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Report On “Study of Commodity market”

Prepared By Amit Kumar yadav

Under the Guidance of Dr. Mihir Dash

In partial fulfillment of the Course-Industry Internship Programme (IIP) in Semester II of the Master of Business Administration

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

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3 Industry Overview 1.1 Introduction of the Company 2.3.2 Description of various market 1.6 SWOT Analysis 30 32 33 34 36 38 Page | 5 .3.1 Market Structure 1.2 Historical Background 1.-:Table of Contents:- Particulars Executive Summary Chapter : 1 Introduction & Industry Analysis 1.5 Products & Services 2.2 Vision and Mission 2.3 Organisational Structure 2.5 Regulatory issues 1.4 Commodity Trading & its Mechanism 1.3 Markets Rational 1.6 Indian Scenario Global & Indian Operation & Market share 2.1 Introduction 1.3. 1 3 5 6 7 12 14 17 20 27 Chapter : 2 Company Overview 2.3.7 Global Scenario Page no.3.

5 Sampling plan 3.Chapter : 3 Research Methodology 3.1 Objectives of the study 3.2 Scope of the study 3.3 Research design 3.6 Limitations of the study 40 40 41 41 42 43 Chapter : 4 Chapter : 5 Chapter : 6 Chapter : 7 Chapter : 8 Observation & Analysis Findings & Recommendations Conclusion Learning outcome Annexure Bibliography 44 – 56 57 – 61 62 65 67 77 Page | 6 .4 Sources of data 3.

a survey has been done in order to know basically the awareness level of people regarding commodity markets. Finally at the end. So how these options especially commodities has maintained the stable performance is the crux of the matter of this report. stock market. the report also explains about the different regulatory aspects regarding commodity trading in both India as well as rest of the world. All of these options posses’ different rate of return. Apart from this. Page | 7 . one can invest in mutual funds. commodities market. the reports also contains the details about the types of commodities. one need to do proper research about that particular option. because these options have given a stable and expected return in last few years. there are many options are available in market. for example. derivatives etc. over the last few years {especially after global recession of 2008-09}. term & fixed deposits. some of the above mentioned options like mutual funds. but at the same time some of the options like commodities has shown a stable and positive performance over the years. that is one of the reason behind the increasing demand of these things in the global market. there are lot of investment options are available. so how and where to invest the resources or in financial terms funds in order to maximize the return on investment is not less than an Art. Now as far as the investment options are concerned. In addition to this. It is Science because. hence before investing in any of these options.EXECUTIVE SUMMARY Investing is both Arts as well as Science. stock markets etc. different risks etc. It is an Art because every individual has some specific need and expectation based on the resources he/she has. how trading happens in the commodities market and major exchanges in the country as well rest of the world. in today’s world Gold & silver has been considered as one of the safest investment. For example. has witnessed lot of fluctuations on return on investment.

Chapter-1 Introduction & Industry overview Page | 8 .

may find commodities an unfathomable market. The price of the commodities is subject to supply and demand. Page | 9 . metals. But after setting up of three multi-commodity exchanges in the country. who claim to understand the equity markets. pricing in commodities futures has been less volatile compared with equity and bonds. Till few months ago.1 Introduction: Commodities are the physical substance. Retail investors. Historically.207. this wouldn't have made sense. arbitrageurs and speculators. Currently. 40.1. commodities are the best option. With the introduction of futures trading. For those who want to diversify their portfolios beyond shares. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Indian markets have recently thrown open a new avenue for retail investors and traders to participate through commodity derivatives. retail investors can now trade in commodity futures without having physical stocks. the various commodities across the country clock an annual turnover of Rs 1.000 crores (Rs 1.400 billion). This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities. commodities related (and dependent) industries constitute about 58 per cent. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. For retail investors could have done very little to actually invest in commodities such as gold and silver -or oilseeds in the futures market. As far as the size of commodity market of India is concerned. 20.730 crores (Rs 13.3 billion). and which investors buy or sell in a market. Commodities actually offer immense potential to become a separate asset class for market-savvy investors. crude oil etc. usually through futures contracts. thus providing an efficient portfolio diversification option. of the country's GDP of Rs 13. the size of the commodities market grows many folds here on. such as food grains. which are interchangeable with another product of the same type. bonds and real estate.

