CHAPTER 1INTRODUCTION

1.1

INTRODUCTION TO ORGANIZATION

1.1.1

HISTORY
The Karvy group was formed in 1983 at Hyderabad, India. Karvy ranks among the

top player in almost all the fields it operates. Karvy Computershare Limited is Indias largest
Registrar and Transfer Agent with a client base of nearly 500 blue chip corporates, managing
over 2 crore accounts. Karvy Stock Brokers Limited, member of National Stock Exchange of
India and the Bombay Stock Exchange, ranks among the top 5 stock brokers in India. With
over 6,00,000 active accounts, it ranks among the top 5 Depositary Participant in India,
registered with NSDL and CDSL. Karvy Comtrade, Member of NCDEX and MCX ranks
among the top 3 commodity brokers in the country. Karvy Insurance Brokers is registered as
a Broker with IRDA and ranks among the top 5 insurance agent in the country. Registered
with AMFI as a corporate Agent, Karvy is also among the top Mutual Fund mobilizer with
over Rs. 5,000 crores under management. Karvy Realty Services, which started in 2006, has
quickly established itself as a broker who adds value, in the realty sector. Karvy Global offers
niche off shoring services to clients in the US. Karvy has 575 offices over 375 locations
across India and overseas at Dubai and New York. Over 9,000 highly qualified people staff
Karvy.

1.1.2

ORGANIZATION:
Karvy was started by a group of five chartered accountants in 1979. The partners

decided to offer, other than the audit services, value added services like corporate advisory
services to their clients. The first firm in the group, Karvy Consultants Limited was
incorporated on 23rd July, 1983. In a very short period, it became the largest Registrar and
Transfer Agent in India. This business was spun off to form a separate joint venture with
Computershare of Australia, in 2005. Karvys foray into stock broking began with marketing
IPOs, in 1993. Within a few years, Karvy began topping the IPO procurement league tables
and it has consistently maintained its position among the top 5. Karvy was among the first
few members of National Stock Exchange, in 1994 and became a member of The Stock
Exchange, Mumbai in 2001. Dematerialization of shares gathered pace in mid-90s and Karvy

was in the forefront educating investors on the advantages of dematerializing their shares.
Today Karvy is among the top 5 Depositary Participant in India.
While the registry business is a 50:50 Joint Venture with Computershare of Australia,
we have equity participation by ICICI Ventures Limited and Barings Asia Limited, in Karvy
Stock Broking Limited.
Karvy has always believed in adding value to services it offers to clients. A top-notch
research team based in Mumbai and Hyderabad supports its employees to advise clients on
their investment needs. With the information overload today, Karvys team of analysts help
investors make the right calls, be it equities, mf, insurance. On a typical working day Karvy:

Has more than 25,000 investors visiting our 575 offices

Publishes / broadcasts at least 50 buy / sell calls

Attends to 10,000+ telephone calls

Mails 25,000 envelopes, containing Annual Reports, dividend cheques / advises,

allotment / refund advises

Executes 150,000+ trades on NSE / BSE

Executes 50,000 debit / credit in the depositary accounts

Advises 3,000+ clients on the investments in mutual funds

1.1.3

SERVICES OFFERED

KARVY Stock Broking Limited, one of the cornerstones of the KARVY edifice, flows freely
towards attaining diverse goals of the customer through varied services. It creates a plethora
of opportunities for the customer by opening up investment vistas backed by research-based
advisory services. Here, growth knows no limits and success recognizes no boundaries.
Helping the customer create waves in his portfolio and empowering the investor completely
is the ultimate goal. KARVY Stock Broking Limited is a member of:

National Stock Exchange (NSE)

Bombay Stock Exchange (BSE)

Hyderabad Stock Exchange (HSE)

Karvy Com trade Limited, an ISO 9001:2000 certified company, is another venture of the
prestigious Karvy group. With our well established presence in the multifarious facets of the
modern Financial services industry from stock broking to registry services, it is indeed a
pleasure for us to make foray into the commodities derivatives market which opens yet
another door for us to deliver our service to our beloved customers and the investor public at
large.
At Karvy Insurance Broking Limited we provide both life and non-life insurance products to
retail individuals, high net-worth clients and corporates. With the opening up of the insurance
sector and with a large number of private players in the business, we are in a position to
provide tailor made policies for different segments of customers. In our journey to emerge as
a personal finance advisor, we will be better positioned to leverage our relationships with the
product providers and place the requirements of our customers appropriately with the product
providers. With Indian markets seeing a sea change, both in terms of investment pattern and
attitude of investors, insurance is no more seen as only a tax saving product but also as an
investment product. By setting up a separate entity, we would be positioned to provide the
best of the products available in this business to our customers.
Our wide national network, spanning the length and breadth of India, further supports these
advantages. Further, personalized service is provided here by a dedicated team committed in
giving hassle-free service to the clients.
Deepening of the Financial Markets and an ever-increasing sophistication in corporate
transactions, has made the role of Investment Bankers indispensable to organizations seeking
professional expertise and counseling, in raising financial resources through capital market
apart from Capital and Corporate Restructuring, Mergers & Acquisitions, Project Advisory
and the entire gamut of Financial Market activities.

Karvy Investor Services Limited (KISL), a SEBI registered Merchant Banker has emerged
as a leading Investment Banking entity in the country with over a decade of experience. KISL
has built its reputation by capitalizing on its qualified professionals, who have successfully
executed a large number of complex and unique transactions.
Our quality professional team and our work-oriented dedication have propelled us to offer
value-added corporate financial services and act as a professional navigator for long term
growth of our clients, who include leading corporates, State Governments, Foreign
Institutional Investors, public and private sector companies and banks, in Indian and global
markets.
We have also emerged as a trailblazer in the arena of relationships, both at the customer and
trade levels because of our unshakable integrity, seamless service and innovative solutions
that are tuned to meet varied needs. Our team of committed industry specialists, having
extensive experience in capital markets, further nurtures this relationship.
Credentials

Emerging as a leading Investment Banker with a strong support from its Group entities in
Research, Stock Broking, Institutional Sales and Retail Distribution.

Strong team of more than 25 qualified professionals operating from six cities; Hyderabad,
Mumbai, Delhi, Kolkata, Chennai, and Bangalore apart from two overseas offices at New
York (USA) and Dubai.

One of the largest retail distribution networks with over 584 branches in over 389
cities/towns.

Excellent Institutional Sales Desk.

Karvy Realty (India) Limited (KRIL) is promoted by the Karvy Group, Indias largest
financial services group. The group carries forward its legacy of trust and excellence in

investor and customer services delivered with passion and the highest level of quality that
align with global standards.
Karvy Realty (India) Limited is engaged in the business of real estate and property services
offering:

Buying/ selling/ renting of properties

Identifying valuable investments opportunities in the real estate sector

Facilitating financial support for real estate and investments in properties

Real estate portfolio advisory services.

KRIL is your personal real estate advisor guiding and hand holding you through real estate
transactions and offering valuable investment opportunities. Building on the KARVY brand
as a leading industry benchmark for world class customer servicing and quality standards,
KRIL brings to investors a reputation of reliability, dependability and honesty. Our
understanding of the needs and preferences of our clients and our teams of qualified realty
professionals help us to establish fruitful relationships with buyers and sellers of properties
alike.
A single stop shop for realty services offering:

Transacting Options: Choose to buy, sell or rent properties (residential and

commercial)

Investing Options: Give your investments a good opportunity with properties

marketed by KRIL.

Financing Options: Get unmatched deals for financing your investment

Research Options: We undertake valuation and feasibility studies, area analysis and
customized analysis on behalf of clients.

KRIL has ongoing relations with builders and developers across the country which will help
you place your investments in the most genuine properties for a good value appreciation at
the right place and at the right price. KRIL is committed to the guiding principles of
quality, timely service delivery, fair pricing, transparency and integrity.
Karvy Computershare Private Limited is a joint venture between Computershare,
Australia and Karvy Consultants Limited, India in the registry management services industry.
Computershare, Australia is the worlds largest and only global share registry providing
financial market services and technology to the global securities industry. Karvy Corporate
and Mutual Fund Share Registry and Investor Services business, India's No. 1 Registrar and
Transfer Agent and rated as India's "Most Admired Registrar" for its overall excellence in
volume management, quality processes and technology driven services.
Karvy Global Services is a knowledge services company. We provide specialist resources to
extend in house analyst teams in driving clear business results. We serve investment banks,
insurance providers, brokerages, hedge funds, research agencies, and life settlement providers
across the United States, Middle East, and Europe. Our clients have found our cost
advantage, ability to scale efforts, and specialist knowledge regarding emerging markets to be
a strong advantage in the new, fast, and unpredictable world. Our areas of focus include
equity and industry research, commodity research, credit analytics, technology-based
workflow solutions, insurance policy and portfolio valuation, and other specialized services.
Incorporated in 2004, we are backed by over 25 years of experience through Indias largest
financial services company, the Karvy Group. We are headquartered in New York and have
our primary delivery center in Hyderabad, India. We encourage you to contact us to evaluate
your research or outsourcing needs
As the flagship company of the KARVY Group, KARVY Consultants Limited has always
remained at the helm of organizational affairs, pioneering business policies, work ethic and
channels of progress. Having emerged as a leader in the registry business, the first of the
businesses that we ventured into, we have now transferred this business into a joint venture

with Computershare Limited of Australia, the worlds largest registrar. With the advent of
depositories in the Indian capital market and the relationships that we have created in the
registry business, we believe that we were best positioned to venture into this activity as a
Depository Participant. We were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited), the first Depository in the country and
then with CDSL (Central Depository Services Limited). Today, we service over seven lakh
customer accounts in this business spread across over 540 cities/towns in India and are
ranked amongst the largest Depository Participants in the country. With a growing secondary
market presence, we have transferred this business to KARVY Stock Broking Limited
(KSBL), our associate and a member of NSE, BSE and HSE.
1.1.4

ORGANIZATION:

Karvy was started by a group of five chartered accountants in 1979. The partners decided to
offer, other than the audit services, value added services like corporate advisory services to
their clients. The first firm in the group, Karvy Consultants Limited was incorporated on 23rd
July, 1983. In a very short period, it became the largest Registrar and Transfer Agent in India.
This business was spun off to form a separate joint venture with Computershare of Australia,
in 2005. Karvys foray into stock broking began with marketing IPOs, in 1993. Within a few
years, Karvy began topping the IPO procurement league tables and it has consistently
maintained its position among the top 5. Karvy was among the first few members of National
Stock Exchange, in 1994 and became a member of The Stock Exchange, Mumbai in 2001.
Dematerialization of shares gathered pace in mid-90s and Karvy was in the forefront
educating investors on the advantages of dematerializing their shares. Today Karvy is among
the top 5 Depositary Participant in India. While the registry business is a 50:50 Joint Venture
with Computershare of Australia, we have equity participation by ICICI Ventures Limited
and Barings Asia Limited, in Karvy Stock Broking Limited. Karvy has always believed in
adding value to services it offers to clients. A top-notch research team based in Mumbai and
Hyderabad supports its employees to advise clients on their investment needs. With the

information overload today, Karvys team of analysts help investors make the right calls, be it
equities, mf, insurance. On a typical working day Karvy:

Has more than 25,000 investors visiting our 575 offices

Publishes / broadcasts at least 50 buy / sell calls

Attends to 10,000+ telephone calls

1.2 INTRODUCTION TO COMMODITY MARKET

Commodity markets are markets where raw or primary products are exchanged. These raw
commodities are traded on regulated commodities exchanges, in which they are bought and
sold in standardized contracts.
Commodity market is an important constituent of the financial markets of any country. It is
the market where a wide range of products, viz., precious metals, base metals, crude oil,
energy and soft commodities like plam oil, coffee etc are traded. It is important to develop a
vibrant, active and liquid commodity market. This will help investors hedge their commodity
risk, take speculative positions in commodities and exploit arbitrage opportunities in the
market.
Different types of commodities traded
World-over one will find that a market exists for almost all the commodities known to us.
These commodities can be broadly classified into the following categories:

Precious metals: Gold, Silver, Platinum etc.

