"The boxes of the DTC are fine; the only thing that's wrong is their distribution." That's an authentic quote from a DTC Sightholder in Mumbai. As the raison d'?tre of the DTC (and its core product) is distribution, that statement is roughly comparable to, "General Motors is a great company; the only thing that's wrong is their cars."

It's fundamental. The man was dead serious and so were others who expressed similar sentiments. "We actually do think that the pricing of the DTC boxes has been quite correct. Most of the downward price adjustments which were made, at least for the Indian boxes we see here in Mumbai, were not necessary. The DTC just threw money away." This surprising position invites some explanation.

A concrete example given was the color sawables box (3 to 8 grainers) that is trading in the market at a 10 percent discount to DTC’s list price. "We bought these boxes at a discount in the market and quickly discovered that, at the full DTC list price, we would have been able to produce these goods profitably. Thus the negative premium on the boxes is totally misplaced.

“Chips boxes are also traded at a discount (a small one of 1 percent), but at list prices these boxes are doing fine. Those selling these boxes have paid the 2 percent VAS, the 1 percent broker – and are getting rid of them at a loss. There was no need for anyone to make such losses if De Beers would simply do what it claimed it set out to do, what it undertook to do when it got the EC approval for Supplier of Choice, and get the goods into the hands of those who need the boxes for manufacturing and downstream marketing."

The same story repeats itself around Mumbai coffee shops. When the ITO's for the present six month period were issued, the distribution of the brown goods were put in hands of some who didn't need them – and soon these boxes began trading at a minus. At least one company that used to receive these boxes for its own manufacturing facilities refused to take the goods at the DTC Sight. Apparently, the principals of that company seem to feel that the allocation process has become overly complex – largely due to the DTC's lack of good market information on which to base its decisions - and they prefer to wait until the DTC straightens the situation out.

This assumes that distortions are not a sustainable option and that the DTC is operating a ‘self-correcting’ mechanism. In Mumbai, at least, there is faith that at the end of the day, the DTC will get it correct. A day can be a long time...

It seems that the DTC never really truly understands India's domestic operations. Even though companies have become more transparent, there is far more information available – but, nevertheless, the DTC still doesn't seem to get it. In the past, that really didn't make much difference – as the DTC enjoyed considerable flexibility in its allocation process and it could quickly adjust allocation policies.

Today, it is backfiring in a big way. It not only hurts many good companies; it will hurt the DTC itself. You can not sustain a system that is supposedly giving you "good information" and then let yourself be deceived. One prominent local leader, who made a reference to the GIA bribing scandal, said, "Just as the DTC allowed the bribers to get away with their clients' criminal actions and reward them with increased allocations 'earned' through higher turnovers and margins, lack of good market information channels allocations the wrong hands. Box trading is the result of faulty distribution policies – not the cause.

            In all fairness, not everybody would agree that the DTC pricing was without problems. One observer carefully phrased it differently. "The prices are part of the problem, but the inept distribution mechanism has certainly aggravated and magnified the market trouble. It is a fact that one doesn't hear about discount trading on boxes of other producers." Moreover, some of the "wrong" premiums may well be the result from the liquidity crunch. "Whenever the cash comes in short supply, irrational deals happen."

The architects of Supplier of Choice 2 (and we don't know who they are, but we assume there must be architects who are presently designing SOC2 day and night, in a race against the clock) must focus on getting the right goods to the right people. You can't have a New York manufacturer of large stones getting for six months a box of Indian goods that may be marketed at the wrong price to the wrong people – and, at the end, create distortions in the market – at no benefit to the DTC. The DTC's inability to see "behind" or "through" the profiles should not be an excuse for faulty distribution. Generally, in a weekly column, it would be inappropriate to say more. But the message between the lines was more profound and maybe the time has come to say it aloud.

"Bad Apples" may ruin it for all of us."

            The rapidly growing Indian diamond industry is only a shadow of what it once was. Today it is modern, sophisticated, and producing high quality goods alongside the traditional smalls and near gems. But, more than anything else, the industry has become more transparent, more "visible" than at any time its history.

            India is now playing on a level field with other centers. Except for concessionary finance terms for export financing, there are no governmental incentives. The government is considering introducing an "assumptive tax" (just as in Israel and Belgium), but not much is moving. In the meantime, the industry pays taxes just as any other industrial sector. (And general tax collection in India is 30 percent up this year over the previous year.)

