Study of Commodity Market | Futures Contract | Clearing House (Finance)

Report On “Study of Commodity market”

Prepared By Amit Kumar yadav

Under the Guidance of Dr. Mihir Dash

In partial fulfillment of the Course-Industry Internship Programme (IIP) in Semester II of the Master of Business Administration

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“Knowledge is an experience gained in life, it is the choicest possession, which should not be shelved but should be happily shared with others. It is the supreme art of the teacher to awaken joy in creative expression and knowledge.” The feeling of a task well done is incomplete without giving the acknowledgment where due, so before I proceed further I wish to spend some time in expressing my gratitude to all those who have been involved in guiding me and helping me out during my report. First and foremost I would like thank Dr. Madhukar Angur, Honorary Chancellor, Alliance University Bangalore, for granting me the opportunity to be the part of this renowned institution. I would like to give special thanks to Mr. Younus Saleem P, Team leader – Commodities, Bonanza Portfolio Limited, Bangalore, for his guidance during the report. Despite of his demanding schedule, he bestowed every possible support to us, so as to carry on the report work without any hindrance. I have a deep sense of gratitude for Dr. Mihir Dash, Associate Professor, Alliance University Bangalore, my faculty guide, who helped me throughout the project and gave me ideas and direction to complete my project in a systemic manner. I would like to thank valuable works of publishers and authors whose work helped me during the project.

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2 Vision and Mission 2.3.7 Global Scenario Page no.4 Commodity Trading & its Mechanism 1.4 Global & Indian Operation & Market share 2.1 Introduction 1.3 Markets Rational 1.3.5 Regulatory issues 1.3. 1 3 5 6 7 12 14 17 20 27 Chapter : 2 Company Overview 2.3 Organisational Structure 2.6 SWOT Analysis 30 32 33 34 36 38 Page | 5 .3.6 Indian Scenario 1.5 Products & Services Introduction of the Company 2.3.-:Table of Contents:- Particulars Executive Summary Chapter : 1 Introduction & Industry Analysis 1.2 Historical Background 1.2 Description of various market 1.1 Market Structure 1.3 Industry Overview 1.

1 Objectives of the study 3.4 Sources of data 3.2 Scope of the study 3.6 Limitations of the study 40 40 41 41 42 43 Chapter : 4 Chapter : 5 Chapter : 6 Chapter : 7 Chapter : 8 Observation & Analysis Findings & Recommendations Conclusion Learning outcome Annexure Bibliography 44 – 56 57 – 61 62 65 67 77 Page | 6 .Chapter : 3 Research Methodology 3.3 Research design 3.5 Sampling plan 3.

one can invest in mutual funds. that is one of the reason behind the increasing demand of these things in the global market. hence before investing in any of these options. because these options have given a stable and expected return in last few years. there are many options are available in market. derivatives etc. All of these options posses’ different rate of return. for example. It is Science because. some of the above mentioned options like mutual funds. term & fixed deposits. different risks etc. there are lot of investment options are available. in today’s world Gold & silver has been considered as one of the safest investment. In addition to this. the report also explains about the different regulatory aspects regarding commodity trading in both India as well as rest of the world. stock markets etc. a survey has been done in order to know basically the awareness level of people regarding commodity markets. It is an Art because every individual has some specific need and expectation based on the resources he/she has. so how and where to invest the resources or in financial terms funds in order to maximize the return on investment is not less than an Art. how trading happens in the commodities market and major exchanges in the country as well rest of the world. Apart from this. Finally at the end. Now as far as the investment options are concerned. has witnessed lot of fluctuations on return on investment. Page | 7 . For example. So how these options especially commodities has maintained the stable performance is the crux of the matter of this report. commodities market. the reports also contains the details about the types of commodities.EXECUTIVE SUMMARY Investing is both Arts as well as Science. over the last few years {especially after global recession of 2008-09}. stock market. one need to do proper research about that particular option. but at the same time some of the options like commodities has shown a stable and positive performance over the years.

Chapter-1 Introduction & Industry overview Page | 8 .

Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Currently.1 Introduction: Commodities are the physical substance. which are interchangeable with another product of the same type.207. pricing in commodities futures has been less volatile compared with equity and bonds. usually through futures contracts. and which investors buy or sell in a market. the various commodities across the country clock an annual turnover of Rs 1. may find commodities an unfathomable market. bonds and real estate. the size of the commodities market grows many folds here on. The price of the commodities is subject to supply and demand. Indian markets have recently thrown open a new avenue for retail investors and traders to participate through commodity derivatives.000 crores (Rs 1. For those who want to diversify their portfolios beyond shares.3 billion). Till few months ago. As far as the size of commodity market of India is concerned.400 billion). such as food grains.730 crores (Rs 13. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities. thus providing an efficient portfolio diversification option. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. of the country's GDP of Rs 13.1. For retail investors could have done very little to actually invest in commodities such as gold and silver -or oilseeds in the futures market. Page | 9 . this wouldn't have made sense. retail investors can now trade in commodity futures without having physical stocks. Commodities actually offer immense potential to become a separate asset class for market-savvy investors. But after setting up of three multi-commodity exchanges in the country. 20. metals. arbitrageurs and speculators. 40. commodities are the best option. Retail investors. commodities related (and dependent) industries constitute about 58 per cent. Historically. With the introduction of futures trading. who claim to understand the equity markets. crude oil etc.

they make the underlying market more liquid. the one for commodity futures plays a valuable role in information pooling and risk sharing. So by considering these myths. In the process. The idea is to understand the importance of commodity derivatives and learn about the market from both global as well as Indian point of view.Like any other market. and once these are understood one should have little difficulty understanding the nature of futures markets and how they function. this report aims at know-how of the commodities market and how the commodities traded on the exchange. Actually. and facilitates decisions related to storage and consumption of commodities. they are not. Most people have the impression that commodity markets are very complex and difficult to understand. The market mediates between buyers and sellers of commodities. Page | 10 . There are several basic facts that one must know.

Sealed in clay vessels with a certain number of such tokens. and the states which could handle them most effectively became very powerful empires.this made them like a modern futures contract. rare seashells. dating from ancient Sumerian use of sheep or goats. Regardless of the details. it was a major focus of these civilizations to keep markets open and trading in these scarce commodities.more than an I. Considering the many hazards of climate. Commodity money and Commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. While wheat and corn. cloth. Page | 11 . Eventually the tokens disappeared. to render trade itself more smooth and predictable. were widely traded using standard instruments in the 19th century in the United States.O. Classical civilizations built complex global markets trading gold or silver for spices. Reputation and clearing became central concerns.2 Historical Background: The modern commodity markets have their roots in the trading of agricultural products. Historically. at which point the number or terms written on the outside became subject to doubt. wood and weapons. they were also known to contain promises of time and date of delivery . trusted by many peoples to manage and mediate trade and commerce. other peoples using pigs. theft and abuse of military fiat by rulers of kingdoms along the trade routes. piracy. most of which had standards of quality and timeliness. This represented the first system of commodity accounting.U. This made them a form of commodity money . or other items as commodity money. but the contracts remained on flat tablets.1. but less than a guarantee by a nation-state or bank. they represented a promise to deliver that number. people have sought ways to standardize and trade contracts in the delivery of such items. it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it. However. cattle and pigs. other basic foodstuffs such as soybeans were only added quite recently in most markets. with that number written on the outside.

agricultural products etc. 1. electricity etc. as an increasing number of market participants are trading in exotic options.3. Usually Commodity markets cover physical assets such as precious metals. However. an OTC market has also been growing.1. It merely provides the facilities and ground rules for its members to trade in commodity futures and for non-members also to trade by dealing through a member broker and paying a brokerage commission. These raw commodities are traded on regulated commodities exchanges. over the last few years. pulses etc. in which they are bought and sold in standardized contracts.}. The exchange itself does not operate for profit. wheat. energy {oil. Most of the trading is done using futures.1 Market structure: Quality Certification Agency Warehouses Hedger Clearing Bank Commodities Market Producers Transporte rs/support agencies Consumers (Retail/ Institutional) Traders (Speculators) Page | 12 .}. base metals.3 Industry overview: Commodity markets are markets where raw or primary products are exchanged. The purpose of a commodity exchange is to provide an organized marketplace in which members can freely buy and sell various commodities in which they have an interest. food {rice.

