Sectoral Analysis

Wealth Management Sector

Submitted By
Shrijay Jadhav
Deepanshu Jagwani
ChintanKumar Shah
Anshul Agrawal

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 Index

Name of Topic : Page Number

Preface : 3

Wealth Management-An introduction : 4

Stakeholder Analysis : 8

Breakthroughs& Trends : 10

Value Parameters : 13

Components

1. Liquid Investment : 15

2. Real-Estate : 23

3. Commodities : 27

Primary Survey

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 Preface

Wealth management has been an upcoming sector in the past few decades. Fuelled by the boom in
telecommunication and IT services this sector is witnessing a robust growth across globe.

The year 2009 has been an exceptionally challenging year for the global economy and financial sector.
India, while fundamentally in a much stronger position, has also experienced the impact of these events as
they were transmitted through the trade and capital channels. However Indian economy’s robust
fundamentals and domestic growth drivers will impart it the resilience to emerge stronger from other
developing economies. Economic recovery, some signs of which are already visible, will gather
momentum in faster being a growing economy and in due course see India returning to a high growth
trajectory.

So an attempt was made by us to get into this sector and carry out a detailed analysis on the various
products/services and practises in wealth management sector. The main attention is given to Indian
Markets during this study but also global linkages of this sector were kept in mind while carrying out our
Analysis.

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 Wealth Management – An Overview

Before Focussing on wealth management first of all we need to understand the concept of
“wealth”. Wealth since time immemorial has been an important tool for determining the social
status of individual/person. But what wealth actually is? As per our study wealth is not only the
cash or bank balance an individual has with his bank account. It has a broader perspective. It
includes all the savings/investment that the person has made in his lifetime. In includes bank
balances, insurance policies, shares/debentures of companies, precious metals like gold and
silver, real estate, mutual funds, bank/post office deposits, alternative investments (if any,
discussed in later part of this report) et cetera.

It is more like a portfolio or basket that an individual has, to meet the material desires of his/her
family or life. It is from here the term portfolio management was coined.

Wealth management is an investment advisory discipline that incorporates financial

planning, investment portfolio management and a number of aggregated financial services. High
net worth individuals, small business owners and families who desire the assistance of a
credentialed financial advisory specialist call upon wealth managers to coordinate retail banking,
estate planning, legal resources, tax professionals and investment management

Manager who works to enhance the income, growth and tax favoured treatment of long-term
investors is known as wealth manger. In Indian context one must already have accumulated a
significant amount of wealth for wealth management strategies to be effective.

Wealth management can be provided by large corporate entities, independent financial advisers
or multi-licensed portfolio managers whose services are designed to focus on high-net worth
customers. Large banks and large brokerage houses create segmentation marketing-strategies to
sell both proprietary and non-proprietary products and services to investors designated as
potential high net-worth customers. Independent wealth managers use their experience in estate
planning, risk management, and their affiliations with tax and legal specialists, to manage the
diverse holdings of high net worth clients.

Banks and brokerage firms use advisory talent pools to aggregate these same services.

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So wealth management is basically all the techniques/principles that an individual or
manager deploys with an intension to offset the risk associated with the products or
portfolios and to increase their value over a period of time.

Before going forward we studied the common sources from where people acquire their wealth.

We identified the following areas from where people commonly acquire their wealth.

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Based on the following areas we tried to categorize individuals into following:

1. Creator :- makes money from new innovations

2. Mechanic :- Makes money by creating systems and procedures that 'automate' a business

3. Trader :- Makes money buying low and selling high

4. Accumulator :- Makes money by holding assets that appreciate in value over time

5. Lord :- Makes money by controlling cash flow producing assets

6. Deal maker :- Makes money through the creation of deals

7. Supporter :- Makes money through their contacts

8. Star :- Makes money through uniqueness of personal brand

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 Wealth Management Industry in India
The Indian wealth management industry is gearing itself up to meet expanding market
opportunities. Providers, products, channels, technology, regulation and clients are
coming together in the wealth management space to capitalise on tremendous growth
opportunity.

In the next four-five years, wealth management service revenues are expected to
contribute to over a third (32-37 per cent) of full-service financial institutions.

Also, the wealth management market is currently undergoing structural changes with
increased market penetration by organised players drawing clients from the unorganised
end of the market.

The significant changes are witnessed in the following sectors

Financial sector

Disposable income is expected to grow from the current 2 per cent to 5 per cent in 2017.
Currently, Indian financial sector shares about 7 per cent of the total national disposable
income. The share of the financial institutions would grow to 18 per cent by 2012, it is
estimated.

Projecting an addition of 500 million people to the working class in the next decade, with
the young population enjoying increase in income levels, a 20 per cent compounded
annual growth rate in the nearly $400 billion annual consumer spending could be
expected, adding that this enhanced spending would soon find its way into the financial
institutions.

The Indian market has been segmented by wealth management service providers
into four categories,

1. The mass market (investible surplus $5,000 to $25,000);

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 2. The mass affluent ($25,000 to $1 million);
3. The high net worth (HNW $1 million to $30 million)
4. The ultra-high net worth (ultra-HNW greater than $30 million).
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Stakeholders of Wealth Management

Industry

1. Primary Stakeholders
1.1. Stock Brokers: stock brokers form the part of primary stakeholders of wealth
management. They provide crucial broking services to the clients, as capital markets are
a primary investment targets for wealth managers. According to SEBI it is mandatory for
an individual to buy share through a broker registered with an exchange so they are a
primary requirement for wealth management industry.
1.2. Retail Investors: Retails investors are directly impacted by developments in economy
and markets and are major participants in stock markets.
1.3. High Net worth Individuals: HNI’s are primary stakeholders because their major chunk
of portfolio is invested in capital markets. Hence they are very keen in knowing the
fundamental development in the wealth management industry.
1.4. Financial Analyst: Financial Analysts are interested in wealth management sector as
their main objective of portfolio management is in sync with the development of capital
markets.
1.5. Insurance Companies: Insurance companies in order to maximise the policyholders
return take part in wealth creation activities and do form the part of primary stakeholders
of industry.

