Commodity Project

FINAL PROJECT REPORT

ON

COMMODITIES

A NEW INVESTMENT AVENUE

PREPARED BY

Manish RathiManish RathiManish RathiManish Rathi

06BS 172906BS 172906BS 172906BS 1729

Prem KumarPrem KumarPrem KumarPrem Kumar

06BS 240206BS 240206BS 240206BS 2402

Chandra PrakashChandra PrakashChandra PrakashChandra Prakash

06BS 087606BS 087606BS 087606BS 0876

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FINAL PROJECT REPORT

COMMODITIES

A NEW INVESTMENT AVENUE

A Report submitted in partial fulfillment of

the requirements of MBA Program of

ICFAI Business School

DISTRIBUTION LIST: PREPARED BY:

Faculty guide:

Prof. C.V.A. Prasad Rao

Prof. Kaushik Bhattacharjee

Company guide:

Mr. Suman Kumar Adepu

Branch head, UTI securities, Ameerpet

Chandra Prakash 06BS 0876

Manish Rathi 06BS 1729

Prem Kumar 06BS 2402


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TABLE OF CONTENTS Executive Summary 6 Commodities Demystified 8

Definition and Basics 8

Characteristics 8

Spot versus futures contract 9

Difference between commodity and financial derivatives 12 Participants in the market 13 The Indian picture 16

FMC 17 Our methodology in phases 19 Step towards the Mandis 22

The pulses story 22

Meeting with the Farmers 24

Interaction with MCX and FMC 26

Bullion story 28

Base metals 29

The chilli story 31

The FAPCCI episode 46

Industries we visited 48

Sugar story 51


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Hyderabad Stock Exchange episode

Commodity Sutra… Our Initiative Commodity exchanges in India Futures trading… The growth story The Road blocks

Ban on futures

Speculation

Playing with the future

The price management fundamentals

Price discovery is a Ruse Prescriptions/Suggestions Commodity futures… An alternative investment avenue Suggestions to make Indian commodity market mature Latest developments in the last 1 year National spot exchange (NSE)

The concept

Objectives

Participants

Advantages

Operations


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About the organization

UTI securities Ltd. (UTISEL)

Securities Trading Corp of India (STCI)

STCI Commodities Ltd.

Standard Chartered Appendices

Frequently asked questions (FAQs)

Invitation letter for Chilli market seminar

Communication details

o MCX o FMC o NCDEX

Business cards

Zink Calculator

Proposal submitted to FAPCCI

References

Bibliography

Webliography

LIST OF TABLES / CHARTS


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Table no. 1: Arrivals of Chilli in Guntur market Table no. 2: Area, Production and Yield for Chilli in India Table no. 3: List of foreign exchanges and commodities traded in them Table no. 4: List of commodities in the Indian exchanges Table no. 5: Details of commodities traded in MCX and NCDEX Chart no. 1: Area and production for Chilli in India Chart no. 2: Percentage share of Chilli in total exports on India Chart no. 3: Spot and Futures price Chart no. 4: technical chart on Chilli Chart no. 5: Contract specification of Red Chilli Chart no. 6: Production, Consumption and Closing stock of Sugar in India Chart no. 7: Nybot Sugar 11 futures price Chart no. 8: web page of Commodity sutra Chart no. 9: National Spot Exchange for agro products (NSEAP)… The concept Chart no. 10: Participants of NSEAP Chart no. 11: Advantages on NSEAP Chart no. 12: Trading operations at NSEAP Chart no. 13: Delivery operations at NSEAP

Executive summary

Our endeavor is to find out the status of commodity Derivatives as they stand

in the overall economical, social and demographic picture of our system. The


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impact in economical system is very much obvious and beyond any dispute as

commodities are themselves economical propositions.

But commodities are also subject matter of our social fabrication. Any society

comprises of two set of people: Traders and farmers. Commodities are

affecting the lives of both set of people. Their business practices and

strategies are rapidly changing and commodity market is very much

influencing it. We have studied that impact. It is noteworthy that the new

world economic order is of convergence. All sectors, economies and trades are

being interlinked. Whether we like it or not, our businesses are no more ours.

Entire world economy is involved into it. The same applies to commodities.

Whether one participates into it or keeps himself aloof, he, in no ways can

escape its effects.

However, it has to be kept in mind that as an asset class and even as a tool of

risk minimization (for Traders, Farmers and businesses); it is a very new and

nascent proposition in India. Even though Commodity futures have

their long history in this country, periodical bans and derogatory

government policies have hindered their prospects to develop as a

tool for hedgers (risk minimization), leave alone the matter of their

development as an investment avenue. Their primary goal of true price

discovery is also much waited.

This project aims to achieve the following objectives:

• To explore commodity futures as :

� An investment avenue (for middle class)

� A risk minimization tool (for the business class).

• To find out the penetration level of commodity futures markets in

Indian society taking Hyderabad as a representative market and

added inputs from other parts of country

• To explore the present status and future prospects of commodities in

our economy.


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• To develop a business development model for UTI SECURITIES as a

brokerage firm by targeting key markets and business houses in and

around Hyderabad, giving main emphasis on sugar and metal

companies.

Commodities Demystified

Definition and Basics


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A futures trading is a standardized agreement between a buyer and a seller

to exchange a pre agreed and standardized grade of an asset at a specific

price and future date. The item or underlying asset can be an agricultural

commodity, a metal, mineral, energy or commercial commodity, a financial

instrument or a foreign currency.

Characteristics

A "Futures Contract” is a highly standardized contract with certain distinct

features. Some of the important features are as under:

a. Futures trading are necessarily organized under the auspices of a

market 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 & Bye-laws of the association.

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".

c. The units of price quotation and trading are fixed in these contracts,

parties to the contracts not being capable of altering these units.

d. The delivery periods are specified.

e. The seller in a futures market has the choice to decide whether to

deliver goods against outstanding sale contracts. In case he decides to

deliver goods, 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.


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f. In futures market actual delivery of goods takes place only in a very

few cases. 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.

Spot versus Future Contracts:

Every transaction has three components.

• Trading

• Clearing

• Settlement

A buyer and seller come together, negotiate and arrive at a price. This is

trading. Clearing involves finding out the net outstanding, that is exactly

how much of goods and money the two should exchange. Settlement is the

actual process of exchanging money and goods.

In a spot transaction, the trading, clearing and settlement happens

instantaneously where as a contract by which two parties irrevocably agree

to settle a trade at a future date, for a stated price and quantity. No money

changes hands when the contract is signed. The exchange of money and the

underlying goods only happens at the future date as specified in the contract.

In a forward contract the process of trading, clearing and settlement does

not happen instantaneously. The trading happens today, but the clearing and

settlement happens at the end of the specified period. A forward is the most


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basic derivative contract. We call it a derivative because it derives value from

the price of the asset underlying the contract.

A derivative is a product whose value is derived from the value of one or

more underlying variables or assets in a contractual manner. The underlying

asset can be equity, forex, commodity or any other asset. Derivative contracts

are of different types. The most common ones are forwards, futures, options

and swaps. Participants who trade in the derivatives market can be classified

under the following three broad categories.

• Hedgers

• Speculators

• Arbitragers.

1. Hedgers: Hedgers face risk associated with the price of an asset they use

for their business. They use the futures or options markets to reduce or

eliminate this business risk. These are the people who have the direct

interest in the underlying asset.

2. Speculators: Speculators are participants who wish to bet on future

movements in the price of an asset. Futures and options contracts can give

them leverage; that is, by putting in small amounts of money upfront, they

can take large positions on the market. As a result of this leveraged

speculative position, they increase the potential for large gains as well as

large losses.

3. Arbitragers: Arbitragers work at making profits by taking advantage of

discrepancy between prices of the same product across different markets. If,

for example, they see the futures price of an asset getting out of line with the

cash price, they would take offsetting positions in the two markets to lock in

the profit.

A commodity derivative derives its value from an underlying asset, which is

necessarily a commodity. Commodities, in simple words are any goods that

are common and unbranded. Gold, silver, rubber, pepper, jute, wheat, sugar,


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cotton etc., are some of the common commodities. For e.g. apple juice can be a

commodity whereas the ‘Real’ apple juice cannot be called a commodity. One

may be surprised to know that in the US commodities markets there are

futures available even on cattle.

Commodity includes all kinds of goods. FCRA defines "goods" as "every kind

of movable property other than actionable claims, money and securities".

Futures' trading is organized in such goods or commodities as are permitted

by the Central Government. At present, all goods and products of agricultural

(including plantation), mineral and fossil origin are allowed for futures

trading under the auspices of the commodity exchanges recognized under the

FCRA. The national commodity exchanges have been recognized by the

Central Government for organizing trading in all permissible commodities

which include precious (gold & silver) and nonferrous metals; cereals and

pulses; ginned and unginned cotton; oilseeds, oils and oilcakes; raw jute and

jute goods; sugar and Gur; potatoes and onions; coffee and tea; rubber and

spices, etc.

Commodities market essentially represents another kind of organized market

just like the stock market and the debt market. However, commodities

market, because of its unique nature lends to the benefits of a wide spectrum

of people like investors, importers, exporters, producers, corporate etc.

Difference between Commodity and Financial derivative:

FINANCIAL DERIVATIVES COMMODITY DERIVATIVE

Only cash settled Option of physically

settlement


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Not bulky Bulky

Warehousing not required Warehouse required

No variation in quality Varying quality of assets

Unlike the physical markets, futures markets trade in futures contracts

which are primarily used for risk management (hedging) on commodity

stocks or forward (physical market) purchases and sales. Futures contracts

are mostly offset before their maturity and, therefore, scarcely end in

deliveries. Speculators also use these futures contracts to benefit from

changes in prices and are hardly interested in either taking or receiving

deliveries of goods.

