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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3 Organisational Structure Global Scenario Page no.2 Vision and Mission 2.1 Introduction of the Company 2.3.2 Historical Background 1.4 Commodity Trading & its Mechanism 1.1 Market Structure 1.3.6 SWOT Analysis 30 32 33 34 36 38 Page | 5 .-:Table of Contents:- Particulars Executive Summary Chapter : 1 Introduction & Industry Analysis 1. 1 3 5 6 7 12 14 17 20 27 Chapter : 2 Company Overview Markets Rational 1.6 Indian Scenario 1.5 Products & Services 2.3.1 Introduction 1.5 Regulatory issues 1.4 Global & Indian Operation & Market share 2.2 Description of various market 1.3 Industry Overview 1.

4 Sources of data 3.1 Objectives of the study 3.3 Research design 3.2 Scope of the study 3.5 Sampling plan 3.Chapter : 3 Research Methodology 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 .

It is an Art because every individual has some specific need and expectation based on the resources he/she has. commodities market. for example. one can invest in mutual funds. the reports also contains the details about the types of commodities. Apart from this. Finally at the end. that is one of the reason behind the increasing demand of these things in the global market. 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. in today’s world Gold & silver has been considered as one of the safest investment. stock market. Page | 7 . there are lot of investment options are available. because these options have given a stable and expected return in last few years. All of these options posses’ different rate of return. In addition to this. different risks etc. Now as far as the investment options are concerned. So how these options especially commodities has maintained the stable performance is the crux of the matter of this report. how trading happens in the commodities market and major exchanges in the country as well rest of the world. stock markets etc. but at the same time some of the options like commodities has shown a stable and positive performance over the years. hence before investing in any of these options. over the last few years {especially after global recession of 2008-09}.EXECUTIVE SUMMARY Investing is both Arts as well as Science. For example. term & fixed deposits. It is Science because. there are many options are available in market. one need to do proper research about that particular option. the report also explains about the different regulatory aspects regarding commodity trading in both India as well as rest of the world. derivatives etc. some of the above mentioned options like mutual funds. a survey has been done in order to know basically the awareness level of people regarding commodity markets. has witnessed lot of fluctuations on return on investment.

Chapter-1 Introduction & Industry overview Page | 8 .

730 crores (Rs 13.3 billion). and which investors buy or sell in a market. such as food grains. may find commodities an unfathomable market. the various commodities across the country clock an annual turnover of Rs 1. But after setting up of three multi-commodity exchanges in the country. metals.207. Indian markets have recently thrown open a new avenue for retail investors and traders to participate through commodity derivatives. commodities are the best option.400 billion). this wouldn't have made sense. commodities related (and dependent) industries constitute about 58 per cent. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities. With the introduction of futures trading. which are interchangeable with another product of the same type. of the country's GDP of Rs 13.1 Introduction: Commodities are the physical substance. arbitrageurs and speculators. Historically. pricing in commodities futures has been less volatile compared with equity and bonds. Commodities actually offer immense potential to become a separate asset class for market-savvy investors. retail investors can now trade in commodity futures without having physical stocks. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors. 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 .1. usually through futures contracts. the size of the commodities market grows many folds here on.000 crores (Rs 1. bonds and real estate. 20. For those who want to diversify their portfolios beyond shares. who claim to understand the equity markets. The price of the commodities is subject to supply and demand. thus providing an efficient portfolio diversification option. Till few months ago. As far as the size of commodity market of India is concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Currently. 40. crude oil etc.

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

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

3. Usually Commodity markets cover physical assets such as precious metals. 1. base metals.1 Market structure: Quality Certification Agency Warehouses Hedger Clearing Bank Commodities Market Producers Transporte rs/support agencies Consumers (Retail/ Institutional) Traders (Speculators) Page | 12 . agricultural products etc. energy {oil. 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. Most of the trading is done using futures. These raw commodities are traded on regulated commodities exchanges. The exchange itself does not operate for profit.}. electricity etc. pulses etc. as an increasing number of market participants are trading in exotic options. in which they are bought and sold in standardized contracts.3 Industry overview: Commodity markets are markets where raw or primary products are exchanged.1.}. food {rice. 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. wheat. an OTC market has also been growing. over the last few years. However.