1
Source : Celenet Report on Indian Wealth Management Industry

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 1.6. Wealth Managers: Wealth managers with the help of their technical expertise are
constantly engaged in monitoring and evaluating the capital markets.
1.7. Shareholders: Every listed company are strictly regulated by guidelines of SEBI and
hence their shareholders are major stakeholders in wealth management industry.
1.8. Business Owners : Business Owners are an important part of wealth management
industry as they constantly track the development in their respective business sector in
order to figure out their future business strategies and decisions

2. Secondary Stakeholders
2.1. Travel and Tourism Industry
2.2. Government
2.3. Income Tax Department
2.4. Astrologers
2.5. Telecom Industry
2.6. Software companies
2.7. Computer Hardware Companies
2.8. Internet service providers
2.9. Consumer Durables
2.10. Educational Institutes

2.11. Consultants

2.12. Competitors

2.13. Legal Agencies

2.14. Regulators

2.15. Media
2.15.1. Television
2.15.2. Print
2.15.3. Internet

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 Breakthroughs in Wealth Management
Industry

Following are the major breakthroughs in wealth management industry

 Abolition of open outcry & introduction of SBTS (wider reach)

 Allowing Foreign Ownership

 Permission to raise capital from Abroad (ADR , GDR)

 Expansion of product range ( Equities , Debt, MF , ETF, Commodities,

Currencies etc)

 Depository System for custody of Shares ( NSDL, CDSL)

 Demutualization of Stock Exchanges

 T+2 settlement system

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 Introduction of Derivatives ( Futures & Options)

Major Regulatory Authorities

 Reserve Bank Of India

 Securities Exchange Board Of India

 Ministry Of Finance

 Department Of Economic Affairs

 Company Law Board

 Financial Planning Standard Board Of India

 IRDA

 Institute Of Chartered Accountants Of India

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  Association of Mutual Funds Of India

Major Trends in Wealth Management Industry

Following is the way in which wealth management industry has grown over a
period of time.

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 Value Parameters

Value parameter can be defined as a norm which helps a customer to compare two service
providers in the market. Through our primary research which had a series of personal interviews
and a questionnaire

Listed below are the six value parameters which we found were the most observed by the
consumers:

 Account opening lead time: the lead time taken in opening of the account many a time
becomes the reason for the customer to avoid a service provider. If the lead time or cycle
time to for opening an account is less, the firm will be able to attract new and more
customers. This value parameter is more important for the provider as a less cycle time
offered by the competitor may also lead to existing customer to opt for a new service
provider.

 Value for service: the commissions and fees charged by many service providers is the
major differentiator between them for the customer as the general customer doesn’t
believe in paying for just advice. It is therefore necessary that the firm gives good value
for money to their customer in terms of better ROI on the investor’s money. And keep the
charges reasonable so as to make the customer feel that he’s not being robbed out of his
pocket.

 Speedy information: as the saying goes ‘time is money’, time is of umpteen importances
in this industry, as information at the right time can mean more value for the investor.
Speedy information about the markets and about their portfolios helps the investor make
fast and clean decisions. In equity markets (primary and secondary) time is of the most
precious, thus value for time means and earns a lot for the investor.

 Smooth transactions: a customer is most glad with a smooth transaction, it means a

comfortable position for the customer, he should be able to invest and divest his holdings
easily. The transfer of securities should take place smoothly through the customer’s

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 account and in a transparent way. An investor can take his investment decision quickly
without bothering about the hurdles in transferring of funds or securities.

 Accuracy In research: in this market, the accuracy in the calculation of a share’s or

bond’s correct valuation and the prediction of its future value is what is most important,
that is how an investor makes money on his money, and therefore a service provider
whose findings and valuation are the most accurate in the market is likely to have the
most customers.

Besides that a great research will inevitably find its way to the market where it will again
be used by others and could act as a great marketing tool for the firm, as more and more
people start to see the suggestions and findings of the firm proving right, more customers
will be attracted towards working with the firm rather than anyone else.

 Customer retention: this parameter is more important to the firms than the customers as
the service provider’s dominance in this field can be checked by the number of customers
it can retain with it for the longer time.

Supply Chain in Wealth Management

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Components OF Wealth Management

Real estate
India Real Estate Fund is a significant component of the Indian realty market flooded with Indian
and foreign financial institutions. The growing increase in the industrial, commercial and
residential projects have boosted the real estate market in India. This has thrown open unlimited
scope for the incoming of the India Real Estate Funds. The profits have encouraged financial
assistance from not only domestic funds but also lured many foreign investors to participate in
the India Real Estate Fund.

The cooperating assistance from the government has further encouraged liquidity flow into the
India real estate market sector. The foreign contributions in the India Real Estate Fund have been

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witnessing a steady rise of 40%-45% per year. The domestic financial institutions have also build
up their investments like their foreign counterparts. This combined participation from both along
with contributions of the corporate houses has accelerated the growth of India Real Estate Fund.

Leading India Real Estate Fund:

Some of the leading India Real Estate Funds are:

1. India Advantage Fund (ICICI)

2. DHFL Venture Capital Fund- DHFL Venture Capital Fund, promoted by Dewan
Housing, has a focus on developing properties rather than investing in real estate.

