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Introduction

National Spot Exchange Limited (NSEL) is a national-level, institutionalized, electronic, transparent spot trading platform, for commodities which is poised to transform the commodity market by way of reducing the cost of intermediation and, thereby, improving marketing efficiency. Its state-of-threat, organized and structured market place provides facilities for risk-free and hassle free purchase and sale of various commodities. NSEL provides customized solution to various issues faced by the farmers, traders, processors, exporters, importers, arbitrageurs, investors and the masses in general relating to commodity marketing, procurement, storage, and warehouse receipt financing, etc. National Spot Exchange commenced live trading on October 15, 2008. At present, NSEL is operational in 14 states, providing delivery-based spot trading in 30 commodities. In 2010, NSEL added a new dimension to commodity market by introducing investment products in commodities, which were made available in demat form. For the first time in the history of Indian commodity market, NSEL launched a series of unique investment products, known as e-Series . e-Gold was the first product to be launched under the e-Series umbrella, on March 17, 2010. e-Series products provide an opportunity to small investors to invest in physical commodities (e.g. Bullion) in smaller denomination in demat form. This segment is similar in functionality to the cash segment in equities.

The main objective of National Spot Exchange is to develop a vibrant electronic spot market in various commodities and to offer a value proposition to different segments of the commodity eco system. This can be achieved by reducing cost of intermediation and creating an electronic linkage between buyers and sellers across the country. The Exchange provides counter party guarantee in terms of quantity, quality and payment. Hence, the participants are immune from the credit risk and counterparty defaults.

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Trading mechanism and other procedures Of NSEL

Operations
Trading National Spot Exchange provides an online, screen-based trading system, which can be accessed through VSAT, leased line or internet. The Exchange conducts trade through daily expiry commodities contracts. The positions outstanding at the end of the day result into compulsory delivery. However during the day, the transactions offsetting are netted off and delivery is effected only with respect to the net quantity outstanding at the end of the day. All the terms relating to quality specifications, place of delivery, date of delivery and other conditions are specified by the Exchange in advance and all contracts executed on the system are based on such terms only. Market remains open from 10 am to 11.30 pm. Delivery, Clearing and Settlement All trades executed during the day are netted off at the close of market hours as per the weighted average price of the last 30 minutes. The profit/loss arising thereon is settled on the basis of MTM on either the same day or next day depending on the contract condition. The net sellers have to give delivery by way of depositing goods in the Exchange designated warehouses/storage tanks as specified in the Circular. The buyer's account is debited by the Exchange and delivery order is issued to him after ensuring that payment is complete. Thereafter, payout is credited to the seller's account. In case the seller/buyer fails to honour his delivery obligation, the position is auctioned/closed out at the risk and cost of the defaulting party. Risk Management, Margining and Surveillance The Exchange uses various tools for risk management, margining and surveillance to ensure market integrity. All positions outstanding in the market are subject to margin payable by both buyers and sellers. However, margin is not applicable on the sellers who have deposited goods in the Exchange designated warehouses and pledged the same with the Exchange. Settlement Guarantee Fund

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The Exchange guarantees performance of all contracts executed on the Exchange platform. For this purpose, the Exchange maintains a settlement guarantee fund. Notwithstanding the default of any member, the payout is honoured as per the Exchange schedule.

Technology National Spot Exchange gets the strategic advantage of having Financial Technologies (India) Ltd. as its technology partner for delivering technologically advanced solutions to market participants. FTIL has provided a robust technology platform to multiple domestic and international Exchanges. The Exchange uses a client server application, which can be accessed through VSAT, leased line, Internet as well as mobile phones. The hardware hosting the trading and surveillance applications are fully fault tolerant systems with zero redundancy. FTIL has delivered a cutting-edge technology to the National Spot Exchange Trade Life Cycle i.e. PreTrade, Trade and Post-Trade operations.