 Metals:  Base metals: Aluminum. Almond. wind.  Precious metals: Gold. jet fuel. Silver. Page | 13 . Zinc. gasoline. Palladium & Titanium. Pepper. Maize.  Forest products: Plywood. fuel oil. Urad. Barley.2 Description of the various Markets: Commodities markets cover the assets under following categories:  Energy:  Mainly oil and gas like crude oil. precipitation) have been forth and traded.  Pulse: Chana. Coffee.  Fiber: Cotton {Kapas}. Nickel. Tin.  Foodstuffs: Cocoa. Sugar. Rubber. Crude Palm oil. Platinum. Jeera.  Livestock: Live hogs. Turmeric. Iron & Steel. Rice.  Spices: Cardamom. many derivative products whose underlying is weather (temperature. Tur. Cheddar. Natural gas & propane etc  Electricity as well as renewable forms of energies like solar and wind energy. Sunflower.  Agricultural:  Grains: Wheat. Coriander. Refined Soya oil.1. heating oil. Copper.3. Soya beans. over the last years. Lead. Cattle and Pork bellies. Potato.  Weather: weather is obviously not a tradable asset but we include them here because.

Future Markets: Future commodity market is the market. Page | 14 . Actually. Major examples of Spot markets are as under:  MCX {Multi Commodity Exchange}.  National Spot Exchange. only a very small percentage. one can buy and sell commodities in a futures market regardless of whether or not one has.Spot Markets: Spot markets are the organized exchanges where commodity products can be traded on the daily basis in large amount. where commodities are contracted for purchase or sell in standardized contractual agreements. or with a minimum lag between the trade and delivery due to technical constraints.  CME {Chicago Mercantile Exchange}. In such types of markets. These agreements (usually known as futures contracts) provide for delivery of a specified amount of a particular commodity during a specified future month. In other words. they are known as Spot markets. One may at any time cancel out a previous sale by an equal offsetting purchase or a previous purchase by an equal offsetting sale. but involve no immediate transfer of ownership of the commodity involved. that is the reason.  NCDEX {National Commodity & Derivatives Exchange limited}. If done prior to the delivery month the trades cancel out and thus there is no receipt or delivery of the commodity. usually less than 2 % of the total future contracts that are entered into are ever settled through deliveries. For the most part they are cancelled out prior to the delivery month in the manner just described. When one deals in futures one need not be concerned about having to receive delivery (for the buyer) or having to make delivery (for the seller) of the actual commodity. the particular Commodity involved. providing of course that one does not buy or sell a future during its delivery month. delivery of the products either takes place immediately. or owns.  MCE {Mid America Commodity Exchange} etc.

(b) It is invariably entered into for a standard variety known as the “basis variety” with permission to deliver other identified varieties known as “tender able varieties”. They are agreements to purchase or sell a given quantity of a commodity at a predetermined price. with settlement expected to take place at a future date. (d) The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. and place and date of delivery of the commodity. The closing out involves buying a different times of two identical contracts for the purchase and sale o the commodity in question. (c) The units of price quotation and trading are fixed in these contracts. (e) In futures market actual delivery of goods takes place only in a very few cases.Commodity Future Contract: Futures contracts are an improved variant of forward contracts. he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centers. The commodity futures contracts in India as defined by the FMC has the following features: (a) Trading in futures is necessarily organized under the auspices of a recognized association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules and Bye-laws of the association. with each cancelling the other out. The futures contracts are standardized in terms of quality and quantity. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place. The terms and specifications of futures contracts vary depending on the commodity and the exchange in which it is traded. In case he decides to deliver goods. Page | 15 . parties to the contracts not being capable of altering these units. While forward contracts are mainly over-the-counter and tailor-made which physical delivery futures settlement standardized contracts whose transactions are made in formal exchanges through clearing houses and generally closed out before delivery.

There are many kinds of hedge. Then as the cash wheat is sold the hedges will be removed by covering (with an offsetting purchase) the futures that were previously sold short. these bins will again be filled and the wheat will remain in storage throughout the season until it is sold. let us take an example to understand the principle of hedging in future trading. to those needing wheat.  Commodity financers.  Exporters.  Importers. or insure. and hedges this purchase with an equivalent sale of December wheat at $4. the firm’s storage bins will be relatively empty. But if the storage firm buys cash wheat at $4 a bushel.  Corporate having price risk exposure in commodities. During the crop movement when the firm’s inventory of cash wheat is being replenished. Let us take the case of a firm that is in the business of storing and merchandising wheat.05. As the new crop becomes available In June.  Merchandisers/Traders. a 10-cent break in prices between the time the hedge is placed and the time it is taken off would result in a 10-cent loss on the cash wheat and a 10Page | 16 . against unpredictable price changes.  Consumers/Industry.Participants in the Commodity Future Market: The participants in the Commodity futures are as under:  Farmers/Producers. lot-by-lot. these cash wheat purchases (to the extent that they are in excess of merchandising sales) will be hedged by selling an equivalent amount of futures short. By early June. In this manner the storage firm’s inventory of cash wheat will be constantly hedged.  Agriculture credit providing agencies. avoiding the risk of a possible price decline – one that could more than wipe out the storage and merchandising profits necessary for the firm to remain in business. just ahead of the new crop harvest. Hedging in the Future Commodity Market: The justification for futures trading is that it provides the means for those who produce or deal in cash commodities to hedge. July and August.

To a certain extent these hedges offset one another. this price relationship is sufficiently close to make hedging a relatively safe and practical Undertaking. Although speculation in commodity futures is sometimes referred to as gambling. unless of course cash and futures prices should fail to advance or decline by the same amount. however. In connection with hedging. merchandising and processing cash commodities in large volume are not in a position to assume them. this is an inaccurate reference. The futures contract is a legitimate contract tied to an actual commodity. if the future is selling at a normal carrying charge premium at the time the future is sold as a hedge. due to offsetting profits and losses. legal contract providing for delivery of a cash commodity. or whether the futures contract is subsequently cancelled by an offsetting purchase or sale. profit margins that can be wiped out by unpredictable price changes. Whether the commodity is finally delivered. or speculator. Everyone who trades in commodities becomes a party to an enforceable. but they can be transferred to others by means of a futures market hedge. the firm would be protected against losses resulting from price fluctuations. thus giving to the storage interest his normal carrying charge profit in his hedging transaction. Usually. Speculations and its functions in Commodity market: The primary function of the commodity trader. is of no real consequence. is to assume the risks that are hedged in the futures market. but for the most part speculative traders carry the hedging load. Commodity trading falls into the latter category. the future should slowly but Steadily decline in relation to the cash as it approaches the delivery month. In fact. and those who trade in these Page | 17 .cent profit on the futures trade. it must be remembered that there are unavoidable risks when large stocks of any commodity subject to price fluctuation must be owned and stored for extended periods. In the event of a 10-cent advance there would be a 10-cent profit on the cash and a 10-cent loss on the futures trade. In any case. Usually those in the business of storing. whereas in speculation there is an assumption of risks that exist and that are a necessary part of the economy. These risks of price fluctuation cannot be eliminated. They are in a competitive business dependent upon relatively narrow profit margins. The generally accepted difference between gambling and speculation is that in gambling new risks are created which in no way contribute to the general economic good. Someone must assume these risks.

The commodity trader has complete freedom of choice and at no time is there any reason to assume a risk that he doesn’t think is a good one. where producers and consumers can transact deals. making them valuable diversification investment instruments to other assets like equity stocks and bonds.linked trading and speculative instruments. Standard arbitrage theory provides that the price of futures contracts is equal to: [Spot Price] + [Cost of Carry] = [Futures Price] -----------. commodity markets have been growing to offer Commodity . The arrival of news (especially ones relating to local wars or political crises) can have a very high impact on commodity prices. 1. if one looks at the correlation between the GSCI and the SP 500 for instance). commodities present negative correlation with stocks and bonds (around –15% to –30% over the last ten years. especially oil. In addition.Contracts perform the economic function of establishing a market price for the commodity. One’s skill in selecting good risks and avoiding poor risks is what determine one’s success or failure as a commodity trader.3. this does not mean that traders have no choice as to the risks they assume – or that all of the risks passed on are bad risks. commodities exhibit strong seasonality as well as high level of volatility (cf.[Reinvestment Costs] like coupon or dividends + [Storage cost] ------------------.(1. making hedging strategies a true challenge for the various market participants.2) Where under [Reinvestment costs] one should understand [coupons] and/or [dividends]. With the growing volume of futures contracts. While speculative traders assume the risks that are passed on in the form of hedges.(1. the spike in oil prices in 1973. Compared to other assets like equity stock or bonds. 1979 or the Gulf war). Page | 18 .1) Where the cost of carry is equal to: [Cost of Carry] = [Interest Rate Cost] .3 Markets Rational: Although the primary reason of being of commodity markets was to have efficient markets for agricultural and energy goods. commodity futures contracts have become a very liquid instrument besides being an easy one to trade.