3. HDFC Property Fund- HDFC India Real Estate Fund (HI-REF), the first scheme HDFC
Property Fund, invests in all the stages of the real estate projects.

4. Kshitij Venture Capital Fund - Kshitij Venture Capital Fund, a group venture of
Pantaloon Retail India Ltd., will be deploying funds exclusively in developing malls especially
in western and southern India.

5. Kotak Mahindra Realty Fund

• India Real Estate Mutual Fund:

The further involvement of the real estate mutual funds has improved the quality of the
construction practices. The 10th Five-Year Plan has proposed that Securities and Exchange Board
of India would regulate the India real estate mutual funds.

• Real Estate Investment Trusts:

The primary difference between Real Estate Investment Trusts and a mutual fund is that
investments made in the former are traded in real estate stocks and not invested in company
stocks moreover they provides a heavier liquidity than the mutual funds.

• India Real Estate Foreign Funds-

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The significant international investments in the India Real Estate Fund are like:
1. Tishman Speyer
2. Blackstone Group
3. Hines
4. Morgan Stanley Real Estate Fund
5. Columbia Endowment Fund
6. Broadstreet
7. Warburg Pincus
8. Sam Zell’s Equity International

To cater to the fall in demand for the real estate investment several plans have come up for the
real estate development

The interest rates on new home loans have been lowered down

According to the government standards, sufficient liquidity with the housing finance companies
has to be maintained

During Jan, 09 SBI freezed interest rates on new home loans for 1 year @ 8%

Regulations in Real Estate

Urban Land Ceiling Act (ULCA) helps to lower the price of land. The major effect of the urban
land ceiling act has been to freeze large areas of land in legal disputes. These areas are not
available for development or redevelopment. An additional negative impact of the act was to
prevent private developers to assemble land for subsequent development. The act gave a de facto
monopoly on land development to government developers such as housing boards or
Development Authorities.

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Low value for FSI (typically, FSI in India are seldom above 1.6, even in centrally located areas,
compared to values ranging from 5 to 15 in the CBD of other cities of Asia) tend to increase the
consumption of land because with low FSI more land is required to built a given area of floor
space.

In the case where the supply of land is severely constrained by the laws and practices described
above, low FSI values result in a reduction in the consumption of floor space. This affects lower
and middle income households more than others and in the non residential sector contribute to a
loss of productivity.

Mumbai Property Tax

Mumbai Property tax system will be given a face-lift soon to remove the inequality in the system
as different tax are charged to the properties located in suburbs and island city. The whole
property tax system in Mumbai works on the Mumbai Provincial Municipal Corporation Act,
1949. It is one such act that imposes various taxes on property in Mumbai. Except for the burial
grounds, land used for public worship and public charity all other properties and land owned
need to pay tax under this act.

Mumbai city is divided into wards and property tax rates are fixed ward-wise by Mumbai
Municipal Corporation. For the property tax assessment purposes area of property is considered.
Different system is followed to do the tax assessment of buildings of schools, colleges, charitable
institution, and open land in the city.

Bombay Municipal Corporation (BMC) Act is used to calculate property tax. According to this,
property tax is calculated on the basis of the rent the property is likely to earn. After doing the
assessment the property tax appraisal is done which means placing the value on property.

The cost of transferring land titles has been 10% of the stamp duties now in Maharashtra the
stamp duty has been reduced to 5%. Apart from this registration charges are 1 %.

18% ready recnor charges apply which increases the stamp duty.

The validity of building permit has been increased from 3 TO 5 years.

Simplification of Building Permit Procedure Requirement for obtaining building permit on plots
up to 100 sq. m. area in the old built-up areas of cities has been abolished.

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Purchasable Development Rights: The Government of U.P. has framed a policy to increase FAR
in the growing urban areas so as to reduce the increasing pressure of urbanization on agricultural
land. Compensatory FAR is permissible to such owners whose land is affected by road widening
or community facilities, provided such affected land is transferred free of cost by the owner to
the concerned development authority.

Rent control creates the perverse incentive for landlords to see their property deteriorate or even
collapse.

The hit on the market

The U.K. experienced a 26.3% drop in its HNWI population in 2008, to 362k. A mature
economy, heavily reliant on financial services, the U.K. was particularly hard-hit by falling
equity and real estate values.

India’s HNWI population shrank 31.6% to 84k, the second largest decline in the world, after
posting the fastest rate of growth (up 22.7%) in 2007. India, still an emerging economy, suffered
declining global demand for its goods and services and a hefty drop in market capitalization
(64.1%) in 2008.

Market performance, another key driver of wealth, turned from challenging to devastating in
2008. Most key assets (equities, fixed income, real estate and alternative investments)
experienced a mediocre first-half at best. Then they were hit by a massive sell off, particularly in
the fourth quarter, as investors fled to safe havens like cash, gold, and U.S. Treasuries. Many
commodities and currencies, secondary drivers of wealth, also lost value in 2008.

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Real Estate losses intensified toward year-end. Real estate was another case in which a clear but
steady downtrend in the first half of the year was dwarfed by sharp losses in the second. Housing
prices fell in many nations in 2008, making it one of the worst real estate years on record.
Declines were evident worldwide, including Ireland (-11.8%), the UK (-21.3%), Hong Kong (-
13.4%), South Africa (-7.8%) and Dubai (-11.0%), where residential unit sales were 45% lower
in the fourth quarter than in the third. Luxury residential real estate prices also fell 25% on
average globally. The U.S. housing market continued to deteriorate, with a 19.5% loss for the
year. However, real estate prices did remain constant or increase slightly in some countries,
including Japan, China and Germany. REIT prices also ended the year sharply lower. After
peaking at 1,574.9 at the end of February 2007, the Dow Jones Global REIT benchmark index
declined steadily, to around 1,000 (base value) in July 2008, where it held until mid-September
2008. Thereafter, however, a heavy sell-off pushed the index down more than 50% in a matter of
weeks. The index had bottomed at 474.5 points by the end of October 2008, and closed the year
at 621.8 points.

