Buzz of default by old Surat lab diamond maker grips market

MUMBAI: In the close-knit world of diamonds, there is a growing whisper among traders in Surat that one of the oldest makers of lab-grown stones has defaulted.

The deal that the firm had cut with many wealthy individuals, including professionals, real estate players, and a few farmers in the region to raise money has backfired amid a fall in the price of lab grown diamonds. The outstanding dues would be in the region of Rs 500 crore, three persons in the diamond market told ET.

Under a back-to-back financing arrangement, funds were raised from several individuals to install machines that are used to manufacture man-made or lab-grown stones. The scheme, similar to a startup fundraising deal and different from regular institutional lending, rests on trust and a promise of a certain level of production and future price forecast.

“With the price of lab-grown diamonds falling, particularly at the trade level more than the retail level, the firm in question is refusing to pay back…Though this is probably the first time the lab grown diamond business is facing such a situation, I don’t think it would have any repercussions on the overall market for lab-grown diamonds. In fact, it could stabilise the price a little,” said an industry person.

The Surat-based firm had imported spares for assembling the machines which cost Rs 1 crore-1.5 crore. While local newspapers in Surat had reported about the company having borrowed from a cooperative bank, this could not be independently verified.
“I heard that while the company may be servicing the bank loan, it is not paying individual creditors. The market is slow, but investors are attracted towards lab-grown stones due to the publicity in the last few years,” said a diamond broker in Mumbai.
Lab-grown diamonds come across as replicas of the mined, natural stones even though they cost a third or even a quarter of the real ones. Such stones are created using chemical vapour deposition technology. The man-made stones, better known as green stones which do not have the stigma that is sometimes attached to the more expensive earth-mined natural diamonds, recently made news after Prime Minister Narendra Modi gifted Jill Biden a 7.5-carat lab grown diamond made by another Surat-based company.
“The default the trade is talking about is the outcome of a bad financing structure and business planning. With the caratage guarantee arrangement and sudden interest of investors, this kind of incident had to happen,” said a senior official of a large synthetic diamond company.

Finance from banks is structured differently. Earlier this year, a few public sector lenders formulated a policy to give working capital as well as term loans to manufacturers of lab-grown stones against 100% collateral security and a high internal rating of the borrower.

The technology to make lab grown stones, which only a few could access earlier, is now easily available. A new lobby of jewellers is setting up factories in the diamond-polishing hub of Surat, with the industry encouraged by the government’s decision to cut import duty on the basic raw material ‘diamond seed’ in the last Union Budget.

India is currently producing about 15% of the global lab-grown diamonds and the industry believes it has the potential to increase its share in the global market. India has less than 10,000 diamond-growing machines and consumption can far outpace supply, according to an industry official.

However, diamond houses controlling the entire chain from housing a large number of machines to growing the diamond to cutting it and finally selling the stones through jewellery retail outlets are likely to have an upper hand in the new trade.