Participants in the Market

Investor’s Perspective


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Commodities futures represent a good form of investment because of the

following reasons:

• High Leverage – The margins in the commodity futures market

are less than the F&O section of the equity market. This gives an

investor a greater opportunity to trade and obtain economies in

commodities.

• Less Manipulations - Commodities are mostly governed by

international price movements. Especially in the metals space and

the bullion market, the prices of commodities mostly run in tandem

with the international exchanges. So they are less prone to rigging

or price manipulations.

• Diversification – The returns from commodities market are free

from the direct influence of the equity and debt market. We say this

because a high degree of negative correlation is found between

commodity prices and that of equity and bond market, which means

that they are capable of being used as effective hedging

instruments providing better diversification.

Importer or Exporter

Commodities futures can be of immense help to an importer or exporter in

the following ways:

• Hedge against price fluctuations – Wide fluctuations in the prices

of import or export products can directly affect their bottom-line as the

price at which they import/export is fixed beforehand. Commodity

futures help them to procure or sell the commodities at a price decided


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months before the actual transaction, thereby ironing out any change

in prices that happen subsequently.

Producer’s Benefits

• Lock-in the price for the produce – For farmers, there is every

chance that the price of their produce may come down drastically at

the time of harvest. By taking positions in commodity futures they can

effectively lock-in the price at which they wish to sell your produce.

This is termed as hedging against the market price in future.

• Assured demand – Any glut in the market can make them wait

unendingly for a buyer. Selling commodity futures contract can give

them assured demand at the time of harvest.

Consumer’s Perspective

• Cost Control – For an industrialist, the raw material cost dictates the

final price of their output. Any sudden rise in the price of raw

materials can compel them to pass on the hike to their customers and

make their products unattractive in the market. By buying commodity

futures, a producer can fix the price of its raw material thus saving the

customer from a sudden price hike.

• Ensures continuous supply – Any shortfall in the supply of raw

materials can stall their production and make them default on their

sale obligations. They can avoid this risk by buying a commodity

futures contract by which they assured of supply of a fixed quantity of

materials at a pre-decided price at the appointed time.


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The Indian Picture


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Coming to the Indian scenario, despite a long history of commodity markets,

commodity markets in India are still in their initial stages of development.

The essential contributors of this scenario include stringent regulatory

restrictions, intermediate ban on commodity trading and policy interventions

by the government. Commodity markets have a huge potential in the Indian

context particularly because of the agro-based economy. With the

government's initiative for agricultural liberalization, commodities' trading in

India has gained increased momentum in activities. Commodity markets are

of great help not only for their participants but also the economy as a whole.

The twenty year bear market for commodities has drastically reduced the

prices of many commodities to their lowest levels. The present shift in trend

in commodity trading complimented by the global increase in demand will

certainly hold a promising future for the investments in this segment. Indian

markets have recently thrown open a new avenue for retail investors and

traders to participate: commodity derivatives.

For those who want to diversify their portfolios beyond shares, bonds and real

estate, commodities are the best option. Till some months ago, this wouldn't

have made sense. For retail investors could have done very little to actually

invest in commodities such as gold and silver, or oilseeds in the futures

market. This was nearly impossible in commodities except for gold and silver

as there was practically no retail avenue for punting in commodities.

However, with the setting up of three multi-commodity exchanges in the

country, retail investors can now trade in commodity futures without having

physical stocks! Commodities actually offer immense potential to become a

separate asset class for market-savvy investors, arbitrageurs and

speculators. Retail investors, who claim to understand the equity markets,

may find commodities an unfathomable market. But commodities are easy to

understand as far as fundamentals of demand and supply are concerned.

Retail investors should understand the risks and advantages of trading in

commodities futures before taking a leap. Historically, pricing in commodities


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futures has been less volatile compared with equity and bonds, thus

providing an efficient portfolio diversification option.

The Regulator

Forward Markets Commission (FMC) headquartered at

Mumbai is a regulatory authority, which is overseen by the

Ministry of Consumer Affairs and Public Distribution, Govt. of

India. It is a statutory body set up in 1953 under the Forward

Contracts (Regulation) Act, 1952.

"The Act Provides that the Commission shall consist of not less then two but

not exceeding four members appointed by the Central Government out of

them being nominated by the Central Government to be the Chairman

thereof. Currently Commission comprises three members among whom Dr.

Kewal Ram, IES, is acting as Chairman and Smt. Padma Swaminathan, CSS

and Dr. (Smt.) Jayashree Gupta, CSS, are the Members of the Commission."

The functions of the Forward Markets Commission are as follows

To advise the Central Government in respect of the recognition or the

withdrawal of recognition from any association or in respect of any

other matter arising out of the administration of the Forward

Contracts (Regulation) Act 1952.

To keep forward markets under observation and to take such action in

relation to them, as it may consider necessary, in exercise of the

powers assigned to it by or under the Act

To collect and whenever the Commission thinks it necessary, to

publish information regarding the trading conditions in respect of

goods to which any of the provisions of the act is made applicable,

including information regarding supply, demand and prices, and to

submit to the Central Government, periodical reports on the working

of forward markets relating to such goods;


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To make recommendations generally with a view to improving the

organization and working of forward markets.

To undertake the inspection of the accounts and other documents of

any recognized association or registered association or any member of

such association whenever it considerers it necessary.

Our Methodology


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Commodity Market: A new investment avenue

The Beginning…………

Our first objective was to explore the project and plan it

periodically. As the topic given to us was quite new and very

less study had so far been done, it was really a difficult task to

go ahead with our project…

The literature survey: Phase I

The next few days were of understanding, reading and studying the

commodity market and all its facets. We went through all the materials,

journals, websites and literature, whatever was available and could be

assessed. Building up the basics in commodity market and understanding its

dynamics was the foremost important thing for us. We studied thoroughly

and were able to understand the elementary things of the market after much

effort.

Merely understanding and knowing the basics and even the intermediary

things were not going to help us. So our next endeavor was to understand the

subtle complexities of commodity markets. We would rather like to use here

the more appropriate word of commodity future because the commodity

market is entirely future market up to now.

Hence we tried to track the daily price movements of various commodities.

We also learnt fundamental and technical analysis tools to be able to

understand interpret and use those data, news and trends. We got help from

our technical and fundamental experts in UTI SECURITIES in the office. I

would specifically like to mention the name and contribution, we received

from these experts.


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Mr. Suman Kumar Adepu, (Branch Head, Ameerpet, UTI securities)

Our branch head , a technical expert in commodities and has an experience of

working with companies like Kotak and Karvy, though he holds equally good

command over fundamentals of various commodities as well. He taught us a

number of technical analysis tools that were going to help us in our future

work. From time to time, through his own contacts, he arranged for us a

number of guest speakers and experts.

Mr.Rajeev Ranjan (Regional Head, Delivery, karvy comtrade Ltd.)

He shared with us minute details of delivery mechanism of Commodity

exchanges. Mainly what is the procedure to be followed in taking delivery

from the warehouses at the end of the contract period and all the issues

involved in it.

Mr. Chirag Seth (Manager, Commodity Research, STCI commodities ltd.)

He gave us deep insight about the fundamental analysis of commodities. He

is a person from the Mumbai head office and he spared some time from his

business visit in discussing with us the methodology one should adopt to do

the fundamental research of commodities.

Learning commodity market almost took 15 days of ours. We were now very

much comfortable with the mechanism, trends, nature and analysis of

commodities.

Market Survey: Phase II


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The second phase of our project was to explore the real world of commodities

which was not within the four walls of our office. It was neither in the

commodity terminals nor with the books, journals and literatures. We had to

understand the practical realities of this very nascent market. We had to go

to different stakeholders, participants, traders, farmers, brokers and all the

concerned people for whom the commodity market (read future) was

envisaged.

The next few days were to face the hard realities of commodity trading in

India. We had to gauge the progress, this market has so far made and the

ground realities associated with it. It was now important for us to know

whether the market is same on ground as it appears from outside. We had to

enter the tough, exciting and promising terrain of commodity futures.

Tough, because after 6 years of introduction, it was not mature, the real

stakeholders were not fully participating. Also because. to our knowledge, the

commodity markets had still not penetrated even the crust of the Indian

Economy.

Exciting, because, commodities market has became as big as 76 % of India’s

GDP within san of 3 years. Because people out there were highest paid, it is

the fastest growing sector of Indian economy and because this sector has

yield the highest returns with least calculated risk to its investors.

Promising because, this market promises two most difficult propositions of

business: True price discovery and Risk management.

So with the theoretical tools of technical and fundamentals, a vast bookish,

superficial knowledge and an inquisitive, argumentative mind, we entered

the market.

Steps towards the Mandi….


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Please note that all the suggestions and comments made here are

strictly that of the traders and the people whom we interviewed, and

are not influenced by any personal bias or influence.

The Pulses Story:

Our first interaction was with the pulses traders in Bagumbazzar.

Let us first introduce the very nature of

this market (mandi). This mandi comprises

almost 200 medium to big traders. Traders

have there links to Rajasthan, Gujarat and

mostly Marwari-Gujraati communities.

They trade in pulses (tur, urad, moong,

gaur seeds, masoor, chana) and other agri-

commodities like wheat, rice, etc. They give high turnover and all the trading

done here are spot in nature. They trade through local brokers at the

mutually agreed price and on (credit cash) basis. Some of the traders here are

in their business for more than 70 years and it is their third generation which

is carrying forward their business. Some other traders are also mill –owners

of Dal (pulses).

I am putting all these things across because it is very much obvious that

these traders have their stake in the commodity future market. They are the

one, who should have actively participated in the futures market for hedging

(risk management). They have their obvious interest in the future market

because futures are very much related to their business activities. Price

movements in the future market reflect in their own business and they are

prone to the activities and practices of the commodity exchanges.

We met a number of traders, brokers, mill owners and whole sale merchants

to find out what they thought about the different commodity exchanges. We


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introduced ourselves as research trainees from ICFAI business school that

were there to undertake research on perceptions of people towards

commodity futures trading and its comparison with other investments.

