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L-1BF License is the equivalent of a Master Distributor License for a country/company, where all sales must be made through this entity at the top of the distribution chain. In 2016-17 there were 12 such distributors in Haryana, each shelling out Rs.1.0 million for the first 5000 cases and Rs.800,000 for each of the subsequent 5000. This year, Haryana in its financial wisdom decided to make an exclusive master distributor, creating what is known in economics as monopoly.
Interestingly bidding was done online- so no one knew how others bid except the Reserve Price of Rs.500 million. The highest bid of Rs.62.5 crores (Rs.625 million) by Ashir Marketing, owned/controlled by Neeraj Sachdeva of Lake Forest Wines was awarded the license. The next highest bid came from Buddy Retail at Rs. 52 crores.
Such schemes in the past, notably and notoriously in UP, also had monopoly element when Mayawati was the chief minister and late Ponty Chadha was appointed as the wholesale single distributor. This had the industry’s tail wagging with the general impression that it was not all kosher and that Mayawati or her representatives were alleged to have been involved financially. Neeraj decries such comparison and insists that any such possibility of corruption is ludicrous. ‘The reserve price of the bid was Rs. 50 crores. We had decided to be the highest bidders. If there has been any collusion, we would have we known about Buddy Retail’s quotation and bid for Rs.53 crores, slightly higher than their bid’.
Why then a bid for 62.5 Crores? Promptly came his answer, ‘the security deposit was 5% of the bid amount but if the bid was more than 25% over the Reserve Price, the deposit increased to a much higher amount, around 20%.’ He claims to have now paid Rs. 21 crores already so he could go online for business- a pre-condition for the license. He informed me during the meeting on Saturday that they had just gone online, which meant they were open for business as of April 8.
Monopoly not for the first time
Neeraj claims that Haryana had been a monopoly state once before also, even before he had come back from the US and started a liquor business in Gurgaon. When I feigned ignorance, he called up a well-known and established distributor I have known for several years. He confirmed that Haryana was in fact divided into only a few major districts for one year and the whole of Haryana was given to one distributor for another, for the L-1 license in 2003 and 2004 through a cartel that curiously included Ponty Chadha and when Chautala was the Chief Minister. There was not too much imported liquor at that time to merit attention, he says.
Even when there is no monopoly, Haryana is infamous for cartelisation. It is common knowledge that there are a few powerful people who can be counted on the fingers of one hand who manipulate the whole bidding process. When a different retail vend, for instance, is allotted the license in any year, nothing changes except the shop board outside the khokha (temporary looking structure). Like the dabbawalas of Mumbai, a tight-knit complex system appears to work between the privileged few. It is not easy to join the cartel or compete against it or understand the working. But the beat goes on!
To shift from 12 L1-BF licensees to just one wholesale L-1BF licensee and that too for a seemingly unviable Reserve Price of Rs. 50 crores is unfathomable. Even Sachdeva agrees but is unable to explain why the government would take such a bold and adventurous step. Perhaps the answer lies in the documents for e-bidding, where it is clearly mentioned that in case there is no bidder at the Reserve Price, a new government-owned entity on terms and conditions to be decided by the government, will take over the wholesale business. Perhaps, they had a Karnataka type policy in mind and the bidding would be a win-win situation for them as they now pocket a cool Rs. 625 million with the prospects of collecting VAT to the tune of Rs. 80-130 crores, according to rough estimates by Neeraj.
Old Brands to be registered
What about the fear of the existing importers that you may discourage the sale of some brands and promote others where you can make more money or have better buying terms? ‘How can I do that? I am obliged to register with excise any such brand that was already registered last year,’ he says. According to clause (iv) of the provisions for L-1 BF the ‘Licensee shall be required to keep sufficient stock of all such brands as are demanded and all such brands as were registered with the department in 2016-17.’ Of course the registration charges have gone up from Rs. 20,000 a label to 25,000 a label which will have to be borne by the importer directly or indirectly.
An interesting condition laid by the License (vii) is that the stocks remaining unsold for the outgoing L-1BF for 2016-17 have to be transferred to the new exclusive L-1BF based on certain seemingly fair pre-defined pricing conditions.