especially in view of storage problems associated with certain commodities. this stems from the fact that the global demand is in excess of the supplies and that the cash-and-carry arbitrage is not easily put forward. This premium is referred to as the convenience yield. although. The degree of contango is limited by the fair value of the futures prices whilst there is no limit to the degree of backwardation. both states can occur. commodity futures trade often at a substantial discount to their fair value. Backwardation and contango Page | 19 . the cash and carry arbitrage is very difficult to put in place and the theoretical price is often an upper bound of the traded price. one then says that the market is in Backwardation while when spot trade below futures prices. market participants are ready to pay a premium for readily available commodities. From an economic point of view. reflected by the convenience yield. In practice.However. Put another way. Backwardation is the most frequent state of the market. the market is in Contango. for commodity products. When the spot trades above futures prices.

facing important risk due to the deregulation of the energy market. In India. first in the US and now in Europe & Asia. After trade is made with another floor broker who takes the opposite side of the transaction for another customer or for his own account.Big players in the commodity markets comprise not only raw material producers. who try to hedge their risk. after year 2000. Chicago Board of Trade (CBOT). 1. the details of transactions are passed on to the clearing house through a transaction slip on the basis o which the clearinghouse verifies the match and adds to its records. has made risk management of commodities a must for utilities. Moreover. but also  Airlines companies that face the risk of unfavorable jet fuel price fluctuations. various financial instruments having commodities as underlying are traded on the exchanges. Bangalore Page | 20 . In case of a spot market. spot market and derivative market. The commodity market also has two constituents’ i. coffee futures exchange. Following the experiences of stock exchanges with electronic screen based trading commodity exchanges are also moving from outdated open outcry system to automated trading system. the commodities are bought and sold for immediate delivery.4 Commodity Trading & its Mechanism: Trading in commodity markets is quite similar to equity markets. have already computerized the trading activities. The floor brokers/trading members on receipt of orders from clients or from their office transmits the same to others on the trading floor by hand signal and by calling out the orders (in an open outcry system they would like to place and price. In case of a commodities derivative market.e. the deregulation of the energy markets. London.  Utility companies.  Various hedge funds interested in risk diversification.3. distributors and suppliers. Many leading commodity exchanges in the world including Chicago Mercantile Exchange (CME). The buy and sell orders for commodity futures are executed on the trading floor where floor brokers congregate during the trading hours stipulated by the exchange. International Petroleum Exchange (IPE).

To add to modernization efforts. the Bombay Commodity Exchange (BCE) has initiated for a common electronic trading platform connecting all commodity exchanges to conduct screen based trading. The entire procedural steps involved in electronic trading beginning from placing the buy/sell order to the confirmation of the transaction have been given below: Order and Execution flow in electronic future trade Page | 21 . trading takes place through a centralized computer network system to which all buy and sell orders and their respective prices are keyed in from various terminals of trading members. In electronic trading. The deal takes place when the central computer finds matching price quotes for buy and sell.has already put in place the screen based trading and many others are in the process of computerization.

. Therefore. First. and assumes all counterparty risk on behalf of buyer and seller. Instead. This offsetting reduces the open position in the account of all traders as they approach the maturity date of the contract. Page | 22 . if any. clearing and reporting of all transactions. For squaring of a position. execution. In a futures exchange all transactions are routed through and guaranteed by the clearinghouse which automatically becomes a counterpart to each transaction. which remain unsettled by offset until maturity date are settled by physical delivery. It assumes the position of counterpart to both sides of the transaction. the ready market. There is no clearinghouse in a forward market due to which buyers and sellers face counterparty risk. etc. or as a substitute for. In fact the clearinghouse plays a major role in the process explained above by intermediating between the buyer and seller. The contracts. settlement of all transactions on maturity by paying the price difference or by arranging physical delivery. which distinguishes futures from forward contracts is that. the buyer (seller) can offset the contract by selling (buying) the same amount of commodity and squaring off his position. The buyer or seller of futures contracts has two options before the maturity of the contract. the buyer (seller) may take (give) physical delivery of the Commodity at the delivery point approved by the exchange after the contract matures. It sells contract to the buyer and buys the identical contract from the seller.Clearing House: Clearinghouse is the organizational set up adjunct to the futures exchange which handles all back-office operations including matching up of each buy and sell transactions. the clearinghouse may substitute any contract of the same specifications in the process of daily matching. fixing the daily price limits and settlement guarantee fund. traders obtain a position vis-à-vis the clearing house. It ensures default risk-free transactions and provides financial guarantee on the strength of funds contributed by its members and through collection of margins marking-tomarket all outstanding contracts. It is important to understand that the futures market is designed to provide a proxy for the ready (spot) market and thereby acts as a pricing mechanism and not as part of. position limits imposed on traders. the buyer (seller) is not obligated to sell (buy) the original contract. As delivery time approaches. The second option. virtually all contracts are settled by offset as those who have bought (long) sell to those who have sold (short).

market ensures that the holder gets the payment equivalent to the difference between the initial contract value and its change over the lifetime of the contract on the basis of its daily price movements. 1. These are:  Initial margin. Hedgers are affected as well: the necessary link between futures and physical market transactions is too rigidly defined. Maintenance margin usually ranges from 60 to 80 percent of Initial margin. Page | 23 . The clearinghouse restores initial margin through margin calls to the client for collecting variation margin. In case of an increase in value of the contract. There are two types of margins to be maintained by the trader with the clearinghouse.Margins: Margins (also called clearing margins) are good -faith deposits kept with a clearinghouse usually in the form of cash. Initial margin: Initial margin is a fixed amount per contract and does not vary with the current value of the commodity traded.5 Regulatory issues in Commodity market: Government policies: The government policies play a major role in the growth of commodities markets. he is bound to square off his position or else the clearinghouse will be liquidating the position. If the member is not able to pay the variation margin. Different tax treatment of speculative gains and losses discourage many speculators from participating in official futures exchanges. which affects the commodity future markets:  First issue is taxes. thereby affecting the liquidity of the markets.  Maintenance or Variation margin. A debit in the margin account due to adverse market conditions and consequent change in the value of contract would lead to initial margin falling below the maintenance level.3. Tax issues need to be clarified so that futures losses can be offset against profits on the underlying physical trade and vice versa. marking to. Maintenance margin: Maintenance margin is a kind of compensation in order to compensate the risk borne by the clearinghouse on account of price volatility of the commodity underlying the contract to which it is a counterparty. Following are the issues related to government policies.

the role of government entities directly involved in commodity trade should be reconsidered. many institutions (particularly financial institutions but also. the regulating authorities must consider the following measures:  The first issue is that the perspective of regulators should move away from a concern about preventing volatility towards protecting market integrity. it could. does not destroy market mechanisms. as long as done within clear policy guidelines. The rules which prevent such engagement need to be modified. and an improved day-to-day oversight of exchanges. If a federal or state government wishes to continue direct interventions in commodity markets.  Finally. if it wished. They are likely to set guidelines for exchanges and will need to satisfy themselves at all times that exchanges are conducting their businesses in line with those guidelines. and.  Third. Stamp duties on trade in commodity futures exchanges should be nil. stamp duty can be arbitrarily imposed by the state in which the futures exchange is located. pass through the commodity exchanges. So for this. except when physical delivery is made. Page | 24 . The regulators therefore must satisfy themselves that the exchange business is being conducted in a proper manner. The direct purchasing practices of these entities now damage the potential of commodity exchanges. Second problem is stamp duty. Clarification from the Indian states in which there are exchanges that there will be no arbitrary position on stamp duty is recommended. needs a new focus. a stronger role. Now. This would ensure effective market intervention (the effect on prices will be immediate). The regulators must set the regulatory template under which each of the exchanges is permitted to operate and is expected to run its business. cooperatives) are not permitted to engage in commodity futures trade. in a less direct manner. the regulating authorities like FMC in India. Regulatory perspectives: In order to regulate the market. CFTC in US.

