15 Jul, 2022
Warehouse Receipts Act, Regulations and the Zimbabwe Mercantile Exchange
In 2007, the Warehouse Receipt Act (Chapter 18:25) came into operation, to provide for the establishment and registration of warehouses, the licensing of warehousepersons, the issuing of warehouse receipts and the negotiability of the warehouse receipts. The Act also sought to provide the framework governing the storage, grading, weighing and inspection of agricultural commodities.
In September 2020, the Warehouse Receipt (General) Regulations SI 224 of 2020 were promulgated, thus operationalising the Warehouse Receipt Act. This article seeks to provide an analysis of the Act and the Regulations, particularly as they relate to the negotiation of the warehouse receipts. The article also considers the Zimbabwe Mercantile Exchange that was established by the Agricultural Marketing Authority (Zimbabwe Mercantile Exchange) Rules SI 184 of 2021.
REGISTRATION OF WAREHOUSE OPERATORS
The Warehouse Receipt Act establishes the Office of the Registrar of Warehouses, who is responsible for the administration of the Act. The Act states that the physical warehouse, that is, the building or structure in which the agricultural commodities are stored, can only be operated by a company that is a registered warehouse operator. The Act and Regulations provide the requirements for the application for registration as a warehouse operator through the Registrar of Warehouses, including submission of the company’s constitutional documents, details of shareholders and directors, list of the warehouses and their location, business plan, insurance policy, the prescribed registration form, and the prescribed fee. The Third Schedule of the Regulations provide the minimum standards and physical requirements that each warehouse building or structure must satisfy. Once a warehouse operator is registered, the company is issued with a registration certificate, which is valid for three years, and can be renewed. In the intervening period, the warehouse operator is required to pay an annual fee to the Registrar of Warehouses, who is mandated to keep a public register of all warehouse operators.
LICENSING OF WAREHOUSE PERSONS
The Act and Regulations specify the requirements to be submitted when applying to be licenced as a warehouse person to the Registrar of Warehouses, namely, the prescribed qualifications, the prescribed minimum period of experience in the production, processing or marketing of the agricultural commodity to be stored in the warehouse concerned, the prescribed form and the prescribed fee. A successful applicant is issued with a licence that is valid for three years and is required to pay an annual fee to the Registrar of Warehouses.
STORAGE OF COMMODITIES
The Act mandates the warehouse operator to uphold certain standards of care when receiving, weighing, grading and storing agricultural commodities delivered by farmers/ depositors. The operator is expected to keep the commodities in separate, distinguishable storage, for ease of identification. This is an important requirement, given the different types of agricultural commodities that can be submitted for storage and the varied storage requirements for each type of commodity. Thereafter, the warehouse operator must issue the depositor with a warehouse receipt. All farmers/ depositors are expected to pay a storage fee as agreed with the warehouse operator, failing which the warehouse operator can exercise the statutory lien against the commodities, to cover its storage and processing charges.
ISSUANCE OF WAREHOUSE RECEIPTS
The Act states that warehouse receipts are issued by warehouse persons after they receive agricultural commodities from depositors/ farmers for storage in their warehouses. The Regulations provide the detailed list of mandatory terms and information that must be captured in the warehouse receipt, as well as the security features that each receipt must have. The Regulations provide that a warehouse receipt may be hard copy or electronic/ dematerialised format, and a warehouse person is prohibited from issuing more than one receipt for the same lot of commodities, unless the depositor requests partial receipts for the commodities.
NEGOTIABILITY OF WAREHOUSE RECEIPTS
The Act states that a warehouse receipt is negotiable on condition that the receipt clearly states that the agricultural commodity received shall be delivered to the depositor or to a specified person on demand. The Regulations provide that the negotiability of the warehouse receipts can be either over-the-counter, or on a securities exchange registered in terms of the Securities and Exchange Act (Chapter 24:25) or on a registered commodity exchange.
The negotiation of the warehouse receipt over-the-counter is done when the warehouse person endorses on the receipt to the order of a named person, and the transaction is done directly between two persons without an exchange or a centralised system platform.
The negotiation of the warehouse receipt on a registered securities or commodity exchange is brought about by the extension of the definition of the term “security” in the Securities and Exchange Act to include a warehouse receipt, through General Notice 469 of 2020. By designating a warehouse receipt as a “security” for the purposes of the Securities and Exchange Act, it means that a warehouse receipt can be negotiated in a formalised secondary marketplace in the same manner as shares traded on a stock exchange.