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

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

However. The exchange itself does not operate for profit. agricultural products etc. in which they are bought and sold in standardized contracts. Most of the trading is done using futures. The purpose of a commodity exchange is to provide an organized marketplace in which members can freely buy and sell various commodities in which they have an interest. food {rice. Usually Commodity markets cover physical assets such as precious metals. over the last few years.}. These raw commodities are traded on regulated commodities exchanges.1 Market structure: Quality Certification Agency Warehouses Hedger Clearing Bank Commodities Market Producers Transporte rs/support agencies Consumers (Retail/ Institutional) Traders (Speculators) Page | 12 . as an increasing number of market participants are trading in exotic options. energy {oil.3.}. wheat. It merely provides the facilities and ground rules for its members to trade in commodity futures and for non-members also to trade by dealing through a member broker and paying a brokerage commission. an OTC market has also been growing. 1.3 Industry overview: Commodity markets are markets where raw or primary products are exchanged. pulses etc.1. electricity etc. base metals.

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

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

While forward contracts are mainly over-the-counter and tailor-made which physical delivery futures settlement standardized contracts whose transactions are made in formal exchanges through clearing houses and generally closed out before delivery. (c) The units of price quotation and trading are fixed in these contracts. (d) The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. parties to the contracts not being capable of altering these units. (b) It is invariably entered into for a standard variety known as the “basis variety” with permission to deliver other identified varieties known as “tender able varieties”. They are agreements to purchase or sell a given quantity of a commodity at a predetermined price. The futures contracts are standardized in terms of quality and quantity. he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centers. with each cancelling the other out. Page | 15 . The terms and specifications of futures contracts vary depending on the commodity and the exchange in which it is traded. The closing out involves buying a different times of two identical contracts for the purchase and sale o the commodity in question.Commodity Future Contract: Futures contracts are an improved variant of forward contracts. (e) In futures market actual delivery of goods takes place only in a very few cases. In case he decides to deliver goods. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place. and place and date of delivery of the commodity. The commodity futures contracts in India as defined by the FMC has the following features: (a) Trading in futures is necessarily organized under the auspices of a recognized association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules and Bye-laws of the association. with settlement expected to take place at a future date.

or insure.  Agriculture credit providing agencies. But if the storage firm buys cash wheat at $4 a bushel. During the crop movement when the firm’s inventory of cash wheat is being replenished.05. Hedging in the Future Commodity Market: The justification for futures trading is that it provides the means for those who produce or deal in cash commodities to hedge.  Merchandisers/Traders.  Corporate having price risk exposure in commodities. There are many kinds of hedge. In this manner the storage firm’s inventory of cash wheat will be constantly hedged.Participants in the Commodity Future Market: The participants in the Commodity futures are as under:  Farmers/Producers. the firm’s storage bins will be relatively empty. and hedges this purchase with an equivalent sale of December wheat at $4. Then as the cash wheat is sold the hedges will be removed by covering (with an offsetting purchase) the futures that were previously sold short. to those needing wheat.  Commodity financers. against unpredictable price changes. avoiding the risk of a possible price decline – one that could more than wipe out the storage and merchandising profits necessary for the firm to remain in business. July and August. lot-by-lot. By early June. a 10-cent break in prices between the time the hedge is placed and the time it is taken off would result in a 10-cent loss on the cash wheat and a 10Page | 16 .  Importers. just ahead of the new crop harvest. let us take an example to understand the principle of hedging in future trading.  Consumers/Industry. Let us take the case of a firm that is in the business of storing and merchandising wheat. these bins will again be filled and the wheat will remain in storage throughout the season until it is sold. these cash wheat purchases (to the extent that they are in excess of merchandising sales) will be hedged by selling an equivalent amount of futures short. As the new crop becomes available In June.  Exporters.