Currently. it is quite important for regulators to check the brokerage system within their territory. There is a need for mandated capital adequacy for brokers together with measures to monitor that the capital is. It should abolish NTSD {Non-Transferable Specific Delivery Contracts} and TSD {Transferable Specific Delivery Contracts} contracts. the regulators therefore need to be able to evaluate (proposed) contract specifications. A broker can start trading once he fulfills the exchange Page | 25 . to make this possible. Exchange management should form a first line of defence (and be punished if they do not do their job properly). but regulators should keep continuous track of market developments too. and push for a change if these specifications are not sound. Knowledge has now sufficiently spread.. admission fees etc. should be stimulated. the authorities should change the portfolio of contracts that are traded. a broker's membership at the exchange is solely dependent upon fulfilling the financial requirements (in form of upfront payment or equity participation. and technology sufficiently improved. Brokers (after the transition period) should meet the following requirements:  Mandated capital adequacy: The regulators should seek to minimize any risk to investors and threat to the stability of the market from the failure of an institution because it becomes unable to meet its liabilities.) levied by the different exchanges. Apart from this. and have only tradable futures contracts. membership. there is no requirement of any form of licensing.  And finally with the changing environment of industry. either in joint ventures with domestic brokers or independently. The authorities should also allow exchanges to introduce option contracts.  Third. in case the physical market for a well-established contract changes). So in this way. There should be a transition period (not exceeding One year).  Licensing: In most of the countries around the globe including India. Second. first of all the entry of international broking houses. with respect to combating manipulation. in fact. where each exchange sets initial standards for their brokers. or have become inappropriate (e. maintained.g.

Before the Second World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab. a separate association by the name "Bombay Cotton Exchange Ltd. In 1893.  Customer agreements: Before an exchange member can operate on behalf of a customer a client agreement should be in place. followed by some oilseeds and their derivatives. mustard seed. Page | 26 . There is no educational requirement. a three-pronged approach has been adopted to revive and revitalize the market. in 1999. Forward trading was permitted in cotton and jute goods in 1998. A statement in the first ever National Agriculture Policy.g." was constituted. sesame.pass a character assessment— a member/employee of an exchange . Futures trading in oil seeds were organized in India for the first time with the setting up of Gujarat Vyapari Mandali in 1900. technology driven exchanges with nationwide reach and adopting best international practices." in 1875.. It is advisable that anyone dealing in futures for clients is registered. new promoters with resources and professional approach were being attracted with a clear mandate to set up dematerialized. no conviction of fraud. Firstly. Thirdly. The exchange or the regulator may wish to define the minimum acceptable content of such an agreement. After independence. strengthening of infrastructure and institutional capabilities of the regulator and the existing exchanges received priority. Secondly. on policy front many legal and administrative hurdles in the functioning of the market have been removed.6 Commodity market: Indian Scenario Organized futures market evolved in India by the setting up of "Bombay Cotton Trade Association Ltd. To be registered. as the existing exchanges are slow to adopt reforms due to legacy or lack of resources. one would need to: . such as groundnut. which carried on futures trading in groundnut.requirements. issued in July. 2000 by the government that futures trading will be encouraged in increasing number of agricultural commodities was indicative of welcome change in the government policy towards forward trading. castor seed and cotton. 1.3. cottonseed etc. following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association.

and National Board of Trade. which itself cannot be ignored. amendments to the Essential Commodities Act.But the turning point came in 2003. Ahmadabad (NMCE). Structure of market: Ministry of Consumer Affairs FMC Commodity Exchanges National Exchanges Regional Exchanges MCX NCDEX NMCE NBOT 20 Other Regional Exchanges Source: Sebi Bulletin Page | 27 . run mainly by entities which trade on them resulting in substantial conflict of interests. such as. Multi Commodity Exchange Ltd.. Indore (NBOT).. are regional in nature. commodities related (and dependent) industries constitute about roughly 50-60 %. Mumbai (MCX). Of the country's total GDP. National Commodities and Derivatives Exchange. These exchanges are expected to be role model to other exchanges and are likely to compete for trade not only among themselves but also with the existing exchanges. which have reduced bottlenecks in the development and growth of commodity markets. Mumbai (NCDEX). Securities (Contract) Rules. opaque in their functioning and have not used technology to scale up their operations and reach to bring down their costs. Most of the existing Indian commodity exchanges are single commodity platforms. when the government issued notifications for withdrawing all prohibitions and opening up forward trading in all the commodities. This period also witnessed other reforms. all these shortcomings will be addressed rapidly. But with the strong emergence of: National Multi-commodity Exchange Ltd.

Leading Commodity Market of India: The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. So far there are 25 commodity derivative exchange are available and dealing with around 100 commodities for trade. These exchanges are expected to offer a nation-wide anonymous, order driven; screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges. Some of the leading commodity exchanges across the country with their recent turnover are given as under:  Multi Commodity Exchange {MCX}: Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. It is headquartered in Mumbai. The demutualised Exchange set up by Financial Technologies (India) Ltd (FTIL) has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operations for commodity futures across the country. Having started operations in November 2003, today, MCX holds a market share of over 80% of the Indian commodity futures market, and has more than 2100 registered members operating through over 1, 80,000 trading terminals, across India. MCX offers more than 40 commodities across various segments such as bullion, ferrous and non-ferrous metals, energy, weather and a number of agri – commodities on its platform. The Exchange is the world's largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures, with respect to the number of futures contracts traded. MCX has been certified to three ISO standards including ISO 9001:2008 Quality Management System standard, ISO 14001:2004 Environmental Management System standard and ISO 27001:2005 Information Security Management System standard. Promoted by FTIL, MCX enjoys the confidence of blue chips in the Indian and international financial sectors. MCX's broad-based strategic equity partners include State Bank of India and its associates, NABARD, NSE, SBI Life Insurance Co Ltd, Bank of India (BOI), Bank of Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Fid Fund (Mauritius) Ltd. an affiliate of Fidelity International, Merrill Lynch, Euronext N.V. and others.

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Average turnover: Volume {In lakh tonnes} 6149.034 Value {in Rs lakh} 6393302.17

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above mentioned figures are for financial year 2009-10.

 National Commodity & Derivative Exchange Ltd. {NCDEX}: National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. Like MCX, it is also headquartered in Mumbai & offers facilities to its members from the centers located throughout India. 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 and shareholders of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. It became a public limited company on April 23, 2003 under the companies act, 1956 and started its operation since December 15. 2003. The Exchange, as on May 21, 2009 when Wheat Contracts were relaunched on the Exchange platform, offered contracts in 59 commodities - comprising 39 agricultural commodities, 5 base metals, 6 precious metals, 4 energy, 3 polymers, 1 ferrous metal, and CER. The top 5 commodities, in terms of volume traded at the Exchange, were Rape/Mustard Seed, Gaur Seed, Soya bean Seeds, Turmeric and Jeera. Key promoters: Promoter shareholders: ICICI Bank Limited (ICICI)*, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited.(NSE). Other shareholders: Canara Bank, Punjab National Bank (PNB), CRISIL Limited, Indian Farmers Fertiliser Cooperative Limited (IFFCO), Goldman Sachs, Intercontinental Exchange (ICE), Shree Renuka Sugars Limited and Jaypee Capital Services Limited.
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Average turnover: Volume {In lakh tonnes} 3137.44 Value {In Rs. Crore} 917584.71

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above mentioned figures are for financial year 2009-10

 National Multi Commodity Exchange {NMCE}. National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). NMCE has many unique features, like it is a zero-debt company; following widely accepted prudent accounting and auditing practices. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE commenced futures trading in 24 commodities on 26th November, 2002 on a national scale and the basket of commodities has grown substantially since then to include cash crops, food grains, plantations, spices, oil seeds, metals & bullion among others. It was the first Exchange to complete the contractual groundwork for dematerialization of the warehouse receipts. Average turnover: Volume {In lakh tonnes} 495.91 Value {In Rs. Crore} 227901.48

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above figures are for financial year 2009-10.

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 Indian Commodity Exchange {ICEX}: Indian Commodity Exchange Limited is a screen based on-line derivatives exchange for commodities and has established a reliable, time tested, and a transparent trading platform. It is also in the process of putting in place robust assaying and warehousing facilities in order to facilitate deliveries. It has Reliance Exchangenext Ltd. as anchor investor and has MMTC Ltd., Indiabulls Financial Services Ltd., Indian Potash Ltd., KRIBHCO and IDFC among others, as its partners. The exchange is headquartered at Gurgaon. Average turnover: Volume {In lakh tonnes} 122.104 Value {In Rs crores} 136425.36

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above mentioned figures are for financial year 2009-10.