We made the following observations and inferences1:

We came to know from them that they call commodity futures markets

as “Dabba Trading”

The found the initial perception of commodity market to be very

negative and inflexible.

They said that it was meant to create unnecessary volatility in the

market price, and there wasn’t any correlation between spot prices

and the future prices.

They believed that the futures market moves only due to speculation

by the few top players like ITC, Reliance etc who dominate the whole

market.

The idea of delivery did not suit them mainly due to the freight

charges involved in delivering the goods from their respective

warehouses to their place of business and moreover they were not

clear regarding the procedures to be followed for delivery of

commodities from the exchange.

The traders shared with us their experiences where last year they lost

crores of rupees due to the game in “kabuli channa”.

Farmer’s Story:

1 Source: Conversation with Pulse Traders at Begum Bazzar


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Farmer is one of the biggest stake holders of commodity (AGRI) market. So

we decided to interact with farmers also. We searched on internet about

Farmers association in Hyderabad and found the address and contact

number. We called next morning the General Secretary of Federation of

Farmers Association Mr. P Chengal Reddy and told him about our project.

We got appointment with him and met him at his office at Shanthi Nager.

Mr. Chengal Reddy Introduced us with many farmers representing

different province of the state and producer of different crops.

We were shocked by knowing that none of the farmers knew about the

commodity exchanges and future derivatives. Even Mr. Reddy was also not

having much idea. We understood that awareness level is key

responsible factor for less participation of farmers in commodity futures.

Mr. Reddy told us the various factors which are reason for farmer’s distress

condition:

1. Agriculture being Unorganized(They fall in traps of traders )

2. No standardized production(Can’t trade with exchanges in bulk)

3. Farmers do not get remunerative price

4. Lack of Agro Technical Support.

5. Lack of awareness

6. Computer illiteracy

7. Lack of capital

(Borrow from traders and sell their produce to them only at very

lower price)

8. lack of co-operative societies

Apart from all this, many reasons were being counted but the main theme of

the story was that farmers do not get remunerative price of their produce

because of cartel of traders.


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2Example 1:

The sweet oranges are sold in a lot of 10 tons and there is 1 ton "chhut" on

this. This “chhut” means Relaxation. It means farmers sell 10 tons of sweet

orange at a price of 9 tons. Even these 9 tons also are at a distress price.

This practice is running at

Kothapet Market

Dilshukh Nagar

Hyderabad

(In fact, this is the mode in entire country.)

Sweet orange farmers do not have any escape.

Example 32:

Most chilly farmers sell the red chilly at a price of 20 Rs. per Kg, while end

consumers pay a price of 120-150 per kg for chilly powder. There is a large

sum of 100-130 Rs. per Kg goes to multi layered middle man.

Though at Guntur where MCX and NCDEX have their warehouse gets price

of 50 Rs. per Kg.

We understood how Exchanges can create an environment where farmers will get

good prices.Once the farmers of India will get price, most of the issue related to farmers

will be addressed.

4Interaction with MCX and FMC:

2 Source: Conversation with Farmers 3 Source: Conversation with Mr. P Chengal Reddy 4 Email communication in Appendix:


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We sent email questionnaire to Research and

development department, MCX as well as Mr.

Anupam Mishra, Director (IR) Forward Markets

Commission about the concern raised by the trader. We got quick and positive

reply from them. This has shown us the dedication of regulators and facilitators

for the reform.

Issues raised by traders were very generic in nature and only FMC

or exchange was in capacity to answer it. So we raised the same

concern to them.

MCX, Mumbai fixed a meeting of Vice president (Business

development) Mr. Madhav Reddy with us. In another two Days we were

sitting with Mr. Madhav Reddy in his office and discussing the issue.

The main outcome of this meeting was:

1. MCX is very flexible and dedicated to shape this financial service in

the benefit of participant if practical.

2. Quality norms are in place and if someone finds flaws in that they

can revise and inspect the process.

3. MCX is in process of changing the Units and now accepts both 25 as

well as 40 kgs bags for chilly.

4. Having warehouses in each city is not practical. Although they

introduced us with concept of spot market which they are

introducing very soon. These markets will have online terminals in

each city where Framers and traders of any part of India can trade

in a common platform. This will solve the problem of delivery

complications.


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Mr. Reddy has shown the willingness to meet the traders to solve their

problems. This was a very positive and constructive step towards organizing

seminar at chilly mandi.

Apart from this we also had a talk on farmers issue with Mr. Madhav Reddy

which was raised at farmer’s association. Mr. Reddy said that how Exchange

can help farmers to get the true price. On our query, how farmers with

delivery intentions at other part of country where exchange do not have their

warehouses can trade through it, Mr. Reddy said we can not provide

warehouse in each city as it is not financially viable. But spot market on an

electronic platform which is already started in 4 states can be a solution.

MCX as well as NCDEX is opening electronically integrated spot market in

each city of India where farmers and traders from all over country can trade

on single platform. In this case existence of trader’s cartel will not be

possible.

Due to lack of Political repercussion these exchanges could not get govt. nod

in Andhra Pradesh under APMC Act. (Government of Andhra Pradesh)

Which comes under state legislation to open Spot markets in the state?

On Mr. Madhav request, we had meeting with farmers association again on

the spot market. The outcome of the meeting was that there is need for

awareness within farmers for the spot market.

Bullion Story

Our next target was to cover the Bullion

Markets in Hyderabad. We went to Mahan

kali Street to meet and interact with Gold,


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Silver and Bullion merchants. This street is known as the biggest market for

precious metals in and around Hyderabad.

We expected, people here to be much aware of the commodity trading as

precious metals (Gold and Silver) are the one where exchanges have proved

their worth worldwide and almost 75% business of exchanges run on these

metals. But here also, traders were not very friendly and aware of Exchange

trading. The same old proposition of speculation was prevalent here also.

Traders relied much on banks for taking deliveries of Bullions and were

ready to be risk exposed to price fluctuations rather than taking resort of

hedging in exchanges. It is assumed to be more risky in taking

positions in exchanges rather bear the cost of price fluctuations. In

stead, traders resort to block their own delivery to their customers in case of

price increase. This was one practice which give them profit in case of price

rise. They used to take delivery when prices are low, and stock them until

prices rise.

Here, we tried to interact with traders to educate them about the benefits of

using exchange as a platform for their advantage.

We also planned to arrange a seminar here with local traders to

educate them and bring awareness about commodity futures.

Base Metals

Our next step in this direction was towards the market

of Base metals and industrialists who use these base

metals in their industrial production. We did some

research on this field and headed towards


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secunderabad to meet the metal traders and later on to Balanagar

industrial area where we fixed appointments with a number of

industrialists and big traders.

Our Discoveries:

Traders here are of varying nature, some are dealers in scrap and

prime metals while some others deal in ingots and finished materials.

The turnover in this market runs from 1 crore to 100 crores.

The big players in this market from whom these traders procure most

of their materials like ingots and prime raw material are Hindustan

Zinc, Adani and Sterlite copper and some traders in Whivandi in

Maharashtra.

The industrialists here buy a considerable quantity of goods from the

local market as well in the form of scrap.

Although all the traders were aware about the overview of metals in

world market but still they were not exposed to exchange traded

contracts.

The traders here did agree with us that exchange rate and futures

contracts have a great influence on the normal business but hardly

anybody had the accurate understanding of how the exchange

functions.

Few traders who have earlier invested in the exchanges had also

stopped trading after incurring huge losses.

At Balanagar Industrial area, we met industrialists who manufacture

metal components. They are the people who have interests in zinc,

copper; aluminum and nickel. They are mainly SMEs which

manufacture metal components of machines and other equipments.

We found that few of these traders did actually did some study to

participate in the futures market to prevent their business from

market risks.


30

Most of the contracts here are made for a future period, which means

we enter into contract with our customers to supply finished goods at

an agreed fixed price within the next 5 – 6 months. Told Mr. Santosh

Rungta5, an Industrialist in Balanagar.

These are the class of people who are exposed to exchange trading and

also participate in it. But the noticeable thing is that very less traders’

trade on MCX or NCDEX platform. Most of them trade through LME

or COMEX platform

When asked the reason they said that the exchanges in India were not

that mature in terms of rules and regulations, proper framework and

governing body.

Trading through LME gives them more hedges against their business

risk, since the Indian metal market is influenced by the movements in

the foreign market mostly US and china.

Moreover they told us that they import a large quantity of their goods

so trading in MCX do not give them any major advantages since there

is no delivery of goods like Zinc, copper, aluminum etc. in India now.

They also pointed out to us the difference between the futures market

and the spot market rates the reasons for which were not well

explained.

The Chilli Story:

Next we went to the Chilli market at Malakpet in

Hyderabad. Located at about 6 kms from the

Secretarial, this market contributes to about 10%

5 MD, Tapasya Casting Pvt. Limited


31

of the total chilli trade in AP. The other commodities traded in this market

are Onion and tamarind.

Chilli is mainly traded in the months of march – may which is the harvesting

season for chilli and in this season the fresh crops start coming into the

market. The following table would clear the sowing and harvesting pattern of

chilli in India.

Andhra Pradesh Karnataka Madhya Pradesh

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Harvesting

Sowing season

We followed the same method of research in this market as well.

First we met the president of the Andhra Pradesh grain & seeds merchants

association, Mr. D. Raghavendra and he explained to us the method of

operation in the spot market.

He said that the market opens at 7:00 a.m. at Guntur in AP, which is the

biggest market for Chilli in the world and by 9:00 a.m. they get somewhat the


32

market rate which is taken into consideration for further transactions in

other markets like the malakpet market.