Pranav Khanna {BA.LLB (H)}

Pranav Khanna {BA.LLB (H)}

Products
National Spot Exchange provides an unbiased and state-of-art platform for buying and selling of commodities. Commodities traded on National Spot Exchange include agricultural commodities, bullions and metals. It has also introduced e-Series of investment products catering to retail investors. NSEL also plans to introduce some Industrial products in the near future. Commodity is traded in a structured and well-documented contract form having a standard quality specification. All contracts are of single day duration having different settlement cycles depending on the commodity and market practices. Types of contracts : Farmers Contract; These are mandi cess unpaid contacts in agricultural commodities, which come in very small trading lots (such as of 1 bag each) to enable small and marginal farmers to sell their produce directly on the pan- India platform without any intermediation. Traders contract: These are mandi cess paid contracts in agricultural commodities, which are traded in multiples of truck loads (such as 10 MT). These contracts enable traders to access NSEL platform to sell their stocks in a risk-free and hassle-free manner. Forward Auction Contracts: These are specific contracts that serve the needs of specific sellers and enable them to electronically auction their produce on NSELs platform. This also enhances their price realisation due to competitive bidding and brings transparency in the auction process. Most of the Government companies such as FCI, Hafed, Nafed, MMTC, PEC, etc. use this mechanism on the NSEL platform. Reverse Auction Contracts: These are specific contracts that serve the needs of specific buyers and enable them to procure raw materials at the lowest possible price through competitive offers from large number of sellers.

Membership
Membership of National Spot Exchange is available to individuals, partnership firms, corporate houses, HUFs, cooperative societies and other legal entities. Membership is granted to such entities, which comply with all requirements relating to admission fee, security deposit, annual subscription, qualification/experience and net worth criteria. Members can trade on their own account or on accounts of their clients. They can also appoint their sub-brokers, franchisees, authorised persons and remisiers. Members can also set up their branch offices and franchises. Members/brokers can charge brokerage or commission from their clients, as may be negotiated between them.

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Corporate houses, willing to use National Spot Exchange platform for procurement or sell of commodities, can either become a member directly or can trade through any of the members of the Exchange. Membership Categories Trading-cum-Clearing Member (TCM) TCM is a person/corporate admitted by the exchange as a member, conferring upon him a right to trade on proprietary account as well as on accounts of clients, and clear all such trades at the Exchange. TCM can appoint his sub-brokers, franchisees, authorized persons and remisiers, set up their branch offices and franchises. Members can charge brokerage or commission from their clients, as may be negotiated between them. Trading Member (TM) TM is a person admitted by the Board who has the right to trade on his own account as well as on the accounts of his clients, but has no right to clear and settle such trades himself. All such trading members must be affiliated with any one of the Institutional Trading-cum-Clearing Member (ITCM) or Professional Clearing Member (PCM), having clearing rights on the Exchange. Institutional Trading-Cum-Clearing Member (ITCM) ITCM is an institution/corporate which is admitted by the Exchange as a member, conferring upon it the right to trade and clear trades, as an Institutional Trading-Cum-Clearing Member. Further, the ITCMs can also appoint sub-brokers, authorized persons, and Trading Members, who would be registered as Trading Members on NSEL at the request of the ITCM. ITCM can clear and settle trades on behalf of the sub-brokers, authorized persons and such Trading Members who are registered on NSEL at their request, subject to the terms and conditions specified by NSEL. Professional Clearing Member (PCM) PCM is a Financial Institution, company or Bank admitted by the Exchange as a Professional Clearing Member, conferring upon it the right to clear and settle trades through the clearing house of the exchange, as a Professional Clearing Member. PCM is allowed to clear and settle trades of such members of the Exchange who choose to clear and settle their trades through such PCM. However, PCM do not have trading rights. Market types: The National Exchange for Spot Trading (NEST) system supports two types of markets.

Spot Market Auction Market

Spot Market: In Spot market, single day trading contracts are traded. The contracts open every day for trading and the position open at the end of the trading session results into the compulsory delivery of the commodity traded. The electronic Spot market platform is many-to-many market structure. For each contract, Exchange has identified a particular delivery location or additional warehouses where the commodities can be delivered and lifted by the sellers and buyers respectively.