Problems of Indian Commodity Market: Even though the commodity derivatives market has made good progress in the last few years, but still there are lot issues, which are yet to be resolved. Some of them are discussed below:  Cash Vs Physical settlement: this is one of the major problem of commodity market in India. It is probably due to the inefficiencies in the present warehousing system that only about 1% to 5% of the total commodity derivatives trades in the country are 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 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.
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most of the trade takes place only on a few exchanges. However. similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. Page | 32 . Lack of economy of scale: There are too many (3 national level and 25 regional) commodity exchanges. Again.  The Regulator: As the market activity pick-up and the volumes rise. the question of convergence of securities and commodities derivatives markets has been debated for a long time now. These need to be removed so that a truly national market could develop for commodities and derivatives. The Government of India has announced its intention to integrate the two markets. All this splits volumes and makes some exchanges unviable. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets. Food and Public Distribution) and depends on it for funds. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts. the Securities and Exchange Board of India. Though over 80 commodities are allowed for derivatives trading. in practice derivatives are popular for only a few commodities. Unlike SEBI which is an independent body. Also.  Tax and legal bottlenecks: There are at present restrictions on the movement of certain goods from one state to another. but has not yet been uniformly implemented by all states. Forward Markets commission. This problem can possibly be addressed by consolidating some exchanges. and the Department of Company affairs etc. the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs. regulatory changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005. Also. this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India. 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. the market will definitely need a strong and independent regular.

Rapid economic growth caused global stocks of many commodities to fall to levels not seen since the early 1970s.7 Commodity Market: Global Scenario Most commodity prices reached historical highs in mid-2008. Commodity prices {nominal. and investment fund activity. the boom was fuelled by numerous factors including years of low prices and low investment. in turn accelerating the price increases that peaked in 2008.1. Apart from strong and sustained economic growth. The financial crisis that erupted in September 2008 and the subsequent global economic downturn relieved most of the demand-side pressures and induced sharp price declines across most commodity sectors.3. 2000 = 100} Page | 33 . giving rise to the longest and broadest commodity boom of the post-WWII period. adverse weather conditions. The largest declines occurred in industrial commodities such as metals (which had also registered the greatest gains in the early 2000s). a weak dollar. and government policies such as export bans and prohibitive taxes. Further exacerbating the demand and supply mismatch were the diversion of some food commodities to the production of bio-fuels.

Global Commodity Exchanges: Chicago Board of Trade: Chicago Board of Trade was established in 1948 and has trading in agricultural produce. Dollar price increases also reflected the depreciation of the dollar against major currencies. New York Board of Trade (NYBOT): New York Board of Trade (NYBOT) is the world's largest commodities exchange for Coffee. It has both electronic as well as open cry. Hard winter wheat constitutes the maximum of US production. Cotton and Frozen Concentrated Orange Juice. Soya complex. wheat and corn prices across the world are referenced here. In 2005 it became a public traded NYSE listed company. metals and US treasuries. Prices of energy and metals commodities began to recover in March 2009. in some cases (for example. in response to demand increases and. It trades both in futures as well as options. Page | 34 . NYBOT also facilitates trades in foreign currencies and derivative indices for equities. in part responding to recovery in industrial production and other factors including strong import demand from China. expressed in trade-weighted local currency indices. Sugar. large-scale production restraint in the extractive commodities. This exchange is benchmark for bread wheat prices. The exchange was founded as the New York Cotton Exchange in 1870. prices raised my much less. Dow. and strike-related disruptions in the case of metals. with prices of edible oils dropping by 42 percent. sugar and rice). prices of energy declined by two-thirds while those of metals dropped by more than half. tight scrap markets. Kansas Board of Trade: Kansas Board of Trade in US specializes in hard red winter wheat. Yet. Prices of some agricultural commodities also started to rebound in 2009:Q2. The troughs in energy and non-energy indices broadly coincided with troughs in global economic activity (particularly in China and East Asia). Prices of agricultural goods retreated by more than 30 percent.Between July 2008 and February 2009. interests. the effects of adverse weather.

power. the middle & the Far East. London Metal Exchange: London Metal Exchange trades in Metals and non ferrous metals like aluminum. (At the moment there is none in India) has both open outcries as well as electronic. The exchange is planning to introduce futures and options in crude oil. Index futures and options and government securities. equities. New York Mercantile Exchange (NYMEX): New York Mercantile Exchange in its current form was created in 1994 by the merger of the former New York Mercantile Exchange and the Commodity Exchange of New York (COMEX). foreign exchange and agricultural commodities. milk cheese) and live stock futures (cattle and pork). crude palm kernel oil futures. Europe.Winnipeg Commodity Exchange: Winnipeg Commodity Exchange is located in Manitoba and trades only in futures and options of canola. Chicago Mercantile Exchange (CME): Chicago Mercantile Exchange (CME) is the largest futures exchange in US. Agricultural commodities traded on the exchange include dairy products (butter. Dalian Commodity Exchange: Dalian Commodity Exchange in China trades in corn and soybean. The exchange trades on interest rates. It has both open cry as well as electronic trading. lead. Page | 35 . Together they represent one of world’s largest exchanges for precious metals and energy. wheat and barley. tin and zinc. nickel. There are over 400 LME approved warehouse in some 32 locations covering USA. Consumers as well as producers of metals use the official prices of LME for their long term contracts pricing. copper. Singapore Commodity Exchange (SICOM): Singapore Commodity Exchange (SICOM) specializes in rubber and Robusta coffee. steel and plastic. Bursa Malaysia Derivatives exchange: Bursa Malaysia Derivatives exchange trades in crude palm oil futures.

fuel oil. Formed in Nov 10. gasoline. It is still to be launched and is likely to be an active exchange for oil futures as it is in the centre of oil producing nations. At the moment it is trading in Gold but plans to trade in others also. It also deals in aluminum. rubber. Among actively commodities trades are cocoa. silver. Wool and cattle futures are its specialty. corn. gold. Dubai has an advantage of its location of serving all time zones. 2003. robusta coffee. It is developed jointly by Dubai government as well as MCX and FTIL. rapeseed. equities. Sydney Futures Exchange: Sydney Futures Exchange deals in interest rates. platinum and rubber are the commodities that are actively traded. Dubai Gold & Commodity Exchange (DGCX): Dubai Gold & Commodity Exchange (DGCX) was formed in Dubai.The exchange has developed its reputation for trading in bullion. Page | 36 .Tokyo Commodity Exchange (TOCOM): Tokyo Commodity Exchange (TOCOM) is the largest exchange in Japan and second largest commodity exchange in the world for futures and options. Robusta coffee prices are determined through this exchange. London International Financial Futures and Options Exchange (LIFFE): London International Financial Futures and Options Exchange (LIFFE) also know as Euro next. currencies and commodities. kerosene. Crude oil. crude oil and mentha oil. Shanghai Futures Exchange: Shanghai Futures Exchange is one of biggest exchange for copper price determination. aluminum. potato. gas oil. sugar and wheat. etc. Multi Commodity Exchange of India Limited (MCX): Multi Commodity Exchange of India Limited (MCX). Dubai Mercantile Exchange (DME): Dubai Mercantile Exchange (DME) is a joint venture between Dubai holding and the New York Mercantile Exchange (NYMEX).

Chapter-2 Company overview Page | 37 .

2. etc. acknowledged industry leadership and experience. the company has one of the finest and most dedicated research teams with experts who have in-depth. Besides. With a smorgasbord of services across all verticals in finance. backed by thorough research and in-depth analysis. With diligent effort. Mission:  To be a Customer-centric organization. MCX .2 Mission & Vision: Vision:  To be one of the most trusted and globally reputed financial distribution company. Bonanza has spread its trustworthy tentacles all over the country with pan-India presence across more than 1611 outlets spread across 550 cities. Bonanza developed into one of the largest financial services and broking house in India within a short span of time. These affiliations prove the worth in the market and make Bonanza a name to reckon with. Bonanza believes in being technologically advanced so that it can offer an integrated and innovative platform to trade online as well as offline to its techsavvy customers.  To generate client’s wealth through professional advice. NSDL. BSE MCX.1 Introduction of the Company: “Bonanza Portfolio Limited” is one of the leading brokerage firm in India. Advisory Services that cover Portfolio Management Services. Mutual Fund Investments. unsurpassed knowledge of the market place.SX to CDSL. Page | 38 . Bonanza is the fastest growing financial service with 5 mega group companies under it. and Insurance to exceptional Depository Services. All this and more makes Bonanza the perfect place for the people to take their first step in the direction of financial success. 2. Established in the year 1994. The company is affiliated with the best in the industry – right from the NSE. Today. Bonanzas offers the perfect blend of financial services right from Equity Broking.

 Mr. K. Goel.2. Goel. S. S.  Mr. Vishnu Kumar Agarwal. Shiv Kumar Goel. P. Page | 39 . Limited Bonanza Insurance Brokers Pvt.  Mr. Anand Prakash Goel. Limited Stock Broking & Commodity Retail Wealth Management Broking Broking Insurance Venture Capital & Investment Banking Board of Directors:  Mr.  Mr. Limited Bonanza Fin invest Pvt.3 Organizational Structure: B Bonanza Bonanza Portfolio Limited Bonanza Commodity Brokers Pvt.