cent profit on the futures trade. Usually. profit margins that can be wiped out by unpredictable price changes. Usually those in the business of storing. it must be remembered that there are unavoidable risks when large stocks of any commodity subject to price fluctuation must be owned and stored for extended periods. if the future is selling at a normal carrying charge premium at the time the future is sold as a hedge. the firm would be protected against losses resulting from price fluctuations. but for the most part speculative traders carry the hedging load. The futures contract is a legitimate contract tied to an actual commodity. In any case. however. this is an inaccurate reference. is to assume the risks that are hedged in the futures market. whereas in speculation there is an assumption of risks that exist and that are a necessary part of the economy. and those who trade in these Page | 17 . the future should slowly but Steadily decline in relation to the cash as it approaches the delivery month. this price relationship is sufficiently close to make hedging a relatively safe and practical Undertaking. Someone must assume these risks. In the event of a 10-cent advance there would be a 10-cent profit on the cash and a 10-cent loss on the futures trade. due to offsetting profits and losses. is of no real consequence. Although speculation in commodity futures is sometimes referred to as gambling. or whether the futures contract is subsequently cancelled by an offsetting purchase or sale. They are in a competitive business dependent upon relatively narrow profit margins. or speculator. In connection with hedging. These risks of price fluctuation cannot be eliminated. Speculations and its functions in Commodity market: The primary function of the commodity trader. unless of course cash and futures prices should fail to advance or decline by the same amount. Everyone who trades in commodities becomes a party to an enforceable. The generally accepted difference between gambling and speculation is that in gambling new risks are created which in no way contribute to the general economic good. Whether the commodity is finally delivered. Commodity trading falls into the latter category. legal contract providing for delivery of a cash commodity. In fact. thus giving to the storage interest his normal carrying charge profit in his hedging transaction. merchandising and processing cash commodities in large volume are not in a position to assume them. To a certain extent these hedges offset one another. but they can be transferred to others by means of a futures market hedge.

In addition.1) Where the cost of carry is equal to: [Cost of Carry] = [Interest Rate Cost] .(1.2) Where under [Reinvestment costs] one should understand [coupons] and/or [dividends]. making them valuable diversification investment instruments to other assets like equity stocks and bonds. if one looks at the correlation between the GSCI and the SP 500 for instance).Contracts perform the economic function of establishing a market price for the commodity. The commodity trader has complete freedom of choice and at no time is there any reason to assume a risk that he doesn’t think is a good one. 1979 or the Gulf war). commodities exhibit strong seasonality as well as high level of volatility (cf. this does not mean that traders have no choice as to the risks they assume – or that all of the risks passed on are bad risks.(1. commodity markets have been growing to offer Commodity . especially oil.3 Markets Rational: Although the primary reason of being of commodity markets was to have efficient markets for agricultural and energy goods. One’s skill in selecting good risks and avoiding poor risks is what determine one’s success or failure as a commodity trader. commodity futures contracts have become a very liquid instrument besides being an easy one to trade. Compared to other assets like equity stock or bonds. The arrival of news (especially ones relating to local wars or political crises) can have a very high impact on commodity prices.linked trading and speculative instruments. making hedging strategies a true challenge for the various market participants. where producers and consumers can transact deals. commodities present negative correlation with stocks and bonds (around –15% to –30% over the last ten years. With the growing volume of futures contracts.3. Standard arbitrage theory provides that the price of futures contracts is equal to: [Spot Price] + [Cost of Carry] = [Futures Price] -----------.[Reinvestment Costs] like coupon or dividends + [Storage cost] ------------------. the spike in oil prices in 1973. Page | 18 . While speculative traders assume the risks that are passed on in the form of hedges. 1.

especially in view of storage problems associated with certain commodities. Backwardation is the most frequent state of the market. The degree of contango is limited by the fair value of the futures prices whilst there is no limit to the degree of backwardation. When the spot trades above futures prices. In practice. both states can occur. This premium is referred to as the convenience yield. for commodity products. Put another way. Backwardation and contango Page | 19 . From an economic point of view. although. reflected by the convenience yield.However. the cash and carry arbitrage is very difficult to put in place and the theoretical price is often an upper bound of the traded price. commodity futures trade often at a substantial discount to their fair value. market participants are ready to pay a premium for readily available commodities. this stems from the fact that the global demand is in excess of the supplies and that the cash-and-carry arbitrage is not easily put forward. one then says that the market is in Backwardation while when spot trade below futures prices. the market is in Contango.