            What has this to do with the DTC? "Ninety percent of our industry is playing by the rules; there is a 10 percent that creates problems for us all," confided one industry leader. What really bothered him is that among those "creating problems for all," there are some who are strongly supported – if not encouraged – by the DTC.

            That was the hidden message behind the publicly expressed discontent with the DTC's distribution system.

            How do the acts of few affect all? Assume, for a second, that someone in his eagerness to please the administrators of Supplier of Choice is producing exaggerated on-paper-only turnovers. These administrators, through the profile mechanism, will move more goods into the direction of the "eager Sightholder". That affects mostly other Sightholders – ostensibly, it doesn't affect the Indian diamond industry at large.

            This, however, is not the case. If a Sightholder, eager to play the profile game, inflates his exports – that impacts the total export statistics of the country. As diamonds and jewelry represent some 20 percent of India's overall exports, this is a major economic sector of great importance to the government.

 The sector is closely monitored by the government, which yearly sets growth targets for the industry. The Indian diamond community takes pride in reaching those targets – or even exceeding it. But targets must be realistic and achievable.

As the government bases its targets on the last year's performance, and if the official export figures include SoC inspired "padding," year after year, and the DTC seems reluctant or simply refuses to implement its own Best Practice Principles, the continued jiggling of profiles by a single or a few players, will eventually impact the relationship between government and the industry at large. Those players who play by the book will not be able to meet the government's targets – and then the industry becomes dependent on the jiggling by the bad apples.

For the DTC to get its distribution in order is becoming – from an Indian perspective – a matter of urgency.

It may be recalled that when he was the DTC chief, Gareth Penny made the decision to employ Kroll forensic accountants to verify the veracity of the profiles, publicly stated that he had made that quite difficult decision on the urging and prompting of clients – who were fed-up with the cheaters who were securing larger Sights at the expense of others. Though that statement was met with some skepticism by the traditional SoC-skeptics, it was the truth and nothing but the truth.

Fellow Sightholders are hurt – but, in the case of India, the pain of a few DTC clients may become a problem for the industry at large.

At the conclusion of my present visit to India, I am inclined to draw an additional conclusion out of the cries for the DTC to get its distribution right – and, finally, implements Diamond Best Practice Principles in a way it likes to portray its compliance. De Beers is proud that its clients are financially the strongest players in the market – and now has to witness that the major defaults and insolvencies in the industry centers around DTC Sightholders. The DTC will, however, survive that blow to its systems, to its prestige and to the standing of Sightholders. Business failures do happen – and though it doesn't bestow much honor, it isn't a disgrace either, as there are no guarantees in business.

However, when the Indian bubble bursts, when the jigglers are eventually exposed – as they inevitably will – all (including the Indian government) may point at the DTC's failure to address the paddings of the profile.

That is what Indians pleading for the DTC to get its distribution right are really thinking. It isn't the pricing – it is doing it right. One Mumbai player gave some interesting advice – "When you feel you have missed the direction, go back to your roots."

From my reading of the map (and the figures), a failure of the DTC to act – and act fast – will in a piece-meal basis deliver ever heavier reputational blows to De Beers. And one day, Gareth Penny and Varda Shine will face a reputational debacle of major magnitude – and may not even realize how they got there to begin with. I cannot help but make a comparison to banks. The New York branch of an Israeli bank, which is also involved in diamond industry financing, was required this week to pay some $20 million in penalties to the regulatory authorities for its failure to conduct proper and effective client due diligence and for not noticing (or reporting) suspicious activities.

There is no regulator that monitors the De Beers implementation of its own Diamond Best Practice Principles. No one can impose on De Beers tens of millions of dollars of penalties or fines. And the intriguing thing is – there is no need for such regulator, as every day De Beers continues in not getting its distribution right – De Beers itself pays in lower revenues, while also incurring severe reputational damage.

That's a heavy price to pay – especially, as it can be avoided with relatively ease. It's the distribution, stupid!

Heave a nice weekend.

P.S. I am surprised I could write this column without mentioning the Certifigate bribers even once. Good that there is always room for a post script.