Goregaon {E}. (BSE).  National Commodity & Derivative Exchange Ltd. Mumbai – 400063.  Dubai Gold Commodities Exchange (DGCX). 2. (NSEIL). The company has more than 1632 outlets spread across 535 cities in the country. Daryaganj. Corporate Office: Bonanza House Plot No. (NSEIL).  The Bombay Stock Exchange Ltd. Ansari Road. New Delhi – 110002. (NCDEX). Behind the Hub.  United Stock Exchange.Affiliations:  Equity:  National Stock Exchange of India Ltd.  Commodities:  Multi Commodity Exchange (MCX). (BSE). M-2. Cama Industrial Estate. it is the 4rth largest brokerage firm in the country.  National Multi Commodity Exchange (NMCE).4 Global & Indian Operations and Market share: As far as the operations and presence of Bonanza is concerned.  The Bombay Stock Exchange Ltd.  Depository participant with CDSL and NSDL.  OTC Exchange of India Ltd (OTCEIL). Walbhat Road. Registered Office: 4353/4-C. Page | 40 .  MCX-SX Ltd.  Currency:  National Stock Exchange of India Ltd. Madan Mohan Street.

Dehradun. Jammu Ranchi Bangalore. Kattapana. Nagpur. Salem. Theni. Kumily. Gandhi nagar. Kottayam. Trivandrum. Bhubaneswar. Jaipur. Pala. Calicut. Allahabad. Thane. Nagarcoil. Ajmer. Alwar. Siliguri Page | 41 Andhra Pradesh Bihar Chhattisgarh Delhi Gujrat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerela Madhya Pradesh Maharashtra Orissa Rajasthan Tamilnadu Uttar Pradesh Uttarakhand West Bengal . Anantpur. Visakhapatnam Patna. Kota. Vadakara Indore. Jamnagar. Truchur. Chennai. Jodhpur. Kamjirappaly. Nedumkandam. Muttom. Angamalay. Tuticorin Lucknow. Haridwar. Rajkot. Madurai. Panchkula Sirmour Srinagar. Bikaner. Mangalore Kochi. Junagadh. Hubli. Arah Bhilai Delhi Ahmadabad. Kanpur. Varanasi. Kurnool. Pune. Thirunelveli. Tirupur. Tellicherry. Anand. Kolkata. Thodupuzha. Jalna. Baroda. Tirupati. Pondicherry. Bhopal Mumbai.The state wise presence of the company is given as under: Name of the state City Hyderabad. Coimbatore. Nadiad. Surat. Uaipur. Sujangarh. Gorakhpur. Moovattupuzha.

00% 0.50% 2.50% 0.00% 2.50% 1.Market Share: 3.50% 3.00% 1.00% FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 H1 FY 11 NSE & BSE F&O MCX & NCDEX Source: 2.5 Product & Services:  Brokerage Services: Brokerage Services Equity Derivatives Commodity Currency Online Offline Page | 42 .

 Distribution: Distribution Insurance Funds Fixed Deposits IPO Life Non-Life Mutual Funds Venture Capital Funds  Wealth Management: Wealth Management PMS Advisory Structured Product  De-mat: Demat NSDL CDSL Page | 43 .

 Unfavorable economic condition. Opportunities:  Growing financial services Industry’s share of wallet for disposable income. Weaknesses:  Higher brokerage charge as Compare to other companies in the industry.  Slowdown in global liquidity flows. Page | 44 .2.  State-of-the-art technology.  Leveraging technology to enable best practices and processes.  Lesser presence in the eastern part of the country.  Increased appetite of Indian Corporate for growth capital.  A young dynamic team.6 SWOT Analysis: Strengths: A diverse product range.  A vast network across India.  Regulatory reforms would aid greater participation by all class of Investors. Threats:  Execution Risk.  Increased intensity of competitors from local and global players.

Chapter-3 Research Methodology Page | 45 .

in order to get the maximum return on their investment. New markets have been opened. NCDEX & NMCE. India has emerged as a front-running country of on-line trading in the global securities & commodities markets. Mainly three exchanges are involved in online commodities trading MCX. Online Commodities trading is new as compared to Equity market in India. after equity. But at the same time. currency etc.  To know about the trading/demat account for trading in different financial markets and its benefits. commodity is the market on which investors have shown their faith and invested in commodities like gold.1 Objectives of the study:  To understand the structure and functioning of Commodity market in India & rest of the world. Page | 46 . In the Securities Industry & Futures Commodities.2 Scope of the study: Globalization of the financial market has led to a manifold increase in investment. silver. changing the way the market works.  To study how to build a relationship marketing in Capital market.3.  To understand the importance of the role of a brokerage firm in various financial market.  To clearly state the awareness level of people about commodities. crude oil etc.  To gain an idea about the people’s preference regarding investment in commodities over the other financial products like equity. 3. and new services have been launched. Apart from this. a number of opportunities and challenges have also been thrown open. For example the rapidly advancing technology. as well as the way the investors access the market. new instruments have been developed. Having taken advantage of information technology at an opportune time. particularly the Internet. the Internet has facilitated on-line trading. has drastically changed the social and economic landscapes and every aspect of our daily lives.

Ministry of Consumer Affairs.  Random sample survey of customers.  Another method to get the information was a direct approach in which I approached the clients and got a direct response from them. The study consists of analysis about customer’s awareness and satisfaction of Bonanza commodities Ltd. NCDEX. The methodology adopted includes:  Questionnaire. For the purpose of the study 100 customers were picked up at random and their views solicited on different parameters. Page | 47 . Personal interviews and informal discussions were held when I was interacting with new customers through phone and sometimes personally to ascertain the awareness and existing consumers’ satisfaction level.  Discussions with the concerned.3.  Secondary data:  I had made phone calls to the clients from the data base that I was given by the company in order to get the accurate information regarding their investment and their preference. Food & Public distribution. Published materials of Bonanza Portfolio & finally Newspapers.4 Sources of Data:  Primary data:  Collected through the structured questionnaire. Further applying simple statistical techniques has processed the data collected.3 Research design of the study: The study is based on survey technique. 3.  Official websites of MCX.

shopkeepers etc.  Sample size: A sample size of 100 was chosen for the purpose of the study. so non-probability sampling was chosen for the study.  Population: Universe {Existed as well as Non-existed Clients of Bonanza Portfolio Ltd.  Field study: Directly approached respondents.}.  Sampling procedure: From a large number of client {existed & nonexisted of Bonanza Portfolio Ltd. In this project sampling units are government as well as private firm’s employees. small & large businessmen. Hence sampling survey method was adopted for the purpose of the study.}. Sample consists of both small as well as large investors.  Sampling methods: Since probability sampling requires complete knowledge of all sampling units in the universe which was not possible due to time constraint. The group of respondents consists of businessmen.  Sampling unit: To define sample unit.5 Sampling plan:  Sampling: Since Bonanza Portfolio Ltd. sample lot were randomly picked by me. Page | 48 . one must answer the question that who is to be surveyed. has many segments I selected commodities segment as per my profile to do the survey.3. 100% coverage was difficult within the limited period of time. physical commodity traders & service class people. small as well as large shopkeepers.

 The sample size of the survey was limited to 100 respondents.3. which might not be representing the whole country. There might be a difference between the actual and projected results. Page | 49 .  The results are totally derived from the respondent’s answers.6 Limitations of the study:  The survey was restricted to Bangalore city.  Information is partly based on secondary data and hence the authenticity of the study can be visualized and is measurable.

Chapter – 4 Observation & Analysis Page | 50 .

as well as pvt. And finally professionals comes which constitutes around 4 percent. Page | 51 . Occupation: Total no. of person = 100 4 30 43 Bussinessman 23 Prefessionals Employed {both govt. businessmen and others which mainly consist of small shopkeepers have participated. there are majority of service class people participated in the survey. Sector} others Interpretation & Analysis: From the above chart it is crystal clear that. After that. They are the key investors.

