The Federal Investigation Agency has uncovered documentary evidence that explains how brokers and speculators fix sugar prices months in advance.
The agency recovered 500 books and files of forward contracts for sugar during multiple raids in Lahore.
The record shows the price of 110kg of sugar was Rs9,000 on March 15, 2021. The bookers were setting the prices for the month of April and May at Rs9,500 for wholesalers. A 100kg sack was then sold for around 9,800 in the market.
Of the 500 books recovered, 60 belonged to Malik Majid, 40 to Malik Ibad, 10 to Khurram Shafi, and 20 to Amir Waheed and Khawaja Imran, according to the FIA.
Majid used to deal with all sugar mills. Ibad was dealing with Jahangir Tareen’s mill, and Waheed and Imran with the Sharif family’s sugar mills. Shafi’s books showed that he was in business with Chanaar Mills.
Satta: how it works
Satta is an illegal practice and a menace to control price increases. It is a virtual sale in which no physical quantity of an item is traded.
However, players speculate prices, which influence the price in retail markets, causing artificial inflation.
Related: Dirty satta players scheming Rs100 sugar price for Ramazan Satta works through ‘forward’ contracts, which are the sale in advance by sugar mills. The deal takes place but the sugar is lifted at some future date specified in the contract.
There are two types of forward contracts.
In the first type, party A (wholesaler, investor, stockist) buys certain quantities of sugar from party B (mill owner) at lower than the current rates. Payment is made in advance but delivery is executed at a future point.
In this case, the buyer makes a profit if the rate goes up. This is a normal business practice and justifiable because payment was made in advance for a discount, the committee’s report said.
The seller, on the other hand, gets the capital (read money) in advance that he or she can use for their business expenses without delivering the produce.
In the second type of forward contract, the buyer enters an agreement with the seller.
This could be written or verbal.
Again, the sugar is lifted at a future date but unlike the first type, no payment is made. In this case the rate is normally set at higher than the current rate.
Again, if the price goes up, the buyer makes a profit, “but this type of forward contract lends itself to the possibility of satta” or speculative sale, the committee wrote in its report.
It said that in both the types the buyer has the advantage when the price increases, but participation of both parties and a physical transfer of the sugar at a future date is required.
To understand where the problem may arise, consider this example:
The price of sugar right now is Rs90 per kilo but in a forward contract, the buyer books a virtual sugar delivery with the person selling it at Rs92.
No payment is made at this point.
If the price in the overall market goes up to Rs94, then a mechanism kicks in: the seller who was going to take Rs92 now has to pay the buyer Rs2 more per kg to make up for it.
If the price falls to Rs88, the buyer has to make up for it by paying the seller Rs4 (because they had originally settled on Rs92). All of this price movement is speculative as no physical trade is taking place.
The problem is that speculation around prices by some players has the effect of influencing the retail price like a rumour would.
Simply put, if market speculation is on the higher side, the prices will go up even though there has been no on-the-ground change in actually demand or supply. It is a form of gambling.
Satta has become a common practice in sugar markets across Pakistan, the committee noted and proposed a detailed forensic audit of all forward contracts.