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

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

parties to the contracts not being capable of altering these units. 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. Page | 15 . 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. They are agreements to purchase or sell a given quantity of a commodity at a predetermined price. The futures contracts are standardized in terms of quality and quantity. 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. The terms and specifications of futures contracts vary depending on the commodity and the exchange in which it is traded. and place and date of delivery of the commodity. (d) The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. (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”. with each cancelling the other out. In case he decides to deliver goods. 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. 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. (e) In futures market actual delivery of goods takes place only in a very few cases. with settlement expected to take place at a future date.Commodity Future Contract: Futures contracts are an improved variant of forward contracts.

During the crop movement when the firm’s inventory of cash wheat is being replenished. lot-by-lot.Participants in the Commodity Future Market: The participants in the Commodity futures are as under:  Farmers/Producers.05. or insure.  Exporters. But if the storage firm buys cash wheat at $4 a bushel. July and August. 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. As the new crop becomes available In June.  Consumers/Industry.  Importers. There are many kinds of hedge. these bins will again be filled and the wheat will remain in storage throughout the season until it is sold.  Merchandisers/Traders. Let us take the case of a firm that is in the business of storing and merchandising wheat. 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.  Corporate having price risk exposure in commodities. 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. against unpredictable price changes.  Agriculture credit providing agencies. let us take an example to understand the principle of hedging in future trading. the firm’s storage bins will be relatively empty. By early June. just ahead of the new crop harvest.  Commodity financers. 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. In this manner the storage firm’s inventory of cash wheat will be constantly hedged. 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 . and hedges this purchase with an equivalent sale of December wheat at $4. to those needing wheat.

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

In addition. commodity markets have been growing to offer Commodity . 1979 or the Gulf war).3. the spike in oil prices in 1973. commodities exhibit strong seasonality as well as high level of volatility (cf.3 Markets Rational: Although the primary reason of being of commodity markets was to have efficient markets for agricultural and energy goods. Standard arbitrage theory provides that the price of futures contracts is equal to: [Spot Price] + [Cost of Carry] = [Futures Price] -----------.1) Where the cost of carry is equal to: [Cost of Carry] = [Interest Rate Cost] . With the growing volume of futures contracts.2) Where under [Reinvestment costs] one should understand [coupons] and/or [dividends]. The arrival of news (especially ones relating to local wars or political crises) can have a very high impact on commodity prices. 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. especially oil. making hedging strategies a true challenge for the various market participants. commodities present negative correlation with stocks and bonds (around –15% to –30% over the last ten years.(1. commodity futures contracts have become a very liquid instrument besides being an easy one to trade. Page | 18 . One’s skill in selecting good risks and avoiding poor risks is what determine one’s success or failure as a commodity trader.Contracts perform the economic function of establishing a market price for the commodity. if one looks at the correlation between the GSCI and the SP 500 for instance). where producers and consumers can transact deals.(1.linked trading and speculative instruments. While speculative traders assume the risks that are passed on in the form of hedges. Compared to other assets like equity stock or bonds. 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.[Reinvestment Costs] like coupon or dividends + [Storage cost] ------------------. 1. making them valuable diversification investment instruments to other assets like equity stocks and bonds.

one then says that the market is in Backwardation while when spot trade below futures prices. especially in view of storage problems associated with certain commodities. 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. commodity futures trade often at a substantial discount to their fair value. Put another way.However. From an economic point of view. Backwardation is the most frequent state of the market. market participants are ready to pay a premium for readily available commodities. This premium is referred to as the convenience yield. both states can occur. The degree of contango is limited by the fair value of the futures prices whilst there is no limit to the degree of backwardation. the market is in Contango. In practice. for commodity products. Backwardation and contango Page | 19 . reflected by the convenience yield. 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. although. When the spot trades above futures prices.

