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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3.3.1 Introduction of the Company 2.3 Organisational Structure 2. 1 3 5 6 7 12 14 17 20 27 Chapter : 2 Company Overview 2.3.1 Introduction 1.4 Global & Indian Operation & Market share 2.2 Description of various market 1.6 SWOT Analysis 30 32 33 34 36 38 Page | 5 .3.5 Products & Services 2.2 Vision and Mission 2.3.5 Regulatory issues 1.-:Table of Contents:- Particulars Executive Summary Chapter : 1 Introduction & Industry Analysis 1.6 Indian Scenario 1.1 Market Structure 1.4 Commodity Trading & its Mechanism 1.3.3 Industry Overview 1.7 Global Scenario Page no.3.2 Historical Background 1.3 Markets Rational 1.

5 Sampling plan 3.Chapter : 3 Research Methodology 3.2 Scope of the study 3.4 Sources of data 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 .3 Research design 3.1 Objectives of the study 3.

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

Chapter-1 Introduction & Industry overview Page | 8 .

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

the one for commodity futures plays a valuable role in information pooling and risk sharing. 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. 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. Actually. Page | 10 . and facilitates decisions related to storage and consumption of commodities. they make the underlying market more liquid. they are not. this report aims at know-how of the commodities market and how the commodities traded on the exchange. In the process. Most people have the impression that commodity markets are very complex and difficult to understand.Like any other market.

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

1. Usually Commodity markets cover physical assets such as precious metals. wheat.1 Market structure: Quality Certification Agency Warehouses Hedger Clearing Bank Commodities Market Producers Transporte rs/support agencies Consumers (Retail/ Institutional) Traders (Speculators) Page | 12 .1.3 Industry overview: Commodity markets are markets where raw or primary products are exchanged. an OTC market has also been growing. The exchange itself does not operate for profit. These raw commodities are traded on regulated commodities exchanges.}. base metals. energy {oil. as an increasing number of market participants are trading in exotic options. 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.}. However. food {rice. over the last few years. Most of the trading is done using futures. 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. pulses etc. agricultural products etc.3. in which they are bought and sold in standardized contracts. electricity etc.

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

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

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. 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. parties to the contracts not being capable of altering these units. with settlement expected to take place at a future date. The terms and specifications of futures contracts vary depending on the commodity and the exchange in which it is traded. The closing out involves buying a different times of two identical contracts for the purchase and sale o the commodity in question. and place and date of delivery of the commodity. 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. (d) The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. (e) In futures market actual delivery of goods takes place only in a very few cases. (c) The units of price quotation and trading are fixed in these contracts.Commodity Future Contract: Futures contracts are an improved variant of forward 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”. Page | 15 . In case he decides to deliver goods. with each cancelling the other out. 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. 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.

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

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

One’s skill in selecting good risks and avoiding poor risks is what determine one’s success or failure as a commodity trader.(1.[Reinvestment Costs] like coupon or dividends + [Storage cost] ------------------. making them valuable diversification investment instruments to other assets like equity stocks and bonds. 1979 or the Gulf war). if one looks at the correlation between the GSCI and the SP 500 for instance). the spike in oil prices in 1973. Standard arbitrage theory provides that the price of futures contracts is equal to: [Spot Price] + [Cost of Carry] = [Futures Price] -----------. commodities exhibit strong seasonality as well as high level of volatility (cf. where producers and consumers can transact deals. commodity futures contracts have become a very liquid instrument besides being an easy one to trade.1) Where the cost of carry is equal to: [Cost of Carry] = [Interest Rate Cost] .(1. 1.3. In addition. commodity markets have been growing to offer Commodity . With the growing volume of futures contracts. While speculative traders assume the risks that are passed on in the form of hedges.Contracts perform the economic function of establishing a market price for the commodity. commodities present negative correlation with stocks and bonds (around –15% to –30% over the last ten years. 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. 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.3 Markets Rational: Although the primary reason of being of commodity markets was to have efficient markets for agricultural and energy goods. Compared to other assets like equity stock or bonds. The arrival of news (especially ones relating to local wars or political crises) can have a very high impact on commodity prices.2) Where under [Reinvestment costs] one should understand [coupons] and/or [dividends]. making hedging strategies a true challenge for the various market participants. Page | 18 .linked trading and speculative instruments.

