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

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2 Description of various market 1.1 Introduction of the Company 2. 1 3 5 6 7 12 14 17 20 27 Chapter : 2 Company Overview 2.3 Organisational Structure 2.5 Regulatory issues 1.3.3 Industry Overview 1.3.-:Table of Contents:- Particulars Executive Summary Chapter : 1 Introduction & Industry Analysis 1.2 Historical Background 1.3.3.3.3 Markets Rational 1.4 Commodity Trading & its Mechanism 1.4 Global & Indian Operation & Market share 2.7 Global Scenario Page no.1 Introduction 1.3.5 Products & Services 2.1 Market Structure 1.2 Vision and Mission 2.6 SWOT Analysis 30 32 33 34 36 38 Page | 5 .6 Indian Scenario 1.3.

5 Sampling plan 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 .1 Objectives of the study 3.2 Scope of the study 3.4 Sources of data 3.Chapter : 3 Research Methodology 3.3 Research design 3.

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

Chapter-1 Introduction & Industry overview Page | 8 .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The largest declines occurred in industrial commodities such as metals (which had also registered the greatest gains in the early 2000s).1. Commodity prices {nominal.7 Commodity Market: Global Scenario Most commodity prices reached historical highs in mid-2008.3. 2000 = 100} Page | 33 . Further exacerbating the demand and supply mismatch were the diversion of some food commodities to the production of bio-fuels. Apart from strong and sustained economic growth. Rapid economic growth caused global stocks of many commodities to fall to levels not seen since the early 1970s. and investment fund activity. giving rise to the longest and broadest commodity boom of the post-WWII period. 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. in turn accelerating the price increases that peaked in 2008. and government policies such as export bans and prohibitive taxes. the boom was fuelled by numerous factors including years of low prices and low investment. adverse weather conditions. a weak dollar.

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

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

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

Chapter-2 Company overview Page | 37 .

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

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

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

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

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.com 2.50% 1.00% 2.50% 3.5 Product & Services:  Brokerage Services: Brokerage Services Equity Derivatives Commodity Currency Online Offline Page | 42 .00% 1.00% 0.Market Share: 3.50% 0.

 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 .

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

Chapter-3 Research Methodology Page | 45 .

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

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

physical commodity traders & service class people. In this project sampling units are government as well as private firm’s employees.  Field study: Directly approached respondents. one must answer the question that who is to be surveyed. The group of respondents consists of businessmen.  Sampling procedure: From a large number of client {existed & nonexisted of Bonanza Portfolio Ltd.}. Hence sampling survey method was adopted for the purpose of the study. so non-probability sampling was chosen for the study. sample lot were randomly picked by me.}. small & large businessmen.  Sample size: A sample size of 100 was chosen for the purpose of the study.5 Sampling plan:  Sampling: Since 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.  Sampling unit: To define sample unit. has many segments I selected commodities segment as per my profile to do the survey. shopkeepers etc.  Population: Universe {Existed as well as Non-existed Clients of Bonanza Portfolio Ltd. 100% coverage was difficult within the limited period of time.3. Page | 48 . Sample consists of both small as well as large investors. small as well as large shopkeepers.

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

Chapter – 4 Observation & Analysis Page | 50 .

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

they are less in number as compare to middle income group. Their less number indirectly indicates that. they are less interested in investing in various investment avenues as compare to their middle counterpart.5 lakh 5 . Annual Income: Total no. Page | 52 .10 lakh > 10 lakh Interpretation & Analysis: As per the occupation’s chart. As far as the higher income group is concerned. most of the people in my survey are from service class people & businessman. which shows that there are a majority of medium class people. 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 .

of person = 100 30 39 8 23 To enhance the income level For future wefare Retirement protection Tax benefit Interpretation & Analysis: In my survey. 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. so it is obvious that they would try to maximise the tax benefit. 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. another major objective of investment is to avail the tax benefit. I found that. apart from this. Page | 53 . it is also clear from the above chart. Investment Objective: Total no.

50 % 14 10 50 .75 % >75 % Interpretation & Analysis: From the above chart it is clear that. people are less interested in investing the bigger part of their income. 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. Investment portion of Income: Total no. Page | 54 . of person = 100 50 45 40 35 30 25 20 29 47 15 10 5 0 < 25 % 25 .

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

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

a large number of people are not aware about the markets like commodity. Awareness of Commodity market: Total no. Page | 57 . If some of them know. From this information it can be said that. 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. then their knowledge is incomplete. of person = 100 Fully aware 21% Not aware 42% Partially aware 37% Interpretation & Analysis: This was the main part of my survey. From the above chart one can easily observe that.