In malakpet, farmers from different places and regions bring their produce

and place them for open auction. Every day about 8,000 to 10,000 bags arrive

in this market in the season time which is from January to April. During this

time the arrivals at Guntur is somewhere in the range of 1,00,000 to 1,20,000

bags. In the auction whichever trader, broker or the exporter makes the

highest bid takes away the produce and the farmers get their price.

We Discovered That:

This was a very unscientific method of price discovery and that the

farmers do not receive their right price all the time.

Another draw back of the system was that the farmers are bound to

sell their products at the market price because they cannot afford to

take back their goods due to their huge transportation costs.

We thus discussed with them the concept of futures trading and how it can be

beneficial to the traders as well as the farmers but a number of problems and

issues were brought to light by those traders

As a part of our endeavor to solve few of their issues, we wrote a mail to MCX

India, which is a well known commodity exchange. We received a positive

response from them and very soon arranged a meeting with Mr. Madhav

Reddy, Vice President, Business development in MCX. We discussed with

him all the issues brought forward by the traders in the chilli market and we

did arrive at certain conclusions and solutions on some problems. We

remained in constant touch with the MCX people from there on.

There after we again approached the Chilli association and after a series of

meetings with the President and the Gen secretary of this association, we


33

planned to organize a seminar here with the help of the Association to

educate the traders and farmers about the Commodity exchanges and futures

contracts and how they can be benefited by it.

We had identified that the biggest problem in this market is the lack of

proper awareness and information about these exchanges and thus through

this seminar we tried to address these issues and enabled the traders to get

the right information straight from the horse’s mouth. The arrangements of

the seminar were being done with the help of MCX (Multi Commodity

Exchange) and the dates were to be finalized very soon.

The Seminar at Malekpet Mandi

Our seminar was scheduled for 25th April 2007. Our guests in the seminar

included:


34

Mr. D. Raghevender President AP Grain & Seeds Merchants Association

Mr. Rajesgwar Secretary AP Grain & Seeds Merchants Association

Mr. Someshwar Treasurer AP Grain & Seeds Merchants Association

And other important board members and office bearers of the association.

Our speakers were:

Mr. Chirag Seth Research head STCI Commodities

Mr. Ali Spices in charge STCI Commodities

Mr. Madhav Reddy VP, Business Development MCX

Mr. Pradeep Reddy All India Product head, Chilli MCX

The seminar was attended by about 50 traders including some masala

company owners and cold storage

owners.

The opening speech was

delivered by Mr. Raghevender

who introduced our team, our

objective and purpose of the

seminar. He welcomed our

guests and introduced them to

the whole association. Our first speaker was Mr. Chirag Seth, Research

head, STCI commodities. He spoke at length about commodity futures and its

introduction in India. He discussed in details the different strategies that

should be used in the futures market by the traders and dealers namely

Hedging and Arbitrage. He discussed how a trader can make use of hedging

and intelligent speculation to maximize his profit and minimize the business

risk.

Traders in this market buy and sell goods on every day basis and there are

few instances where the traders take forward contracts of sale i.e. they enter

into a contract of sale of some specified quantity of goods at an agreed price


35

on some specified future date. In such cases hedging should be used by taking

an inverse position in the futures market to lock in the price of goods that the

trader agrees to sell on a specified time.

He also discussed about Arbitrage opportunities in the futures market and

that how the difference between the cash and futures price can be used for

arbitrage.

He also talked about the investment involved in trading in futures market,

the brokerage to be charged by UTI securities which was announced at .05 %

for any account opened in the market, the initial margin to be supplied by the

investors at about 5 % to 7 % and the lot size of chilli in the futures market

that is 5 tons.

Our next speaker was Mr. Ali, the spices specialist at STCI commodities. He

gave complete outlook on chilli, its fundamentals, and production, acreage

and export figures. He also discussed the future expectations of chilli, its

price targets in the medium and long term. Traders showed special interest

when they were told that chilli in Guntur accounts for about 50 % of the chilli

traded in the country and that the malakpet market contributes to about 10

% of the volume traded in Guntur.

Few of his important discussions are as follows:

Indian Scenario:

India is the world's largest producer, consumer and exporter of chillies

in the world. India also has the largest area under chillies in the


36

world. Chillies are the most common spice cultivated in India. It is

estimated that India produced 1060345 tons of dry chilli from an area

of 8,84,183 hectares in 2003-04. 6

Almost all the states of India produce the crop. The important chilli

growing states of India are Andhra Pradesh (46%), Karnataka (15%),

Maharashtra, Madhya Pradesh, Orissa, West Bengal, Rajasthan and

Tamil Nadu.

Chillies can be grown during the entire year at one or the other part of

the country. However, the major arrival season extends from February

to April. The crop planting starts from August and extends till

October. While, the harvesting begins from December with 5% of the

arrivals usually reported in this month. The peak arrivals are

reported in February to March.

There are several varieties of chilli cultivated in India. The most

popular among these are, Sannam, LC 334, Byadgi, Teja, Wonder Hot,

Jwala etc.

The major chilly growing districts of Andhra Pradesh are Guntur,

Warangal, Khammam, Krishna and Prakasham.

The Indian scenario of chilli includes the fundamentals like demand and

supply. Arrivals in the market form an important aspect of supply and it is

shown with the help of the following table which depicts in details the

arrivals in the Guntur market that forms the benchmark for all chilli traded

on any exchange.

6 Source: MCX


37

7

Global Scenario: Chilli

• 25% of the world chilli production is contributed by India.

• Besides India, the other chilli producing nations are: Pakistan, China,

Spain, Turkey, Syria, Mexico and Morocco.

• China is becoming a major competitor for Indian Chilli growers.

• Chilli contributes almost 22% of the total world spices trade in Volume

terms which is led by Pepper which contributes about 34%.

He also presented the production and export statistics of chilli in India for the

last 10 years:

He presented a full picture of the chilli production over a 1 year period, the

reason for decline in 2005 mainly being the production area being used for

other crops than chilli and there has been an increase in production due to

the export demand from countries like Srilanka, Pakistan and other

countries.

7 Table no: 1

Source: STCI commodities


38

Area & Production for Chili(1996-97 to 2006-07)

100000300000500000700000900000110000013000001500000

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07 (e)

Year

Hect & Prodn

(000)

20040060080010001200140016001800

Kg/Hect

Area (Hect) Production (Tons) Yield (Kg/Hect)

8

945.62658000008460002006-07 (e)

7906000007596002005-06

1157.89511000009500002004-05

169812878007586002003-04

10818946008274002002-03

121510690008800002001-02

11769837008365002000-01

109810528009592001999-00

117110432008912001998-99

10358701008406001997-98

112910660009442001996-97

Yield (Kg/Hect)Production

(Tons)Area (Hect)Year

945.62658000008460002006-07 (e)

7906000007596002005-06

1157.89511000009500002004-05

169812878007586002003-04

10818946008274002002-03

121510690008800002001-02

11769837008365002000-01

109810528009592001999-00

117110432008912001998-99

10358701008406001997-98

112910660009442001996-97

Yield (Kg/Hect)Production

(Tons)Area (Hect)Year

9

Export of chilli has always been a very important aspect of discussion and it

is one important factor which governs the price movement as well.

8 Chart no. 1 9 Table no: 2



39

Chilli Export

9000

29000

49000

69000

89000

109000

129000

149000

169000

2000-01 2003-04 2004-05 2005-06 2006-07e 2007-08p

Tons

Year

10

This increase in exports is mainly due to fresh demand coming US and from

the Asian countries.

Percentage Share in Total Exports of India

USA, 26%

Sri Lanka,

24%

Others,

28%

Bangladesh

, 13%

Malaysia,

6%

Nepal, 3%

11

He also talked about the technical aspects relating to chilli some of them

being the correlation between futures and the spot market at Guntur.

11 Chart no.:2



40

Table source: STCI commodities12

Finally before he wound up, he showed everybody the technical chart of chilli

trading in NCDEX. This was the daily candle stick chart of chilli from

January 2007 onwards which shows the trends in the price of chilli over the

last few months, the fibonacci series distribution can also be seen clearly in

the chart where the percentage distribution can be seen as 61.8 %, 50 %, 38.2

% and so on.

12 Chart no.: 3

Average Future Prices

1200

2200

3200

4200

5200

6200

7200

JanFebMarAprMayJunJulAugSepOctNovDec

Month

Prices

2005 2006

Average Spot Prices

1200

2200

3200

4200

5200

6200

7200

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Month

Prices

2005 2006


41

13

There after we laid emphasis on the delivery issue and we called the MCX

people to answer all their queries.

We had gathered from research that people in that market had the following

issues and they sought clarifications on the following matters:

Firstly they were not satisfied with the quality specifications of the

CHILLI traded in the exchange. They said that the percentage of

impurities in the exchange traded Chilli sums up to about 35% were

as in the spot market that percentage comes to only about 15%. They

blamed the exchange for adding extra impurities to make that

percentage as 35

Secondly they said that the delivery mechanism at the exchange

accredited warehouses were not up to the mark.

There is lack of transparency, no proper control, hidden costs and

other problems in the delivery.

13 Chart no: 4



42

One trader told us that the exchange provides packaging of chilli in

bags of 25 kg where as in the spot market it is traded in bags of 40 kg.

They did not like this disparity.

Last year, there was a huge mess created by NCDEX in Guntur where

traders were denied delivery of goods when the prices were on a roll

towards the higher side and there was a lot of unrest and confidence

was breached by the traders.

Now, this seminar turned out to be hot debate between MCX officials and the

traders. Mr. Madhav Reddy explained the delivery rules and the quality

issues and specifications were taken up by Mr. Pradeep Reddy the product

head of chilli.

Mr. Madhav Reddy explained the contract specifications and rules to be kept

in mind before trading through MCX.