In case of a spot market. distributors and suppliers. 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. London.e. In India.4 Commodity Trading & its Mechanism: Trading in commodity markets is quite similar to equity markets. but also  Airlines companies that face the risk of unfavorable jet fuel price fluctuations. The commodity market also has two constituents’ i. the commodities are bought and sold for immediate delivery. Many leading commodity exchanges in the world including Chicago Mercantile Exchange (CME).3. various financial instruments having commodities as underlying are traded on the exchanges. 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. have already computerized the trading activities.  Utility companies. In case of a commodities derivative market. International Petroleum Exchange (IPE). the deregulation of the energy markets. facing important risk due to the deregulation of the energy market. spot market and derivative market.  Various hedge funds interested in risk diversification. 1. 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. first in the US and now in Europe & Asia. Moreover. after year 2000. who try to hedge their risk. 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. Chicago Board of Trade (CBOT). After trade is made with another floor broker who takes the opposite side of the transaction for another customer or for his own account. has made risk management of commodities a must for utilities. coffee futures exchange. Bangalore Page | 20 .Big players in the commodity markets comprise not only raw material producers.

In electronic trading. The deal takes place when the central computer finds matching price quotes for buy and sell. 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. 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 .has already put in place the screen based trading and many others are in the process of computerization. To add to modernization efforts.

It assumes the position of counterpart to both sides of the transaction. 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. the buyer (seller) can offset the contract by selling (buying) the same amount of commodity and squaring off his position. The contracts. Page | 22 . the buyer (seller) may take (give) physical delivery of the Commodity at the delivery point approved by the exchange after the contract matures. virtually all contracts are settled by offset as those who have bought (long) sell to those who have sold (short). the clearinghouse may substitute any contract of the same specifications in the process of daily matching. and assumes all counterparty risk on behalf of buyer and seller. the ready market. traders obtain a position vis-à-vis the clearing house. Therefore. which distinguishes futures from forward contracts is that. There is no clearinghouse in a forward market due to which buyers and sellers face counterparty risk. etc. First. or as a substitute for. 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. position limits imposed on traders. The buyer or seller of futures contracts has two options before the maturity of the contract. which remain unsettled by offset until maturity date are settled by physical delivery. In fact the clearinghouse plays a major role in the process explained above by intermediating between the buyer and seller. execution. settlement of all transactions on maturity by paying the price difference or by arranging physical delivery. The second option. 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. For squaring of a position. fixing the daily price limits and settlement guarantee fund. This offsetting reduces the open position in the account of all traders as they approach the maturity date of the contract. if any. In a futures exchange all transactions are routed through and guaranteed by the clearinghouse which automatically becomes a counterpart to each transaction. Instead. As delivery time approaches. the buyer (seller) is not obligated to sell (buy) the original contract. clearing and reporting of all transactions..

he is bound to square off his position or else the clearinghouse will be liquidating the position. Page | 23 .  Maintenance or Variation margin. Hedgers are affected as well: the necessary link between futures and physical market transactions is too rigidly defined.3. 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. Maintenance margin usually ranges from 60 to 80 percent of Initial margin. 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.5 Regulatory issues in Commodity market: Government policies: The government policies play a major role in the growth of commodities 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. thereby affecting the liquidity of the markets.Margins: Margins (also called clearing margins) are good -faith deposits kept with a clearinghouse usually in the form of cash. marking to. There are two types of margins to be maintained by the trader with the clearinghouse. 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. Following are the issues related to government policies. Initial margin: Initial margin is a fixed amount per contract and does not vary with the current value of the commodity traded. In case of an increase in value of the contract. These are:  Initial margin. which affects the commodity future markets:  First issue is taxes. Tax issues need to be clarified so that futures losses can be offset against profits on the underlying physical trade and vice versa. The clearinghouse restores initial margin through margin calls to the client for collecting variation margin.

