Exporting the same stock of goods multiple times to borrow from banks against the receivables at a lower interest rate than what is available through traditional money-lenders is termed as Round tripping.
‘Round tripping’ in diamonds is wherein traders undertake a series of exports and imports of the same goods for the purpose of receiving greater bank financing. Hypothetically, if a parcel made four round trips it means that for every $1 million worth of polished goods, the exporter got $4 million in financing.
Round tripping of diamonds first caught the Centre’s attention in 2010-11, when data showed an unprecedented 60% increase in polished diamond at about Rs 12,900 crore.
In the year 2007, India scraped the 3% import duty and allowed free imports of cut and polished diamonds. It was the period when ‘round tripping’ was used as an aggressive tool by the Diamond Merchants. This free import was meant to felicitate those Indian diamond processors who had mining licenses in African countries where they mined, processed and wanted to bring back polished diamonds to India.
But, this zero duty was too attractive for some other diamond traders who used this opportunity for ‘round tripping’. After this, there was increased imports of polished diamonds year on year. The practice increased to a magnitude when even the top diamond financing banks became jittery.
MODUS OPERANDI IN ROUND TRIPPING
STAGE I:
Company XYZ applies for pre- shipment credit for three months from a bank to get a working capital of say $60 million to import rough diamonds from Belgium and pay for labour charges and other expenses
STAGE II:
Company XYZ cuts and polishes the diamonds and exports them for a value of $100 million to company ABC, either in Dubai, Hong Kong or US. This foreign firm is usually owned by a relative or cartel associated with company XYZ.
STAGE III:
After export, the firm takes post-shipment credit of $100 million against export receivables, usually extended by banks for up to six months. Against this, the firm repays $60 million extended as pre- shipment credit to the bank.