HNWIs also had slightly more of their financial assets allocated to real estate holdings, which
rose to 18% of the total global HNWI portfolio from 14% in 2007. They also sought safety in
home-region and domestic investments, which increased significantly in all regions in 2008—
and by a global average of 6.8%, continuing a trend that began in 2006.

Real estate, especially Residential, regained some of its appeal for HNWIs in 2008.

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Real estate investments picked up again in 2008, rising to 18% of total HNWI financial assets
from 14% in 2007, when its share had dropped by 10 percentage points from the year before.
The return to real estate reflected the preference of HNWIs for tangible assets, as well as a trend
toward bargain hunting, especially in commercial real estate and newly built segments, but also
in residential real estate, where prices saw the worst decline on record. Inflation hedging may
also have spurred some buying. Residential real estate accounted for 45% of total HNWI real
estate investments at the end of 2008. Luxury residential property values dropped in 2008 to
levels last seen in 2003 and 2004, prompting some HNWIs to buy, particularly “once in a
lifetime” properties.

The emerging regions of the Middle East and Asia-Pacific (excluding Japan) had the highest
HNWI allocation to real estate investment (25% and 23%, respectively), and the greatest
proportion of residential real estate (54% and 58%, respectively). Both regions have experienced
an exponential boom in real estate investment over the last few years, but a steep drop in end-
user demand has combined with lack of available financing to fuel a rapid decline in prices,
particularly in the fourth quarter of 2008.

Within the Middle East, the biggest change in the real estate market has been the shift in buyer
profile—from short-term speculative investors back to professional investors, who focus on
cash-on-cash yield potential (i.e., focusing on the return on invested capital, not the asset value
itself). Real estate in the Middle Eastern lynchpin of Dubai peaked in September, before falling
about 25% in value during the fourth quarter of 2008.

HNWI holdings of commercial real estate accounted for 28% of total HNWI real estate holdings,
little changed from 29% in 2007. Typically, there is little correlation between commercial and
residential real estate performance, as the key drivers of strength in each market differ. However,
the financial crisis has impacted drivers of demand in both markets—including economic
growth, rates of unemployment, consumer spending and personal income, mortgage availability,
consumer confidence, and demographics. Latin American HNWIs had the highest allocation in
the world to commercial real estate (31%), following the huge boom in commercial real estate
across the region since 2006.

Farmland and undeveloped property, meanwhile, comprised 15% of aggregate global HNWI real
estate portfolios in 2008, but that share was much higher (31%) in Latin America, where a
significant amount of wealth has traditionally been derived from agricultural businesses.
Notably, Ultra-HNWIs held more of their real estate holdings in commercial real estate than

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HNWIs did in 2008 (33% of the total vs. 28%), while holding less in residential real estate (39%
vs. 45%). This is largely because Ultra-HNWIs have more assets at their disposal, and tend to
have broader and more diversified portfolios than HNWIs, allowing them to more comfortably
allocate a greater proportion of their wealth to less-liquid assets. HNWIs continued to reduce
their holdings of real estate investment trusts (REITs) in 2008. REIT investments are generally
more liquid than direct property ownership, so HNWIs were quick to sell as soon as real-estate
sentiment started to turn negative. Only 10% of HNWI real estate holdings were in REITs by the
end of 2008, down from 17% in 2007, and 22% in 2006. REITs continued their steady decline in
performance from 2007 into the first half of 2008, before plummeting more than 50% in the
second half of 2008. REIT investment fell the most in North America to 14% of the region’s
overall HNWI real-estate investments. That was down 11 percentage points from 2007, but that
year had seen a relatively large allocation to REITs in historical terms.

Commercial Real Estate Problems

Commercial real estate, unlike residential, has typically been financed with five to ten year loans,
the lender not requiring amortization or providing a guarantee of renewal. The borrower does not
offer a personal guarantee of payment. That makes it vulnerable to foreclosure on maturity.

Most commercial real estate has been initially financed at a 75 percent or 80 percent loan-to-
value ratio, with the additional constraint of a 1.2 to 1.5 debt service coverage ratio. That is, the
first mortgage principal should be less than 75 percent or 80 percent of the property value, and
net operating income should exceed the proposed debt service by 20 percent to 50 percent, the
ratio often depending on various risk factors in the given type of property.

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When lenders had ample funds to offer, however, their due diligence may not have been
adequately rigorous. Many lenders’ due diligence consisted primarily of a third-party appraisal,
with some allowing the proposed borrower to select the appraiser. Once a loan is originated,
many lenders do little to monitor the property’s performance. Lenders are often unaware of
problems until default. Non-recourse financing is common. The lenders’ only recourse is to the
property, not to the borrower.

The appraisal is often the most critical part of a loan submission package. Purchasers, or those
seeking to refinance, may approach appraisers until they find one who is acceptable to the lender
and appears to be accommodating of their needs.

Components OF Wealth Management

Liquid investment market

Objective- To analyse the current state and the transitions occurring in the liquid investment
market such as equity, bond and debentures markets, the opportunities provided by these markets
to investors. We shall be looking at the current products it has to offer as well as its modus
operandi. The focus will also be at the expectations of the customers from the industry.