and. does not destroy market mechanisms. Regulatory perspectives: In order to regulate the market. This would ensure effective market intervention (the effect on prices will be immediate). cooperatives) are not permitted to engage in commodity futures trade. The rules which prevent such engagement need to be modified. Now. 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. The direct purchasing practices of these entities now damage the potential of commodity exchanges. Second problem is stamp duty. many institutions (particularly financial institutions but also. it could. 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. Stamp duties on trade in commodity futures exchanges should be nil. So for this. in a less direct manner. a stronger role. the role of government entities directly involved in commodity trade should be reconsidered. the regulating authorities like FMC in India. as long as done within clear policy guidelines. except when physical delivery is made. Page | 24 . The regulators must set the regulatory template under which each of the exchanges is permitted to operate and is expected to run its business. pass through the commodity exchanges. and an improved day-to-day oversight of exchanges. CFTC in US. If a federal or state government wishes to continue direct interventions in commodity markets.  Third. stamp duty can be arbitrarily imposed by the state in which the futures exchange is located. The regulators therefore must satisfy themselves that the exchange business is being conducted in a proper manner.  Finally. 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. if it wished.

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

such as groundnut. The exchange or the regulator may wish to define the minimum acceptable content of such an agreement.g. Page | 26 . issued in July. mustard seed. technology driven exchanges with nationwide reach and adopting best international practices. Thirdly. 1. strengthening of infrastructure and institutional capabilities of the regulator and the existing exchanges received priority. castor seed and a member/employee of an exchange ." in 1875. one would need to: .requirements. After independence. which carried on futures trading in groundnut. Futures trading in oil seeds were organized in India for the first time with the setting up of Gujarat Vyapari Mandali in 1900.. followed by some oilseeds and their derivatives. A statement in the first ever National Agriculture Policy. There is no educational requirement.pass a character assessment—e. In 1893. on policy front many legal and administrative hurdles in the functioning of the market have been removed. cottonseed etc. 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.  Customer agreements: Before an exchange member can operate on behalf of a customer a client agreement should be in place. a three-pronged approach has been adopted to revive and revitalize the market.3. Secondly. as the existing exchanges are slow to adopt reforms due to legacy or lack of resources. following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association. To be registered. a separate association by the name "Bombay Cotton Exchange Ltd. in 1999. sesame. no conviction of fraud. Before the Second World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab.6 Commodity market: Indian Scenario Organized futures market evolved in India by the setting up of "Bombay Cotton Trade Association Ltd. new promoters with resources and professional approach were being attracted with a clear mandate to set up dematerialized. It is advisable that anyone dealing in futures for clients is registered. Firstly." was constituted. Forward trading was permitted in cotton and jute goods in 1998.

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

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.

Page | 28

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.
Page | 31

 The Regulator: As the market activity pick-up and the volumes rise. most of the trade takes place only on a few exchanges. the question of convergence of securities and commodities derivatives markets has been debated for a long time now. 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. VAT has been introduced in the country in 2005. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets. Also. However. These need to be removed so that a truly national market could develop for commodities and derivatives. Again. Though over 80 commodities are allowed for derivatives trading. the market will definitely need a strong and independent regular. and the Department of Company affairs etc. Also.  Tax and legal bottlenecks: There are at present restrictions on the movement of certain goods from one state to another. Page | 32 . All this splits volumes and makes some exchanges unviable. It would also help in resolving some of the issues concerning regulation of the derivative markets. Unlike SEBI which is an independent body. The Government of India has announced its intention to integrate the two markets. This problem can possibly be addressed by consolidating some exchanges. Forward Markets commission. Food and Public Distribution) and depends on it for funds. this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India. in practice derivatives are popular for only a few commodities. similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. but has not yet been uniformly implemented by all states. the Securities and Exchange Board of India. regulatory changes are required to bring about uniformity in octroi and sales taxes etc. the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs. Lack of economy of scale: There are too many (3 national level and 25 regional) commodity exchanges.

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

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

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

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

Chapter-2 Company overview Page | 37 .