Other metals: Nickel, Aluminum, Copper etc.

Agro-Based commodities: Wheat, Corn, Cotton, Oils, Oilseeds.

Soft commodities: Coffee, Cocoa, Sugar etc.

Live-Stock: Live cattle, Pork bellies etc.

Energy: Crude oil, Natural Gas, Gasoline etc.

10

1.2.1

COMMODITIES AND COMMODITY MARKET IN INDIA

India, a commodity based economy where two-third of the one billion population depends on
agricultural commodities, surprisingly has an under developed commodity market. Unlike the
physical market, futures markets trades in commodity are largely used as risk management
(hedging) mechanism on either physical commodity itself or open positions in commodity
stock.
For instance, a jeweler can hedge his inventory against perceived short-term downturn in gold
prices by going short in the future markets.
The article aims at know how of the commodities market and how the commodities traded on
the exchange. The idea is to understand the importance of commodity derivatives and learn
about the market from Indian point of view. In fact it was one of the most vibrant markets till
early 70s. Its development and growth was shunted due to numerous restrictions earlier. Now,
with most of these restrictions being removed, there is tremendous potential for growth of
this market in the country.
History
Though in recent years organized commodity markets have come into limelight however we
have a long history of commodity markets. It is believed that the establishment of "Bombay
Cotton Trade Association Ltd." in 1875 marks the beginning of organized futures Commodity
market in India. Further while in 1900 futures trading in oilseeds was organized
In India with the setting up of Gujarati Vyapari Mandali, the same in Raw Jute and Jute
Goods began in Calcutta with the establishment of the Calcutta Hessian Exchange Ltd. in
1919. Futures market in Bullion began at Mumbai in 1920 and following the trend similar
Markets also came up in various other key cities of the country. Over the years futures
Trading in various other commodities like pepper, turmeric, potato, sugar and gur etc. also
begun. After independence, Forward Contracts (Regulation) Act, 1952, was enacted to
regulate commodity futures markets and Forward Markets Commission was also set up.
However in the seventies, most of the registered associations became inactive, as futures
trading in the commodities for which they were registered came to be either suspended or
prohibited altogether. With the gradual withdrawal of the government from various sectors in
the post-liberalization era, the need has been felt that various operators in the commodities
market is provided with a mechanism to perform the economic functions of price discovery
and risk management. Consequently the Government issued notifications on 1.4.2003
permitting futures trading in the commodities.
11

1.2.2

COMMODITY

A commodity may be defined as an article, a p.

roduct or material that is bought and sold. It can be classified as every kind of movable
property, except Actionable Claims, Money & Securities.
Commodities actually offer immense potential to become a separate asset class for marketsavvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the
equity markets, may find commodities an unfathomable market. But commodities are easy to
understand as far as fundamentals of demand and supply are concerned. Retail investors
should understand the risks and advantages of trading in commodities futures before taking a
leap. Historically, pricing in commodities futures has been less volatile compared with equity
and bonds, thus providing an efficient portfolio diversification option.
In fact, the size of the commodities markets in India is also quite significant. Of the country's
GDP of Rs 13, 20,730 crore (Rs 13,207.3 billion), commodities related (and dependent)
industries constitute about 58 per cent.
Currently, the various commodities across the country clock an annual turnover of Rs 1,
40,000 crore (Rs 1,400 billion). With the introduction of futures trading, the size of the
commodities market grows many folds here on.
1.2.3

COMMODITY MARKET

Commodity market is an important constituent of the financial markets of any country. It is

the market where a wide range of products, viz., precious metals, base metals, crude oil,
energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a
vibrant, active and liquid commodity market. This would help investors hedge their
commodity risk, take speculative positions in commodities and exploit arbitrage opportunities
in the market.
Table 1.1
Turnover in Financial Markets and Commodity Market
(Rs in Crores)
S

Market segments

2009-10

2010-11

2011-12 (E)

No.
1

Government Securities Market

1,544,376 (63) 2,518,322 (91.2) 2,827,872

(91)

Forex Market

Total Stock Market Turnover (I+ II) 1,374,405 (56) 3,745,507 (136) 4,160,702 (133.8)

National Stock Exchange (a+b)

658,035 (27) 2,318,531 (84) 3,867,936 (124.4)

1,057,854 (43) 3,230,002 (117) 3,641,672 (117.1)

12

II

a)Cash

617,989

1,099,534

1,147,027

b)Derivatives

439,865

2,130,468

2,494,645

Bombay Stock Exchange (a+b)

316,551 (13) 515,505 (18.7) 519,030

a)Cash

314,073

503,053

499,503

2,478

12,452

19,527

b)Derivatives
4

Commodities Market

NA

130,215 (4.7) 500,000

(16.7)

(16.1)

Note: Fig. in bracket represents percentage to GDP at market prices

Source: SEBI Bulletin
Different types of commodities traded
World-over one will find that a market exits for almost all the commodities known to us.
These commodities can be broadly classified into the following:
Precious Metals: Gold, Silver, Platinum etc
Other Metals: Nickel, Aluminum, Copper etc
Agro-Based Commodities: Wheat, Corn, Cotton, Oils, Oilseeds.
Soft Commodities: Coffee, Cocoa, Sugar etc
Live-Stock: Live Cattle, Pork Bellies etc
Energy: Crude Oil, Natural Gas, Gasoline etc
Different segments in Commodities market
The commodities market exits in two distinct forms namely the Over the Counter (OTC)
market and the Exchange based market. Also, as in equities, there exists the spot and the
derivatives segment. The spot markets are essentially over the counter markets and the
participation is restricted to people who are involved with that commodity say the farmer,
processor, wholesaler etc. Derivative trading takes place through exchange-based markets
with standardized contracts, settlements etc.
Leading commodity markets of world
Some of the leading exchanges of the world are New York Mercantile Exchange (NYMEX),
the London Metal Exchange (LME) and the Chicago Board of Trade (CBOT).
Leading commodity markets 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.
These exchanges are expected to offer a nation-wide anonymous, order driven; screen based

13

trading system for trading. The Forward Markets Commission (FMC) will regulate these
exchanges.
Consequently four commodity exchanges have been approved to commence business in this
regard. They are:
Multi Commodity Exchange (MCX) located at Mumbai.
National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai.
National Board of Trade (NBOT) located at Indore.
National Multi Commodity Exchange (NMCE) located at Ahmedabad.

MAIN COMMODITY EXCHANGES OF

INDIA

Regulatory Framework
The commodity exchanges are governed and regulated under FORWARDS CONTRACTS
(REGULATION) ACT, 1952 by the FORWARDS MARKET COMMISSION (FMC). Which
is an apex regulatory body for the commodities and futures market on the lines of securities
and exchange board of India (SEBI), for the securities market operations? The commodity
exchanges are granted approval by FMC under the overall aegis of the Ministry Of Consumer
Affairs, Food and Public Distribution, Government of India. All commodities and future
contracts traded on the exchange are required to be approved by the FMC along with their
contract specification which describes the quantity quality and place of the commodities
traded.
The Indian commodities market stands out quiet tall among the global markets for a variety
of factors. And the reasons for the same are not difficult to understand.

Supply:

Worlds leading producers of 17 agro commodities

Demand

Worlds largest consumer of edible oils ,GOLD

14

GDP driver:

Primarily an AGRAIRIAN ECONOMY

Captive market

Agro Products are consumed locally

Waiting to explode

Value of production around Rs. 300000 crore and expected

future market potential around Rs. 3000000 crore (this is assuming a conservative
multiplier 10 times which was 20 times and also assuming that all commodities have
futures market over a period of time as the markets mature .)

1.2.4

OVERVIEW OF COMMODITIES EXCHANGES IN INDIA

Forward Markets Commission (FMC) headquartered at Mumbai is a regulatory authority,

which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of
India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act,
1952.
"The Act Provides that the Commission shall consist of not less then two but not exceeding
four members appointed by the Central Government out of them being nominated by the
Central Government to be the Chairman thereof. Currently Commission comprises three
members among whom Dr. Kewal Ram, IES, is acting as Chairman and Smt. Padma
Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS, are the Members of the
Commission."
The list of exchanges that has been allowed to trade in commodities are
1. Bhatinda Om & Oil Exchange Ltd., Batinda.
2. The Bombay Commodity Exchange Ltd. Mumbai
3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd
4. The Kanpur Commodity Exchange Ltd., Kanpur
5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut
6. The Spices and Oilseeds Exchange Ltd.
7. Ahmedabad Commodity Exchange Ltd.
8. Vijay Beopar Chamber Ltd., Muzaffarnagar
9. India Pepper & Spice Trade Association. Kochi
15

10. Rajdhani Oils and Oilseeds Exchange Ltd., Delhi

11. National Board of Trade. Indore.
12. The Chamber Of Commerce, Hapur
13. The East India Cotton Association Mumbai.
14. The Central India Commercial Exchange Ltd, Gwaliar
15. The East India Jute & Hessian Exchange Ltd,
16. First Commodity Exchange of India Ltd, Kochi
17. Bikaner Commodity Exchange Ltd., Bikaner
18. The Coffee Futures Exchange India Ltd, Bangalore.
19. Esugarindia Limited.
20. National Multi Commodity Exchange of India Limited.
21. Surendranagar Cotton oil & Oilseeds Association Ltd,
22. Multi Commodity Exchange of India Ltd.
23. National Commodity & Derivatives Exchange Ltd.
24. Haryana Commodities Ltd., Hissar
25. e-Commodities Ltd.