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

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

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

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

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

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

A statement in the first ever National Agriculture Policy.." was constituted. mustard seed. Page | 26 . 1. new promoters with resources and professional approach were being attracted with a clear mandate to set up dematerialized. one would need to: . no conviction of fraud. which carried on futures trading in groundnut. To be registered.3. Before the Second World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab. on policy front many legal and administrative hurdles in the functioning of the market have been removed. It is advisable that anyone dealing in futures for clients is registered. In 1893.6 Commodity market: Indian Scenario Organized futures market evolved in India by the setting up of "Bombay Cotton Trade Association Ltd. as the existing exchanges are slow to adopt reforms due to legacy or lack of a member/employee of an exchange . followed by some oilseeds and their derivatives.g. There is no educational requirement. a separate association by the name "Bombay Cotton Exchange Ltd. Secondly.  Customer agreements: Before an exchange member can operate on behalf of a customer a client agreement should be in place. in 1999. Futures trading in oil seeds were organized in India for the first time with the setting up of Gujarat Vyapari Mandali in 1900. strengthening of infrastructure and institutional capabilities of the regulator and the existing exchanges received priority. technology driven exchanges with nationwide reach and adopting best international practices. a three-pronged approach has been adopted to revive and revitalize the market. Firstly. following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association. sesame. issued in July." in 1875. Forward trading was permitted in cotton and jute goods in 1998. The exchange or the regulator may wish to define the minimum acceptable content of such an agreement. 2000 by the government that futures trading will be encouraged in increasing number of agricultural commodities was indicative of welcome change in the government policy towards forward trading. After independence.pass a character assessment—e. Thirdly. cottonseed etc. such as groundnut. castor seed and cotton.

. These exchanges are expected to be role model to other exchanges and are likely to compete for trade not only among themselves but also with the existing exchanges..But the turning point came in 2003. Multi Commodity Exchange Ltd. Indore (NBOT). run mainly by entities which trade on them resulting in substantial conflict of interests. opaque in their functioning and have not used technology to scale up their operations and reach to bring down their costs. commodities related (and dependent) industries constitute about roughly 50-60 %. Most of the existing Indian commodity exchanges are single commodity platforms. But with the strong emergence of: National Multi-commodity Exchange Ltd. Mumbai (MCX). This period also witnessed other reforms. when the government issued notifications for withdrawing all prohibitions and opening up forward trading in all the commodities. National Commodities and Derivatives Exchange. all these shortcomings will be addressed rapidly. Structure of market: Ministry of Consumer Affairs FMC Commodity Exchanges National Exchanges Regional Exchanges MCX NCDEX NMCE NBOT 20 Other Regional Exchanges Source: Sebi Bulletin Page | 27 . which have reduced bottlenecks in the development and growth of commodity markets. which itself cannot be ignored. Securities (Contract) Rules. are regional in nature. Ahmadabad (NMCE). such as. amendments to the Essential Commodities Act. Of the country's total GDP. and National Board of Trade. Mumbai (NCDEX).

Leading Commodity Market of India: The government has now allowed national commodity exchanges, similar to the BSE & NSE, to come up and let them deal in commodity derivatives in an electronic trading environment. So far there are 25 commodity derivative exchange are available and dealing with around 100 commodities for trade. These exchanges are expected to offer a nation-wide anonymous, order driven; screen based trading system for trading. The Forward Markets Commission (FMC) will regulate these exchanges. Some of the leading commodity exchanges across the country with their recent turnover are given as under:  Multi Commodity Exchange {MCX}: Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-art electronic commodity futures exchange. It is headquartered in Mumbai. The demutualised Exchange set up by Financial Technologies (India) Ltd (FTIL) has permanent recognition from the Government of India to facilitate online trading, and clearing and settlement operations for commodity futures across the country. Having started operations in November 2003, today, MCX holds a market share of over 80% of the Indian commodity futures market, and has more than 2100 registered members operating through over 1, 80,000 trading terminals, across India. MCX offers more than 40 commodities across various segments such as bullion, ferrous and non-ferrous metals, energy, weather and a number of agri – commodities on its platform. The Exchange is the world's largest exchange in Silver, the second largest in Gold, Copper and Natural Gas and the third largest in Crude Oil futures, with respect to the number of futures contracts traded. MCX has been certified to three ISO standards including ISO 9001:2008 Quality Management System standard, ISO 14001:2004 Environmental Management System standard and ISO 27001:2005 Information Security Management System standard. Promoted by FTIL, MCX enjoys the confidence of blue chips in the Indian and international financial sectors. MCX's broad-based strategic equity partners include State Bank of India and its associates, NABARD, NSE, SBI Life Insurance Co Ltd, Bank of India (BOI), Bank of Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank, Fid Fund (Mauritius) Ltd. an affiliate of Fidelity International, Merrill Lynch, Euronext N.V. and others.