43


44

Source: http://www.mcxindia.com/RedChilli_apr07.pdf14

Most of the traders who raised issues relating to delivery suggested MCX to

open warehouses and delivery centers in Hyderabad so that the traders are

saved of the transportation cost in delivering goods from Guntur to

Hyderabad. They even promised MCX to

14 Chart no.: 5 Source: www.mcxindia.com


45

The Seminar Effect

Things changed a lot after this seminar. We witnessed a very important

aspect in the chilli market that the association is considered to be a bench

mark and is looked upon for any important business decisions on the part of

an individual trader. We found that all of a sudden the mentality and outlook

of people had changed towards futures market. After the seminar, we

followed up with the traders to clarify their doubts if any they had, and we

learnt that breaking of ice was very important here and this ice breaker was

the president himself. Owing to his bad experiences in the futures market

last year, he had cautioned the rest of the traders so when we met the traders

individually, they told us that though they were satisfied with the concept of

hedging and other risk minimization strategies, they were still wary of

investing because they were not advised to do so by their president. We then

followed up with the president, Mr. Raghevender, and his son Mr. Radha

Krishna, who was also the owner of cold storages in Hyderabad. We fixed up

appointments and meeting with him and also asked our CEO Mr. Deepak

Dave to give a small presentation to him and finally the ice was broken and

this sent a positive message in the whole market and we started with opening

6 accounts in two days in the Malakpet Market. This number further went up

to 15 in one week time.


46

The FAPCCI Episode:

An Introduction:

FAPCCI started in 1917 as a Chamber of Commerce and Industry

representing the entire state of Hyderabad. It represents large, medium and

small scale Industries from the State. It also represents wholesale, retail and

small trade organizations. It consists of companies from public, private, joint

and corporate sectors. This organization is awarded ISO 9001:2000

organization. It has about 150 other Chambers and Associations at State,

District levels affiliated to it. It has 2800 members on its rolls. Its indirect

membership through its affiliates covers a broad spectrum of industries and

trade organizations come to 20,000 members.15

Our Objective:

FAPCCI is a leading consortium of all Industries and commercial firms in

entire Andhra Pradesh representing all big, medium and small firms.

Reaching to FAPCCI means reaching to all the industries of Andhra Pradesh

in one go.

We had three objectives in our mind while approaching FAPCCI:

1. To understand business dynamics of Andhra Pradesh through FAPCCI

and Industries through A.P.

2. To explore the possibility of Business Development among the member

industries of FAPCCI.

15 Source: FAPCCI


47

3. To create the awareness about Commodity futures among the

Industries and to explore the possibility to use the Commodity futures

as a hedging tool in a real industrial scenario.

Our Approach:

This part of our project was indeed a very ambitious one. Getting access and

targeting the entire Industry community was a giant task. But this endeavor

had a great business opportunity for our organization. Hence, we contacted

FAPCCI board. We met with two Deputy Secretaries of FAPCCI, Mr, Ananth

Reddy & Mr. C.V.Rao.

We held a long discussion of about one hour and we discussed several issues

regarding FAPCCI, its members and business community, in general. We

also discussed about ways in which commodity futures contracts can be

introduced to them for mitigating their price risk by hedging and locking in

their profit.

We finally came with a consensus of organizing a seminar in association with

FAPCCI about commodity futures. Our target audience was set as Small &

Medium Enterprises (SMEs).FAPCCI suggested us to come up with a

detailed proposal and submit it to the core committee of FAPCCI. We came

up with the proposal the very next day. (The proposal is given in the

appendices). We also discussed about the marketing of the seminar in detail.

We were given the compendium of members of FAPCCI. Finally, we were told

that we are allotted a slot of 20 minutes in one of their ongoing seminar

scheduled on 10th may. The topic of seminar was “Exit Route for Sick SSIs”.

We were asked to first present our ideas in the seminar after which FAPCCI

would have to conduct a fresh seminar with us.


48

For attending the seminar, the CEO of our company Mr. Deepak Dave gave

his personal nod to attend. He came with his team (Mr.Chirag Seth, Head,

Commodity Research, STCI commodities ltd.).

Prem Kumar (one of us) was given the opportunity to address the gathering

of more than 100 industry heads. He talked about the Commodity Futures

contracts as a risk mitigating tool for price risk in the business of SMEs &

SSIs. Our effort was much appreciated by all the participants of the seminar.

We got many participants who were inquisitive about commodity futures and

its scope in their business model. We also got confirmation from the President

of FAPCCI for arranging a one day workshop on commodity futures. This was

a great business opportunity for our company and our efforts also got

acknowledged by CEO, STCI Commodities Limited himself.

Industries:

We also planned to meet as many industries as possible to get the real feed

back from them. We decided to convince them individually about the viability

of commodity futures in their business. In this effort, we mailed around 50

industries about commodity futures on a trial basis. We also talked to them

on phone and got appointment with many of them. Our approach was to

directly talk to heads of these businesses.


49

Some of the key Industries, we interacted were:

• Suryavanshi Spinning Mills Mr. J.K.Agarwal (M.D.)

• SAMKRG Piston & Rings Ltd. Mr.S.Karunakar ( Director)

• ITW India Ltd. R.V.S.Ramakrishnan (Jt.M.D.)

• Agarvanshi Aluminum Ltd. Mr.Rahul Agarwal (Chairman)

• Aishu Castings pvt. Ltd. K.Ramanaiah (M.D.)

• CUBEX Tubings Ltd. Mr.U.M.Bhandari (Ex. Director)

• Darsith Agrotech Ltd. Mr.Laxmiprashad (Chairman)

• Kakatiya Cements/Sugar ind. Ltd. Mr. P.Venkatashwaralu

• Pennar Profiles Ltd. Mr.P.B.Rao (Pres. & CEO)

• Sujana Metals Ltd. N.C.Krishna (V.P.Finance)

• Tirupati Udyog Ltd. Mr.Akash Garg (Asst. CEO)

• Bimla Spices food industries Ltd. Mr.Manoj Kumar Goel (Dr.)

• Ennore Foundries Ltd. Mr.K.Udaya Babu (V.P.)

• Tolsariya Metals Udyog Ltd. Mr. U. Tolasariya (M.D.)

Our meetings with all these people were very fruitful. Apart from the huge

business opportunity, we generated for the company, it also gave us an

exposure to the industrial scenario of A.P.

One recent Example of price risk

Example 116 There are several Transformer manufacturing companies

around Hyderabad. About 6 months before, they got a huge chunk of

business for manufacturing transformers and it was a good opportunity to

expand their business. They entered into contracts of various sizes at a

fixed price. This rosy picture suddenly changed when the metal prices rose

sharply in the international market .Now this led to an altogether strange

16 Source: Mr.U.M.Bhandari.C.M.D , Cubex Tubings pvt.Lvt.


50

situation. They had to now procure raw metal at a higher price. This led

to their cost of production being more than the selling price. It made them

incurring heavy losses in spite of having good orders.

If they would had taken commodity futures contracts earlier, they would

not been suffering losses even in the worst scenario. They could have

locked up their profit margin and commodity futures contracts would have

covered their price risks.


51

Sugar Story: A bitter situation

India is the largest producer-consumer

of sugar in the world. Sugar output this

year is expected about 26 million tonnes

against a consumption of about 19 million tonnes. Taking into account the

carry over stock of 4 million tonnes from the previous season, the surplus

sugar during the year has been estimated at 6.517 million tonnes.

Main problems of sugar industry18

(From the perspectives of Sugar mill’s owners)

1. The kind of evolution (1975, Sampath Committee Incentive scheme) of

sugar industry in India gave rise to only small capacity plant with further

expansion. Indian sugar industry could not get the benefit of economies of

scale.

2. Cane-pricing act was enforced to provide good price to farmers. The price

at which sugarcane are procured by the

mills is controlled by central and state

government through Statutory

Minimum Price (SMP) and State

Advised Prices (SAP) respectively.

3. Due to unpaid dues to cane farmers, many of them switched over to other

crop that has its effect on the supply of sugar cane thereby price tends to

increase.

17 Source: http://www.indiansugar.com/president/index.htm 18 Source: Based on conversation with sugar mill owners


52

4. Sugar as a commodity is currently faced with a peculiar situation of huge

inventories, plunging prices, unpaid dues to cane farmers and mills suffering

losses. We can see below the graph of production, consumption as well as

surplus.

19

5. Currently, the Indian sugar industry pays the highest cane price in the

world. Cost of producing one quintal of sugar is about Rs 155020 but not

realizing more than 1300 Rs per quintal. For paying unpaid due to the cane

grower, mill owners finding 250 Rs loss a better bet than taking a loan from

any bank. The down-sliding price of sugar is not Indian specific but it is

world market phenomenon.

International trend

21

International future price trend as reflected on NYBOT prices.

19 Chart no. :6 20 Economictimes 9/05/07 21 Chart no.: 7 Source: Special Commodity Report: http://www.mcxindia.com/


53

In India, government policies, both at the Centre and State levels have

played a crucial role in the development of the sugar industry. The sugar

economy in India, like many other countries, is highly regulated, starting

from sugarcane to the use of end-product sugar. Government control, covers

all aspects of sugar business i.e. licensing/capacity/cane area, procurement/

pricing/sugar pricing/distribution and Imports and exports. Even the by-

products are subject to government control.

Government control

Government liberalized export / import trade in sugar from

1997. Simultaneously, the government had also put sugar

imports on Open General License (OGL) allowing private

parties to import sugar. The policy allows free export of sugar

and factories can also under take export of raw sugar in

addition to mill white sugar. Other WTO compatible policy22

measures facilitating export are

• Duty Entitlement Pass Book (DEPB) scheme @ 4% for export of sugar.

• Reimbursement of internal transportation charges on sugar exported from

factories to the port of shipment.

• Fixed ocean freight reimbursement @ Rs. 350/- per tonne of the sugar

exported.