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The seller willing to sell agri- commodity on the Exchange platform will be required to bring the commodity to the Exchange warehouse where weighment and quality certification is done. The quality certification is done by the quality certifying agent based at the exchange warehouse. The commodity is allowed for trading on the Exchange platform only if the quality of the commodity is as per the contract specification of the Exchange. For withdrawal of the commodity from the Exchange designated warehouse, the buyers are required to give at least 1 day prior intimation to the warehouse for necessary arrangements. Based on the intimation received from the withdrawer, delivery schedule will be intimated by the warehouse supervisor. Loading of commodity will be done on first cum first serve basis. At the time of lifting the delivery form the exchange warehouse the buyer member needs to submit the Letter of Authority requesting the Warehouse manager to issue the delivery of Commodity to the bearer of the Authority Letter along with original Copy of the Warehouse Receipt. The buyer has to instruct their representative to carry some identity Proof (ID proof of his representative such as Voter ID / PAN/ Passport to enable the Exchange) along with the Authority Letter and Original Warehouse Receipt for lifting the stock from the accredited warehouse. For spot trading in the bullions, the same procedure is followed as in the Agricommodity. The Exchange accredited vaults are the delivery centres for the bullions. Auction Market: In the auction market, the electronic bidding is open for the specific brand of commodity for few hours during the day. The auction market structure is one to many. Auction trading mechanism is further divided into two forward auction and reverse auction. In forward auctions a single seller is selling their resources to multiple buyers. Alternately, in reverse auctions, a single buyer is sourcing resources from multiple suppliers, as is common in procurement. Under the forward auction mechanism, the registered seller posts the requirements online for bids, where a large number of buyers can submit their bids. During the auction session, the seller submit sale quantity and floor price in the trading terminal. The participating buyers can see the quantity of the commodity on the sale but the floor prices are not visible. The buyers then submit their buy bids along with the quantity. The quantity and prices of top 5 bidders will always be reflected in the trading screen. Buyers can revise their bids by reducing or increasing quantity and price. But, during last 5 minutes, they are allowed only to increase the price or increase the quantity but not to reduce it. Similarly, the seller cannot increase his price or reduce his quantity during last 5 minutes. At the end of the auctioning session, the system will automatically match the sale and buy orders at the highest possible price based on submitted buy order prices, if and only if, they are higher than the floor price submitted by the seller. Under the reverse auction mechanism, the registered buyers post the requirements online for bids, where a large number of sellers can submit their bids. The value of bids from the sellers will be decreasing as the competition among the seller's increases. The sale will go to the bidder that meets or exceeds the buyer's best value requirements. The reverse auction mechanism provides dynamic, real-time competition among sellers, resulting in significant cost savings, auditable transaction data, and improved process efficiency for the procurement of commodity.

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Members Guidelines Trades carried in compulsory demat segments of National Spot Exchange limited (NSEL) are settled by the clearing house/clearing corporation of a the Exchange through their clearing members CM-Pool Accounts. The Depository (NSDL /CDSL ) and Depository Participants plays vital role in the settlement process. Hence, every clearing member, needs to open a special and separate account called CMPool Account in the depository system for the purpose of clearing trades done on NSEL. CMPool Account enables the clearing member to receive commodity demat units from its clients for delivery to the clearing house/clearing corporation as pay-in, and to distribute the pay-out to its clients received from the clearing house/clearing corporation. As the clearing account is only a transit account, commodity demat units cannot be kept in this account except for the purpose of delivering to the spot exchange for pay-in, or distribution to its buying clients after pay-out. As per the procedure the clearing members must give instructions to their DPs for transferring the Commodity demat units lying in their clearing accounts to the respective beneficiary accounts within specific specific period of time as decided by the Exchange or regulator from time to time Role of depository in settlement process Settlements are conducted at National Spot Exchange Ltd.( NSEL) through its in house clearing house . The depository (NSDL/CDSL) provides the necessary infrastructure to hold commodity demat units in an electronic form and to transfer them between accounts in a depository. Settlement of funds is facilitated by clearing banks appointed by the spot exchange. Overview Of Trading, Clearing & Settlement Systems at NSEL - A Demateriazation Perspective: Dematerialized commodities units can be traded at NSEL under separate contracts for different commodities and different types of trading. At present NSEL has following separate windows for trading:

Normal settlement Auction settlement

A separate market type is allotted in the depository for each of the above window to facilitate the settlement of obligations in each window separately. For each market type, the NSEL shall have various settlements. Hence, there is a need to identify each settlement within a market type separately. In order to identify each settlement, NSEL gives a separate number for each settlement which is issued in the settlement Calendar of the Exchange.