Brand Registration and negotiations
With the uncertainly and apprehension amongst the importers, would they do business with Ashir? Of course a dumb question! Like him or not, if you want to do business in Haryana, you have to sell and negotiate through his company, Ashir Marketing. There ARE a couple of importers with whom I talked and they are apprehensive enough to have decided to drop Haryana this year. There could be some who might have had some business disputes with him earlier. The policy gives him a clear edge and he does not deny it except to say that he would be fair to everyone. A majority have adopted a wait and watch policy, many not even clear about the policy yet. With the current unfortunate Highway 500 situation, bars and restaurants which are not able to sell liquor, are hardly interested to even think about future buying, though the situation should be back to normal for most of them sooner than later. Interestingly, he is not too concerned with the current calamity which he feels is temporary and in any case, a relatively small part of the total business.
Neeraj says the brand registration is already going on. Sula Selections has already registered the labels through him and Amit Agarwal (Hema) is already in the process. He will be meeting other importers to negotiate the purchase prices. He is very clear that he will negotiate prices down to the bare-bones. “Unlike other L-1BFs I have always liked to buy at the lowest possible prices and pass on the benefits to the buyers. I buy on CIF+ basis and therefore the prices have to be low,” he asserts. It reminds one of the ITC Hotels’ policy where they have a similar ‘take it or leave it’ stand while buying but keep the listing at prices high enough that they feel traffic will bear (mostly beyond the margin of 250% as dictated by the duty-free license) thus maximizing their profits.
Unfortunately, this would be a constraint for the hotels and restaurants as their wine lists would now have to depend upon his whims, they claim. For instance, if Oberoi Gurgaon wanted a selection of wine labels from Brindco who is not able to come to terms with the prices, it would mean that Brindco would not be able to supply that label to Oberoi. What’s more, the price Neeraj may quote to the hotel now may be higher than before even though he would buy at lower prices, since he is in a monopolistic situation.
Sachdeva does not agree with that scenario. ‘I have been dealing with importers earlier too. About 80% of the restaurants have been buying through me only even though they had other options. For instance, The Wine Company has always been buying directly from me. So, the hotels should not mind buying from us; many of them have already been buying form me, even from my own import, he says. Interestingly no direct sales can now be made from Delhi against Duty Free sales to the Haryana hotels as earlier, he says. Every hotel, restaurateur in Haryana must buy every alcoholic product through him-duty free or duty paid, under L-4,L-5. Shops have to buy from L-1 licensees of which there are still multiple numbers including him.
How about the payments? He could delay payments for all or at least some for a period of say 6 months? He feels this apprehension is unjustified as he would be giving PDCs of 90-120 days to all. This is against the current norm of 60-90 days, according to sources.
Earlier Leakages
Defending the current stand by the Haryana government, he says earlier there was a lot of leakage of revenue to the government as the importers would export against Permit but the excise was paid neither to the Delhi nor Haryana excise department. This would stop now, as Haryana would get the VAT of 34.75% from him as it is a first source tax. There is no more excise (assessment charges of Rs. 150 a bottle last year on wine, reduced from Rs. 350 in the previous year) payable now. This year, he would be responsible for collecting the VAT and paying to the government as it would have to be paid the moment the products enter Haryana and government-issued holograms will have to be affixed. The new policy specifies in clause (viii) that VAT for the year 2017-18 shall be payable by the L-1BF licensee.
The doubting importers feel that it is no guarantee that the VAT leakage would stop and some cases pending against the firm in Delhi are a testimonial to that (the case file is with me). However, with the excise department scrutinizing the documents with a magnifying glass, he knows his company would be under the scanner and he will earn brownie points for himself if he can stop the leakage. In fact, he says he is taking the help of the excise department and police to ensure there are no more illegal practice as it would do harm to his legal business as well. Gurgaon is known to be a leakage point to Delhi, UP and even Rajasthan, according to importers who share this information under anonymity.
No change in L-1B License
There is no monopoly or in fact any significant change in the Status of L-1B (distilleries) which relates to all the Indian made alcohols including spirits and wines. All Indian wines come under this head. There are 3-4 such entities which sell to L-1 licensees which in turn sell to shops against L-2 and department stores like Spencer and Spar against their L-1OB-S. Both of these licensees (L-2 and L-10B-S) may further sell to consumers.
L-1BF entitles goods to be sold to the holders of L-1 and also restaurant and hotels under L-4 and L-5 and is applicable for both duty paid and now duty-free goods also.
Incidentally, L-1 is given at Rs. 1.25 crores + deposit of Rs. 20 lakhs and is given to the maximum owners of retail shops to whom L-1 must supply within the District. Thus Gurgaon District East (the new DLF side, minus Cyber Hub) and Gurgaon West (Old Gurgaon and Cyber Hub) have 6 numbers of L-1 each with Neeraj having one each on both sides of NH-48.