Sugar import is allowed under Open General License (OGL). Customs duty at

60% besides countervailing duty of Rs. 850/- per tonne equivalent to 7.5% is

levied on imported sugar. Imported sugar is also subject to the monthly

release mechanism & stock holding limits as applicable to domestic sugar.

Importers are also required to surrender 10% of imported sugar as levy at

prices notified by the Government.

22 Special Commodity Report: http://www.mcxindia.com/


54

The internal sugar prices are largely governed by the

releases of sugar made by the Government. Higher the

release lower the price, lower the release higher the price.

Since December 1979, a specified percentage of total

production of each sugar factory is procured as levy sugar

at notified prices for distribution through the PDS. The

ratio is1585 from 1st February 2001.Levy prices are fixed by the GOI based

on SMP for the year. But usually levy prices are very low and fall below the

cost of production. Therefore the producers are left with only free sale sugar

quota to run the business profitably. GOI controls extend to

free market prices also through the issue of monthly dispatch orders to all the

sugar mills in the country based on demand supply situation in the country.

Though there is no price control on free-sale sugar, market supplies are

regulated by the Government through a mechanism of monthly release

quotas. Costs tend to exceed prices because many producers benefit from

Government protection enabling them to survive despite the fact that their

cost exceeds world price levels. The trend in world raw sugar prices is that it

exhibits a clear downward trend with an annual declining rate of

approximately 1.5% declined over the previous years' prices. This trend

clearly poses a serious challenge to sugar producers around the world.

Following acts and orders through which government regulates the sugar

Industry.

• Essential Commodities Act,23 1955 (Briefly Ec Act)

• Sugar (Control) Order, 1966

• Sugarcane (Control) Order 1966

• Levy Sugar Supply(Control) Order 1979

• Sugar (Packing And Marking)Order, 1970

• Sugar Cess Act, 1982

23 Source: http://www.indiansugar.com/


55

• Sugar Development Fund Act, 1982

• LSPEF Act 1976

• Sugar Development Fund

Rules, 1983 (Government

enacted the Sugar

Development Fund Act &

Rules, which provide for levy

of Rs.l4/-per qtl. of sugar known as Sugar Development Fund

(SDF). The SDF is utilized for granting several term loans to sugar

mills for modernization and grants for research projects in the

sugar industry besides creation of buffer stocks as and when

required to ensure price stability.)

World Sugar Market Review 24

As per ISO (International Sugar Organization), global sugar output is

estimated at 160.2 million tonnes against a consumption demand of 153

million tonnes. World consumption is projected to grow by 2.15%, only a

fraction down from the 10-year average of 2.29%.

For 2006/07, world export availability is projected to exceed import demand

by more than 4 million tones. Unlike few other countries, which produce

sugar for exports on a regular basis, Indian exports were mainly to liquidate

partly its surplus stocks. There is a serious mismatch between the cost of

production of sugar in India and the international price. On several

occasions, international prices have been ruling way below the cost of

production of even the most efficient producer of sugar.

24 Source:www.mcxindia.com


56

Why Futures in Sugar

Since Sugar industry is being slowly decontrolled by the government, market force would

be putting its impact on the price behavior of the commodity. India is the only country in

the world where sugar price goes against the sugarcane price. It indicates too much

interference of the government in the industry. For the industry to become competitive,

allowing future trading would lead to revivals of real market forces which will be for

good health of the industry in the long term. All the factors for success of future trading

such as organized and developed spot market, large number of participants, and active

traders are very much present in the Indian sugar industry. By products of sugar cane

industry is getting a lot of attention and it would add depth in the market. Sugar based

new industry such as ethanol and its use as fuel that has been mooted by government

would constantly strengthen the scope of sugar future trading.


57

Practical Hedging Example Sugar:

Example25 In Dec 2006 if a sugar mill owner expects an output of 5000 tonnes

of sugars in May 2007. If Sugar mill Owner has done a future contract for

May 2007, He might have got a sale contract at price of 1703.Today since spot

price of Sugar in May2007 is nearly 1200-1300.

He could have cover his short position and booked a profit of nearly 400-500

Rs. Since right now the selling price in spot market is even less than Cost

price, this business loss could have turned into profit even in this worse

market scenario.

In case in opposite scenario if price of sugar have rose more than 1700. Let’s

say 1900.Future contract may give loss. This can be effectively avoided by

putting a strict stop loss at resistance say 1720.

Numerically

Cost of manufacturing 1550 Rs/ql

On 1st Dec 2006

Spot price 1670 Rs/ql

May2007 future 1703 Rs/ql

Took a short Position.

Senario 1. On 20th May 2007

Say Spot price 1250 Rs/ql

Cover position in may 2007

25 Assumed situation with real data


58

Future Price 1270 Rs/ql

Business loss 1550-1250=300 Rs/ql

Profit in future contract

1703-1270=433 Rs/ql

Total profit =433-300=133 Rs/ql

Senario 2 On 20th May 2007

Say spot price 1900 Rs/ql

Future Price 1925 Rs/ql

Before reaching to 1925 from 1703

We will put strict stop loss at resistance at (say) 1720 Rs./ql

Business profit

1900-1550=350 Rs/ql

Loss in future contract

1720-1703=17 Rs/ql

Total profit= 350-17=333 Rs/ql.

So in both the scenario we are making profit.


59

The South India Sugar Mills Association (SISMA)

From our search in sugar from internet, we learnt about The India sugar mill

association (http//www.indiansugar.com/). The Andhra chapter comes under

(SISMA) The South India Sugar Mills Association. We called the General

Secretary of SISMA Mr.R.S. Bhale Rao and had telephonic talk with him and

fixed an appointment. At the same time we got database of sugar mills. We

used the database and followed these companies.

Prudential sugar

We interviewed Mr. G. Nageswar Rao (Technical Advisor of Prudential

Sugar).We learnt that company has exposure to forward contract where it

had entered into a contract to sell molasses over the period of time, which is a

major source of revenue especially when sugar is sold in loss. Mr. G.

Nageswar Rao was not happy with the regulation and protectionism. As per

him the only solution of this is to diversify the production towards ethnol.

Rayalseema Sugars

We met Mr. K Madhusudan, Chairman and managing director of KPS Group.

Rayalseema sugar is one of the subsidiaries of KPS group. Since Mr.

Madhusudan is already trading in copper future he was having very fair idea

about the whole concept. He has also opened an account to trades in

commodity with STCI Commodities Limited.


60

GMR Industries

Background Note

GMR Group is one of the biggest corporate house in India with core expertise

in Infrastructure, diversified in various sector like energy, manufacturing as

well as agri business.

GMR Group's Agri-Business comprises of a sugar plant located at Sankili in

Srikakulam district of Andhra Pradesh that has a cane crushing capacity of

5000 tonnes per day. Besides, it is also setting up two more sugar plants

in Karnataka.

Two dimensional growth strategies

Forward Integration Sankili Sugar Plant has set new standards in

forward integration by initiating down stream production of plantation Sugar

and co-generated power, ethanol rectified spirit, bio-composted organics

manure and bio-fertilizer CO2 gas in its distillery units.

Backward Integration GMR Industries Sugar business has implemented

several innovative measures in backward integration. The cane development

programme being one of several initiatives has transformed the socio-

economic face of the region.

Date 10th May, 2007 Interview with Mr. R. Ramakrishnan


61

This fact is very much of concern that Indian sugar is much out of

competition in term of quality and manufacturing cost. Some times price of

cane is much more than the price of refined sugar in world market.

The first reason being Kind of harvesting is done in India. “Indian socio

cultural formation has ruined the agricultural system. You will find 28000

families with 28000 plots of small land in just 32 acres of land and each of

them having various interest of cultivation. This is main hurdle in standard

corporate cultivation with use of machinery. ”says Mr R. Ramakrishnan26.

Although, GMR is in talk with these small landlords to integrate lands for

initiating corporate cultivation. Meeting 28000 landlords, convincing them

and bring them on common platform itself is hectic task and require a big

deal of time. He was not much aware about operation of future market.

26 Joint Managing Director, GMR industries Limited


62

Hyderabad Stock Exchange (HSE) episode

Hyderabad Stock Exchange (HSE) is one among 23 regional stock exchanges

of India. It has around 300 brokers (members) affiliated with it. It works on

the electronic platform of WAN and VSAT.

Before emergence of BSE and NSE, Hyderabad Stock exchange had a good

volume of trading. But the pan India reach of BSE and NSE has posed a

threat on these regional stock exchanges. There business has come down

drastically. Hardly a few trades take place on these exchanges. This has

given a crisis to the exchange.

To sustain in the market and grow, HSE has taken several restructure

measures. It is in the process of demutualization. It has floated a 100 %

owned subsidiary named HSE Securities Ltd. This new company acts as a

broker of NSE and BSE. It gives the facility to its brokers to trade in NSE &

BSE through its own platform. By this way, it has managed to keep it

relevant in this market scenario and also is a very good source of revenue

generation for it.

Introducing Commodity to Stock Exchanges is an innovative idea. Our

company is already working on the idea to provide terminals and franchise to

some regional exchanges so that they can trade in commodity derivatives

through our terminals. This will give exchanges an alternate avenue of

business and a facility to its broker to also deal in commodity futures. Our

company is already in talk with three regional stock exchanges for this

possible partnership. They are

• Madras Stock Exchange

• Bangalore Stock Exchange


63

• Interconnected Stock Exchange

We were assigned the task to explore the possibility of similar kind of tie up

with Hyderabad Stock Exchange also. Our CEO Himself briefed us about the

possible intricacies of such possible collaborations and mandated us to

approach HSE on behalf of the company.

Hence, we approached HSE officials in this regard. We had a meeting with

two deputy CEOs of HSE and HSE Securities. Mr.V.R.Bhaskar Reddy and

Mr. Someshwar Rao. We also discussed this issue with their administrative

head Mr.K.Sri Hari. We got a positive feedback from them and we scheduled

a high powered next round of talks with them in couple of days. Our CEO

himself came for the meeting on 16th May.