1.2.5

NCDEX AND MCX

The two main exchanges in India facilitating commodity trading are NCDEX and MCX.
National Commodity & Derivatives Exchange Limited

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies
Act, 1956. It has commenced its operations on December 15, 2003. National Commodity &

16

Derivatives Exchange Limited (NCDEX) is a professionally managed online multi

commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance
Corporation of India (LIC), National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank
(PNB), CRISIL Limited, Indian Farmers Fertilizer Cooperative Limited (IFFCO) and
Canara Bank

by subscribing to the equity shares have joined the initial promoters as

shareholders of the Exchange. Started with an authorized capital of Rs.50crores, ICICI

BANK, LIC, NABARD and NSE hold the maximum share in the share capital (15%
each).NCDEX is located in Mumbai and offers facilities to its members in more than
390centers throughout India. The reach will gradually be expanded to more centers. NCDEX
is the only commodity exchange in the country promoted by national level institutions.
NCDEX is a nation-level, technology driven on-line commodity exchange with an
independent Board of Directors and professionals not having any vested interest in
commodity markets.
NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed,
Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil,
Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry
Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy
Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black
Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent
phases trading in more commodities would be facilitated.
Currently NCDEX has 700 members at 470 locations across the country. The exchange saw
400% growth in the first year of its operations and expects 200% in the second year also.
According to the latest news NCDEX plans to roll out more contracts like contracts in nickel,
tin and mentha oil.
Multi Commodity Exchange of India Limited (MCX):

17

MCX an independent multi commodity exchange has permanent recognition from

Government of India for facilitating online trading, clearing and settlement operations for
commodity futures markets across the country. It was inaugurated in November 2003 by Mr.
Mukesh Ambani. It is headquartered in Mumbai. The key shareholders of MCX are Financial
Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of
Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd.,
Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank.
MCX offers futures trading in the following commodity categories: Agri Commodities,
Bullion, Metals- Ferrous & Non-ferrous, Pulses, Oils & Oilseeds, Energy, Plantations, Spices
and other soft commodities.
Today MCX is offering spectacular growth opportunities and advantages to a large cross
section of the participants including Producers / Processors, Traders, Corporate, Regional
Trading Centers, Importers, Exporters, Cooperatives, and Industry Associations.
In a significant development, National Stock Exchange of India Ltd. (NSE), countrys largest
exchange and National Bank for Agriculture and Rural Development (NABARD), countrys
premier agriculture development bank announced their strategic participation in the equity of
MCX on June 15, 2005. This new partnership of NSE and NABARD with MCX makes MCX
consortium the largest distribution network across the country.
MCX is an ISO 9001:2000 online nationwide multi commodity exchange. It has over 900+
members spread across 500+ centers across the country, with more than 750+VSATs and
leased line connections and 5,000+ trading terminals that provide a transparent robust and
trustworthy trading platform in more than 50 commodity futures contract with a wide range
of commodity baskets which includes metals, energy and agriculture commodities. Exchange
has pioneered major innovations in Indian commodities market, which has become the
industry benchmarks subsequently.
MCX is the only Exchange which has got three international tie- ups which is with Tokyo
Commodity Exchange (TOCOM), the 250 year old Baltic Freight Exchange, London, Dubai
Metals & Commodity Centre (DMCC) & Dubai Gold & Commodity Exchange (DGCX), the
strategic initiative of Government of Dubai. MCX has to its credit, setting up of the National

18

spot exchange (NSEAP), which connects all India APMC markets thereby contributing in the
implementation of Government of Indias vision to create a common Indian market
The trading system of MCX is state- of-the -art, new generation trading platform that permits
extremely cost effective operations at much greater efficiency. The Exchange Central System
is located in Mumbai, which maintains the Central Order Book. Exchange Members located
across the country are connected to the central system through VSAT or any other mode of
communication as may be decided by the Exchange from time to time. The controls in the
system are system driven requiring minimum human intervention. The Exchange Members
places orders through the Traders Work Station (TWS) of the Member linked to the
Exchange, which matches on the Central System and sends a confirmation back to the
Member
Settlement: Exchange maintains electronic interface with its Clearing Bank. All Members of
the Exchange are having their Exchange operations account with the Clearing Bank.
All debits and credits are affected electronically through such accounts only. All contracts on
maturity are for delivery. MCX specifies tender and delivery periods. A seller or a short open
position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity. Exchange would
select from the long open position holder for the tendered quantity. Once the buyer is
identified, seller has to initiate the process of giving delivery and buyer has to take delivery
according to the delivery schedule prescribed by the Exchange

Players involve d in

commodities trading like commodity exchanges, financial institutions, and banks have a
feeling that the markets are not being fully exploited . Education and regulation are the main
impediments to the growth of commodity trading. Producers, farmers and Agri- based
companies should enter into formal contracts to hedge against losses. The use of commodity
exchanges will create more trading opportunities; result in an integrated market and better
price discoveries
MCX and NCDEX Membership
There shall be different classes of membership along with associated rights and privileges,
which will include trading cum clearing membership and institutional clearing members to
start with. MCX and NCDEX would also include other membership classes as may be

19

defined by the Exchange from time to time. The different membership classes of MCX and
NCDEX for the present are as under:
Trading-Cum-Clearing Member
Trading-Cum-Clearing Member means a person/corporate who is admitted by the Exchange
as the member, conferring upon them a right to trade and clear through the clearing house of
the Exchange, as a Clearing Member.
Moreover, the Member may be allowed to make deals for himself as well as on behalf of his
clients and clear and settle such deals only.
Institutional Clearing Member
Institutional Clearing Member means a person who is admitted by the Exchange as a Clearing
Member of the Exchange and the Clearing House of the Exchange and who shall be allowed
to only clear and settle trades on account of Trading-Cum Clearing Members.
The Market Rules
The Market of the Exchange would be provided with the following framework to trade on
MCX and NCDEX:
They would be required to register with the Exchange on payment of a membership fee
and on compliance of their registration requirements.
Trading limit could be obtained by the Exchange Members on payment of a deposit,
which is called as a Margin Deposit.
They would be provided the software for trading on the exchange.
They would be connected to the central system of MCX and NCDEX inn Mumbai
through a VSAT.
The members have to maintain account with an approved Clearing Bank of MCX and
NCDEX which would provide the Electronic Fund Transfer facility between the Members
and the Exchange through which the daily receipts and payments of margin and mark-tomargins would be accomplished.
The Trading Mechanism
How Trading would take place on MCX and NCDEX

20

The trading system of MCX and NCDEX is state of the art, new generation trading platform
that permits extremely cost effective operations at much greater efficiency. The Exchange
Central System is located in Mumbai which will maintain the Central order book. Exchange
members could be located anywhere in the country and would be connected to Central system
through VSAT or any other mode of communications may be decided by the Exchange from
time to time. The exchange members would place orders through the Traders Workstation
(TWS) of the member linked to the Exchange, which shall match on the Central System and
send a confirmation back to the member.
Clearing and Settlement Mechanism
How MCX and NCDEX propose to Clear and Settle
The clearing and settlement system of Exchange is system driven and rules based.
Clearing Bank Interface
Exchange will maintain electronic interface with its clearing bank. All members need to have
their Exchange operation account with such clearing bank. All debits and credits will be
affected through such accounts only
Delivery and Final Settlement
All contracts on maturity are for delivery. MCX and NCDEX would specify a tender &
delivery period. For example, such periods can be from 8 th working day till the 15th day of the
month-where 15th is the last trading day of the contract month as tender &/or delivery
period. A seller or a short open position holder in that contract may tender documents to the
Exchange expressing his intention to deliver the underlying commodity. Exchange would
select from the long open position for the tendered quantity. Once the buyer is identified,
seller has to initiate the process of giving delivery & buyer has to take delivery according to
the delivery schedule prescribed by the exchange
Limitations of forward markets
Forward markets world-wide are affected by several problems:
Lack of centralization of trading,
Illiquidity and Counterparty risk
In the first two of these, the basic problem is that of too much edibility and generality. The
forward market is like a real estate market in that any two consenting adults can form
21

contracts against each other. This often makes them design terms of the deal which are very
convenient in that specific situation, but makes the contracts non-tradable.
Counterparty risk arises from the possibility of default by any one party to the transaction.
When one of the two sides to the transaction declares bankruptcy, the other suffers. Even
when forward markets trade standardized contracts, and hence avoid the problem of
illiquidity, still the counterparty risk remains a very serious issue.
1.2.6

COMMODITY DERIVATIVES

Derivatives as a tool for managing risk first originated in the commodities markets. They
were then found useful as a hedging tool in financial markets as well. In India, trading in
commodity futures has been in existence from the nineteenth century with organized trading
in cotton through the establishment of Cotton Trade Association in 1875. Over a period of
time, other commodities were permitted to be traded in futures exchanges. Regulatory
constraints in 1960s resulted in virtual dismantling of the commodities future markets. It is
only in the last decade that commodity future exchanges have been actively encouraged.
However, the markets have been thin with poor liquidity and have not grown to any
significant level. In this chapter we look at how commodity derivatives differ from financial
derivatives. We also have a brief look at the global commodity markets and the commodity
markets that exist in India.
Difference between commodity and financial derivatives
The basic concept of a derivative contract remains the same whether the underlying happens
to be a commodity or a financial asset. However there are some features which are very
peculiar to commodity derivative markets. In the case of financial derivatives, most of these
contracts are cash settled. Even in the case of physical settlement, financial assets are not
bulky and do not need special facility for storage. Due to the bulky nature of the underlying
assets, physical settlement in commodity derivatives creates the need for warehousing.
Similarly, the concept of varying quality of asset does not really exist as far as financial
underlying are concerned.
However in the case of commodities, the quality of the asset underlying a contract can vary
largely. This becomes an important issue to be managed. We have a brief look at these issues.
Futures

22

Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in the
future at a certain price. But unlike forward contracts, the futures contracts are standardized
and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies
certain standard features of the contract. It is a standardized contract with standard underlying
instrument, a standard quantity and quality of the underlying instrument that can be delivered,
(or which can be used for reference purposes in settlement) and a standard timing of such
Settlement. A futures contract may be offset prior to maturity by entering into an equal and
opposite transaction. More than 99% of futures transactions are offset this way.
The standardized items in a futures contract are:

Quantity of the underlying

Quality of the underlying

The date and the month of delivery

The units of price quotation and minimum price change

Location of settlement

Futures terminology
Spot price: The price at which an asset trades in the spot market.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The commodity futures contracts on
the NCDEX have one-month, two-months and three-month expiry cycles which expire on the
20th day of the delivery month. Thus a January expiration contract expires on the 20th of
January and a February expiration contract ceases trading on the 20th of February. On the
next trading day following the 20th, a new contract having a three-month expiry is introduced
for trading.
Expiry date: It is the date specified in the futures contract. This is the last day on which the
contract will be traded, at the end of which it will cease to exist.

23

Delivery unit: The amount of asset that has to be delivered less than one contract. For
instance, the delivery unit for futures on Long Staple Cotton on the NCDEX is 55 bales. The
delivery unit for the Gold futures contract is 1 kg.
Basis: Basis can be defined as the futures price minus the spot price. There will be a different
basis for each delivery month for each contract. In a normal market, basis will be positive.
This reflects that futures prices normally exceed spot prices.
Cost of carry: The relationship between futures prices and spot prices can be summarized in
terms of what is known as the cost of carry. This measures the storage cost plus the interest
that is paid to finance the asset less the income earned on the asset.
Initial margin: The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin.
Marking-to-market (MTM): In the futures market, at the end of each trading day, the
margin account is adjusted to re ect the investors gain or loss depending upon the futures
closing price. This is called markingtomarket. Maintenance margin: This is somewhat
lower than the initial margin. This is set to ensure that the balance in the margin account
never becomes negative.
Introduction to options
In this section, we look at another interesting derivative contract, namely options. Options are
fundamentally different from forward and futures contracts. An option gives the holder of the
option the right to do something. The holder does not have to exercise this right. In contrast,
in a forward or futures contract, the two parties have committed themselves to doing
something. Whereas it costs nothing (except margin requirements) to enter into a futures
contract, the purchase of an option requires an upfront payment.
Option terminology
Commodity options: Commodity options are options with a commodity as the underlying.
For instance a gold options contract would give the holder the right to buy or sell a specified
quantity of gold at the price specified in the contract.