Page | 28

Average turnover: Volume {In lakh tonnes} 6149.034 Value {in Rs lakh} 6393302.17

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above mentioned figures are for financial year 2009-10.

 National Commodity & Derivative Exchange Ltd. {NCDEX}: National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. Like MCX, it is also headquartered in Mumbai & offers facilities to its members from the centers located throughout India. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters and shareholders of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. It became a public limited company on April 23, 2003 under the companies act, 1956 and started its operation since December 15. 2003. The Exchange, as on May 21, 2009 when Wheat Contracts were relaunched on the Exchange platform, offered contracts in 59 commodities - comprising 39 agricultural commodities, 5 base metals, 6 precious metals, 4 energy, 3 polymers, 1 ferrous metal, and CER. The top 5 commodities, in terms of volume traded at the Exchange, were Rape/Mustard Seed, Gaur Seed, Soya bean Seeds, Turmeric and Jeera. Key promoters: Promoter shareholders: ICICI Bank Limited (ICICI)*, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited.(NSE). Other shareholders: Canara Bank, Punjab National Bank (PNB), CRISIL Limited, Indian Farmers Fertiliser Cooperative Limited (IFFCO), Goldman Sachs, Intercontinental Exchange (ICE), Shree Renuka Sugars Limited and Jaypee Capital Services Limited.
Page | 29

Average turnover: Volume {In lakh tonnes} 3137.44 Value {In Rs. Crore} 917584.71

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above mentioned figures are for financial year 2009-10

 National Multi Commodity Exchange {NMCE}. National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). NMCE has many unique features, like it is a zero-debt company; following widely accepted prudent accounting and auditing practices. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE commenced futures trading in 24 commodities on 26th November, 2002 on a national scale and the basket of commodities has grown substantially since then to include cash crops, food grains, plantations, spices, oil seeds, metals & bullion among others. It was the first Exchange to complete the contractual groundwork for dematerialization of the warehouse receipts. Average turnover: Volume {In lakh tonnes} 495.91 Value {In Rs. Crore} 227901.48

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above figures are for financial year 2009-10.

Page | 30

 Indian Commodity Exchange {ICEX}: Indian Commodity Exchange Limited is a screen based on-line derivatives exchange for commodities and has established a reliable, time tested, and a transparent trading platform. It is also in the process of putting in place robust assaying and warehousing facilities in order to facilitate deliveries. It has Reliance Exchangenext Ltd. as anchor investor and has MMTC Ltd., Indiabulls Financial Services Ltd., Indian Potash Ltd., KRIBHCO and IDFC among others, as its partners. The exchange is headquartered at Gurgaon. Average turnover: Volume {In lakh tonnes} 122.104 Value {In Rs crores} 136425.36

Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India Note: The above mentioned figures are for financial year 2009-10.

Problems of Indian Commodity Market: Even though the commodity derivatives market has made good progress in the last few years, but still there are lot issues, which are yet to be resolved. Some of them are discussed below:  Cash Vs Physical settlement: this is one of the major problem of commodity market in India. It is probably due to the inefficiencies in the present warehousing system that only about 1% to 5% of the total commodity derivatives trades in the country are settled in physical delivery. Therefore the warehousing problem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A particularly difficult problem in cash settlement of commodity derivative contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants square off their positions before maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need to modify the law to bring it closer to the widespread practice and save the participants from unnecessary hassles.
Page | 31

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

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

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

crude palm kernel oil futures. New York Mercantile Exchange (NYMEX): New York Mercantile Exchange in its current form was created in 1994 by the merger of the former New York Mercantile Exchange and the Commodity Exchange of New York (COMEX). It has both open cry as well as electronic trading. lead. Page | 35 . Index futures and options and government securities. There are over 400 LME approved warehouse in some 32 locations covering USA. Singapore Commodity Exchange (SICOM): Singapore Commodity Exchange (SICOM) specializes in rubber and Robusta coffee. tin and zinc. milk cheese) and live stock futures (cattle and pork). Bursa Malaysia Derivatives exchange: Bursa Malaysia Derivatives exchange trades in crude palm oil futures. Consumers as well as producers of metals use the official prices of LME for their long term contracts pricing. London Metal Exchange: London Metal Exchange trades in Metals and non ferrous metals like aluminum. Europe. Dalian Commodity Exchange: Dalian Commodity Exchange in China trades in corn and soybean. copper. equities. Together they represent one of world’s largest exchanges for precious metals and energy. Chicago Mercantile Exchange (CME): Chicago Mercantile Exchange (CME) is the largest futures exchange in US. wheat and barley. The exchange is planning to introduce futures and options in crude oil. the middle & the Far East. power. The exchange trades on interest rates.Winnipeg Commodity Exchange: Winnipeg Commodity Exchange is located in Manitoba and trades only in futures and options of canola. steel and plastic. Agricultural commodities traded on the exchange include dairy products (butter. nickel. (At the moment there is none in India) has both open outcries as well as electronic. foreign exchange and agricultural commodities.