10 lakh > 10 lakh Interpretation & Analysis: As per the occupation’s chart. of person = 100 40 35 38 31 30 25 20 15 10 5 0 22 9 < 2 lakh 2 .5 lakh 5 . Page | 52 . most of the people in my survey are from service class people & businessman. Annual Income: Total no. they are less in number as compare to middle income group. which shows that there are a majority of medium class people. they are less interested in investing in various investment avenues as compare to their middle counterpart. Their less number indirectly indicates that. As far as the higher income group is concerned. and majority of them earn between 2 to 10 lakhs per annum.

as we have seen in the previous chart. I found that. Investment Objective: Total no. so it is obvious that they would try to maximise the tax benefit. And finally a reasonable number of people want to secure their future through investment in various options. most of the people want to invest their money for increasing their current income level. it is also clear from the above chart. of person = 100 30 39 8 23 To enhance the income level For future wefare Retirement protection Tax benefit Interpretation & Analysis: In my survey. another major objective of investment is to avail the tax benefit. apart from this. most of the people in my survey are from service class. Page | 53 .

of person = 100 50 45 40 35 30 25 20 29 47 15 10 5 0 < 25 % 25 . Investment portion of Income: Total no. people usually believe on saving their income rather than investing in several investment avenues.50 % 14 10 50 .75 % >75 % Interpretation & Analysis: From the above chart it is clear that. people are less interested in investing the bigger part of their income. Page | 54 . Avery few number who have invested more than ¾ rth of their income indicates that.

but after the emergence of Indian economy. commodities etc. but with the time. people are showing their interest towards other options like shares. I am confident that it will play a key role among all investment avenues. debentures. Preference to various investment avenues: Total no. bank deposits are still considered as the one of the safest investment among all financial avenues of investment. As it is clear from the above chart. Page | 55 . However it will take some time. of person = 100 Insurance 11% Debentures 10% Bank deposits 33% Mutual funds 13% Commodities 14% Shares 19% Interpretation & Analysis: This was one of the important segment of my survey. in order to enhance their portfolio.

people usually trade in bullions and agricultural commodities as compare to the other two categories. of persons = 100 45 45 40 35 29 30 25 20 15 10 5 0 Precious Metals Energy Base Metals Agricultural Products 19 17 Interpretation & Analysis: The above graph clearly describes that. it can be inferred that. Page | 56 . From the above chart. Then after.e. agricultural products are in demand. Most preferred commodities: Total no. commodities of precious metals category {basically gold & silver} are considered as the most preferred commodities by respondents. silver & other precious metals. energy & base metals. i. 45 out of 100 people have shown their interest in trading in gold.

If some of them know. Awareness of Commodity market: Total no. From the above chart one can easily observe that. From this information it can be said that. of person = 100 Fully aware 21% Not aware 42% Partially aware 37% Interpretation & Analysis: This was the main part of my survey. a large number of people are not aware about the markets like commodity. then their knowledge is incomplete. But I hope with the time it will become a hot spot market for both large as well small investors. the commodity market are yet to become a major destination of investment in the country. Page | 57 .

5 23 22. while around half of them said they take any decision after consulting with their family & friends. I found that.5 25 24. of person = 100 27 Interpretation & Analysis: In the survey. their investment decision depends upon various sources like by keeping track of market or through Ads/ SMS alerts.5 26 25. most of the respondent revealed that. Around ¼ rth of the respondents said they take advice from professional consultants.5 Friends Family Consultants Others 24 24 25 Total no. Page | 58 .5 24 23. Sources of Investment advice: 27.5 27 26.

Hence in a nutshell. around more than half of them are moderate while investing in the markets like Commodities & Equities. only 15 % of people. of person = 100 60 55 50 40 30 30 20 15 10 0 Low Medium High Interpretation & Analysis: Risk is one of the important factor while making investment in any financial market. it can be said that people do not want to take too much risk while investing in the different kind of financial markets like equities & commodities. In fact the return on investment depends upon it. Here in my survey. More than ¼ rth of them are not willing to take any kind of risk. Risk taking capacity: Total no. I found that. prefers to take higher risk. I surveyed. Page | 59 .

invest at between 25 to 75 % of earnings Receive at least 75 % of earnings as income Interpretation & Analysis: This was one of interesting but important part of the survey. Page | 60 . Re – investment of the income earned by the Investment Portfolio: Total no. it can be infer that. As per the above mentioned chart. Such kind of attitude also shows the risk taking nature of the people while making an investment. while around ¼ rth of them keeps some part of their earnings and again around 1/3rd of the people I surveyed prefers to keep their earnings as income. a majority of the people re-invest their earnings.invest at least 75 % of earnings Re . of person = 100 39 28 33 Re .

because the respondents have given their responses on the return they got in the last 3-4 months. One of the probable reason for this could be the risk taking nature and the unstable movement of market in last few months. Page | 61 . Only 21 % are getting a good return on their investment. most of the respondents are getting 5-10 % of their investment as return.10 % 10 . while another 29 % are getting return between 10-15 % of their investment.15 % > 15 % Interpretation & Analysis: As per the above mentioned graph. of person = 100 35 35 29 30 25 20 21 15 15 10 5 0 <5% 5 . Return on Investment: Total no.

around 2/3rd of the respondents are satisfied with the services of Bonanza Portfolio Ltd.. Page | 62 . of person = 100 23% 10% 67% Satisfied unsatisfied Neither satisfied nor unsatisfied Interpretation & Analysis: From the above chart it is quite clear that. while 10 % said that they are not happy with the services of the company. Which is not a bad figure for a brokerage firm. which could be a considerable issue for the company. which is may be due to past inconvenience. Satisfaction level with the services of Bonanza Portfolio Ltd.: Total no. Around ¼ rth of the respondents rated the company as neither satisfied nor unsatisfied.

Chapter .5 Findings & Recommendations Page | 63 .

Some people invest in order to increase their income level while some wants to gain tax benefit. Most of the people do not know what even the meaning of commodity is. futures. Page | 64 . NMCE. However they have other investment avenues like derivatives and commodity trading. However. Derivatives like forwards.  The depository participants will allow an investor to trade through any broker of his/her choice registered with the commodity exchange MCX. while some may have an affinity for risk.  People have many motives for investing.  The most important thing that I have observed is the unawareness of future commodity trading.Findings:  Commodity derivatives have a crucial role to play in the price risk management process. Investors in the financial market have different attitudes towards risk and hence varying levels of risk-bearing capacity. and if some of them know by the way. It is also followed by the savings and safety in return. In fact it is not evenly distributed throughout the country. After this they prefer to invest in equities. NCDEX. investment in banks deposits is the most preferred investment option. swaps etc are extensively used in many developed as well as developing countries in the world. options. but they are not interested too much in these options.  The physical delivery centers of commodities are very less in India as compare to developed countries. Some investors are risk averse.  Among the investors.  Investors can be classified on the basis of their bearing capacity. they believe that operators and big players drive the market. Especially in any agriculture dominated economy. they have been utilized in a very limited scale in India.

Page | 65 . Around half of the commodity traded at various exchanges in the country.  It was understood during the study that good services provided by the company to the clients play an important role while assessing the worth of the company. especially gold & silver. Not only this but brand name and the research work done by the broking house also affects the investment decision of the client. are from base & precious metals.

” is one of the largest brokerage firm in the country and performing exceptionally well since its inception in 1994. I would like to give here to all investors. Bonanza Portfolio Ltd. There are abundant investment opportunities in the Page | 66 . The company must take it seriously & improve its infrastructure so that it can. I found the network problem at many occasions. I found that the normal tendency of customers was to prefer equity as compared to commodity. it is essential for a brokerage firm to update its technology as well as methodology.Recommendations: The company “Bonanza Portfolio Ltd. the company must keep a watch on the different strategies adopted by its competitors.  In order to sustain in the market and to face cut throat competition.  As a brokerage firm.  During trading.the regulatory body of commodity market in Indiashould take some initiative in order to make commodities market as one the most preferred destination of investment.  Finally this is the most important recommendation.  Many brokerage firms maintain a research library in which their clients can check those companies which are interested in them. So here my first recommendation to Bonanza Portfolio Ltd. therefore. The following recommendations may help the company to enhance its functioning and customer base:  The survey that I have done during my project reveals that most of the customers are not aware about the commodities market. as well as the FMC . it can attract customers. This will not only help them to keep them updated about the new trends but will also help them in order to retain their customers & to find new one. Should also go for such service. Such facilities are important to an investor.

commodities market. It is for the investor to use the available information and analyze it to make meaningful as well as fruitful investment decisions by using numerous tools & techniques available. Page | 67 .