24

Stock options: Stock options are options on individual stocks. Options currently trade on
over 500 stocks in the United States. A contract gives the holder the right to buy or sell shares
at the specified price.
Buyer of an option: The buyer of an option is the one who by paying the option premium
buys the right but not the obligation to exercise his option on the seller/ writer.
Writer of an option: The writer of a call/ put option is the one who receives the option
premium and is thereby obliged to sell/ buy the asset if the buyer exercises on him.
There are two basic types of options, call options and put options.
Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.
Put option: A put option gives the holder the right but not the obligation to sell an asset by a
certain\ date for a certain price.
Option price: Option price is the price which the option buyer pays to the option seller. It is
also referred to as the option premium.
Expiration date: The date specified in the options contract is known as the expiration date,
the exercise date, the strike date or the maturity.
Strike price: The price specified in the options contract is known as the strike price or the
exercise price.
American options: American options are options that can be exercised at any time upto the
expiration date. Most exchange-traded options are American.
European options: European options are options that can be exercised only on the expiration
date itself. European options are easier to analyze than American options, and properties of an
American option are frequently deduced from those of its European counterpart.
In-the-money option: An in-the-money (ITM) option is an option that would lead to positive
cash flow to the holder if it were exercised immediately. A call option on the index is said to
25

be in-the-money when the current index stands at a level higher than the strike price (i.e. spot
price strike price). If the index is much higher than the strike price, the call is said to be deep
ITM. In the case of a put, the put is ITM if the index is below the strike price.
(At-the-money option: An at-the-money (ATM) option is an option that would lead to zero
cash flow if it were exercised immediately. An option on the index is at-the-money when the
current index equals the strike price (i.e. spot price = strike price).
Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to
a negative cash flow it was exercised immediately. A call option on the index is out-of-themoney when the current index stands at a level which is less than the strike price (i.e. spot
price strike price). If the index is much lower than the strike price, the call is said to be deep
OTM. In the case of a put, the put is OTM if the index is above the strike price. )
Intrinsic value of an option: The option premium can be broken down into two components
intrinsic value and time value. The intrinsic value of a call is the amount the option is ITM,
if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it another way, the intrinsic
value of a call is I. Similarly, Q which means the intrinsic value of a call is the greater of 0 or
9 I. K is the strike price Q, i.e. the greater of 0 or 9 C is the spot price. the intrinsic value of a
put is 0
Time value of an option: The time value of an option is the difference between its premium
and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM
has only time value...
1.2.7

WORKING OF COMMODITY MARKET

Physical settlement
Physical settlement involves the physical delivery of the underlying commodity, typically at
an accredited warehouse. The seller intending to make delivery would have to take the
commodities to the designated warehouse and the buyer intending to take delivery would
have to go to the designated warehouse and pick up the commodity. This may sound simple,
but the physical settlement of commodities is a complex process. The issues faced in physical
settlement are enormous. There are limits on storage facilities in different states. There are
restrictions on interstate movement of commodities. Besides state level octroi and duties have
26

an impact on the cost of movement of goods across locations. The process of taking physical
delivery in commodities is quite different from the process of taking physical delivery in
financial assets. We take a general overview at the process of physical settlement of
commodities. Later on we will look into details of how physical settlement happens on the
NCDEX.
Delivery notice period
Unlike in the case of equity futures, typically a seller of commodity futures has the option to
give notice of delivery. This option is given during a period identified as delivery notice
period. Such contracts are then assigned to a buyer, in a manner similar to the assignments to
a seller in an options market. However what is interesting and different from a typical options
exercise is that in the commodities market, both positions can still be closed out before expiry
of the contract. The intention of this notice is to allow verification of delivery and to give
adequate notice to the buyer of a possible requirement to take delivery. These are required by
virtue of the act that the actual physical settlement of commodities requires preparation from
both delivering and receiving members.
Typically, in all commodity exchanges, delivery notice is required to be supported by a
warehouse receipt. The warehouse receipt is the proof for the quantity and quality of
commodities being delivered. Some exchanges have certified laboratories for verifying the
quality of goods. In these exchanges the seller has to produce a verification report from these
laboratories along with delivery notice. Some exchanges like LIFFE, accept warehouse
receipts as quality verification documents while others like BMFBrazil have independent
grading and classification agency to verify the quality.
In the case of BMF-Brazil a seller typically has to submit the following documents:
A declaration verifying that the asset is free of any and all charges, including fiscal debts
related to the stored goods. A provisional delivery order of the good to BM&F (Brazil),
issued by the warehouse. A warehouse certificate showing that storage and regular insurance
have been paid.
Assignment
Whenever delivery notices are given by the seller, the clearing house of the exchange
identifies the buyer to whom this notice may be assigned. Exchanges follow different
27

practices for the assignment process. One approach is to display the delivery notice and allow
buyers wishing to take delivery to bid for taking delivery. Among the international
exchanges, BMF, CBOT and CME display delivery notices. Alternatively, the clearing houses
may assign deliveries to buyers on some basis. Exchanges such as COMMEX and the Indian
commodities exchanges have adopted this method
Any seller/ buyer who has given intention to deliver/ been assigned a delivery has an option
to square off positions till the market close of the day of delivery notice. After the close of
trading, exchanges assign the delivery intentions to open long positions. Assignment is done
typically either on random basis or firstinfirst out basis. In some exchanges (CME), the
buyer has the option to give his preference for delivery location. The clearing house decides
on the daily delivery order rate at which delivery will be settled. Delivery rate depends on the
spot rate of the underlying adjusted for discount/ premium for quality and freight costs. The
discount/ premium for quality and freight costs are published by the clearing house before
introduction of the contract. The most active spot market is normally taken as the benchmark
for deciding spot prices. Alternatively, the delivery rate is determined based on the previous
day closing rate for the contract or the closing rate for the day.
Delivery
After the assignment process, clearing house/ exchange issues a delivery order to the buyer.
The exchange also informs the respective warehouse about the identity of the buyer. The
buyer is required to deposit a certain percentage of the contract amount with the clearing
house as margin against the warehouse receipt. The period available for the buyer to take
physical delivery is stipulated by the exchange. Buyer or his authorized representative in the
presence of seller or his representative takes the physical stocks against the delivery order.
Proof of physical delivery having been affected is forwarded by the seller to the clearing
house and the invoice amount is credited to the sellers account. In India if a seller does not
give notice of delivery then at the expiry of the contract the positions are cash settled by price
difference exactly as in cash settled equity futures contracts.
Warehousing
One of the main differences between financial and commodity derivatives are the need for
warehousing. In case of most exchangetraded financial derivatives, all the positions are cash
settled. Cash settlement involves paying up the difference in prices between the time the
28

contract was entered into and the time the contract was closed. For instance, if a trader buys
futures on a stock at Rs.100 and on the day of expiration, the futures on that stock close
Rs.120, he does not really have to buy the underlying stock. All he does is take the difference
of Rs.20 in cash. Similarly the person, who sold this futures contract at Rs.100, does not have
to deliver the underlying stock. All he has to do is pay up the loss of Rs.20 in cash.
In case of commodity derivatives however, there is a possibility of physical settlement.
Which means that if the seller chooses to hand over the commodity instead of the difference
in cash, the buyer must take physical delivery of the underlying asset? This requires the
exchange to make an arrangement with warehouses to handle the settlements. The efficacy of
the commodities a settlement depends on the warehousing system available. Most
international commodity exchanges used certified warehouses (CWH) for the purpose of
handling physical settlements.
Such CWH are required to provide storage facilities for participants in the commodities
markets and to certify the quantity and quality of the underlying commodity. The advantage
of this system is that a warehouse receipt becomes good collateral, not just for settlement of
exchange trades but also for other purposes too. In India, the warehousing system is not as
efficient as it is in some of the other developed markets. Central and state government
controlled warehouses are the major providers of Agriproduce storage facilities. Apart from
these, there are a few private warehousing being maintained. However there is no clear
regulatory oversight of warehousing services.
Quality of underlying assets
A derivatives contract is written on a given underlying. Variance in quality is not an issue in
case of financial derivatives as the physical attribute is missing. When the underlying asset is
a commodity, the quality of the underlying asset is of prime importance. There may be quite
some variation in the quality of what is available in the marketplace. When the asset is
specified, it is therefore important that the exchange stipulate the grade or grades of the
commodity that are acceptable. Commodity derivatives demand good standards and quality
assurance/ certification procedures. A good grading system allows commodities to be traded
by specification.
Currently there are various agencies that are responsible for specifying grades for
Commodities. For example, the Bureau of Indian Standards (BIS) under Ministry of
29

Consumer Affairs specifies standards for processed agricultural commodities whereas

AGMARK under the department of rural development under Ministry of Agriculture is
responsible for promulgating standards for basic agricultural commodities. Apart from these,
there are other agencies like EIA, which specify standards for export oriented commodities.
How does a Commodity Futures Exchange help in Price Discovery?
Unlike the physical market, a futures market facilitates offsetting the trades without changing
physical goods until the expiry of a contract.
As a result, futures market attracts hedgers for risk management, and encourages considerable
external competition from those who possess market information and price judgment to trade
as traders in these commodities. While hedgers have long-term perspective of the market, the
traders or arbitragers, prefer an immediate view of the market. However, all these users
participate in buying and selling of commodities based on various domestic and global
parameters such as price, demand and supply, climatic and market related information.
These factors, together, result in efficient price discovery, allowing large number of buyers
and sellers to trade on the exchange. MCX is communicating these prices all across the globe
to make the market more efficient and to enhance the utility of this price discovery function.
Price Risk Management: Hedging is the practice of off-setting the price risk inherent in any
cash market position by taking an equal but opposite position in the futures market. This
technique is very useful in case of any long-term requirements for which the prices have to be
firmed to quote a sale price but to avoid buying the physical commodity immediately to
prevent blocking of funds and incurring large holding costs.
How does a seller tender delivery to a buyer?
Sellers at MCX intimate the exchange at the beginning of the tender period and get the
delivery quality certified from empanelled quality certification agencies. They also submit the
documents to the Exchange with the details of the warehouse within the city, chosen as a
delivery center. Sellers are free to use any warehouse, as they are responsible for the goods
until the buyer picks up the delivery, which is a practice followed in the commodities market
globally.