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

Chapter-2 Company overview Page | 37 .

With a smorgasbord of services across all verticals in finance. Bonanza is the fastest growing financial service with 5 mega group companies under it. acknowledged industry leadership and experience. etc.2. unsurpassed knowledge of the market place. Mission:  To be a Customer-centric organization. BSE MCX.SX to CDSL.  To generate client’s wealth through professional advice.2 Mission & Vision: Vision:  To be one of the most trusted and globally reputed financial distribution company. Bonanzas offers the perfect blend of financial services right from Equity Broking. 2.1 Introduction of the Company: “Bonanza Portfolio Limited” is one of the leading brokerage firm in India. Bonanza believes in being technologically advanced so that it can offer an integrated and innovative platform to trade online as well as offline to its techsavvy customers. All this and more makes Bonanza the perfect place for the people to take their first step in the direction of financial success. These affiliations prove the worth in the market and make Bonanza a name to reckon with. Bonanza has spread its trustworthy tentacles all over the country with pan-India presence across more than 1611 outlets spread across 550 cities. MCX . Mutual Fund Investments. NSDL. Established in the year 1994. Page | 38 . Bonanza developed into one of the largest financial services and broking house in India within a short span of time. backed by thorough research and in-depth analysis. The company is affiliated with the best in the industry – right from the NSE. Advisory Services that cover Portfolio Management Services. With diligent effort. Besides. Today. the company has one of the finest and most dedicated research teams with experts who have in-depth. and Insurance to exceptional Depository Services.

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

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

Nagarcoil. Visakhapatnam Patna. Salem. Jalna. Jammu Ranchi Bangalore. Tuticorin Lucknow. Theni. Arah Bhilai Delhi Ahmadabad. Vadakara Indore. Haridwar. Thodupuzha. Nagpur. Kota. Coimbatore. Kottayam. Tirupati. Nedumkandam. Trivandrum. Kolkata. Jamnagar. Moovattupuzha. Anand. Gandhi nagar. Truchur. Ajmer. Thane. Mangalore Kochi. Hubli. Angamalay. Bikaner. Gorakhpur. Jodhpur. Junagadh.The state wise presence of the company is given as under: Name of the state City Hyderabad. Pune. Anantpur. Bhubaneswar. Kumily. Panchkula Sirmour Srinagar. Rajkot. Calicut. Kattapana. Muttom. Kanpur. Chennai. Sujangarh. Kamjirappaly. Pondicherry. Kurnool. Allahabad. Siliguri Page | 41 Andhra Pradesh Bihar Chhattisgarh Delhi Gujrat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand Karnataka Kerela Madhya Pradesh Maharashtra Orissa Rajasthan Tamilnadu Uttar Pradesh Uttarakhand West Bengal . Nadiad. Uaipur. Thirunelveli. Surat. Baroda. Jaipur. Pala. Tellicherry. Bhopal Mumbai. Madurai. Alwar. Dehradun. Tirupur. Varanasi.

00% FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 H1 FY 11 NSE & BSE F&O MCX & NCDEX Source: bonanzonline.00% 2.00% 0.50% 3.50% 2.50% 1.50% 0.5 Product & Services:  Brokerage Services: Brokerage Services Equity Derivatives Commodity Currency Online Offline Page | 42 .Market Share: 3.00% 2.

 Distribution: Distribution Insurance Funds Fixed Deposits IPO Life Non-Life Mutual Funds Venture Capital Funds  Wealth Management: Wealth Management PMS Advisory Structured Product  De-mat: Demat NSDL CDSL Page | 43 .

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

Chapter-3 Research Methodology Page | 45 .

