Understanding the Zimbabwean Warehouse Receipts Act and Regulations *

*This article was published in the December 2020 Issue of the Institute of Bankers of Zimbabwe (IOBZ) Magazine available on this LINK.

Introduction

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. The Act was amended in 2009 to increase the list of agricultural commodities under its framework, to include barley, coffee, groundnuts, macadamia nuts, maize, mhunga, oats, pecan nuts, rapoko, rice, soya beans, sorghum, sugar beans, sunflower seeds, tea, wheat, cow peas and jugo beans/ round nuts.

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, an area of interest in the financial services sector.

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 the shareholders and directors of the company, list of the warehouses and their location, business plan, insurance policy that includes fire, storm-damage, theft, professional indemnity, and fidelity guarantee, 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, upon inspection. Once a warehouse operator is registered, the company is issued with a registration certificate, which is valid for three years. In the intervening period, the warehouse operator is required to pay an annual fee to the Registrar of Warehouses. At least one month before the three year period expires, the warehouse operator can renew the certificate by following the steps outlined in the Regulations. The Registrar of Warehouses is mandated to keep a register of all warehouse operators, which is open for inspection by members of the public.

Licensing of Warehouse Persons

The Act states that no person shall manage a registered warehouse operator, unless they are hold a licence as a warehouse person. The Act and Regulations again 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. The warehouse person can also renew the licence at least one month before the three year period expires. The Registrar is mandated to maintain a register of all licences issued to warehouse persons, and again, this register is open for viewing by the public.

Storage of Commodities

The Act mandates the warehouse operator to uphold certain standards of care when receiving agricultural commodities from farmers/ depositors for storage. The operator is expected to keep the commodities received 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 requirement for each type of commodity. Each commodity must be weighed and graded, prior to placement in storage. Thereafter, the warehouse operator must issue the depositor with a warehouse receipt, which is in the form prescribed by the Regulations.

For as long as the commodities are in the custody of the warehouse operator, it is expected that the operator will ensure that the commodities are well-maintained, free of moisture, ventilated, there is availability of sufficient lighting, leakage is averted, access by birds and rodents is prevented, dust is minimised and there is sanitation and regular/ monthly fumigation. The Act places liability for loss or damage of the agricultural commodities on the warehouse operators, where the loss or damage is caused by the warehouse person’s negligence, fraud or failure to exercise a reasonable degree of care of the commodities. The warehouse operator must also have adequate insurance against risk of loss of the agricultural commodities by fire damage, explosion, employee misconduct, burglary, and theft.

All farmers/ depositors are expected to pay a storage fee as agreed with the warehouse operator. Where the depositor fails to pay the storage fees, the Act provides the warehouse operator with a lien or a legal right against the commodities stored therein, 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 or farmers for storage in their warehouses, using the receipt books given to them by the Registrar of 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 copy, 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.

If a depositor loses a warehouse receipt, both the Act and Regulations provide for the process of its replacement, and cancellation of the lost receipt.

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. It is a requirement that any negotiation of the warehouse receipt to either transfer, pledge or encumber it, be endorsed on the receipt by warehouse person, and recorded by him. Upon negotiation, the holder is entitled to ownership or title to the receipt, ownership or title to the agricultural commodities to the extent specified in the receipt, and the right to dispose of the said agricultural commodities.

The Regulations provide that the negotiability of the warehouse receipts shall 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 latter is defined to mean a platform that provides order management, matching, trading, clearing, settlement and ownership transfer of warehouse receipts.

The negotiation of the warehouse receipt on a registered securities exchange or on a 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 capital markets, in the same manner as shares traded on a stock exchange.

The Regulations state that in order for the warehouse receipts to be negotiated and subsequently traded on the secondary market, the warehouse operator must subscribe with the relevant centralised system platform operator. After this subscription, all transactions relating to the issued warehouse receipt, namely, its issuance, transfer, pledging as collateral, loan repayment, partial or full settlement and release of the underlying goods, cancellation of the receipt, and loss or destruction and subsequent replacement must be recorded on the centralised system platform. Further, the centralised system platform operator must deposit any warehouse receipts that are negotiated on the registered securities exchange or on a commodity exchange with a custodian bank for safekeeping.