30

Seller would receive the money from the exchange against the goods delivered, which
happens when the buyer has confirmed its satisfaction over quality and picked up the
deliveries within stipulated time.
MCX has tied up with State Level Warehousing Corporations of Karalla, Gujarat, Tamil Nadu
and Uttar Pradesh and is in the process of finalizing the arrangements with CWC and other
State level Warehousing Corporations
How settlement happens at the end of the contract?
A contract has a life cycle of one month or longer. At MCX, two weeks before the expiry of a
contract, the contract enters into a tender period. At the start of the tender period, both the
parties must state their intentions to give or receive delivery, based on which the parties are
supposed to act or bear the penal charges for any failure in doing so.
Those who do not express their intention to give or receive delivery at the beginning of tender
period are required to square-up their open positions before the expiry of the contract. In case
they do not, their positions are closed out at 'due date rate'. The links to the physical market
through the delivery process ensures maintenance of uniformity between spot and futures
prices.
Charges
Members are liable to pay transaction charges for the trade done through the exchange during
the previous month. The important provisions are listed below: The billing for the all trades
done during the previous month will be raised in the succeeding month.
1. Rate of charges: The transaction charges are payable at the rate of Rs.6 per Rs. one Lakh
trade done. This rate is subject to change from time to time.
2. Due date: The transaction charges are payable on the 7th day from the date of the bill
every month in respect of the trade done in the previous month.
3. Collection process: NCDEX has engaged the services of Bill Junction Payments Limited
(BJPL) to collect the transaction charges through Electronic Clearing System.
4. Registration with BJPL and their services: Members have to fill up the mandate form
and submit the same to NCDEX. NCDEX then forwards the mandate form to BJPL. BJPL
sends the login ID and password to the mailing address as mentioned in the registration
form. The members can then log on through the website of BJPL and view the billing amount

31

and the due date. Advance email intimation is also sent to the members. Besides, the billing
details can be viewed on the website upto a maximum period of 12 months.
5. Adjustment against advances transaction charges: In terms of the regulations, members
are required to remit Rs.50, 000 as advance transaction charges on registration. The
transaction charges due first will be adjusted against the advance transaction charges already
paid as advance and members need to pay transaction charges only after exhausting the
balance lying in advance transaction .
6. Penalty for delayed payments: If the transaction charges are not paid on or before the due
date, a penal interest is levied as specified by the exchange.
Finally, the futures market is a zero sum game i.e. the total number of long in any contract
always equals the total number of short in any contract. The total number of outstanding
contracts (long/ short) at any point in time is called the Open interest. This Open interest
figure is a good indicator of the liquidity in every contract.
Regulatory framework
At present, there are three tiers of regulations of forward/futures trading system in India,
namely, government of India, Forward Markets Commission (FMC) and commodity
exchanges. The need for regulation arises on account of the fact that the benefits of futures
markets accrue in competitive conditions. Proper regulation is needed to create competitive
conditions. In the absence of regulation, unscrupulous participants could use these leveraged
contracts for manipulating prices. This could have undesirable in hence on the spot prices,
thereby affecting interests of society at large... Regulation is also needed to ensure that the
market has appropriate risk management system. In the absence of such a system, a major
default could create a chain reaction. The resultant financial crisis in a futures market could
create systematic risk. Regulation is also needed to ensure fairness and transparency in
trading, clearing, settlement and management of the exchange so as to protect and promote
the interest of various stakeholders, particularly nonmember users of the market.
Rules governing commodity derivatives exchanges
The trading of commodity derivatives on the NCDEX is regulated by Forward Markets
Commission (FMC). Under the Forward Contracts (Regulation) Act, 1952, forward trading in
commodities notified under section 15 of the Act can be conducted only on the exchanges,
which are granted recognition by the central government (Department of Consumer Affairs,
Ministry of Consumer Affairs, Food and Public Distribution). All the exchanges, which deal
32

with forward contracts, are required to obtain certificate of registration from the FMC.
Besides, they are subjected to various laws of the land like the Companies Act, Stamp Act,
Contracts Act, Forward Commission (Regulation) Act and various other legislations, which
impinge on their working.
1. Limit on net open position as on the close of the trading hours. Some times limit is also
imposed on intraday net open position. The limit is imposed operatorwise, and in some
cases, also member wise.
2. Circuitfilters or limit on price actuations to allow cooling of market in the event of abrupt
upswing or downswing in prices.
3. Special margin deposit to be collected on outstanding purchases or sales when price moves
up or down sharply above or below the previous day closing price. By making further
purchases/sales relatively costly, the price rise or fall is sobered down. This measure is
imposed only on the request of the exchange.
4. Circuit breakers or minimum/maximum prices: These are prescribed to prevent futures
prices from falling below as rising above not warranted by prospective supply and demand
factors. This measure is also imposed on the request of the exchanges.
5. Skipping trading in certain derivatives of the contract, closing the market for a specified
period and even closing out the contract: These extreme measures are taken only in
emergency situations.
Besides these regulatory measures, the F.C(R) Act provides that a clients position cannot be
appropriated by the member of the exchange, except when a written consent is taken within
three days time. The FMC is persuading increasing number of exchanges to switch over to
electronic trading, clearing and settlement, which is more customerfriendly. The FMC has
also prescribed simultaneous reporting system for the exchanges following open outcry
system.
These steps facilitate audit trail and make it difficult for the members to indulge in
malpractices like trading ahead of clients, etc. The FMC has also mandated all the exchanges
following open outcry system to display at a prominent place in exchange premises, the
33

name, address, telephone number of the officer of the commission who can be contacted for
any grievance. The website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC. Officers of the FMC have been
instructed to meet the members and clients on a random basis, whenever they visit exchanges,
to ascertain the situation on the ground, instead of merely attending meetings of the board of
directors and holding discussions with the officebearers.
Rules governing intermediaries
In addition to the provisions of the Forward Contracts (Regulation) Act 1952 and rules
framed there under, exchanges are governed by its own rules and bye laws (approved by the
FMC). In this section we have brief look at the important regulations that govern NCDEX.
For the sake of convenience, these have been divided into two main divisions pertaining to
trading and clearing. The detailed bye laws, rules and regulations are available on the
NCDEX home page.
Trading
The NCDEX provides an automated trading facility in all the commodities admitted for
dealings on the spot market and derivative market. Trading on the exchange is allowed only
through approved workstation(s) located at locations for the office(s) of a trading member as
approved by the exchange. If LAN or any other way to other workstations at any place
connects an approved workstation of a trading Member it shall require an approval of the
exchange.
Each trading member is required to have a unique identification number which is provided by
the exchange and which will be used to log on (sign on) to the trading system. A trading
ember has a non-exclusive permission to use the trading system as provided by the exchange
in the ordinary course of business as trading member. He does not have any title rights or
interest whatsoever with respect to trading system, its facilities, software and the information
provided by the trading system.
For the purpose of accessing the trading system, the member will install and use equipment
and software as specified by the exchange at his own cost. The exchange has the right to
inspect equipment and software used for the purposes of accessing the trading system at any

34

time. The cost of the equipment and software supplied by the exchange, installation and
maintenance of the equipment is borne by the trading member.
Trading members and users
Trading members are entitled to appoint, (subject to such terms and conditions, as may be
specified by the relevant authority) from time to time Authorized persons
Approved users
Trading members have to pass a certification program, which has been prescribed by the
exchange. In case of trading members, other than individuals or sole proprietorships, such
certification program has to be passed by at least one of their directors/ employees/ partners /
members of governing body. Each trading member is permitted to appoint a certain number
of approved users as noticed from time to time by the exchange. The appointment of
approved users is subject to the terms and conditions prescribed by the exchange. Each
approved user is given a unique identification number through which he will have access to
the trading system. An approved user can access the trading system through a password and
can change the password from time to time. The trading member or its approved users are
required to maintain complete secrecy of its password. Any trade or transaction done by use
of password of any approved user of the trading member, will be binding on such trading
member. Approved user shall be required to change his password at the end of the password
expiry period.
Trading days
The exchange operates on all days except Saturday and Sunday and on holidays that it
declares from time to time. Other than the regular trading hours, trading members are
provided a facility to place orders off-line i.e. outside trading hours. These are stored by the
system but get traded only once the market opens for trading on the following working day.
The types of order books, trade books, price a limit, matching rules and other parameters
pertaining to each or all of these sessions are specified by the exchange to the members via its
circulars or notices issued from time to time. Members can place orders on the trading system
during these sessions, within the regulations prescribed by the exchange as per these bye
laws, rules and regulations, from time to time.

35

Trading hours and trading cycle

The exchange announces the normal trading hours/ open period in advance from time to time.
In case necessary, the exchange can extend or reduce the trading hours by notifying the
members. Trading cycle for each commodity/ derivative contract has a standard period,
during which it will be available for trading.
Contract expiration
Derivatives contracts expire on a predetermined date and time up to which the contract is
available for trading. This is notified by the exchange in advance. The contract expiration
period will not exceed twelve months or as the exchange may specify from time to time.
Trading parameters.
The exchange from time to time specifies various trading parameters relating to the trading
system. Every trading member is required to specify the buy or sell orders as either an open
order or a close order for derivatives contracts. The exchange also prescribes different order
books that shall be maintained on the trading system and also specifies various conditions on
the order that will make it eligible to place it in those books.
The exchange specifies the minimum disclosed quantity for orders that will be allowed for
each commodity/ derivatives contract. It also prescribes the number of days after which Good
Till Cancelled orders will be cancelled by the system. It specifies parameters like lot size in
which orders can be placed, price steps in which orders shall be entered on the trading
system, position limits in respect of each commodity etc.
Failure of trading member terminal
In the event of failure of trading members workstation and/ or the loss of access to the
trading system, the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for. Only
requests made in writing in a clear and precise manner by the trading member would be
considered. The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange

36

In the event of failure of trading members workstation and/ or the loss of access to the
trading system, the exchange can at its discretion undertake to carry out on behalf of the
trading member the necessary functions which the trading member is eligible for. Only
requests made in writing in a clear and precise manner by the trading member would be
considered. The trading member is accountable for the functions executed by the exchange on
its behalf and has to indemnity the exchange against any losses or costs incurred by the
exchange.
Trade operations
Trading members have to ensure that appropriate confirmed order instructions are obtained
from the constituents before placement of an order on the system. They have to keep relevant
records or documents concerning the order and trading system order number and copies of
the order confirmation slip/ modification slip must be made available to the constituents.
The trading member has to disclose to the exchange at the time of order entry whether the
order is on his own account or on behalf of constituents and also specify orders for buy or sell
as open or close orders. Trading members are solely responsible for the accuracy of details of
orders entered into the trading system including orders entered on behalf of their constituents.
Trades generated on the system are irrevocable and `locked in'. The exchange specifies from
time to time the market types and the manner if any, in which trade cancellation can be
effected. Where a trade cancellation is permitted and trading member wishes to cancel a
trade, it can be done only with the approval of the exchange.
Margin requirements
Subject to the provisions as contained in the exchange byelaws and such other regulations as
may be in force, every clearing member, in respect of the trades in which he is party to, has to
deposit a margin with exchange authorities.
The exchange prescribes from time to time the commodities/ derivative contracts, the
settlement periods and trade types for which margin would be attracted. The exchange levies
initial margin on derivatives contracts using the concept of Value at Risk (VaR) or any other
concept as the exchange may decide from time to time. The margin is charged so as to cover
one. day loss that can be encountered on the position on 99% of the days. Additional margins
may be levied for deliverable positions, on the basis of VaR from the expiry of the contract
37

till the actual settlement date plus a mark. Up for default. The margin has to be deposited with
the exchange within the time notified by the exchange.