Chapter – 6 Conclusion Page | 68 .

it also works in future and derivative. The future market also provide the benefits for the traders who want investment but they do not have enough money at particular time they can invest with margin money in commodities and pay later to earn profits. As far as the awareness level of the people is concerned. contrary to the beliefs of many people. The project reveals that the commodity market works in delivery base and intraday base. In addition to this. Hence it is necessary for the brokerage firms that they must maintain the dignity and trust of their clients in order to build a long term relation. 3 months contracts which expire last Thursday of every month. but also reveals the clear picture of the particular stock/commodity. The project also explains about the awareness and satisfaction level of the customers who are trading in various commodity exchanges. The guidance and tips provided by them have a significant role in trading. most of the people are still not aware about the Page | 69 . have been in existence in India through the ages and still have to go a long way ahead. It also provides the facility of the hedging in the commodity market by which a customer can minimize the losses which he is facing and ultimately save the principle amount for future investment. forward contracting. Perceptions of investors towards commodity trading might change quite a lot with time.e. The brokerage firms play an important role in trading in any type of financial market. Apart from this. in which investors invest money through the contracts given i. apply hedging to minimize the loss if occur in the commodity market. 2 months contracts. The investors can avail the benefits by opting different options. then it is clear from the survey that was done by during the project. the research done by them not only help in analyzing the performance of a particular stock/commodity.Conclusion: Commodity markets. which further helps in making investment in that stock/commodity.

commodity market and how to trade in it. the reforms and liberalization have transformed India’s financial market in terms of altering market practices. Page | 70 . there is still limited information and transparency and the system continues to be dealer based. expanding the size of the market and liquidity. and significantly improving the trading infrastructure. At last. with limited price discovery. overall. improving market efficiency. The capital markets have become transparent and more uniformly accessible to all. but I hope with the time it will become one of the attractive destination of investment. but at the same time.

Chapter – 7 Learning Outcome Page | 71 .

Learning Outcome: The IIP was one of the most precious and fruitful period of my life. I also got to know about the practical exposure of different kind of trading aspects like short-selling. It was one of the toughest experiences of my life. In addition to this. Page | 72 . buying on margin etc.  Then I learnt the basic concept of stock broking and role of a brokerage firm in financial market. In fact it was a practical application of whatever I had studied in the classroom. I learnt how to pitch the customer.  How to open a trading/de-mat account for trading in different financial markets like equities. how to convince the customer in order to sell your product. in other words.  Got the basic concepts about how to trade in commodities market.  After that I came to know about the structure & functioning of commodity markets in India as well as rest of the world. this was the crux of my whole learning. currencies etc. commodities.  And finally I learnt about the importance of money as Bonanza Portfolio Limited . Here is the snapshot of my learning during the IIP:  First of all.the company from where I did my internship – believe in making money not mistakes. first time I experienced the atmosphere & culture of corporate world during the ten weeks of my Internship.  During the internship.

Chapter.8 Annexure Page | 73 .

Annexure: 1 -:Questionnaire:1) Name : _____________________________ 2) Age: [ ] 20 – 30 [ ] 30 – 50 [ ] 50 & above 3) Gender: [ ] Male [ ] Female 4) Occupation: [ ] Businessman [ ] Employed [ ] Professional [ ] Others 5) Educational Qualification: [ ] Under Graduate [ ] Post Graduate [ ] Graduate 6) Annual Income: [ ] < 2 lakhs [ ] 5 – 10 lakhs [ ] 2 – 5 lakhs [ ] > 10 lakhs Page | 74 .

7) Investment Objective: [ ] To enhance the income level [ ] For future welfare [ ] Retirement protection [ ] Tax benefit 8) Investment portion of your income: [ ] < 25 % [ ] 50 – 75 % [ ] 25 – 50 % [ ] > 75 % 9) Your most preferred investment avenue: [ ] Bank deposit [ ] Commodities [ ] Debentures [ ] Shares [ ] Mutual funds [ ] Insurance 10) Your awareness about Commodity Market: [ ] Fully aware [ ] Partially aware [ ] Not aware Page | 75 .

11) From whom you get your investment advice: [ ] Friends [ ] Family [ ] Consultants [ ] Others 12) Your risk taking capacity: [ ] Low [ ] Medium [ ] High 13) How do you intend to use the income earned by your investment Portfolio: [ ] Re – invest at least 75 % of earnings [ ] Re – invest between 25 – 75 % of earnings [ ] Receive at least 75 % of earnings as income 14) How much return usually you get on your investment: [ ]<5% [ ] 10 – 15 % [ [ ] 5 – 10 % ] > 15 % Page | 76 .

15) Your satisfaction level with the services of Bonanza Portfolio Limited: [ ] Satisfied [ ] Unsatisfied [ ] Neither satisfied nor unsatisfied Page | 77 .

gold and silver. The margins range from 5-10 per cent of the value of the commodity contract. All the exchanges have both systems .  How do I choose my broker? Several already-established equity brokers have sought membership with NCDEX and MCX. The choice is yours. but again the minimum funds required to begin will be approximately Rs 5. quintals or tonnes). If you want your contract to be Page | 78 .  What is the minimum investment needed? You can have an amount as low as Rs 5. Bonanza commodities Ltd. ICICI Securities. that is. the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65. All you need is money for margins payable upfront to exchanges through brokers. For example. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from.the National Commodity and Derivative Exchange.000.Annexure – 2: :-Frequently Asked Questions:-  Where do I need to go to trade in commodity futures? You have three options .000. Some of them also offer trading through Internet just like the way they offer equities.  Do I have to give delivery or settle in cash? You can do both.500 for silver (one kg).00 for gold for one trading unit (10 gm) and about Rs 9. All three have electronic trading and settlement systems and a national presence. Sherkhan etc. For trading in bullion. the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. The prices and trading lots in agricultural commodities vary from exchange to exchange (in and delivery mechanisms.

you have to indicate at the time of placing the order that you don't intend to deliver the item.10-0. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker.  What do I need to start trading in commodity futures? As of now you will need only one bank account. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract. Though many websites are subscription-based. It will also differ based on trading transactions and delivery transactions. settled.  Where do I look for information on commodities? Daily financial newspapers carry spot prices and relevant news and articles on most commodities. If you plan to take or make delivery. there are specialized magazines on agricultural commodities and metals available for subscription. The brokerage will be different for different commodities..25 per cent of the contract value. You can surf the web and narrow down you search. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract.1 per cent of the contract value. Besides you will need to give you details such as PAN no.25 . you need to have the required warehouse receipts. In case of a contract resulting in delivery. But the information easiest to access is from websites. Besides. You will need a separate commodity de-mat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks. Brokers also provide research and analysis support. The brokerage cannot exceed the maximum limit specified by the exchanges. bank account no. a few also offer information for free. Page | 79 . the brokerage can be 0.  What are the other requirements at broker level? You will have to enter into a normal account agreements with the broker.  What are the brokerage and transaction charges? The brokerage charges range from 0.

the NCDEX.  What happens if there is any default? Both the exchanges. Page | 80 . However.  Do I have to pay sales tax on all trades? Is registration mandatory? No.  Is stamp duty levied in commodity contracts? What are the stamp duty rates? As of now. The sales tax is applicable only in case of trade resulting into delivery. If the trade is squared off no sales tax is applicable. the nationwide exchanges have earmarked only a select few for starters. NCDEX and MCX. There is also a separate arbitration panel of exchanges. The member/ broker will levy extra charges in case of trades resulting in delivery. MCX also offers many commodities for futures trading. While the NMCE has most major agricultural commodities and metals under its fold. The sales tax is applicable at the place of delivery. the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market.  Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods? Yes. maintain settlement guarantee funds. metal and energy commodities. In which commodities can I trade? Though the government has essentially made almost all commodities eligible for futures trading. there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. the margin during the delivery period increases to 20-25 per cent of the contract value. has a large number of agriculture. Those who are willing to opt for physical delivery need to have sales tax registration number. The exchanges have a penalty clause in case of any default by any member. In case of delivery. in case of delivery. Normally it is the seller's responsibility to collect and pay sales tax.

Normally it is between 5 per cent and 10 per cent of the contract value. Page | 81 . The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker. in commodities also there is a system of initial margin and mark-to-market margin.  Are there circuit filters? Yes the exchanges have circuit filters in place. The margin keeps changing depending on the change in price and volatility. The margin is different for each commodity. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. in commodities also the margin is calculated by (value at risk) VaR system. How much margin is applicable in the commodities market? As in stocks. Just like in equities.

Bibliography Page | 82 .

in  www. of India. fmc. com  www. in Articles & Journals:  Commodity insight yearbook – 2010.  www. mcx.Websites:  www.  Commodity Derivatives Market in India: Development. gov. The World Bank. bonanzaonline. in  www. Forward Market Commission & Ministry of Consumer affairs and Public distribution. Regulation and Future prospects. Robert L. International Research Journal of Finance and Economics . Narendra L. commodityonline. Lerner. nic. New Delhi. Aahuja. Institute of Integrated learning in Management.Issue 2 (2006). Govt. Page | 83 .  Global Commodity Markets: Review & Price forecast. com  www. sebi.  Annual Report: 2009 – 10. gov.  The Mechanics of Commodity Future markets: What they are & How they  www.

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