Preamble:
The evolution of these markets happened because of the creation of joint stock corporations
which were publicly held, the ownership could be fragmented among a large number of people
with limited liability and the profits would be shared among all the shareholders of the
corporation. It helped these corporations to raise capital for their expansion plans, without
borrowings funds from regular sources such as banks and other financial institutions. Today this
market has spread all around the world and with the arrival of Multi-National corporations, this
has given people across the globe to become the owner of a small part of these corporations and

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hence be able get a share of the profits of these corporations. Soon, this buying and selling of
stocks itself became an industry in itself giving people advice and buying and selling stocks of
companies on their behalf, these people came to be known as brokers.

Key Players

The following key players were identified by us, who play an important role in this
market.

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Following is a description of key players:

• SEBI- Securities & Exchange Board of India:

SEBI plays an important role to three players of the market:

1) The Investor

2) The Issuers of the securities(listed companies)

3) The Market intermediaries(brokers)

The role of SEBI is to draft regulation for the smooth working of the exchange houses in
India and discloser’s to be made for equity research to the investors. SEBI also acts as a
regulatory authority for the listed companies by creating a boundary to practice ethical
trading.

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• Clearing House: A clearing house is a financial services company or a bank that
provides clearing and settlement for financial transactions. A clearing house may also
offer credit enhancement services to its members. It often acts as a middleman between
two counterparties. The two major clearing houses of India are:

1) NSDL- National Securities Depositaries Limited

2) CSDL- Central Securities Depositaries Limited

• Stock Exchanges: stock exchanges provide facilities for the issue and redemption of
securities as well as other financial instruments and capital events including the payment
of income and dividends. The securities traded on a stock exchange include: shares
issued by companies, unit trusts and other pooled investment products and bonds. The
two main exchanges in India and around the world are:

1. BSE- Bombay stock exchange(India)

2. NSE- National Stock Exchange(India)

3. NASDAQ- National Association of Securities Dealers Automated Quote (USA)

4. NYSE- New York Stock Exchange (USA)

5. FTSE International- Financial Times Stock Exchange (UK)

6. Nikkei (Japan)

• Consultancy Firms: consulting firms like advisory agents, Credit rating Agencies and
Management consultancy companies are one of the major players in the equity markets.
These firms help immensely towards the research area of the market and are also the
source for responsible information for improving the investment decisions of the
investor. A consultant is usually an expert in a specified field and has a wide range of
knowledge of the subject matter. Thus, giving investment firms a deeper level of
expertise in evaluating a security.

• Investors: an investor is any party which makes investment. There cannot be any
industry without its main customer. The research the broking is all done for the investor,
SEBI always takes steps to ensure “investment protection. The term “investor protection”
defines the entity of the efforts and activities to observe. A major player of investors also
include FII(Foreign Institutional Investors)

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• Brokers: A broker is a person who mediates between a buyer and seller. A broke is
different from an ‘agent’. A brokerage or a brokerage firm is a business that acts as a
broker. A broker in a strict sense is an exchange member who actually executes the
purchase and sale orders in the pit, on the exchange, as a service to the client of the firm
for which that salesman works

• Reserve Bank Of India: The preamble of the Reserve bank Of India describes the basic
function of the RBI as to regulate the issue of bank notes and keeping of reserves with a
view to securing monetary stability in India and generally to operate the currency and
credit system of the country to its advantage. Thus, the regulation of RBI plays a
significant role in Equity trading, as the money flow has direct effect on the market, as its
action control the industrial environment in a India, it can affect the working of a
company, thus affecting its valuation. Thus having knowledge of the RBI policies and
action is very important for every wealth management company.

• Listed companies: A listed company usually refers to a company that is permitted to

offer its registered securities (stocks, bonds, etc.) to be trade on the stock exchange the
company should be listed on any of the stock exchanges. The equity price of the
company usually depends on the performance of the company and also the market
sentiment towards the company and the sector in which it’s operational.

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Components OF Wealth Management
Commodities
Constituents of Commodities market

Support Agencies Users

Logistics
Farmers and companies
Central and state
Farmers co- Testing and
warehouse
operatives certifying
corporation
companies

APMC, Mandis
Spot Market

Traders

Commodity
Private sector
Exchange
State Civil Supply warehousing
Corporation corporation

Warehouse receipt
system
Lending
Agencies

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The system includes the following elements

• Buyers/sellers/Users/producers: Farmers, Farmers co-operatives, Metal(Precious and

others) producers/ suppliers/stockiest, APMC mandies, Traders, Brokers, members of
commodities exchanges, State civil supply corporation, Hedgers, Speculators and
arbitragers( these could include corporate houses, FMCG Companies, etc.)

• Logistics companies: Storage and transport companies/operators, Quality Testing and

certifying companies, valuers etc.

• Markets and exchanges: Spot markets (Mandies, Bazars, etc.) and commodities
exchanges (National and regional level).

• Support agencies: Depositories/dematerializing agencies, central state warehousing

corporations and private sector warehousing companies

• Lending agencies: banks and financial institutions.