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

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

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

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

These are:  Initial margin.3. Tax issues need to be clarified so that futures losses can be offset against profits on the underlying physical trade and vice versa. Hedgers are affected as well: the necessary link between futures and physical market transactions is too rigidly defined. thereby affecting the liquidity of the markets.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. which affects the commodity future markets:  First issue is taxes. Initial margin: Initial margin is a fixed amount per contract and does not vary with the current value of the commodity traded.  Maintenance or Variation margin. Following are the issues related to government policies. If the member is not able to pay the variation margin. In case of an increase in value of the 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. 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. 1. There are two types of margins to be maintained by the trader with the clearinghouse. Different tax treatment of speculative gains and losses discourage many speculators from participating in official futures exchanges.Margins: Margins (also called clearing margins) are good -faith deposits kept with a clearinghouse usually in the form of cash. Maintenance margin usually ranges from 60 to 80 percent of Initial margin. marking to. Page | 23 . The clearinghouse restores initial margin through margin calls to the client for collecting variation 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.

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

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

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

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

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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The Government of India has announced its intention to integrate the two markets. It would also help in resolving some of the issues concerning regulation of the derivative markets.  Tax and legal bottlenecks: There are at present restrictions on the movement of certain goods from one state to another. Forward Markets commission.  The Regulator: As the market activity pick-up and the volumes rise. but has not yet been uniformly implemented by all states. Again. thereby giving a boost to the growth of commodity derivatives market. this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets. Unlike SEBI which is an independent body. the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs. the market will definitely need a strong and independent regular. However. Page | 32 . It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts. similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. This problem can possibly be addressed by consolidating some exchanges. 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. and the Department of Company affairs etc. Food and Public Distribution) and depends on it for funds. Also. regulatory changes are required to bring about uniformity in octroi and sales taxes etc. These need to be removed so that a truly national market could develop for commodities and derivatives. Lack of economy of scale: There are too many (3 national level and 25 regional) commodity exchanges. Though over 80 commodities are allowed for derivatives trading. All this splits volumes and makes some exchanges unviable. Also. VAT has been introduced in the country in 2005. the Securities and Exchange Board of India. in practice derivatives are popular for only a few commodities.

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

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

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

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

Chapter-2 Company overview Page | 37 .

These affiliations prove the worth in the market and make Bonanza a name to reckon with. Bonanza is the fastest growing financial service with 5 mega group companies under it. Bonanzas offers the perfect blend of financial services right from Equity Broking. BSE MCX. With a smorgasbord of services across all verticals in finance. Bonanza has spread its trustworthy tentacles all over the country with pan-India presence across more than 1611 outlets spread across 550 cities. Besides. With diligent effort. NSDL. Mutual Fund Investments. Bonanza developed into one of the largest financial services and broking house in India within a short span of time. acknowledged industry leadership and experience. unsurpassed knowledge of the market place. etc. All this and more makes Bonanza the perfect place for the people to take their first step in the direction of financial success.1 Introduction of the Company: “Bonanza Portfolio Limited” is one of the leading brokerage firm in India. 2.2 Mission & Vision: Vision:  To be one of the most trusted and globally reputed financial distribution company. Established in the year 1994. Mission:  To be a Customer-centric organization. Page | 38 . and Insurance to exceptional Depository Services.2. Today. MCX . The company is affiliated with the best in the industry – right from the NSE.SX to CDSL. the company has one of the finest and most dedicated research teams with experts who have in-depth. 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. backed by thorough research and in-depth analysis. Advisory Services that cover Portfolio Management Services.  To generate client’s wealth through professional advice.

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

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

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

com 2.50% 0.00% 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 .50% 1.50% 2.00% 0.00% 1.00% 2.Market Share: 3.50% 3.

 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 .

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

Chapter-3 Research Methodology Page | 45 .

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

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.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. 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. Food & Public distribution. For the purpose of the study 100 customers were picked up at random and their views solicited on different parameters. Published materials of Bonanza Portfolio & finally Newspapers.  Discussions with the concerned. The methodology adopted includes:  Questionnaire.  Random sample survey of customers. Page | 47 .  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. 3. NCDEX.3.  Another method to get the information was a direct approach in which I approached the clients and got a direct response from them.

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

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

Chapter – 4 Observation & Analysis Page | 50 .