The warehouse operator is mandated to keep an electronic record of warehouse receipts issued on the registered securities exchange or on a commodity exchange, and deposited with a custodian bank. The custodian bank itself must maintain an accurate register of all underlying beneficiaries of the warehouse receipts in its custody. Important to note is that each warehouse receipt deposited with a custodian bank can have more than one beneficiary, albeit each with proportional ownership of the underlying goods therein. The custodian bank and warehouse operator must therefore accurately record such proportional ownership of the underlying goods per beneficiary. In the case where a warehouse receipt is pledged for credit facilities, the custodian bank and warehouse operator must keep records of this.

Understanding the negotiation and trading of warehouse receipts on the secondary market

The Regulations provide a framework for the negotiation and trading of warehouse receipts on the secondary market, that is, on a registered securities exchange or on a commodity exchange. Firstly, the warehouse operator must enter the capital markets marketplace, by subscribing to a centralised system platform operator. This is because the warehouse operators are responsible for issuance warehouse receipts with all the mandatory terms, information and security features. However, in order for the negotiability and trading of issued warehouse receipts to be carried out on the secondary market, the warehouse operator must subscribe to a centralised system platform. After this subscription, the centralised system platform operator must ensure that all activity regarding the issued warehouse receipt, starting with its issuance, right down to its cancellation is recorded on this platform. Further the centralised system platform operator must deposit the warehouse receipts with a custodian bank. The custodian bank must keep an accurate register of all beneficiaries and underlying goods of the warehouse receipts in its custody, and the warehouse operator must also keep an electronic record of warehouse receipts issued on the secondary market and deposited with the custodian bank.

The Regulations therefore bring together the various participants in the capital markets marketplace to enable the negotiation and trading of warehouse receipts as security in the secondary market. These participants are the securities exchange or a commodities exchange, the centralised system operator, and the custodian bank. The first new entrant in this marketplace is the warehouse operator, through subscription with a centralised system platform. Another new entrant is the farmer or depositor, by virtue of depositing their agricultural commodities and being issued with a warehouse receipt that can be traded on the secondary market. Lastly, commodity buyers enter the capital markets as they participate in the buying and/or selling of warehouse receipts.

This deepening of the capital markets into agriculture is not unique to Zimbabwe, as there are several African countries that already operate commodity exchanges, for example, South Africa, Kenya, Egypt, Ethiopia, Malawi, Mauritius, Rwanda, Madagascar, Nigeria and Ghana. By so doing, the perception that only blue chip companies can participate in a securities exchange is demystified, as the expansion to include agricultural commodities brings on board warehouse operators, small scale, medium and commercial farmers and commodity buyers into the capital markets.

Are the Regulations beneficial?

The Regulations create order in the warehouse receipts value chain, starting with the registration of warehouse operators, the licencing of warehouse persons, the storage of agricultural commodities, the issuance of warehouse receipts and their negotiability. The Registrar of Warehouses is therefore empowered to regulate the activities of warehouse operators and warehouse persons, as well as ensuring compliance with the minimum standards and physical requirements of the warehouse buildings or structures. The Regulations also provide a framework for the issuance, negotiation and trading of warehouse receipts not only in the free market, which is provided for as the over-the-counter transactions, but also, in the secondary market on a securities exchange or commodities exchange, following their designation as a security earlier this year.

Warehouse operators will therefore have to adjust their internal processes and procedures to comply with the provisions of Regulations. Those warehouse operators seeking to participate on the secondary market will have to subscribe with the relevant centralised system platform operator. The Regulations certainly provide the much needed supervision and support of the activities in the warehouse receipts value chain in a succinct manner that expands financial inclusion of the capital markets into the agricultural sector.

Conclusion

The gazetting of the Warehouse Receipt (General) Regulations SI 224 of 2020 is certainly a welcome development, as its provisions relating to the negotiation of the warehouse receipts deepen the capital markets, and promote financial inclusion. What remains is for their implementation over the next 12 to 18 months.