50% of the total crop is sold through auctions. “If the current mechanism is indeed efficient, why aren’t auction volumes going up?" he argues. “A more efficient market driven by technology is the only way to ramp up auction volumes."