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April 10, 2020

FIA report on sugar rip-off: ‘Satta’ is gambling, most prevalent in sugar market

Top Story

April 10, 2020

ISLAMABAD: “Satta” or imaginary/speculative/virtual advance sales, which is simply a form of gambling and has become common practice in the sugar market throughout Pakistan, is absolutely illegal and a menace to control the prices of the commodity.

“This requires strict legal action by the provincial governments which should be started immediately as people involved in such business are speculating a severe price hike in the holy month of Ramazan. The Satta rates are now about Rs100 per kg for Ramazan. The provincial governments have information available through their special branch about the Satta dealers and action can be taken immediately,” the Federal Investigation Agency (FIA) inquiry report into the sugar scam says.

While analysing the impact of forward contracts on the prices of the sugar and whether any mala fide is involved, the findings noted that there are two kinds of forward contracts according to the discussion with different stakeholders.

One is that the buyer enters into an agreement, written or verbal, with the mill to purchase sugar. The sugar is to be lifted at a later stage of time but no payment is made. The rate is normally set higher than the current rate. In this situation, again the buyer would make profit if the price of the sugar goes up. This kind of contract lends itself to the possibility of Satta.

Explaining the Satta, the report said A person Mr. A might be the owner of sugar mill, wholesale dealer or simply a salesman, who sells virtual sugar to Mr. B. If the current price of sugar is Rs70 per kg then Mr. B offers Mr. A to book 100 truckload of sugar at the rate of Rs72/kg for 15th April. Now on 15th April, if the price of sugar becomes Rs68/kg in the market, then Mr. B will pay Rs4/kg to Mr. A for the quantity of 100 truckload. If price of sugar on 15th April becomes Rs74/kg then Mr. A will pay to Mr. B Rs2/kg on quantity of 100 truck load. No actual investment or sale or lifting of sugar is involved in Satta.

The report said that forward contracts and more so Satta sales affect the market. Speculation about the increased or decreased rates of Satta in the market affects the price accordingly. The upward speculation results in perception of increased demand against the supply which will result in price hike. The forward contract is the advance sale of sugar by the sugar mills. The buyers buy the sugar to be lifted at some point in future. There are multiple reasons for sugar mills for adopting this practice. Forward contract fetches business capital for the sugar mills whereas they don’t have to deliver sugar immediately.

The second kind of forward contract is that the buyer, who is normally a wholesale dealer, stockist or investor, buys the sugar to be lifted at a later time as per agreement. The payment is made in advance and normally the rate is set lower as compared to the current rate. In this situation the buyer makes profit if the sugar price goes up. This kind of forward contract seems justifiable as the money is paid in advance for a small discount.

In its finding, the inquiry committee said that the detailed analysis of forward contract can be carried out with the availability of full information from the sugar mills. The data, so far obtained from the sugar mills, shows that sixteen mills of Punjab, one of Khyber Pakhtunkhwa and five of Sindh (data furnished for only 13 sugar mills) have entered into forward contracts for sale of sugar. The details of buyers in these contracts and the mode of payment need to be analysed with the help of Federal Board of Revenue. The authenticity of forward contracts also requires verification. All these verifications need in-depth analysis with all the requisite information which can be obtained through a detailed audit.

The two sugar groups, which are the largest according to the FIA report, generated a whopping surplus profit of Rs54.33b (Rs32.89b and Rs21.44b) from November, 2018 till February, 2020 because of price increase, currency depreciation and export subsidy.

An eminent chartered accountant, who did not want to be named, did the calculations for The News, which are based on the “report data” and “actual data” of sugar production of the conglomerates.

The computations are based on three factors: Retail price increase from Rs55.47/kg to Rs79.86/kg with an average surge of Rs12.74/kg; 40% currency depreciation from Rs105/$1 to Rs150/$1; and Punjab government-sanctioned export subsidy of Rs3 billion.

The accountant dealt with the two groups separately and said that there are two values for total production capacity in two years: Report data of 1.42 million tons (MT) and actual data of 2.08 MT. He calculated profits on each data individually.

First, he covered the biggest group. Its surplus profit due to average retail price increase of Rs12.74/kg on total production of 1.42 MT came to Rs18.12b on report data and Rs26.5b on actual data. The surplus profit acquired due to export subsidy from the Punjab government was officially documented to be Rs561.03m.

The surplus profit due to currency depreciation on total sugar export of 0.122 MT with export rate in international market being $350 per ton was Rs1.931b.

Similarly, the profit generated due to steady support price for local farmers - $1.74-$1.24/40 kg – came to Rs2.66b, and total profit due to currency depreciation was Rs4.59b.

All in all, the total surplus profit generated by this group was Rs23.27b on report data and Rs32.89b on actual data.

The calculations of the surplus profit pocketed by the other biggest sugar group were done following the same formula.

Its report data was 0.94 MT while the actual data was 1.28 MT. Its surplus profit due to retail price increase on total production of 0.94 MT with average increase in retail price of Rs12.74/kg came to Rs11.97b on report data and Rs16.30b on actual data.

It has been officially stated that the surplus profit acquired by this group due to export subsidy of the Punjab government was Rs452.3m.

The surplus profit due to 40% currency depreciation on total sugar export of 0.146 MT at the export rate of $350 per ton in international market came to Rs2.29b. The profit generated due to steady support price for local farmers - $1.74-$1.24/40kg on total production came to Rs1.762b. The total profit due to currency depreciation was Rs4.052b.

Put all together, the group generated surplus profit of Rs16.47b on report data and Rs21.44b on actual data.