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

they are less in number as compare to middle income group.10 lakh > 10 lakh Interpretation & Analysis: As per the occupation’s chart. which shows that there are a majority of medium class people. Annual Income: Total no.5 lakh 5 . 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. 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. Page | 52 .

another major objective of investment is to avail the tax benefit. most of the people in my survey are from service class. most of the people want to invest their money for increasing their current income level. 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. as we have seen in the previous chart. And finally a reasonable number of people want to secure their future through investment in various options. Page | 53 . apart from this. Investment Objective: Total no. it is also clear from the above chart. so it is obvious that they would try to maximise the tax benefit.

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 .50 % 14 10 50 . Avery few number who have invested more than ¾ rth of their income indicates that. people usually believe on saving their income rather than investing in several investment avenues. Page | 54 . people are less interested in investing the bigger part of their income. Investment portion of Income: Total no.

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

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

Page | 57 . a large number of people are not aware about the markets like commodity. 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. then their knowledge is incomplete. Awareness of Commodity market: Total no. From the above chart one can easily observe that. If some of them know. 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 | 58 .5 26 25.5 24 23.5 25 24.5 Friends Family Consultants Others 24 24 25 Total no. of person = 100 27 Interpretation & Analysis: In the survey. I found that. most of the respondent revealed that. their investment decision depends upon various sources like by keeping track of market or through Ads/ SMS alerts. while around half of them said they take any decision after consulting with their family & friends. Around ¼ rth of the respondents said they take advice from professional consultants.5 27 26.5 23 22. Sources of Investment advice: 27.

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

As per the above mentioned chart.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. of person = 100 39 28 33 Re . Re – investment of the income earned by the Investment Portfolio: Total no. it can be infer that. Page | 60 . a majority of the people re-invest their earnings. 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. Such kind of attitude also shows the risk taking nature of the people while making an investment.invest at least 75 % of earnings Re .

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

 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. which could be a considerable issue for the company. around 2/3rd of the respondents are satisfied with the services of Bonanza Portfolio Ltd.: Total no. Around ¼ rth of the respondents rated the company as neither satisfied nor unsatisfied. Page | 62 . which is may be due to past inconvenience. Which is not a bad figure for a brokerage firm. while 10 % said that they are not happy with the services of the company..

5 Findings & Recommendations Page | 63 .Chapter .

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

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

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

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 reveals that the commodity market works in delivery base and intraday base. apply hedging to minimize the loss if occur in the commodity market. most of the people are still not aware about the Page | 69 . 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. contrary to the beliefs of many people. then it is clear from the survey that was done by during the project. Perceptions of investors towards commodity trading might change quite a lot with time. 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.e. In addition to this. which further helps in making investment in that stock/commodity. have been in existence in India through the ages and still have to go a long way ahead. The investors can avail the benefits by opting different options. 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. 2 months contracts. The brokerage firms play an important role in trading in any type of financial market. Apart from this. 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. 3 months contracts which expire last Thursday of every month. the research done by them not only help in analyzing the performance of a particular stock/commodity. forward contracting. in which investors invest money through the contracts given i.Conclusion: Commodity markets. As far as the awareness level of the people is concerned. but also reveals the clear picture of the particular stock/commodity.

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

Chapter – 7 Learning Outcome Page | 71 .

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

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 .

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

25 per cent of the contract value. The brokerage will be different for different commodities.  What do I need to start trading in commodity futures? As of now you will need only one bank account. the brokerage can be 0.1 per cent of the contract value. a few also offer information for free. Besides you will need to give you details such as PAN no. It will also differ based on trading transactions and delivery transactions. The brokerage cannot exceed the maximum limit specified by the exchanges.  Where do I look for information on commodities? Daily financial newspapers carry spot prices and relevant news and articles on most commodities.  What are the other requirements at broker level? You will have to enter into a normal account agreements with the broker. etc. You can surf the web and narrow down you search. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker. you need to have the required warehouse receipts. Brokers also provide research and analysis support. If you plan to take or make delivery. In case of a contract resulting in delivery. 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. bank account no.25 . there are specialized magazines on agricultural commodities and metals available for subscription. You will need a separate commodity de-mat account from the National Securities Depository Ltd to trade on the NCDEX just like in settled. Page | 79 .10-0.  What are the brokerage and transaction charges? The brokerage charges range from 0. Though many websites are subscription-based. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. Besides.. But the information easiest to access is from websites. you have to indicate at the time of placing the order that you don't intend to deliver the item.

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

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

Bibliography Page | 82 .

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

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