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Physical Delivery Procedure :


Step 1: The investor have to submit a delivery instruction slip (DIS) to the Depository Participants (DP) along with the Surrender Request form (SRF) Step 2: The DP, thereafter, transfers the e-Series units to the account of NSEL based on DIS. Step 3: DP then attest the signature of the investor on the transfer request form (TRF) and handover the same to the investor along with the acknowledgement of DIS Slip. Step 4: The investor then submit DIS and SRF to the Exchange specifying the center of his choice from where he intends to take delivery. Step 5: On receipt of the copy of DIS and SRF, the Exchange compute charges relating to making and packaging charges, Delivery charges, VAT/ GST/ CST and other dues, if any. Step 6: The Exchange then communicate the total amount due to the investor through the Email ID provided in the SRF. The client then required to make such payment through DD/Cheque in favour of National Spot Exchange Ltd. Ensuring Physical Delivery : 1. Exchange issue instruction to the Authorized Dealer specifying the denominations of Commodity required as well as the relevant delivery location from where the investor intends to lift delivery. 2. The Authorized Dealer effect delivery of physical commodity in such denominations at the relevant center along with a sale invoice in favor of the investor. 3. On delivery of Silver bars/ coins to the unit holder, the Exchange then transfer the demat units received from the investor to the account of the authorized dealer. 4. The investors applying for conversion of electronic units to physical units, will be required to pay VAT/ GST, as applicable on that date plus local taxes such as Octroi , if any, applicable at the place of delivery. 5. All such taxes and levies will be payable at the clearing rate on the date of execution of DIS, irrespective of original purchase price or multiple transactions of buy and sale executed during the intervening period.

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Procedure, conditions, norms of Deposit, Quality check and Withdrawal of Commodity Deposit & Quality Check:
The members and their clients willing to deposit commodity in the Exchange accredited warehouse are advised to note the below mentioned procedure / conditions / norms. Members and their respective clients willing to deposit commodity in the Exchange Warehouse or Exchange accredited warehouse will be required to give at least 1 day prior intimation to the warehouse for necessary storage arrangements. Based on the intimation received from the depositor, delivery schedule will be intimated by the warehouse supervisor. Loading and Unloading of commodity will be done on first cum first serve basis.

Issue of Warehouse Receipt:


Warehouse Receipt will be issued by designated warehouse for all Commodities kept in the designated warehouse. The depositor will get the photo copy / scan copy of the warehouse receipt and the original warehouse receipt shall be retained by the Exchange for transferring it to buyer upon the onward sale by the depositor. The depositor can sell the commodities on any day after obtaining the copy of the warehouse receipt. The members are free to sell it in normal market or through the negotiated deal entered into with any other member of the Exchange. On the date of pay-in, the seller will intimate the exact warehouse receipt, which he intends to tender against his obligation through the member of the Exchange. On receipt of the intimation before the scheduled pay-in time by the Exchange, the pay-out will be made by the Exchange and the warehouse receipt will be transferred to the buyer after due endorsement subject to their completion of funds pay-in obligation.

Withdrawal (Delivery of Commodity from Exchange designated Warehouse):


1. Members are required to give at least 1 day prior intimation to the warehouse for necessary arrangements. Based on the intimation received from the withdrawer, delivery schedule will be intimated by the warehouse supervisor 2. The buyer member shall submit the Letter of Authority requesting the Warehouse manager to issue the delivery of Commodity to the bearer of the Authority Letter along with original Copy of the Warehouse Receipt. The Members are advised to instruct their representative to carry the identity Proof which has been mentioned in the letter of authority (ID proof of his representative

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such as Voter ID / PAN / Passport to enable the Exchange) along with the Original Authority Letter and Original Warehouse Receipt for lifting the stock from the accredited warehouse.