5 27 26. Around ¼ rth of the respondents said they take advice from professional consultants. most of the respondent revealed that.5 24 23. while around half of them said they take any decision after consulting with their family & friends.5 25 24. of person = 100 27 Interpretation & Analysis: In the survey. their investment decision depends upon various sources like by keeping track of market or through Ads/ SMS alerts. I found that. Page | 58 . Sources of Investment advice: 27.5 26 25.5 23 22.5 Friends Family Consultants Others 24 24 25 Total no.

More than ¼ rth of them are not willing to take any kind of risk. Here in my survey. 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. Hence in a nutshell. only 15 % of people. Risk taking capacity: Total no. I found that. prefers to take higher risk. I surveyed. 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. 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. Page | 59 .

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

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

of person = 100 23% 10% 67% Satisfied unsatisfied Neither satisfied nor unsatisfied Interpretation & Analysis: From the above chart it is quite clear that.. 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. Which is not a bad figure for a brokerage firm. Page | 62 . while 10 % said that they are not happy with the services of the company. which is may be due to past inconvenience. Satisfaction level with the services of Bonanza Portfolio Ltd. which could be a considerable issue for the company.

Chapter .5 Findings & Recommendations Page | 63 .

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

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

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

commodities market. 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.

Chapter – 6 Conclusion Page | 68 .

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

At last. but I hope with the time it will become one of the attractive destination of investment. overall. 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.commodity market and how to trade in it. with limited price discovery. expanding the size of the market and liquidity. improving market efficiency. the reforms and liberalization have transformed India’s financial market in terms of altering market practices. Page | 70 . but at the same time.

Chapter – 7 Learning Outcome Page | 71 .

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

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 .

but again the minimum funds required to begin will be approximately Rs 5. Bonanza commodities Ltd. the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65. Sherkhan etc. The margins range from 5-10 per cent of the value of the commodity contract. For trading in bullion.  How do I choose my broker? Several already-established equity brokers have sought membership with NCDEX and MCX. quintals or tonnes). All three have electronic trading and settlement systems and a national presence.  Do I have to give delivery or settle in cash? You can do both.000. If you want your contract to be Page | 78 . All the exchanges have both systems .000.00 for gold for one trading unit (10 gm) and about Rs 9..500 for silver (one kg). gold and silver. ICICI Securities. The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg.the National Commodity and Derivative Exchange. the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd.cash and delivery mechanisms. that is.  What is the minimum investment needed? You can have an amount as low as Rs 5. For example.Annexure – 2: :-Frequently Asked Questions:-  Where do I need to go to trade in commodity futures? You have three options . All you need is money for margins payable upfront to exchanges through brokers. The choice is yours. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from.

Brokers also provide research and analysis support. Besides. there are specialized magazines on agricultural commodities and metals available for subscription. In case of a contract resulting in delivery. 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. The brokerage will be different for different commodities. Besides you will need to give you details such as PAN no. But the information easiest to access is from websites.  What are the other requirements at broker level? You will have to enter into a normal account agreements with the broker.  What do I need to start trading in commodity futures? As of now you will need only one bank account.cash settled. 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. The brokerage cannot exceed the maximum limit specified by the exchanges.1 per cent of the contract value. You will need a separate commodity de-mat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks.  What are the brokerage and transaction charges? The brokerage charges range from 0. etc. Page | 79 .10-0. 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. You can surf the web and narrow down you search. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. the brokerage can be 0. a few also offer information for free. If you plan to take or make delivery. bank account no.25 per cent of the contract value..25 . 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.

the NCDEX. in case of delivery. Page | 80 . Those who are willing to opt for physical delivery need to have sales tax registration number. metal and energy commodities. the nationwide exchanges have earmarked only a select few for starters. The sales tax is applicable at the place of delivery. Normally it is the seller's responsibility to collect and pay sales tax.  What happens if there is any default? Both the exchanges. 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.  Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods? Yes. has a large number of agriculture. In case of delivery. maintain settlement guarantee funds.  Do I have to pay sales tax on all trades? Is registration mandatory? No. This is applicable in similar fashion as in stock market. the margin during the delivery period increases to 20-25 per cent of the contract value. There is also a separate arbitration panel of exchanges. While the NMCE has most major agricultural commodities and metals under its fold. NCDEX and MCX. However. there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. In which commodities can I trade? Though the government has essentially made almost all commodities eligible for futures trading. The member/ broker will levy extra charges in case of trades resulting in delivery. 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 filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker. Normally it is between 5 per cent and 10 per cent of the contract value. in commodities also there is a system of initial margin and mark-to-market margin. How much margin is applicable in the commodities market? As in stocks. Page | 81 . in commodities also the margin is calculated by (value at risk) VaR system. The margin keeps changing depending on the change in price and volatility. Just like in equities. The margin is different for each commodity.  Are there circuit filters? Yes the exchanges have circuit filters in place.

Bibliography Page | 82 .

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

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