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

Published materials of Bonanza Portfolio & finally Newspapers. The study consists of analysis about customer’s awareness and satisfaction of Bonanza commodities Ltd. Personal interviews and informal discussions were held when I was interacting with new customers through phone and sometimes personally to ascertain the awareness and existing consumers’ satisfaction level.3. Ministry of Consumer Affairs. NCDEX. 3. Page | 47 . Further applying simple statistical techniques has processed the data collected.  Discussions with the concerned.  Official websites of MCX.3 Research design of the study: The study is based on survey technique.  Secondary data:  I had made phone calls to the clients from the data base that I was given by the company in order to get the accurate information regarding their investment and their preference.  Random sample survey of customers. The methodology adopted includes:  Questionnaire. Food & Public distribution.  Another method to get the information was a direct approach in which I approached the clients and got a direct response from them. For the purpose of the study 100 customers were picked up at random and their views solicited on different parameters.4 Sources of Data:  Primary data:  Collected through the structured questionnaire.

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

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

Chapter – 4 Observation & Analysis Page | 50 .

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

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

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

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

As it is clear from the above chart. people are showing their interest towards other options like shares. in order to enhance their portfolio. but with the time. of person = 100 Insurance 11% Debentures 10% Bank deposits 33% Mutual funds 13% Commodities 14% Shares 19% Interpretation & Analysis: This was one of the important segment of my survey. debentures. Page | 55 . I am confident that it will play a key role among all investment avenues. bank deposits are still considered as the one of the safest investment among all financial avenues of investment. Preference to various investment avenues: Total no. commodities etc. However it will take some time. but after the emergence of Indian economy.

Then after. people usually trade in bullions and agricultural commodities as compare to the other two categories. of persons = 100 45 45 40 35 29 30 25 20 15 10 5 0 Precious Metals Energy Base Metals Agricultural Products 19 17 Interpretation & Analysis: The above graph clearly describes that. silver & other precious metals. Page | 56 . agricultural products are in demand. commodities of precious metals category {basically gold & silver} are considered as the most preferred commodities by respondents.e. it can be inferred that. i. Most preferred commodities: Total no. energy & base metals. From the above chart. 45 out of 100 people have shown their interest in trading in gold.

 Awareness of Commodity market: Total no. If some of them know. From the above chart one can easily observe that. Page | 57 . the commodity market are yet to become a major destination of investment in the country. From this information it can be said that. then their knowledge is incomplete. a large number of people are not aware about the markets like commodity. But I hope with the time it will become a hot spot market for both large as well small investors. of person = 100 Fully aware 21% Not aware 42% Partially aware 37% Interpretation & Analysis: This was the main part of my survey.

their investment decision depends upon various sources like by keeping track of market or through Ads/ SMS alerts. while around half of them said they take any decision after consulting with their family & friends.5 23 22.5 26 25.5 24 23.5 27 26.5 Friends Family Consultants Others 24 24 25 Total no. Page | 58 . Around ¼ rth of the respondents said they take advice from professional consultants. of person = 100 27 Interpretation & Analysis: In the survey. I found that. Sources of Investment advice: 27. most of the respondent revealed that.5 25 24.

 Risk taking capacity: Total no. More than ¼ rth of them are not willing to take any kind of risk. prefers to take higher risk. it can be said that people do not want to take too much risk while investing in the different kind of financial markets like equities & commodities. Hence in a nutshell. I surveyed. of person = 100 60 55 50 40 30 30 20 15 10 0 Low Medium High Interpretation & Analysis: Risk is one of the important factor while making investment in any financial market. Page | 59 . I found that. only 15 % of people. Here in my survey. In fact the return on investment depends upon it. around more than half of them are moderate while investing in the markets like Commodities & Equities.

invest at between 25 to 75 % of earnings Receive at least 75 % of earnings as income Interpretation & Analysis: This was one of interesting but important part of the survey. of person = 100 39 28 33 Re . it can be infer that. As per the above mentioned chart. Such kind of attitude also shows the risk taking nature of the people while making an investment. Page | 60 . Re – investment of the income earned by the Investment Portfolio: Total no. while around ¼ rth of them keeps some part of their earnings and again around 1/3rd of the people I surveyed prefers to keep their earnings as income.invest at least 75 % of earnings Re . a majority of the people re-invest their earnings.