Importer’s hat
Neeraj imports wines on his own account as well. Last year he imported labels like Barefoot (Gallo, California), Familia/Finca Don Cano (Argentina), Rio Del La Hoz (Spain) and later Robert Mondavi and Woodbridge (California). He claims to have sold over 8,000 such cases last year. But this year he hopes to sell 30,000-40,000 cases. Denying vehemently that this will be because of his monopolistic strength, he says he had already been negotiating with various international brands before this opportunity arose. He had already hired Mayur Toshniwal, CEO-New Business and Sherry Anne Sudan as Country Head, Marketing to strengthen his marketing team much before the bidding was announced on March 17.
Calculations for bid
Importers have been apprehensive enough and discussing the math of the bid and how Ashir Marketing would find it difficult to recover the money paid to the government, let alone make profit (the Reserve Price of Rs.50 crores as a pre-condition notwithstanding). Neeraj is less worried on this count. Already having Rs.300 crores turnover under his belt, he claims the sales this year would be around 800 crores.
While Haryana government might derive comfort from that kind of sales, the importers are skeptical. The current revenues estimated are from Rs.120 crores to Rs.150 crores market, according to many. Neeraj sniggers at those figures. He claims his total sales of the company would be in the region of Rs.800 crores this year though the market estimates it at Rs.300-350 crores. He plans to sell a total of 230,000 cases, 50,000 each of which are likely to be for wine and beer. The balance 130,000 cases of whisky and other hard liquors would be his target.
MRP and maximum price
On one point, the importers, restaurateurs and Sachdeva are in agreement- someone must pay for the money he has invested in the license fee- it would perhaps be split between the importers and the buyers, like restaurateurs. Hopefully, the consumer of Haryana would be spared the extra burden with his promise of passing on the benefits to the customer and multiplicity of L-1s (there are 10 besides him, remember!).
He is frank enough to admit that though the assessment fee on wine of Rs. 150 has been now waived off (the Permit fee of Rs. 20/ Bulk Litre or Rs.15 a 750 mL standard bottle, remains unchanged) it would be recovered from the suppliers to pay towards the license fee.
So, would that make the prices more expensive? ‘I don’t think so. The assessment fee that I would build up in my prices anyway existed in the costs before. I hope to buy now at cheaper prices so I can pass it on to the buyer.’ Moot point and contrary to the axioms of monopoly! Incidentally, he also does not like the term monopoly and likes to call it an exclusive marketing arrangement.
There seems to be some confusion in terms of maximum price that can be charged from customers. Neeraj claims that for the first time, Haryana government has adopted the policy of MRP (Maximum Retail Price). Based on the cost card, the government will decide the MRP, he says. So the question of charging higher price does not arise. However, according to a case filed by the National Restaurant Association of India (NRAI) in the Punjab and Haryana High Court in Chandigarh against the State of Haryana and Ashir Marketing, the petitioner claims that according to clause 7.2 of the excise policy, no maximum sales price is fixed during 2017-18.
Case filed by NRAI
There have been people whispering into my ears. The information given by my several sources has been on the condition of anonymity except for Neeraj who was quite forthcoming. 80% of the restaurants might have been buying from Lake Forest earlier but the National Restaurant Association of India (NRAI) is unhappy on behalf of its 600 members in Haryana and has filed a case against the State of Haryana, Additional Chief Secretary-Haryana, Excise and Taxation Commissioner, Haryana and Ashit Marketing (India) Pvt. Ltd. on various grounds.
The interesting part is that the successful bid was declared at 6 pm on March 20 and the writ was filed on March 21, with unprecedented speed. The case is sub-judice so one cannot comment on it except that the main crux of the case seems to be against the monopoly created by the excise department (according to the copy of the case file I have with me). The Stay prayed for was not granted by the Hon’ble High Court but the case is fixed to be heard again on April 17, according to sources.
Till next time
As I got up to leave Sachdeva’s huge, posh office in Udyog Vihar, a former call center he had reportedly purchased over 5 years ago with land, building and furniture, he told me, ‘let’s have another meeting in 3 months. I can assure you the fears expressed to you by various people will be allayed. I want to make the system work so that we may do business with the government again next year.’
I promised to meet him and pencilled in the date for a follow up; this is one meeting I must attend for the sake of harmony and continuity of communications in the Haryana wine and liquor market. I invite the importers and buyers to share their new experiences.
Cheers! Jai Ho!!
Subhash Arora
License L-1FB |