Other Terms and conditions:


Delivery logic: Compulsory delivery. Transactions on trade to trade basis will be permitted and all trades will result into compulsory delivery. Mode of communication: Official Communication with the exchange in regards to commodity delivery should be done only through E-mail / Fax or courier. Taxes, Duties, Cess and Levies: Ex-WAREHOUSE Haryana.or other state as case may be, Inclusive of APMC cess but excluding VAT and other charges. The invoices submitted against such sales will clearly show that APMC Cess is already collected on such commodities and the person raising such APMC cess paid invoice should be competent to raise such invoice under State APMC Act and Concerned state Sales Tax Act. Depositor shall provide the declaration stating that all commodities deposited in the warehouse are APMC cess paid and provide necessary documents as and when required by the exchange. In case such details are not given, the selling constituent shall be liable for losses / consequences arising out of such noncompliance. The buyer shall be liable to pay VAT / Sales Tax on the purchase amount and the seller shall get the VAT credit on submission of invoice to the buyer under the copy to the Exchange. In case of Inter-state movement, buyer has to submit requisite C form and pay CST as applicable. Delivery lifting charges are borne by the buyer. Sellers tendering commodity or Buyers taking delivery or their clients shall have necessary registration from the concerned tax and other authorities and obtain relevant licenses, if any, required by them. The Member giving delivery and the Member taking delivery will exchange appropriate tax forms as provided in law and as customary and neither of the parties will unreasonably refuse to do so. In case any of the member or his client fails to provide necessary forms in respect of sales tax resulting into pecuniary loss to the other party, the Exchange will impose a charge on the party in default and after collection thereof, will pass on the same to the member, who or whose client has suffered such loss. In addition to above, the Exchange can impose additional penalty on the party in default. - Agriculture Produce Market Committee (APMC) Deliverable grade of commodity: The selling members tendering delivery will have to deliver such grades as may be acceptable as per the contract specifications. The buyer has no option to select a particular grade and the delivery offered by the seller and allocation by the Exchange shall be binding on him. Delivery allocation: Delivery will be allocated at client level after the pay-in of commodities. Odd Lot Treatment: Deliveries must be in multiples of 300 Bags of 50 Kgs each with a tolerance limit of +/- 500 gms. Tax Invoice: The respective Clients of Members or the Member himself in case he sells on his own account, after execution of sale shall have to raise invoice in triplicate - One copy for the

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onward delivery to the buyer, one copy to be sent to exchange and the third to be retained by the seller for his own records (format enclosed as Annexure 6). Warehouse, Insurance and Transportation charges: As specified in Extension of delivery period: As per decision of the Exchange due to a force majeure or otherwise. Legal obligation: The members will provide appropriate tax forms wherever required as per law and as customary and neither of the parties (seller member and buyer member) will unreasonably refuse to do so. Applicability of Business Rules: The general provisions of Business Rules of the Exchange and decisions taken by the Board of Directors and Executive Committee of the Exchange in respect of matters specified above will apply mutatis mutandis. The Exchange may further prescribe additional measures relating to delivery procedures, warehousing, quality certification, margin and risk management from time to time. In case of any interpretational dispute or clarifications, the decision of the Exchange shall be final and binding on the members and others.

Settlement Procedure (Demat)


The settlement of the delivery obligations takes place from Monday to Friday on T+2 basis. The pay in and payout of commodity units shall be taken place at 1.00 PM and 05:30 PM respectively. The procedure for transfer, settlement, pledge and freeze of demat ICINs will be the same as applicable in respect of securities.
Settlement Schedule Normal Market type: AA Particulars Mark-to-Market Funds Normal Commodities - normal Auction Market type: MM Funds - Normal Commodities - normal Auction +2 Auction +2 Day T+1 T+2 T+2 Normal Market Description : T+2 Pay-in Up to 11:00 AM Up to 1:00 PM Up to 1:00 PM Pay-out At 12:00 Noon At 05:30 PM At 05:30 PM

Auction Market Description : T+2-AU Up to 1:00 PM Up to 1:00 PM At 05:30 PM At 05:30 PM

Funds/commodity Pay-In:

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The buying member must keep sufficient funds in his settlement account to meet his Pay-In obligation. The funds shall be debited from the Members settlement account on the settlement day as per the settlement calendar. Similarly the selling member should give delivery out instruction before the scheduled pay- in time. Funds/Commodity Pay-Out : On the settlement day, the Exchange will effect Pay out of funds as well as ICINs to the member. It is mandatory for the clients to open demat accounts with the empanelled Depository participants in order to accept pay out in demat form. The clients must inform the depository accounts details such as DP ID and Client ID to his member through whom he has purchased. In case of default by the seller in giving delivery, the commodities shall be procured through auction process and delivered to the buyer on auction pay out day.