Indian commodity
Market

Ministry of Consumer
Affairs

FMC

Co
Commodity Exchanges

National Regional
Exchanges Exchanges

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NCDEX NMCE MCX NBOT 20 other regional

Exchanges
NCDEX
• National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally
managed online multi commodity exchange promoted by ICICI Bank Limited (ICICI
Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and
Rural Development (NABARD) and National Stock Exchange of India Limited (NSE).
• Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information
Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank by subscribing to the equity shares have joined the initial promoters as
shareholders of the Exchange.
• NCDEX is the only commodity exchange in the country promoted by national level
institutions. This unique parentage enables it to offer a bouquet of benefits, which are
currently in short supply in the commodity markets.
• The institutional promoters of NCDEX are prominent players in their respective fields
and bring with them institutional building experience, trust, nationwide reach, technology
and risk management skills.
• NCDEX is a public limited company incorporated on April 23, 2003 under the
Companies Act, 1956. It obtained its Certificate for Commencement of Business on May
9, 2003. It has commenced its operations on December 15, 2003.
• NCDEX is a nation-level, technology driven de-mutualised on-line commodity exchange
with an independent Board of Directors and professionals not having any vested interest
in commodity markets.
• It is committed to provide a world-class commodity exchange platform for market
participants to trade in a wide spectrum of commodity derivatives driven by best global
practices, professionalism and transparency.
• NCDEX is regulated by Forward Market Commission in respect of futures trading in
commodities. Besides, NCDEX is subjected to various laws of the land like the
Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and
various other legislations, which impinge on its working.
• NCDEX is located in Mumbai and offers facilities to its members in more than 390
centres throughout India. The reach will gradually be expanded to more centres.
• NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed,
Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard
Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot,
Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein,
Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur,
Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow
Soybean Meal. At subsequent phases trading in more commodities would be facilitated.

MCX

30
 • MCX an independent and de-mutualised multi commodity exchange has permanent
recognition from Government of India for facilitating online trading, clearing and
settlement operations for commodity futures markets across the country.
• Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,
NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State
Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India,
Bank Of Baroda, Canara Bank, Corporation Bank.
• Headquartered in Mumbai, MCX is led by an expert management team with deep
domain knowledge of the commodity futures markets. Through the integration of
dedicated resources, robust technology and scalable infrastructure, since inception MCX
has recorded many first to its credit.
• Inaugurated in November 2003 by Shri Mukesh Ambani, Chairman & Managing
Director, Reliance Industries Ltd, MCX offers futures trading in the following
commodity categories: Agri Commodities, Bullion, Metals- Ferrous & Non-ferrous,
Pulses, Oils & Oilseeds, Energy, Plantations, Spices and other soft commodities.
• MCX has built strategic alliances with some of the largest players in commodities eco-
system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent
Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana,
United Planters Association of India and India Pepper and Spice Trade Association.
• Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of Exporters, Cooperatives, and Industry Associations, amongst others MCX
being nation-wide commodity exchange, offering multiple commodities for trading with
wide reach and penetration and robust infrastructure, is well placed to tap this vast
potential.

NMCE
• Faced with the grudging reluctance to modernize and slow pace of introduction of fair
and transparent structures by the existing Exchanges, Government allowed setting up of
new modern, demutualised Nation-wide Multi-commodity Exchanges with investment
support by public and private institutions.
• National Multi Commodity Exchange of India Ltd. (NMCE) was the first such exchange
to be granted permanent recognition by the Government

31
Evolution of Indian commodity market
• The Indian experience in commodity futures market dates back to thousands of years.
References to such markets in India appear in Kautialya’s ‘Arthasastra’. The words,
“Teji”, “Mandi”, “Gali”, and “Phatak” have been commonly heard in Indian markets for
centuries.
• The first organized futures market was however established in 1875 under the aegis of
the Bombay Cotton Trade Association to trade in cotton contracts. Derivatives trading
were then spread to oilseeds, jute and food grains. The derivatives trading in India
however did not have uninterrupted legal approval. By the Second World War, i.e.,
between the 1920’s &1940’s, futures trading in organized form had commenced in a
number of commodities such as – cotton, groundnut, groundnut oil, raw jute, jute goods,
castor seed, wheat, rice, sugar, precious metals like gold and silver. During the Second
World War futures trading was prohibited under Defence of India Rules.
• After independence, the subject of futures trading was placed in the Union list, and
Forward Contracts (Regulation) Act, 1952 was enacted. Futures trading in commodities
particularly, cotton, oilseeds and bullion, was at its peak during this period. However
following the scarcity in various commodities, futures trading in most commodities were
prohibited in mid-sixties. There was a time when trading was permitted only two minor
commodities, viz., pepper and turmeric.
• Deregulation and liberalization following the forex crisis in early 1990s, also triggered
policy changes leading to re-introduction of futures trading in commodities in India. The
growing realization of imminent globalization under the WTO regime and non-
sustainability of the Government support to commodity sector led the Government to
explore the alternative of market-based mechanism, viz., futures markets, to protect the
commodity sector from price-volatility. In April, 1999 the Government took a landmark
decision to remove all the commodities from the restrictive list. Food-grains, pulses and
bullion were not exceptions.
• The long spell of prohibition had stunted growth and modernization of the surviving
traditional commodity exchanges. Therefore, along with liberalization of commodity
futures, the Government initiated steps to cajole and incentives the existing Exchanges to
modernize their systems and structures. Faced with the grudging reluctance to modernize
and slow pace of introduction of fair and transparent structures by the existing
Exchanges, Government allowed setting up of new modern, demutualised Nation-wide
Multi-commodity Exchanges with investment support by public and private institutions.
National Multi Commodity Exchange of India Ltd. (NMCE) was the first such exchange
to be granted permanent recognition by the Government