The exchange also prescribes

categories of securities that would be eligible for a margin deposit, as well as the method of
valuation and amount of securities that would be required to be deposited against the margin
amount.
The procedure for refund/ adjustment of margins is also specified by the exchange from time
to time. The exchange can impose upon any particular trading member or category of trading
member any special or other margin requirement. On failure to deposit margin/s as required
under this clause, the exchange/clearing house can withdraw the trading facility of the trading
member. After the pay-out, the clearing house releases all margins.
Margins for trading in futures
Margin is the deposit money that needs to be paid to buy or sell each contract. The margin
required for a futures contract is better described as performance bond or good faith money.
The margin levels are set by the exchanges based on volatility (market conditions) and can be
changed at any time. The margin requirements for most futures contracts range from 2% to
15% of the value of the contract.
In the futures market, there are different types of margins that a trader has to maintain... At
this stage we look at the types of margins as they apply on most futures exchanges.
Initial margin: The amount that must be deposited by a customer at the time of entering into
a contract is called initial margin. This margin is meant to cover the largest potential loss in
one day.
The margin is a mandatory requirement for parties who are entering into the contract.
Maintenance margin: A trader is entitled to withdraw any balance in the margin account in
excess of the initial margin. To ensure that the balance in the margin account never becomes
negative, a maintenance margin, which is somewhat lower than the initial margin, is set. If
the balance in the margin account falls below the maintenance margin, the trader receives a
margin call and is requested to deposit extra funds to bring it to the initial margin level within
a very short period of time. The extra funds deposited are known as a variation margin. If the

38

trader does not provide the variation margin, the broker closes out the position by offsetting
the contract.
Additional margin: In case of sudden higher than expected volatility, the exchange calls for
an additional margin, which is a preemptive move to prevent breakdown? This is imposed
when the exchange fears that the markets have become too volatile and may result in some
payments crisis, etc.
Mark-to-Market margin (MTM): At the end of each trading day, the margin account is
adjusted to re direct the traders gain or loss. This is known as marking to market the account
of each trader. All futures contracts are settled daily reducing the credit exposure to one days
movement. Based on the settlement price, the value of all positions is markedtomarket
each day after the official close. i.e. the accounts are either debited or credited based on how
well the positions fared in that days trading session. If the account falls below the
maintenance margin level the trader needs to replenish the account by giving additional
funds. On the other hand, if the position generates a gain, the funds can be withdrawn (those
funds above the required initial margin) or can be used to fund additional trades.
Unfair trading practices
No trading member should buy, sell, deal in derivatives contracts in a fraudulent manner, or
indulge in any unfair trade practices including market manipulation. This includes the
following:
Effect, take part either directly or indirectly in transactions, which are likely to have effect
of artificially, raising or depressing the prices of spot/ derivatives contracts.
Indulge in any act, which is calculated to create a false or misleading appearance of
trading, resulting in refection of prices, which are not genuine?
Buy, sell commodities/ contracts on his own behalf or on behalf of a person associated
with him pending the execution of the order of his constituent or of his company or director
for the same contract.
Delay the transfer of commodities in the name of the transferee.

39

 Indulge in falsification of his books, accounts and records for the purpose of market
manipulation.
When acting as an agent, execute a transaction with a constituent at a price other than the
price at which it was executed on the exchange.
Either take opposite position to an order of a constituent or execute opposite orders which
he is holding in respect of two constituents except in the manner laid down by the exchange.
Clearing
As mentioned earlier, National Securities Clearing Corporation Limited (NSCCL) undertakes
clearing of trades executed on the NCDEX. All deals executed on the Exchange are cleared
and settled by the trading members on the settlement date by the trading members themselves
as clearing members or through other professional clearing members in accordance with these
regulations, bye laws and rules of the exchange.
Last day of trading
Last trading day for a derivative contract in any commodity is the date as specified in the
respective commodity contract. If the last trading day as specified in the respective
commodity contract is a holiday, the last trading day is taken to be the previous working day
of exchange.
On the expiry date of contracts, the trading members/ clearing members have to give delivery
information as prescribed by the exchange from time to time. If a trading member/ clearing
member fail to submit such information during the trading hours on the expiry date for the
contract, the deals have to be settled as per the settlement calendar applicable for such deals,
in cash together with penalty as stipulated by the exchange.
Delivery
Delivery can be done either through the clearing house or outside the clearing house. On the
expiry date, during the trading hours, the exchange provides a window on the trading system
to submit delivery information for all open positions. After the trading hours on the expiry
date, based on the available information, the matching for deliveries takes place. firstly, on
the basis of locations and then randomly keeping in view the factors such as available
40

capacity of the vault/ warehouse, commodities already deposited and dematerialized and
offered for delivery and any other factor as may be specified by the exchange from time to
time. Matching done is binding on the clearing members. After completion of the Delivery
through the depository clearing system
Delivery in respect of all deals for the clearing in commodities happens through the
depository clearing system. The delivery through the depository clearing system into the
account of the buyer with the depository participant is deemed to be delivery, notwithstanding
that the commodities are located in the warehouse along with the commodities of other
constituents.
Payment through the clearing bank
Payment in respect of all deals for the clearing has to be made through the clearing bank(s);
Provided however that the deals of sales and purchase executed between different
constituents of the same clearing member in the same settlement, shall be offset by process of
netting to arrive at net obligations.
The relevant authority from time to time fixes the various clearing days, the pay-in and pay.out days and the scheduled time to be observed in connection with the clearing and settlement
operations of deals in commodities/ futures contracts.
1. Settlement obligations statements for TCMs: The exchange generates and provides to
each trading clearing member, settlement obligations statements showing the quantities of the
different kinds of commodities for which delivery/ deliveries is/ are to be given and/ or taken
and the funds payable or receivable by him in his capacity as clearing member and by
professional clearing member for deals made by him for which the clearing Member has
confirmed acceptance to settle. The obligations statement is deemed to be confirmed by the
trading member for whom deliveries are to be given and/ or taken and funds to be debited
and/ or credited to his account as specified in the obligations statements and deemed
instructions to the clearing banks/ institutions for the same.
2. Settlement obligations statements for PCMs: The exchange/ clearing house generates
and provides to each professional clearing member, settlement obligations statements
showing the quantities of the different kinds of commodities for which delivery/ deliveries is/
41

are to be given and/ or taken and the funds payable or receivable by him. The settlement
obligation statement is deemed to have been confirmed by the said clearing member in
respect of all obligations enlisted therein.
Delivery of commodities
Based on the settlement obligations statements, the exchange generates delivery statement
and receipt statement for each clearing member. The delivery and receipt statement contains
details of commodities to be delivered to and received from other clearing members, the
details of the corresponding buying/ selling constituent and such other details. The delivery
and receipt statements are deemed to be confirmed by respective member to deliver and
receive on account of his constituent, commodities as specified in the delivery and receipt
statements. On respective pay-in day, clearing members affect depository delivery in the
depository clearing system as per delivery statement in respect of depository deals. Delivery
has to be made in terms of the delivery units notified by the exchange. Commodities, which
are to be received by a clearing member, are delivered to him in the depository clearing
system in respect of depository deals on the respective pay-out day as per instructions of the
exchange/ clearing house.
Delivery units
The exchange specifies from time to time the delivery units for all commodities admitted to
dealings on the exchange. Electronic delivery is available for trading before expiry of the
validity date. The exchange also specifies from time to time the variations permissible in
delivery units as per those stated in contract specifications.
Depository clearing system
The exchange specifies depository (ies) through which depository delivery can be effected
and which shall act as agents for settlement of depository deals, for the collection of margins
by way of securities for all deals entered into through the exchange, for any other
commodities movement and transfer in a depository (ies) between clearing members and the
exchange and between clearing member to clearing member as may be directed by the
relevant authority from time to time.
Every clearing member must have a clearing account with any of the Depository Participants
of specified depositories. Clearing Members operate the clearing account only for the purpose
42

of settlement of depository deals entered through the exchange, for the collection of margins
by way of commodities for deals entered into through the exchange. The clearing member
cannot operate the clearing account for any other purpose.
Clearing members are required to authorize the specified depositories and depository
participants with whom they have a clearing account to access their clearing account for
debiting and crediting their accounts as per instructions received from the exchange and to
report balances and other credit information to the exchange.
1.2.8

RISK MANAGEMENT OF COMMODITY MARKET IN LIGHT OF MCX

AND NCDEX
The two major economic functions of a commodity futures market are price risk management
and price discovery of the commodity. Among these the price risk management is by far the
most important, and is raison d etre of a commodity futures market.
The need for price risk management, through what is commonly called hedging arises from
price risks in most commodities. The larger, the more frequent and the more unforeseen is the
rice variability inn a commodity, the greater is the price risk in it. Whereas insurance
companies offer suitable policies to cover the risks of physical commodity losses due to fire,
pilferage, transport mishaps etc. they do not cover the risks of value losses resulting from
adverse price variations. The reason for this is obvious. The value losses emerging from price
risks are much larger and the probability of recurrence is far more frequent than the physical
losses in both the quantity and quality of goods caused by accidental fires and mishaps.
Commodity producers, merchants, stockists and importers face the risk of large value losses
on their production, purchases, stock and imports from the fall in prices. Likewise the
processors, manufacturers, exporters and market functionaries, entering into forward sale
commitments in either the domestic or export markets, are exposed to heavy risks from
adverse price changes.
True, price variability may also lead to windfalls, when losses move favorably. In the long
run, such gains may even offset the losses from adverse price movements. But the losses,
when incurred, are at times so huge these may often cause insolvencies. The greater the
exposure to commodity price risks, the greater is the share of the commodity in the total
43

earnings or production costs. Hence the needs for price risk management by hedging through
the use of futures contracts.
Hedging involves buying or selling of a standardized futures contract against the
corresponding sale or purchase respectively of the equivalent physical commodity. The
benefits of hedging flow from the relationship between the prices of contracts for physical
delivery and those of futures contracts. So long as these two sets of prices move in close
unison and display a parallel relationship, losses in the physical market are off set, either fully
or substantially, by the gains in the future market. Hedging thus performs the economic
function of helping to reduce significantly, if not eliminate altogether, the losses emanating
from the price risks in commodities.
BENEFITS OF COMMODITY MARKET
Why Commodity Futures?
One answer that is heard in the financial sector is "we need commodity futures markets so
that we will have volumes, brokerage fees, and something to trade''. I think that is missing the
point. We have to look at futures market in a bigger perspective -- what is the role for
commodity futures in India's economy?
In India agriculture has traditionally been an area with heavy government intervention.
Government intervenes by trying to maintain buffer stocks, they try to fix prices, and they
have import-export restrictions and a host of other interventions. Many economists think that
we could have major benefits from liberalization of the agricultural sector.
In this case, the question arises about who will maintain the buffer stock, how will we
smoothen the price fluctuations, how will farmers not be vulnerable that tomorrow the price
will crash when the crop comes out, how will farmers get signals that in the future there will
be a great need for wheat or rice. In all these aspects the futures market has a very big role to
play.
If you think there will be a shortage of wheat tomorrow, the futures prices will go up today,
and it will carry signals back to the farmer making sowing decisions today. In this fashion, a
system of futures markets will improve cropping patterns.