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

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

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

Muttom. Alwar. Pune. Mangalore Kochi. Kurnool. Rajkot. Baroda. Madurai.The state wise presence of the company is given as under: Name of the state City Hyderabad. Jamnagar. Hubli. Tellicherry. Jalna. Pala. Tuticorin Lucknow. Sujangarh. Bhopal Mumbai. Theni. Jodhpur. Thane. Panchkula Sirmour Srinagar. Kota. Haridwar. Nadiad. Gorakhpur. Dehradun. Bhubaneswar. Uaipur. Ajmer. Arah Bhilai Delhi Ahmadabad. Allahabad. Coimbatore. Kottayam. Visakhapatnam Patna. Surat. 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 . Salem. Bikaner. Tirupati. Moovattupuzha. Nagpur. Thirunelveli. Nedumkandam. Jaipur. Anand. Chennai. Kumily. Anantpur. Kattapana. Gandhi nagar. Truchur. Trivandrum. Pondicherry. Varanasi. Kamjirappaly. Kolkata. Tirupur. Nagarcoil. Vadakara Indore. Calicut. Junagadh. Angamalay. Thodupuzha. Jammu Ranchi Bangalore. Kanpur.

Market Share: 3.50% 2.00% FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 H1 FY 11 NSE & BSE F&O MCX & NCDEX Source: bonanzonline.5 Product & Services:  Brokerage Services: Brokerage Services Equity Derivatives Commodity Currency Online Offline Page | 42 .00% 2.50% 0.00% 1.50% 3.00% 0.50% 1.

 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 .

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

Chapter-3 Research Methodology Page | 45 .

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

Published materials of Bonanza Portfolio & finally Newspapers.3.  Another method to get the information was a direct approach in which I approached the clients and got a direct response from them.  Discussions with the concerned. 3.3 Research design of the study: The study is based on survey technique. The study consists of analysis about customer’s awareness and satisfaction of Bonanza commodities Ltd. The methodology adopted includes:  Questionnaire. 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. Ministry of Consumer Affairs.4 Sources of Data:  Primary data:  Collected through the structured questionnaire. Further applying simple statistical techniques has processed the data collected.  Official websites of MCX. Food & Public distribution.  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.  Random sample survey of customers. NCDEX. Page | 47 . For the purpose of the study 100 customers were picked up at random and their views solicited on different parameters.

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

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

Chapter – 4 Observation & Analysis Page | 50 .

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

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

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

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

debentures. As it is clear from the above chart. Page | 55 . in order to enhance their portfolio. but after the emergence of Indian economy. but with the time. I am confident that it will play a key role among all investment avenues. commodities etc. people are showing their interest towards other options like shares. bank deposits are still considered as the one of the safest investment among all financial avenues of investment. Preference to various investment avenues: Total no. 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.

people usually trade in bullions and agricultural commodities as compare to the other two categories. Then after. 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.e. agricultural products are in demand. i. From the above chart. 45 out of 100 people have shown their interest in trading in gold. Most preferred commodities: Total no. silver & other precious metals. commodities of precious metals category {basically gold & silver} are considered as the most preferred commodities by respondents. Page | 56 . energy & base metals. it can be inferred that.

From the above chart one can easily observe that. Page | 57 . 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. If some of them know. the commodity market are yet to become a major destination of investment in the country. But I hope with the time it will become a hot spot market for both large as well small investors. then their knowledge is incomplete. Awareness of Commodity market: Total no.

Around ¼ rth of the respondents said they take advice from professional consultants. most of the respondent revealed that. their investment decision depends upon various sources like by keeping track of market or through Ads/ SMS alerts. of person = 100 27 Interpretation & Analysis: In the survey. I found that.5 24 23. while around half of them said they take any decision after consulting with their family & friends.5 Friends Family Consultants Others 24 24 25 Total no.5 25 24. Sources of Investment advice: 27.5 23 22.5 26 25. Page | 58 .5 27 26.

 Risk taking capacity: Total no. 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. Hence in a nutshell. I found that. Page | 59 . In fact the return on investment depends upon it. Here in my survey. I surveyed. 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. around more than half of them are moderate while investing in the markets like Commodities & Equities. More than ¼ rth of them are not willing to take any kind of risk. only 15 % of people. prefers to take higher risk.