In case of physical delivery, a person gets a warehouse receipt in paper form, while in case of delivery in demat form, which in case of delivery in demat form, he gets a credit entry in his demat account.

All non perishable commodities, which include gold, silver, zinc and nickel etc. will be available in demat form E-Series of contracts launched by NSEL are compulsory demat contracts. For taking delivery of such units, you must have a demat account. Similarly, for selling in E-Series contract, you must hold demat units in your beneficiary account.

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Scope Of Applicability of Stamp Duty on the contracts of NSEL


The stamp duty is applicable to the contracts of exchange and it varies from state to state. The

rate applicable to the contracts is Rs 1/ lakh (according to reference place Mumbai) The stamp duty is levied at purchase rate of the commodity at the exchange including ( Transaction cost and brokerage as applicable ) Illustration : Cost of Purchase (Reference Place Mumbai) Particular Min. Delivery Unit No. of Unit Purchase rate Transaction Cost ( ` 10 per lakhs) Brokerage @ ` 0.25% of purchase rate Stamp Duty @ ` 1/- per ` 1 Lakh of transaction Service tax @ 10.30% Total Cost on purchase (` per unit) E-Copper 1 kg ( 1 Unit) of E-Copper Demat Receipt 1 534.4 0.05 1.34 0.01 0.14 1.53

According to article 54 A of the schedule 1 of Indian stamps act (record of transaction ) . It states that record of transaction (electronic or otherwise ) effected by trading member through the association or stock exchange . According to (clause- d) , if relating to forward contract of commodities traded through an association or otherwise the stamp duty is one rupee for every 100,000 or part thereof. The contract is leviable with stamp duty if traded on exchange at the rate mentioned above , only if the there is forward contract which is not ready delivery contract According to FCRA - forward contract means a contract for the delivery of goods
and which is not a ready delivery contract.

This means T+0 T+11 contract is not a forward contract and no stamp duty is applicable on this type of contract. Ready delivery contract means a contract which provides for the delivery of goods and the payment of a price therefor, either immediately or within such period not exceeding eleven days after the date of the contract and subject to such conditions as the Central Government may, by notification in the official Gazette, specify in respect of any goods, the period under such contract not being capable of extension by the mutual consent of the parties thereto or otherwise;

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[Provided that where any such contract is performed either wholly or in part:(1) by tendering of the documents of title to the goods covered by the contract by any party thereto (not being a commission agent or a bank) who has acquired ownership of the said documents by purchase, exchange or otherwise, to any other person (including a commission agent but not including a bank); or (2) by the realization of any sum of money being the difference between the contract rate and the settlement rate or clearing rate or the rate of any offsetting contract: or (3) by any other means whatsoever, and as a result of which the actual tendering of the goods covered by the contract or payment of the full-price therefor is dispensed with then such contract shall not be deemed to be a ready delivery contract.

According to The FCRA the contract having settlement or delivery cycle more that 11 days then the contract is leviable with stamp duty (Under clause d) of schedule -1 of Indian stamps act. In the Physical settlement mode the Contract varies from T +0 to T+ 36 If the contract is beyond trade + 11 days then the stamp duty will be levied , otherwise stamp duty will not be applicable In the Demat Settlement mode the contract varies from T + 0 to T+ 2 and they are mandatory settlement contracts. If the contract is not settled within the specified time then it will be auctioned in different segment. So, normally the stamp duty will not be applicable to the Demat transaction , if the settlement is done within time The settlement cycle is given in different files herewith namely settlement cycle of demat segment and settlement cycle in the physical segment.

Pranav Khanna {BA.LLB (H)}

Pranav Khanna {BA.LLB (H)}