THE ZIMBABWE MERCANTILE EXCHANGE
In July 2020, the Zimbabwe Mercantile Exchange (the ZMX/ Exchange) was launched under the Agricultural Marketing Authority (Zimbabwe Mercantile Exchange) Rules SI 184 of 2020 (the ZMX Rules). The ZMX Rules provide a transparent, efficient, orderly, and fair marketplace for the trading of agricultural commodities using dematerialised warehouse receipts, which can also be pledged as security for loans.
Through its various technology systems, the Exchange provides for the order management, matching, trading, clearing, settlement and ownership transfer of warehouse receipts. Firstly, the ZMX has an electronic Warehouse Receipt System (e-WRS) which is the Central Warehouse Receipt Depository that maintains the Warehouse Receipt Registry. It has an Automated Trading System (ATS), that runs the trade matching engine, the order management system and the market information display boards. Finally, the ZMX has a Clearing and Settlement System, which facilitates the clearing and settlement of trades and is integrated into settlement banks, mobile network operators and warehouse management systems.
PARTICIPANTS IN THE ZIMBABWE MERCANTILE EXCHANGE
The Warehouse Receipts Regulations and the ZMX Rules enable the registration of participants in the ecosystem of the issuance and negotiability of warehouse receipts. These participants include warehouse operators, commodity buyers and sellers such as farmers, settlement banks, custodians, and financiers. Resultantly, all transactions relating to the warehouse receipt, namely, issuance, transfer, pledging, loan repayment, partial or full settlement and release of the underlying goods, cancellation of the receipt, and loss or destruction and subsequent replacement are conducted and recorded on the Exchange.
The ZMX, like any exchange, is responsible for monitoring and regulating the trading of warehouse receipts, be they hard copy or in dematerialised format.
Firstly, the Exchange ensures that the warehouse receipts are kept in the custody of the custodian banks for safekeeping until the final release of the underlying agricultural commodities. The custodian bank itself must maintain an accurate register of all underlying beneficiaries of the warehouse receipts in its custody.
Next, the ZMX is responsible for monitoring the warehouse operators in the physical safekeeping of the underlying agricultural commodities that are the subject of the warehouse receipts. This function of the Exchange is critical as it ensures that while a warehouse receipt is trading on ZMX, the underlying agricultural commodities are in fact physically present in a warehouse that is managed by an operator registered not only by the Registrar of Warehouses, but also with the Exchange. It also means that ZMX must ensure that the warehouse operators comply with the provisions relating to storage of the agricultural commodities as provided for the in the Warehouse Receipts Act outlined above.
In turn, the warehouse operator must keep a record of warehouse receipts issued on the Exchange and deposited with a custodian bank. In the case where a warehouse receipt is pledged for credit facilities, both the custodian bank and warehouse operator must keep records of this.
The ZMX is also responsible for ensuring that the commodity buyers and sellers, who include farmers, off-takers, manufacturers and other investors trade in an orderly marketplace, from the time that the agricultural commodities are deposited until such time as the commodities are withdrawn.
The Warehouse Receipts Regulations and ZMX certainly bring together the traditional participants in the capital markets marketplace such as custodians, banks and financiers, to enable the negotiation and trading of warehouse receipts as security in the secondary market. More importantly, the Regulations and Rules deepen financial inclusion in the capital markets by bringing new entrants such as warehouse operators, commodity buyers, commodity sellers, and farmers. What is more is that the ZMX, through technology innovation, is available on mobile and online platforms such as USSD, the ZMX website and the ZMX mobile application. By so doing, the perception that only blue-chip companies or high net worth investors can participate in a securities exchange is demystified, as the expansion into agricultural commodities brings on board these parties into the capital markets.
Presently, the following agricultural commodities are eligible for issuance of warehouse receipts on the ZMX: barley, jugo beans/ round nuts, cow peas, wheat, sugar beans, sorghum, mhunga, tea, sunflower seeds, rice, soya beans, rapoko, pecan nuts, macadamia nuts, maize and oats.
The gazetting of the Warehouse Receipt Regulations and the Zimbabwe Mercantile Exchange Rules is certainly a welcome development. Zimbabwe has followed the example of other African countries that already operate commodity exchanges, for example, South Africa, Kenya, Egypt, Ethiopia, Malawi, Mauritius, Rwanda, Madagascar, Nigeria and Ghana. As the country’s fourth exchange after ZSE, Finsec and VFEX, it is hoped that ZMX will give investors a diversity of investment options, while providing the much needed financing of agriculture in Zimbabwe.