32
Events and technology of MCX

December 3, 2009 MCX is the 6th largest commodity futures exchange globally in
terms of the number of contracts traded on the exchange for the
period January to June 2009. (Source: FIA and Exchange websites)
November 27, 2009 MCX recorded its Highest Daily Turnover since inception of Rs.
51,626.51 crores
October 14, 2009 PWC and MCX releases India's first Yearbook on Indian
Commodity Ecosystem
September 4, 2009 MCX being awarded “Best Commodity Exchange for the year 2009”
May 12, 2009 Launch of futures trading in Almond for the first time in the World
March 20, 2009 Record all time high turnover of Rs. 32k crs (USD 6.39 bn)
March 12, 2009 MCX becomes the fourth largest derivatives exchange in Asia.
January 9, 2009 Launch of futures trading in electricity for the first time in India.
October 7, 2008 Launch of Currency futures trading on MCX Stock Exchange
(MCX-SX).
September 20, 2008 MCX recognized as "India's First Green Exchange" by Priyadarshini
Academy.
August 26, 2008 SEBI nod to launch exchange for currency futures.
August 18, 2008 Establishment of separate company MCX Stock Exchange.
August 7, 2008 Become first Indian commodity exchange to bag IOSCO
membership.
July 18, 2008 Launch of the Gujarati and Hindi version of website
mcxindia.com.
June 9, 2008 Launch of Asia's maiden futures in CER (Certified Emission
Reduction)
January 21, 2008 MCX 1st derivatives exchange in Asia to launch Carbon Credits
contract.
September 20, 2007 Financial Technologies (India) Ltd, MCX and PTC India Ltd. (PTC)
to launch Indian Energy Exchange Ltd (IEX) as India`s first power
exchange.
May 23, 2007 MCX becomes the world's first and only multi-commodity exchange
to get the ISO 27001:2005 certification, the global benchmark for
information security management systems.
November 27, 2006 Set up Certificate Course in Commodities Futures Market in
association with the National Institute of Agricultural Marketing.
October 17, 2006 Becomes the first Indian commodity exchange to become member of

33
 the Futures Industry Association (FIA), to facilitate knowledge
sharing with global counterparts; MCX signs a joint venture
agreement with the Institute for Financial Markets, an FIA affiliate,
to develop training courses in commodity futures for investors,
traders, and others.
July 10, 2006 Becomes the first exchange to launch rupee-denominated natural gas
futures linked to global benchmarks in India
June 10, 2006 MCX teams up with the Department of Posts, Government of India,
to launch Gramin Suvidha Kendra (GSK) in Jalgaon, Maharashtra,
for information dissemination and query redressal on agricultural
issues to farmers using the Indian postal network.
December 6, 2005 MCX, BSNL and MTN jointly launch Real-time commodity
futures and spot prices on SMS scheme.
December 1, 2005 Sets up MCX Chair for research in commodities at University of
Mumbai
November 22, 2005 Live Dubai Gold and Commodities Exchange (DGCX).
October 17, 2005 Launch of first-of-its-kind Diploma in Commodities Market course
in country along with Welingkar Institute of Management.
June 14, 2005 MCX, MSAMB and NSEL kick-start the Next Green Revolution
by electronically linking Indian APMC Markets by setting up
the first Commodity Suchana Kendra, a knowledge centre on
commodities disseminating spot and futures market prices and
information on fundamentals, at APMC market, Navi Mumbai.
June 7, 2005 Launch of MCX COMDEX, India's first composite commodity
futures index.
February 10, 2005 Set up of National Spot Exchange (NSEL) along with FTIL and
NAFED.
November 10, 2003 Start of operations
September 26, 2003 MCX gains permanent demutualtion recognition from the
Government of India to facilitate online trading, clearing and
settlement operations for commodity futures markets across the
country.

34
Unresolved Issues and Future Prospects
Even though the commodity derivatives market has made good progress in the last few years, the
real issues facing the future of the market have not been resolved. Agreed, the number of
commodities allowed for derivative trading have increased, the volume and the value of business
has zoomed, but the objectives of setting up commodity derivative exchanges may not be
achieved and the growth rates witnessed may not be sustainable unless these real issues are
sorted out as soon as possible. Some of the main unresolved issues are discussed below.

a. Commodity Options: Trading in commodity options contracts has been banned since 1952.
The market for commodity derivatives cannot be called complete without the presence of this
important derivative. Both futures and options are necessary for the healthy growth of the
market. While futures contracts help a participant (say a farmer) to hedge against downside price
movements, it does not allow him to reap the benefits of an increase in prices. No doubt there is
an immediate need to bring about the necessary legal and regulatory changes to introduce
commodity options trading in the country. The matter is said to be under the active consideration
of the Government and the options trading may be introduced in the near future.

b. The Warehousing and Standardization: For commodity derivatives market to work

efficiently, it is necessary to have a sophisticated, cost-effective, reliable and convenient
warehousing system in the country. The Habibullah (2003) task force admitted, “A sophisticated
Warehousing industry has yet to come about”. Further, independent labs or quality testing
centres should be set up in each region to certify the quality, grade and quantity of commodities
so that they are appropriately standardized and there are no shocks waiting for the ultimate buyer
who takes the physical delivery. Warehouses also need to be conveniently located Central
Warehousing Corporation of India (CWC: www.fieo.com) is operating 500 Warehouses across
the country with a storage capacity of 10.4 million tonnes. This is obviously not adequate for a
vast country. To resolve the problem, a Gramin Bhandaran Yojana (Rural Warehousing Plan)
has been introduced to construct new and expand the existing rural godowns. Large scale
privatization of state warehouses is also being examined.

c. Cash versus Physical Settlement: It is probably due to the inefficiencies in the present
warehousing system that only about 1% to 5% of the total commodity derivatives trade in the
country is settled in physical delivery. Therefore the warehousing problem obviously has to be
handled on a war footing, as a good delivery system is the backbone of any commodity trade. A
International Research Journal of Finance and Economics - Issue 2 (2006) 161 particularly
difficult problem in cash settlement of commodity derivative contracts is that at present, under
the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at
maturity is not allowed. In other words, all outstanding contracts at maturity should be settled in
physical delivery. To avoid this, participants square off their positions before maturity. So, in
practice, most contracts are settled in cash but before maturity. There is a need to modify the law
to bring it closer to the widespread practice and save the participants from unnecessary hassles.