44

Next, if I am growing wheat and am worried that by the time the harvest comes out prices
will go down, then I can sell my wheat on the futures market. I can sell my wheat at a price,
which is fixed today, which eliminates my risk from price fluctuations. These days,
agriculture requires investments -- farmers spend money on fertilizers, high yielding
varieties, etc. They are worried when making these investments that by the time the crop
comes out prices might have dropped, resulting in losses. Thus a farmer would like to lock in
his future price and not be exposed to fluctuations in prices.
The third is the role about storage. Today we have the Food Corporation of India, which is
doing a huge job of storage, and it is a system, which -- in my opinion -- does not work.
Futures market will produce their own kind of smoothing between the present and the future.
If the future price is high and the present price is low, an arbitrager will buy today and sell in
the future. The converse is also true, thus if the future price is low the arbitrageur will buy in
the futures market. These activities produce their own "optimal" buffer stocks, smooth prices.
They also work very effectively when there is trade in agricultural commodities; arbitrageurs
on the futures market will use imports and exports to smooth Indian prices using foreign spot
markets.
Benefits to Industry from Futures trading.
* Hedging the price risk associated with futures contractual commitments.
* Spaced out purchases possible rather than large cash purchases and its storage.
* Efficient price discovery prevents seasonal price volatility.
* Greater flexibility, certainty and transparency in procuring commodities would aid bank
lending.
* Facilitate informed lending.
* Hedged positions of producers and processors would reduce the risk of default faced by
banks.
* Lending for agricultural sector would go up with greater transparency in pricing and
storage.
* Commodity Exchanges to act as distribution network to retail agric-finance from Banks to
rural households.
* Provide trading limit finance to Traders in commodities Exchanges

45

Benefits to Exchange Member

* Access to a huge potential market much greater than the securities and cash market in
commodities.
* Robust, scalable, state-of-art technology deployment.
* Member can trade in multiple commodities from a single point, on real time basis.
* Traders would be trained to be Rural Advisors and Commodity Specialists and through
them multiple rural needs would be met, like bank credit, information dissemination, etc.
Economic benefits of the commodity futures trading
Futures market for commodities has a very vital role to play in any economy given the fact
that futures contracts perform two important functions of price discovery and price
risk management with reference to the given commodity. At a broader level
commodity markets provide advantages like it leads to integrated price structure
throughout the country, it ensures price stabilization-in times of violent price
fluctuations

and

facilitates lengthy

and

complex

production

and

manufacturing

activities. At micro level also they provide several economic benefits to several different
sections of the society. For example, it is useful to producer of agricultural commodity
because he can get an idea of the price likely to prevail at a future point of time and
therefore can decide between various competing commodities. The futures trading is
very useful to the exporters as it provides an advance indication of the price likely to
prevail and thereby help the exporter in quoting a realistic price and thereby secure export
contract in a competitive market. Further after entering into an export contract, it enables
him to hedge his risk by operating in futures market. Also from the point of view of a
consumer these market provide an idea about the price at which the commodity would be
available at a future point of time. Thus it enables the consumer to do proper costing
and also cover his purchases by making forward contracts.

46

CHAPTER 2
NEED, SCOPE
&
OBJECTIVES

47

2.3

NEED OF THE STUDY

To create a world class commodity exchange platform for the market participants. To bring
professionalism and transparency into commodity trading. To include international best
practices like Demutualization, technology platforms, low cost solutions and information
dissemination without noise etc into our trade. To provide nation wide reach and consistent
offering. To bring together the names that market can trust.
2.2

SCOPE OF THE STUDY

The area selected for my study is Karvy Stock Broking Company Ltd., Bathinda from where
I filled questionnaires from customers of the karvy.
2.1 OBJECTIVES OF STUDY
To study the awareness about commodity market.
To know the nuances of commodities market in India.
To study the growth of commodities future market.
To know the working and structure of commodities exchanges in India.
To discuss the available risk management tools.

48

CHAPTER-3
REVIEW
OF LITERATURE

49

3.

REVIEW OF LITERATURE

Few studies are available on the performance and efficiency of Indian commodity futures
market. In spite of a considerable empirical literature, there is no common consensus about
the efficiency of commodity futures market.
3.1 Gopal and Sudhir (2002) emphasized that agricultural commodity futures market has not
fully developed as competent mechanism of price discovery and risk management. The study
found some aspects to blame for deficient market such as poor management, infrastructure
and logistics.
3.3 Dominance of spectators also dejects hedgers to participate in the market. Narender
(2006) concluded that Indian commodity market has made enormous progress since 2003
with increased number of modern commodity exchanges, transparency and trading activity.
The volume and value of commodity trade has shown unpredicted mark. This had happened
due to the role played by market forces and the active encouragement of Government by
changing the policy concerning commodity derivative. He suggested the promotion of barrier
free trading in the future market and freedom of market forces to determine the price.
3.4 Himdari (2007) pointed out that significant risk returns features and diversification
potential has made commodities popular as an asset class. Indian futures markets have
improved pretty well in recent years and would result in fundamental changes in the existing
isolated local markets particularly in case of agricultural commodities.
3.5 Kamal (2007) concluded that in short span of time, the commodity futures market has
achieved exponential growth in turnover. He found various factors that need to be consider
for making commodity market as an efficient instrument for risk management and price
discovery and suggested that policy makers should consider specific affairs related with
agricultural commodities marketing, export and processing and the interests involved in their
actual production.
3.6 K. Lakshmi (2007) discussed the implications on the grant of permission to Foreign
Institutional Investors, Mutual Funds and banks in commodity derivative markets. She found

50

that participation of these institutions may boost the liquidity and volume of trade in
commodity market and they could get more opportunities for their portfolio diversification.
3.7 Arup et al. (2008) to facilitate business development and to create market awareness,
they conducted an index named MCX COMAX for different commodities viz. agricultural,
metal and energy traded on Multi Commodity Exchange in India. By using weighted
geometric mean of the price relatives as the index, weights were selected on the basis of
percentage contribution of contracts and value of physical market. With weighted arithmetic
mean of group indices the combined index had been calculated. It served the purpose of Multi
Commodity Exchange to make association among between various MCX members and their
associates along with creation of fair competitive environment. Commodity trading market
had considered this index as an ideal investment tool for the protection of risk of both buyers
and sellers.
3.8 Swami and Bhawana (2009) discussed that with the elimination of ban from
commodities, Indian futures market has achieved sizeable growth. Commodity futures market
proves to be the efficient market at the world level in terms of price risk management and
price discovery. Study found a high potential for future growth of Indian commodity futures
market as India is one of the top producers of agricultural commodities.
3.9 Gurbandani and D.N, (2010) they tested the market efficiency of agricultural
commodities traded on National Commodity Derivative Exchange of India and pointed out
that Indian commodity derivative market has witnessed phenomenal growth in few years by
achieving almost 50 time expansion in market.
3.10 By applying autocorrelation and run tests on four commodities namely-Guar seed,
Pepper Malbar, refined Soya oil and Chana (Gram) the study observed the random walk
hypothesis and tested the week form efficiency of these commodities. The study also
indicated key evidence of liner dependence for selected agricultural commodities which has
reflected by high coefficient values of autocorrelation. Indian agricultural commodity market
is efficient in week form of efficient market hypothesis.

51

Chapter 4
RESEARCH
METHODOLOGY

52

4.1

RESEARCH METHODOLOGY

Meaning of Research
Research in common parlance refers to a search for knowledge.
According to Redman and Moray, research is a systematized effort to gain new
knowledge
Research methodology
Research Methodology describes the research procedure. This includes the overall research
design, the sampling procedure, the data-collection methods.
1. Research Design
Research Design is the conceptual structure within which research is conducted. It
constitutes the blueprint for collection, measurement and analysis of data. The design
used for carrying out this research is Descriptive. A research using descriptive
method with the help of structured questionnaire will be used as it best conforms to
the objectives of the study.
2. Data Collection
Through both the primary and secondary methods.

Primary data collection

1) Survey through a questionnaire.

Secondary sources
1) Financial newspapers, magazines, journals, reports and books.
2) Interaction with experts and qualified professionals.
3) Internet

3. Sampling plan
a) Sample Area
Bathinda.
53

b) Sample size
The sample size is 60.
c) Sampling technique
The simple random sample method is used.
LIMITATIONS OF STUDY
No study is complete in itself, however good it may be and every study has some limitations.
Following are the limitations of my study:

Time constraint.

Unwillingness of respondents to reveal the information.

Sample size is not enough to have a clear opinion.

Lack of awareness about commodity market among respondents.

Since the data collection methods involve opinion survey, the personal bias may
influence the study due to the respondents tendency to rationalize their views.

54

CHAPTER 5DATA ANALYSIS

& INTERPRETATION

55

DATA ANALYSIS & INTERPRETATION

Q 1. You are a/an
Table no-5.1
You are a/an
Options
Broker
Investor
Financial expert
Total

No. of responses
18
30
12
60

Percentage
30
50
20
100

Diagrammatically Presentation
Broker

Investor

Financial expert

20%
30%

50%

Figure no- 5.1

You are a/an
Interpretation:- From the above data collected it is found that majority of the brokers having
knowledge. Out of 200 brokers approximately 60 brokers are dealing in commodity market in
LSE. There are a number of private investment companies, which are investing in
commodities through MCX and NCDEX

56

Q 2. You are investing in-----------Table no- 5.2

You are investing in-----------Options
Shares & Bonds
Derivatives
Commodities
All of the above
None
Total

No. of responses
24
5
16
10
5
60

Percentage
37.5
10.0
26.66
16.66
5
100

Diagrammatically Presentation
Shares & Bonds

Derivatives

Commodities

All of the above

18%
42%

29%

11%
Figure- 5.2
You are investing in------------

Interpretation :- Majority of investors are investing in Share market but growth of

commodity market can be seen as in such a small time the number of investors is 16 i.e. share
of 26.66% and some who are investing in all option of Capital Market.

57

Q 3.

Degree of knowledge in commodities market

Table 5.3
Degree of knowledge in commodities market

Options
Very High (8-10)
High (6-8)
Moderate (4-6)
Low
Very Low
Total

No. of responses
8
10
20
10
12
60

Percentage
13.33
16.66
30.00
20.00
20.00
100

Diagrammatically Presentation

Very High (8-10)

High (6-8)

Moderate (4-6)

Low

Very Low

13%

20%

17%

20%
30%

Figure:- 5.3
Degree of knowledge in commodities market
Interpretation:- Being a new concept the knowledge of people is moderate or less only
13.33% people have high knowledge

58

Q 4.

Are you trading in commodity market?

Table no-5.4
Are you trading in commodity market?

Options
Yes
No
Total

No. of responses
42
1
43

Percentage
90
10
100

Diagrammatically Presentation
Yes

No

10%

90%

Figure:-5.4
Are you trading in commodity market?
Interpretation :-Commodity market is certainly a very gilt market to invest because 90% of
people investing in it.

59

Q 5.

Why you have not ever invested in Commodity Market?

Table no-5.5
Why you have not ever invested in Commodity Market?

Options
Lack of Awareness
New Concept
Less broker initiative
Risk
Total

No. of responses
3
1
0
2
6

Percentage
50.00
16.00
0.00
33.33
100

Diagrammatically Presentation
Lack of Awareness

New Concept

Less broker initiative

Risk

34%

50%
0%
16%

Figure:- 5.5
Why you have not ever invested in Commodity Market?
Interpretation:- Lack of awareness is the major factors among the investors to not to trade in
the commodities.

60

Q 6.

In future in which commodities you want to invest in Future?