Such kind of attitude also shows the risk taking nature of the people while making an investment. As per the above mentioned chart. 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. of person = 100 39 28 33 Re . it can be infer that.invest at least 75 % of earnings Re . Re – investment of the income earned by the Investment Portfolio: Total no.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 .

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

Around ¼ rth of the respondents rated the company as neither satisfied nor unsatisfied. which could be a considerable issue for the company.. which is may be due to past inconvenience.: Total no. around 2/3rd of the respondents are satisfied with the services of Bonanza Portfolio Ltd. Page | 62 . Satisfaction level with the services of Bonanza Portfolio Ltd. 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.

Chapter .5 Findings & Recommendations Page | 63 .

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

Not only this but brand name and the research work done by the broking house also affects the investment decision of the client. especially gold & silver. Around half of the commodity traded at various exchanges in the country. Page | 65 .  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. are from base & precious metals.

I would like to give here to all investors. Should also go for such service. it is essential for a brokerage firm to update its technology as well as methodology. as well as the FMC . I found that the normal tendency of customers was to prefer equity as compared to commodity.  Finally this is the most important recommendation. The company must take it seriously & improve its infrastructure so that it can. I found the network problem at many occasions.  In order to sustain in the market and to face cut throat competition.  During trading. So here my first recommendation to Bonanza Portfolio Ltd. it can attract customers. 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.Recommendations: The company “Bonanza Portfolio Ltd. the company must keep a watch on the different strategies adopted by its competitors. therefore.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. 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.  Many brokerage firms maintain a research library in which their clients can check those companies which are interested in them.” is one of the largest brokerage firm in the country and performing exceptionally well since its inception in 1994.  As a brokerage firm. Such facilities are important to an investor. Bonanza Portfolio Ltd. There are abundant investment opportunities in the Page | 66 .

Page | 67 . 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.commodities market.

Chapter – 6 Conclusion Page | 68 .

The project also explains about the awareness and satisfaction level of the customers who are trading in various commodity exchanges. but also reveals the clear picture of the particular stock/commodity. 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. In addition to this. The brokerage firms play an important role in trading in any type of financial market. contrary to the beliefs of many people. forward contracting. which further helps in making investment in that stock/commodity. 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. Apart from this. in which investors invest money through the contracts given i.Conclusion: Commodity markets. As far as the awareness level of the people is concerned. 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. it also works in future and derivative. The guidance and tips provided by them have a significant role in trading. 3 months contracts which expire last Thursday of every month. Perceptions of investors towards commodity trading might change quite a lot with time. 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. 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.e. most of the people are still not aware about the Page | 69 . The project reveals that the commodity market works in delivery base and intraday base. have been in existence in India through the ages and still have to go a long way ahead.

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

Chapter – 7 Learning Outcome Page | 71 .

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

8 Annexure Page | 73 .Chapter.

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 .

 Do I have to give delivery or settle in cash? You can do and delivery mechanisms. Sherkhan etc. If you want your contract to be Page | 78 . that is. For trading in bullion. All three have electronic trading and settlement systems and a national presence..00 for gold for one trading unit (10 gm) and about Rs 9. For example. gold and silver. The choice is yours. The margins range from 5-10 per cent of the value of the commodity contract. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from. The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg. the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. Some of them also offer trading through Internet just like the way they offer equities. Bonanza commodities Ltd. ICICI Securities. All the exchanges have both systems .000.  How do I choose my broker? Several already-established equity brokers have sought membership with NCDEX and MCX. the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65.the National Commodity and Derivative Exchange.000.500 for silver (one kg). but again the minimum funds required to begin will be approximately Rs 5.  What is the minimum investment needed? You can have an amount as low as Rs 5.Annexure – 2: :-Frequently Asked Questions:-  Where do I need to go to trade in commodity futures? You have three options . quintals or tonnes). All you need is money for margins payable upfront to exchanges through brokers.

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

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

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

Bibliography Page | 82 .

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

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