35
d. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely
Need a strong and independent regular; similar to the Securities and Exchange Board of India
(SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the
Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry
of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative
that the Government should grant more powers to the FMC to ensure an orderly development of
the commodity markets. The SEBI and FMC also need to work closely with each other due to
the inter-relationship between the two markets
.
e. Lack of Economy of Scale: There are too many (3 national level and 21 regional) commodity
Exchanges. Though over 80 commodities are allowed for derivatives trading, in practice
derivatives are popular for only a few commodities. Again, most of the trade takes place only on
a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can
possibly be addressed by consolidating some exchanges. Also, the question of convergence of
securities and commodities derivatives markets has been debated for a long time now. The
Government of India has announced its intention to integrate the two markets. It is felt that
convergence of these derivative markets would bring in economies of scale and scope without
having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives
market. It would also help in resolving some of the issues concerning regulation of the derivative
markets. However, this would necessitate complete coordination among various regulating
authorities such as Reserve Bank of India, Forward Markets commission, the Securities and
Exchange Board of India, and the Department of Company affairs etc.

f. Tax and Legal bottlenecks: There are at present restrictions on the movement of certain goods
from one state to another. These need to be removed so that a truly national market could
develop for commodities and derivatives. Also, regulatory changes are required to bring about
uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has
not yet been uniformly implemented by all states.

36
Regulatory Framework

At present, there are three tiers of regulations of forward/futures trading system in India, namely,
government of India, Forward Markets Commission (FMC) and commodity exchanges. The
need for regulation arises on account of the fact that the benefits of futures markets accrue in
competitive conditions. Proper regulation is needed to create competitive conditions. In the
absence of regulation, unscrupulous participants could use these leveraged contracts for
manipulating prices. This could have undesirable influence on the spot prices, thereby affecting
interests of society at large. Regulation is also needed to ensure that the market has appropriate
risk management system. In the absence of such a system, a major default could create a chain
reaction. The resultant financial crisis in a futures market could create systematic risk.
Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and
management of the exchange so as to protect and promote the interest of various stakeholders,
particularly non-member users of the market.

The trading of commodity derivatives on the NCDEX is regulated by Forward Markets

Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952, forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges, which
are granted recognition by the central government (Department of Consumer Affairs, Ministry of
Consumer Affairs, Food and Public Distribution). All the exchanges, which deal with forward
contracts, are required to obtain certificate of registration from the FMC. Besides, they are
subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward
Commission (Regulation) Act and various other legislations, which impinge on their working.

Forward Markets Commission provides regulatory oversight in order to ensure financial integrity
(i.e. to prevent systematic risk of default by one major operator or group of operators), market
integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and
supply conditions) and to protect and promote interest of customers/ non-members. It prescribes
the following regulatory measures:

1) Limit on net open position as on the close of the trading hours. Sometimes limit is also
imposed on intra-day net open position. The limit is imposed operator-wise, and in some
cases, also memberwise.

2) Circuit-filters or limit on price fluctuations to allow cooling of market in the event of

abrupt upswing or downswing in prices.

3) Special margin deposit to be collected on outstanding purchases or sales when price

moves up or down sharply above or below the previous day closing price. By making
further purchases/sales relatively costly, the price rise or fall is sobered down. This
measure is imposed only on the request of the exchange.

37
 4) Circuit breakers or minimum/maximum prices: These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and
demand factors. This measure is also imposed on the request of the exchanges.

5) Skipping trading in certain derivatives of the contract, closing the market for a specified
period and even closing out the contract: These extreme measures are taken only in
emergency situations.

Overview of commodity Market

E.g. GOLD

38
Primary survey
Primary survey conducted at Banking and finance exhibition at
Goregaon grounds, Mumbai.

Primary survey was conducted from a sample of approximately 30 people.

The people who were surveyed were customers of companies like Anagram,
Bank of Baroda, India bulls, Share khan and Angel Broking.

Insights that were collected are

1) Low transparency.

2) Hassles in shifting account and underlying securities.

3) Lack of Awareness of the Research service.

4) Though people are educated they don’t have time to understand the
markets and do a calculated investment, so they take help from their
friends.

5) Too many customers results in lack of proximity with the customers.

6) Issues with leverage in case of Online.

7) Upfront co-ordination.

39
 8) People unwilling to pay brokerage for Wealth management services.

9) Lack of awareness of tax planning and frequent visits and follow-up

with CA’s needs to be done.

10) Govt. retiring age is 6oyrs, but the tax bracket is up to 65yrs
(senior citizen after 65yrs and hence tax benefits).

Primary survey was conducted in rural area regarding awareness of

commodity market.

Survey was conducted in 6 villages around the washim district which is about
100kms from Akola.

Insights that were collected are

1) Farmers who earn some profit from the harvest invest it back into
farms or keep it as savings for marriage ceremony.

2) No awareness about the commodity market.

3) Farmers were aware of ITC which insists on quality and gives better
price, but refrained to go to it due to transportation charges.

4) Produce is sold immediately to the nearest mandi for immediate cash

requirement

5) Sarpanch of the village receives sms alerts about the rates of food
grains and weather. Service provided by idea.

Timeline showing factors affecting commodities prices

40
JAN FEB MAR APRIL MAY JUNE JULY AUG SEPT OCT NOV DEC

Festival season
Kharif seasom

sugar
maize

Oil pricesgo up

Increase in expenditure
motoringand sugar prices
platinum

41