Table no:- 5.6
Future of commodity investment by people

Options
Bullions (Gold & Silver)
Heavy Metals
Agro- Commodities
Energy
Total

No. of responses
3
1
1
1
6

Percentage
53.33
16.66
15.00
15.00
100

Diagrammatically Presentation
Bullions (Gold & Silver)

Heavy Metals

Agro- Commodities

Energy

15%

15%

53%

17%

Figure:-5.6
Future of commodity investment by people
Interpretation:-Most of the people like to invest to in the Bullions as compared to other
commodities

61

Q 7.

You are trading through ______________________

Table:- 5.7
People Trading Through

Options
LSE
Master Trust
Kotak
Apollo Sindhoori
Total

No. of responses
35
10
7
8
60

Percentage
58.33
16.66
11.66
13.33
100

Diagrammatically Presentation
LSE

Master Trust

Kotak

Apollo Sindhoori

13%
12%

17%
58%

Figure:- 5.7
People Trading Through
Interpretation:- LSE is hot favorite among the investors to invest as 58.33% investors are
investing through LSE.

62

Q 8.

From how much time you are trading?

Table :- 5.8
From how much time you are trading ?

Options
Less than 1 month
1 to 3 months
3 to 6 months
More than 6 months
Total

No. of responses
8
42
4
6
60

Percentage
13.33
70.00
6.66
10.00
100

Diagrammatically Presentation
Less than 1 month

1 to 3 months

3 to 6 months

10%

More than 6 months

13%

7%

70%

Figure :- 5.8
From how much time you are trading ?
Interpretation:- The survey show that most of person thinks that commodities market is fast
growing in India due to its stability of transactions.

63

Q 9.

In which commodities you are investing?

Table 5.9
Commodities in which you are investing.

Options
Bullions (Gold & Silver)
Heavy Metals
Agro commodities
Energy
Total

No. of responses
20
6
5
15
46

Percentage
40.00
12.00
8.33
25.00
85

Diagrammatically Presentation
Bullions (Gold & Silver)

Heavy Metals

Agro commodities

Energy

47%

29%

10%
14%

Figure:-5.9
Commodities in which you are trading.
Interpretation:-Mostly the investors are investing in Bullions (40%) and the second
preference being Energy side (Crude Oil) with 25%.

64

Q 10. What is the basis of trading?

Table:- 5.10
Basis of trading.
Options
Arbitrage
Speculation
Hedging
Delivery
All of above
Total

No. of responses
6
2
10
4
38
60

Percentage
10.00
3.33
16.67
6.669
63.33
100

Diagrammatically Presentation
Arbitrage

Speculation

Hedging

Delivery

All of above

10%
3%

17%

7%
63%

Figure:-5.10
Basis of trading.
Interpretation:- Survey shows that the investors are rational and selects the type which
offers maximum return. They do not stick to a particular mode of trading.

65

Q 11. Growth of commodity market in India is?

Table:- 5.11
Growth of Commodity Market in India
Options
Very fast
Fast
Moderate
Low
Total

No. of responses
15
25
13
7
60

Percentage
25.00
41.66
21.66
11.68
100

Diagrammatically Presentation
Very fast

Fast

Moderate

10%

Low
25%

22%

43%

Figure:- 5.11
Growth of commodity market in india.
Interpretation:- Almost 65% respondents have ticked the option of all of above all these
benefits are to Govt. in indirect way. The most important that is possibility of removal of
subsidy by the Govt.

66

Q 12. How Commodity Market helps in Market Development?

Table:- 5.12
Commodity Market helps in Market Development
Options
Price Fixation
Demand Forecasting
Social Security (Esp. to Farmers)
All of above
Total

No. of responses
5
30
10
15
60

Percentage
8.33
50.0
16.00
25.00
99.33

Diagrammatically Presentation
Price Fixation

Demand Forecasting

Social Security

All of above

8%
25%

16%

51%

Figure:- 5.12
Commodity Market helps in Market Development
Interpretation:- According to the survey Demand Forecasting (50%) is most important tool
in the commodity market.

67

Q 13. Is Commodity Market is _________________ for Indian Economy

Table:- 5.13
Commodity Market is _________________ for Indian Economy
Options
Perfect
Appropriate
Unsuitable
Cant Say
Total

No. of responses
5
30
10
15
60

Percentage
8.33
50.00
16.66
25.00
99.99

Diagrammatically Presentation
Perfect

Appropriate

Unsuitable

Cant Say

8%
25%

17%

50%

Figure:- 5.13
Commodity Market is _________________ for Indian Economy
Interpretation:- The commodity market is appropriate (50%) for the developing agro Indian
economy.

68

Q 14. How it will influence the Indian Economy?

Table:-5.14
Effect of commodity market in Indian market.
Options
Proximity
Social security
High return to Buyer & seller
Reducing Risk Buyer & Seller
Total

No. of responses
12
7
21
20
60

Percentage
20
11.66
35.00
33.33
101.99

Diagrammatically Presentation
Proximity
High return to Buyer & seller

Social security
Reducing Risk Buyer & Seller

20%
33%

12%

35%

Figure:- 5.14
Effect of commodity market in Indian market.
Interpretation:- This shows that commodity market will reduce the risk (20%) and increase
the return (21).

69

Q 15. Impact of Commodity market on Business Houses?

Table:- 5.15
Impact of Commodity market on Business Houses
Options
Increase in Revenues
Development of Banks
Risk management
All of above
Total

No. of responses
9
21
15
15
60

Percentage
15.00
35.00
25.00
25.00
100

Diagrammatically Presentation
Increase in Revenues

Development of Banks

Risk management

All of above

15%

25%

35%
25%

Figure:- 5.15
Impact of Commodity market on Business Houses
Interpretation:- The impact of Commodity market on Business Houses is uniform in all
forms as it will increased the revenues, Develop the bank manage the risk effectively .

70

FINDINGS & RECOMMENDATIONS

Create awareness about the commodity market there is a dire need to have more and more
awareness programs.
Government of India (GOI) is committed to strengthening the commodity markets,
commodity exchanges and the regulatory authority through training and modernization.
GOI will proceed cautiously. It wants to encourage multi-commodity exchanges.
Futures exchanges must gain the confidence of not only the users but also the
agriculturists, the manufacturers, the consumers and
The public at large, through functional transparency and viability.
Clearing, guarantee and settlement procedures are important. Commodity exchanges are
bound to succeed over time with well designed contracts, appropriate technology and
marketing of their services.
Regulations are an integral part of futures markets. Monitoring and surveillance are
extremely important functions. The regulatory authority must be strong, but not overintrusive. The commodity exchanges should provide first level of regulation on a day-today basis.
Banks have a critical role to play in the development of commodity futures. They need to
provide not only the money but also services. With some initial promotion the
investments made and services provided can not be economically viable but also profit
sharing. For this the banks would need to acquire appropriate skills.
Information need of commodity futures markets is not fulfilled. Even though government
collects useful information, it is not timely. There are also good business prospects for the
private sector to provide timely and relevant information.
Training for all those connected with commodity futures is absolutely essential. Training
needs for every level have to be identified. The levels of training have to be different for
different groups and training may have to be imparted in stages.
The commodity exchanges outside India which have adopted "online trading" or "screen
based trading" have made impressive gains in their turnover as also in their ranking in the
commodity exchanges having the highest volumes of trading and liquidity of contracts.
Considering this aspect, the transparency in trades that online trading provides the
possibility of decentralized trading and the facility of direct trading to outstation
members/clients, the Indian commodity exchanges also stress on development of online
system prevailing now-days.
71

 The delivery costs in the MCX and NCDEX are very costly so the -government must
form a platform for it to be economical for general investor.
There should be more awareness programs for the rural sector people by advertising in
regional newspapers & TV channels such as Doordarshan, Akashvani etc.

72

CONCLUSION
The Indian accounting guidelines in this area need to be carefully reviewed. The
international trend is moving the underlying commodities as well as associated
commodity derivative instrument to market. Such a practice would bring into the account
a clear picture of the impact of commodities related operations.
On the basis of overall study on future of commodity market it was found that
derivative products initially emerged as hedging devices against fluctuation and
commodity prices and commodity linked derivatives remained the soul form of such
products.
I was really surprised to see during my study that a layman or a simple investor does
not even know how to hedge and how to reduce risk on his portfolios. Big individual
investors, institutional investors, mutual funds etc generally perform all these activities.
No doubt that commodities growth towards the progress of economy is positive. But
the problems confronting the commodity market segment are giving it a low customer
base. The main problems that it confronts are unawareness and bit lot sizes etc. these
problems could be overcome easily by revising lot sizes and also there should be seminar
and general discussions on derivatives at varied places.

73

BIBLOGRAPHY
BOOKS, JOURNALS etc:
1. NCFM modules
2. Sidhu, H.S., Outlines of Indian Capital Market.
3. Indian commodity market review (MCX publications)
4. Capital market dealer modules (NSE publications)
5. Investor education, 2003, souvenir released by Ludhiana stock exchange
6. Empowering investors through education, souvenir released by Bangalore stock exchange
7. the Indian commodity market derivatives in operation by Dr. J.N. Dhankar
8. BCDE (BSE certificate module on derivatives, BSE publications)
9. SEBI (Disclosure & Investor Protection) guidelines, 2005
10. Manual of SEBI act, rules, regulations, guidelines, circulars etc. (Bharat publications
11. MCX Annual commodity market review
12. LSE Bulletin
13. SEBI Bulletin
14. Listing agreement on commodity exchanges

WEBSITES:
www.ncdexindia.com
www.mcxindia.com
www.sebi.gov.in
www.wikipedia.com

74

APPENDIX
QUESTIONNAIRE
1. You are a/an
a) Broker.
b) Investor...
c) Financial expert..
2. You are investing in ________
a) Shares and Bonds
b) Derivatives..
c) Commodities
d) All of the above
e) None.
3. Degree of knowledge in commodities market
a) Very high (8-10)
b) High (6-8)..
c) Moderate (4-6)..
d) Low (2-4)..
e) Very low (0-1)..
4. Are you trading in commodity market?
a) Yes.
b) No..
5. If No Why you have not ever invested in Commodity Market?
a) Lack of awareness.
b) New concept..
c) Less broker initiative..
d) Risk factor..
6. Which commodities would you like to invest in Future?
a) Bullion..
b) Heavy metals.
c) Agro commodities.
d) Energy
7. You are trading through _________
a) LSE
b) Master trust
75

c) Kotak
d) Apollo sindhoori
8. If yes, from how much time you are trading?
a) Less than 1 month
b) 1-3 months
c) 3-6 months
d) More than 6 months..
9. In which commodities you are investing?
a) Bullion..
b) Heavy metals.
c) Agro commodities.
d) Energy
10. What is the basis of trading?
a) Hedging.
b) Speculation
c) Arbitration.
d) Delivery.
e) All of the above..
11. Growth of commodity market in India is?
a) Very fast
b) Fast
c) Moderate
d) Low
e) Very low
12. How Commodity Market helps in Market Development?
a) Price fixation..
b) Demand forecasting
c) Social security
d) All of the above.
13. Commodity Market is _________________ for Indian Economy.
a) Perfect..
b) Appropriate..
c) Unsuitable
d) Cant say..
76

14. How it will influence the Indian Economy?

a) Proximity..
b) Social security
c) High return to buyer and seller..
d) Reducing risk for buyer and seller.
15. Impact of Commodity market on Business Houses?
a) Increase in revenue
b) Development of banks..
c) Provides platform.
d) All of the above

77