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

 Satisfaction level with the services of Bonanza Portfolio Ltd. Which is not a bad figure for a brokerage firm. Page | 62 .: Total no.. Around ¼ rth of the respondents rated the company as neither satisfied nor unsatisfied. while 10 % said that they are not happy with the services of the company. around 2/3rd of the respondents are satisfied with the services of Bonanza Portfolio Ltd. which is may be due to past inconvenience. of person = 100 23% 10% 67% Satisfied unsatisfied Neither satisfied nor unsatisfied Interpretation & Analysis: From the above chart it is quite clear that. which could be a considerable issue for the company.

5 Findings & Recommendations Page | 63 .Chapter .

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

Not only this but brand name and the research work done by the broking house also affects the investment decision of the client. Page | 65 . are from base & precious metals. Around half of the commodity traded at various exchanges in the country.  It was understood during the study that good services provided by the company to the clients play an important role while assessing the worth of the company. especially gold & silver.

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

commodities market. Page | 67 . It is for the investor to use the available information and analyze it to make meaningful as well as fruitful investment decisions by using numerous tools & techniques available.

Chapter – 6 Conclusion Page | 68 .

2 months contracts. contrary to the beliefs of many people. The guidance and tips provided by them have a significant role in trading. As far as the awareness level of the people is concerned. The project also explains about the awareness and satisfaction level of the customers who are trading in various commodity exchanges.Conclusion: Commodity markets. The investors can avail the benefits by opting different options. The brokerage firms play an important role in trading in any type of financial market. then it is clear from the survey that was done by during the project. but also reveals the clear picture of the particular stock/commodity. forward contracting. most of the people are still not aware about the Page | 69 . have been in existence in India through the ages and still have to go a long way ahead. In addition to this. 3 months contracts which expire last Thursday of every month. in which investors invest money through the contracts given i. The project reveals that the commodity market works in delivery base and intraday base. The future market also provide the benefits for the traders who want investment but they do not have enough money at particular time they can invest with margin money in commodities and pay later to earn profits. which further helps in making investment in that stock/commodity. Perceptions of investors towards commodity trading might change quite a lot with time. It also provides the facility of the hedging in the commodity market by which a customer can minimize the losses which he is facing and ultimately save the principle amount for future investment. Hence it is necessary for the brokerage firms that they must maintain the dignity and trust of their clients in order to build a long term relation.e. the research done by them not only help in analyzing the performance of a particular stock/commodity. Apart from this. apply hedging to minimize the loss if occur in the commodity market. it also works in future and derivative.

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

Chapter – 7 Learning Outcome Page | 71 .

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

8 Annexure Page | 73 .Chapter.

Annexure: 1 -:Questionnaire:1) Name : _____________________________ 2) Age: [ ] 20 – 30 [ ] 30 – 50 [ ] 50 & above 3) Gender: [ ] Male [ ] Female 4) Occupation: [ ] Businessman [ ] Employed [ ] Professional [ ] Others 5) Educational Qualification: [ ] Under Graduate [ ] Post Graduate [ ] Graduate 6) Annual Income: [ ] < 2 lakhs [ ] 5 – 10 lakhs [ ] 2 – 5 lakhs [ ] > 10 lakhs Page | 74 .

7) Investment Objective: [ ] To enhance the income level [ ] For future welfare [ ] Retirement protection [ ] Tax benefit 8) Investment portion of your income: [ ] < 25 % [ ] 50 – 75 % [ ] 25 – 50 % [ ] > 75 % 9) Your most preferred investment avenue: [ ] Bank deposit [ ] Commodities [ ] Debentures [ ] Shares [ ] Mutual funds [ ] Insurance 10) Your awareness about Commodity Market: [ ] Fully aware [ ] Partially aware [ ] Not aware Page | 75 .

11) From whom you get your investment advice: [ ] Friends [ ] Family [ ] Consultants [ ] Others 12) Your risk taking capacity: [ ] Low [ ] Medium [ ] High 13) How do you intend to use the income earned by your investment Portfolio: [ ] Re – invest at least 75 % of earnings [ ] Re – invest between 25 – 75 % of earnings [ ] Receive at least 75 % of earnings as income 14) How much return usually you get on your investment: [ ]<5% [ ] 10 – 15 % [ [ ] 5 – 10 % ] > 15 % Page | 76 .

15) Your satisfaction level with the services of Bonanza Portfolio Limited: [ ] Satisfied [ ] Unsatisfied [ ] Neither satisfied nor unsatisfied Page | 77 .

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

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

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

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

Bibliography Page | 82 .

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