The outcome of the meeting was that they were convinced with this idea but

at the same time all complication of legal aspect needed to be addressed. So,

we were told to submit a detailed proposal for this joint partnership and for

due diligence.


64

Commodity Sutra… An Initiative

We found in all these interviews and meeting that there is a communication

gap which is mother of all this complications. So there should be a forum to

speak on the concern where everyone is listening. To just understand the

reaction of market participation and to work on the bridging this

communication gap we launched a web site as apart of our project.

www.commoditysutra.forum5.com

We received good response and appraisal to whomever we discussed about

this website. We believe that there can be many these kinds of small steps to

boost the pace of awareness level.


65

Commodity exchange in India27

The list of exchanges that has been allowed to trade in commodities are

1. Bhatinda Om & Oil Exchange Ltd., Batinda.

2. The Bombay Commodity Exchange Ltd.Mumbai

3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd

4. The Kanpur Commodity Exchange Ltd., Kanpur

5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut

6. The Spices and Oilseeds Exchange Ltd.

7. Ahmedabad Commodity Exchange Ltd.

8. Vijay Beopar Chamber Ltd.,Muzaffarnagar

9. India Pepper & Spice Trade Association. Kochi

10. Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi

11. National Board of Trade. Indore.

12. The Chamber Of Commerce, Hapur

13. The East India Cotton Association Mumbai.

14. The Central India Commercial Exchange Ltd, Gwaliar

15. The East India Jute & Hessian Exchange Ltd,

16. First Commodity Exchange of India Ltd, Kochi

17. Bikaner Commodity Exchange Ltd., Bikaner

18. The Coffee Futures Exchange India Ltd, Bangalore.

19. Esugarindia Limited.

20. National Multi Commodity Exchange of India Limited.

21. Surendranagar Cotton oil & Oilseeds Association Ltd,

22. Multi Commodity Exchange of India Ltd.

23. National Commodity & Derivatives Exchange Ltd.

24. Haryana Commodities Ltd., Hissar

25. e-Commodities Ltd.

Out of these 25 commodities the MCX, NCDEX and NMCE are large

exchanges and MCX is the biggest among them.

27 Source: PTI / New Delhi April 11, 2007


66

Future Trading: the Growth story

• Futures trading on commodity exchanges rose by more than 70 per

cent to Rs 36.76 lakh crore in 2006-07 compared with Rs 21.55 lakh

crore registered in 2005-06. In 2004-05, the total turnover on the three

national and 20 regional commodity bourses stood at Rs 5.70 lakh

crore.

• According to data released by commodity market regulator Forward

Markets Commission (FMC), during March 16-31 of the last financial

year total turnover from futures trading was Rs 1.67 lakh crore. In the

first half of March, the turnover stood at Rs 1.82 lakh crore.

• The turnover would have hit the Rs 37 lakh crore level, but for this

decline in business in the second half of March, a commodity analyst

said.

• The overall surge in the turnover of commodity

exchanges in 2006-07 has been primarily led by

the three leading national bourses, Multi

Commodity Exchange (MCX), National Commodity and Derivatives

Exchange (NCDEX) and National Multi Commodity Exchange of India

(NMCE), which together account for more than 97 per cent of the

business.

• MCX has emerged as the top commodity

bourse in the last fiscal with a share of

62.3 per cent in the total turnover of

futures trading followed by NCDEX with 31.7 per cent share.


67

• Leading agri-commodity exchange NCDEX continued to march ahead

with its turnover rising to Rs 42,982 crore during March 16-31 from Rs

41,665 crore during Mar 1-15 and Rs 33,632 crore in February 16-28.

• Futures market size relative to GDP in the US is about 90%, in China

about 85%, in Brazil about 200%, and in India? 5.81% in 2003-04,

20.14% in 2004-05 and 66% during 2005-06.28

• Participation of banks, mutual funds and FIIs, along with introduction

of options trading with amendments to the FCR Act, 1952, will boost

the commodity futures trading further in the coming years

Commodities to surpass equities in the next 2-3years –

Even when stock exchanges are enjoying an unprecedented boom and

increasing investors’ wealth, it is the commodities that are making a steady

progress. Commodity exchanges have not logged as much volume of trade and

as much value as securities have done, but there is no doubt that in the next

five years or so the commodity exchanges will overtake stock exchanges in

terms of volume and value.

• The turnover of commodity and stocks futures grew at a scorching pace

in 2006-07, accounting for 80 per cent of the total turnover of the cash

and futures markets. The share of futures in the total turnover was 74

per cent a year ago and 60 per cent two years ago.

• The turnover of the commodity and stocks (including index futures)

futures rose 58.8 per cent in 2006-07, crossing the Rs 100 trillion mark

at Rs 110.53 trillion. The commodity futures outperformed the stocks

and index futures by posting 70 per cent growth in turnover. The

turnover of stocks and index futures rose 53.7 per cent.

28 http://www.pib.nic.in/release/release.asp?relid=17932&kwd


68

• The three major commodity exchanges had a combined turnover of Rs

36.37 trillion (Rs 36, 37,009 crore) during the financial year.

• This was attributed to introduction of international commodities such

as Brent Crude, natural gas and gold by the MCX. The turnover of

these commodities rose 164 per cent, and their share in the total

turnover increased from 47.6 per cent in 2005-06 to 66 per cent in

2006-07.

• On the stock markets, the BSE and the NSE clocked a total turnover of

Rs 74, 15,257 crore due to introduction of 49 new stocks futures during

the year.

• The commodity futures market has been growing at a higher pace with

its share in the total pie increasing from around two per cent in 2004-

05 to 30.7 per cent in 2005-06 and 32.9 per cent in 2006-07.

• The pace of growth of commodity futures would have been much more,

if the government had not banned futures trading in the price-sensitive

agro commodities like urad, moong, tur and wheat in the second half of

2006-07. The ban halted its pace of growth from 126.4 per cent in the

first half of 2006-07 to 32.7 per cent in second half of 2006-07.

• Among the five major exchanges that allow futures trading, the

National Stock Exchange accounts for 66.6 per cent, the Multi

Commodity Exchange (MCX) 20 per cent and the National

Commodities and Derivatives Exchange (NCDEX) 10.5 per cent. The

BSE has a minuscule 0.50 per cent share, while the NMCE accounts

for the remaining 2 per cent.


69

The Roadblocks: Commodity trading despised

Ban on Futures:

• The government banned futures trading in wheat and rice on February

28 when the Budget was presented in Parliament while announcing a

freeze on launching new contracts till an expert committee submits it

report. Earlier, urad and chana futures were banned.

A five-member committee headed by Planning Commission Member Abhijit

Sen has been asked to study “the extent of impact, if any, of futures

trading on wholesale and retail prices of agricultural commodities”

The report submitted found an explicit relationship between wholesale price

and commodity future trading. For some commodities like metal,( those were

in line with the global prices and the factors ),exchanges were able to

discount all the parameters associated in WPI. As the entire metal trading in

the world market is done through exchanges and commodity exchanges in

India being a representative of global metal exchanges, they were able to

synchronize themselves with the WPI. For agri commodities Exchanges were

based on the factored and averaged out inputs in the spot markets, hence

were able to reflect WPI.

As report discovered, in a short span of around 30 months, future commodity

trade has grown to an average daily turnover of Rs.7, 000 crores with a

highest daily turnover of Rs.17, 988 crores. It emphasized on the emergence

of a pan-Indian market for commodities in India that will have unique prices

for the entire country. While highlighting the importance of strategic

alliances that MCX has already gone into with exchanges like NYMEX, LME,

Tokyo Commodity Exchange, Chicago Climate Exchange etc., he expressed


70

his satisfaction at the performance of MCX and hoped that India will become

global hub of commodity trading in near future.

Speculation

For a long time since the Forwards Contract (Regulation) Act 1952,

commodity trading was in disrepute because of unregulated speculative

activity. The attitude towards commodity trading was one of suspicion and

frown. Now things are changing for the better as both the government and

other stakeholders such as traders, investors, farmers, regulators and

financial institutions have realized that it is not enough to set up commodity

exchanges but a strong regulatory mechanism should be in place for orderly

functioning of these exchanges so that both individuals and institutions

participate on a large scale to bring about price discovery and stability to the

market. The ultimate beneficiaries in this scenario will be farmers who

deserve a fair deal in a predominantly agricultural economy of India.

There is no doubt that the situation is a far cry from the one that prevailed

towards the end of the 1960s. Then, commodities trading were looked upon

with suspicion. Traders were seen more as speculators in commodities rather

than market makers. This was because of high speculation that was order of

the day then. Largely, wrong perception owed to the absence of regulatory

mechanism. Today the situation is different as there is a regulatory

mechanism in the form of Forward Markets Commission. But there is still a

need to strengthen regulatory mechanism. There is also another aspect of

speculation. No market can thrive without speculation; much less futures.

Care should be taken to see that unrestrained speculation does not create

unwarranted volatility in prices to the detriment of stakeholders.

Commodities are no longer seen as speculators’ heaven as more and

more investors - both individuals and institutional - coming into commodities

markets on a large scale. That is the volume of trade on commodities

exchanges such as NCDEX, NMCE and National Board of Trade (NBOT) has


71

reached Rs 7.5 lakh crore during the first five and a half month till

September 15 of the current fiscal. The trading volumes on commodity

exchanges surpassed that of futures on the capital market in August 2005 for

the first time in the history of the domestic derivatives in the market. If the

current trend in growth continues it is said that the trade volume will cross

Rs.10 lakh crore by 2010.

Excerpts from an interview taken with FMC Member, Mr.Kewal Ram

throws some light on the issue Regulatory Aspect:

“I feel strongly that for orderly functioning of commodities exchanges there is

a greater need for efficient regulatory bodies.SEBI and other bodies have

regulatory powers over the functioning of stock exchanges in the country. But

it would be a mistake to draw a parallel between these two sectors. After all

stocks are derivatives and commodities are real. So I feel there is a need for

greater participation of financial institutions, banks, FIIs and general

investors in commodities spot and futures, apart from of course, traders. This

will ensure broadening as well as deepening of the commodities markets.

Both price discovery as well as a fair return to farmers, the real actors in the

entire drama, will be possible if there is wider participation of these bodies.

We, at FMC have prepared a plan to strengthen regulatory mechanism more

or less on the lines of SEBI but differing in some details in view of differential

nature of stocks and commodities. After all the primary function of a

commodity exchange is to facilitate the spread of correct information for all

stakeholders so that transparency in transactions makes price discovery

possible.

A strong regulatory mechanism is also needed to check price-rigging,

circulatory trading etc. Forward Contract (Regulation) Act 1952 is being

amended to factor in changes in subsequent period. Once a legal framework

is put in order commodities exchanges will become better and more efficient

conduits of right information for stakeholders. We have developed software


72

somewhat like SEBI’s to facilitate online information. But it is not fair to

compare our software with SEBI’s as that body has spent Rs.20 crore on it. It

has also a long experience in stock regulation.

Prospects for commodities in this country are really bright. We have already

overtaken the Mumbai Stock Exchange (BSE) in terms of value. I am sure

that in the next 2-3 years will see an exponential growth of commodities

trading.”

Ban on Commodity futures:

A case of excessive political intervention in the Economic subsystem

INDIA is unlikely to shut down its agricultural commodity futures anytime

soon, if accolades from the Economic Survey are any indication. Calling the

ban on urad and tur futures ‘temporary’, the survey has forecast that

exchanges are likely to see even higher volumes and value of items traded in

the coming fiscal. The total turnover of commodity derivatives market has

already crossed 76% of India's GDP. "Futures market, as observed from the

cross-country experience of active commodity futures markets, helps in

efficient price discovery of the respective commodities and does not impair

the long-term equilibrium price of commodities," the survey has stated.

Referring to fears about speculators distorting the market, the survey said,

"At times, price behavior of a commodity in the futures market might show

some aberrations... but it quickly reverts to long-run equilibrium price, as

information flows in, reflecting fundamentals of the respective market."

Giving speculators a clean chit, the survey said they play a role in providing

liquidity to markets and may sometimes benefit from price movements, but

do not have a "systematic causal influence on prices" .


73

Ironically, in the last one year, the government has clamped down heavily on

farm futures contracts by increasing the margins, reducing volatility or

simply banning them, as in the case of tur and urad to prevent 'unhealthy'

speculation.

All eyes are now on the proposed amendments to the Forward Contracts

(Regulation Act), 1952. The survey believes the amended Act, expected to be

passed in this session of Parliament, will ensure "orderly conditions" in

commodity futures. The Act intends to substantially enhance the surveillance

and monitoring powers of the regulator Forward Markets Commission. It also

allows the government to introduce options in commodity futures. The

market has been looking forward to the introduction of options as a more

sophisticated way of trading in commodity derivatives. Meanwhile, though

farmers are meant to be the chief beneficiaries of commodity exchanges, gold

has been the real star of the show this year. Punters playing on geo-political

tensions ensured that gold and silver had 50% share in terms of volume.

Guar (11%) and chana (10%) were the only farm commodities with double-

digit figures. Due to the frequent clampdowns and uncertainty in farm

futures, there has been a sharply divergent pattern of growth between MCX,

which derives its market share from metals, energy and bullion, and NCDEX,

which is the biggest in farm commodities. For the first time in three years,

NCDEX saw reduced volumes. Up to December 31, the turnover on NCDEX

shrank from Rs 10 lakh crore in 2005-06 to Rs 9.44 lakh crore in 2006-07.

On the other hand, MCX turnover rose from Rs 9.6 lakh crore in 2005-06 to

Rs 16 lakh crore in 2006-07. Riding on the back of a global boom in metals,

energy and bullion, the growth of MCX in 2006-07 is comparable with some of

the international commodity indexes such as Goldman Sachs Commodity

Index, Dow Jones AIG Commodity Cash Index and Reuters/Jefferies

Commodity Research Bureau, the survey has pointed out. Though punters on

metals and gold have been the biggest players in the market till now, the


74

survey is hopeful of farm commodities getting their share of the spotlight.

"Agricultural commodities are expected to gain importance, helping their

price discovery process and thereby providing an opportunity to farmers," the

survey said. That may well come true. Last year, technology allowed India's

online commodity markets to reach the smallest investor's doorsteps. This is

something even bourses in Chicago and New York are just catching on.

Traditional regional exchanges, using the open outcry method, now have just

3% share of the total commodity derivative business.

Playing With Futures:

Market Manipulation in Commodities Markets

Farmer could not make money despite having a better harvest of Arhar dal

this year because there was a glut in the market. A trader in wholesale

grains market in Who sold his stocks at much lower prices than last year,

hoping he would buy fresh stock at further lower prices. To his dismay, the

market went up instead of down, and so much so that he couldn't afford to

buy fresh stocks at such high prices. Housewives are testing out alternative

food concoctions on her family because she can't afford to prepare sambhar,

as pulses are being sold at exorbitant prices between Rs.45 to Rs.60 per kg.

In spite of high price of produce the fact is devastated by poor returns and a

mountain of debt, the Indian farmer is preferring suicide to a life of misery

and penury.

Fortunately, most Indian housewives don't exercise that option and instead

curse their fate while buying more than Rs.60 a kg for daal (pulses), more

than Rs.40 per kg for tomatoes; and a further amount of around Rs.60 a kg

for capsicum. Even rising wheat prices are triggering alarm bells with the

government announcing wheat imports.


75

The obvious question is, if the farmer is not getting better returns and the

housewife is paying through her nose, where is the money going? If neither

production has gone down, nor has the consumption skyrocketed, then why

are prices hitting the roof? Most Traders acerbically blames it on futures

trading in the commodity market.

Vindicating the point, so does Ashish, A pulse trader at the BegumBazar

(Hyderabad), is alleging that prices of commodities are not being fixed as per

demand or supply, but by the commodity exchanges in order to book profits.

Traders like Ajay, accusing commodity exchanges of manipulating markets,

have angrily demanded a ban on their operations. Even the UPA

Chairperson, Sonia Gandhi, while chairing the Core Ministerial meeting of

the government to review price rise, flatly put the onus of unprecedented

inflation on commodity markets. But the Chairman of commodity futures

regulator, the Forward Markets Commission (FMC), S. Sundaresan,

copiously doesn't think so. The increase in prices is, how do we put it, "In

sync with market trends," as he sassed recently rising up to defend the

futures markets.

Sundaresan's point could well put rhetoric to shame, considering the fact that

there are clear indications that speculation is rampant. And least of all being

the memorandum to the President of India submitted on July 5, 2006, by

Confederation of All India Traders, who allege, "The regulator has totally

failed to monitor abnormal increase in prices of commodities in the market."

And most of all, the following:

• The closing price for mentha oil in October 2005 was about Rs.450 per

tonne; and the trading volume was 'zero'. By March 2006, the volume

traded in mentha oil had skyrocketed to about 400,000 tonnes and the

price had gone up to more than Rs.800 per tonne. Most surprisingly,

the price fell to Rs.420 (a sign?) in the next two months.


76

• Often, the volumes traded in commodity exchanges are 40 to 50 times

the actual supply of the commodity.

• In turmeric, trading went on for more than one year without any

physical delivery of the commodity.

• There are persistent allegations that about 250 small commodity

traders across India have committed suicide after going bankrupt in

2005-06.

• The trading volume in the commodities exchanges went up by a

staggering 274% in 2005-06. The rate of growth continues to be very

high even now.

Commodity markets were permitted by the government to free farmers from

the clutches of local traders, who used to form a cartel and buy the farmer's

produce at prices much lesser than market prices. The online version of

commodity trading was intended to ensure that such "bonded" farmers could

sell their produce online to millions of prospective traders across the world in

an internet based commodity exchange for price discovery of their produce.

And if they felt that they were still not getting the right price, they could sell

it in futures market - at an agreed price they felt could be fetched after a few

months when the demand for their produce could go up, increasing the

market prices of the commodity. The exchange also provided a platform to

foreign traders to buy Indian goods for their own markets. But hardly any

farmer trades his produce on the exchange.

It's again the same for wholesalers - medium and big - who have been trading

their agri-produce after buying it from farmers and small wholesalers. And it

is this group that has been suffering the most due to the entry of FIIs and

other big stock market players in commodity trading. As mentioned before,

not only is this group now demanding a ban on futures commodity markets,

but are also pleading for warning to be given to various similarly stuck

traders. A spice merchant from Delhi provides an incriminating insight,


77

"Total produce of small cardamom in India is 12,000 tonne, valued at Rs.480

million. A big trader can corner 80-90% of the produce through commodity

exchanges making the prices skyrocket in open market..." The spice man may

not be too much off the mark.

The weakening of rupee and non-availability of pepper outside the exchange

resulted in the prices of this sibling of salt zooming up to Rs.7,150 from

Rs.6,850 per unit (per 10 tonne) on June 26. Ajay, a Bullion trader at

Mahan kali, blames futures trading for the upward swing in gold prices

from Rs.6,200 six months ago to Rs.11,500 per 10 grams last month, and

silver from Rs.12,200 per kg to Rs.19,800. There are also allegations of some

tainted stock market players like Ketan Parikh manipulating the commodity

market to book heavy profits.

The NCDEX Managing Director P. H. Ravi Kumar denies this. In any case

the exchange itself imposes margins to ward off speculators. Recently,

NCDEX imposed a margin of 45% on urad daal and 18.5% on tur daal to

discourage speculators. Trading on mentha oil had to be suspended for

sometime on July 9.

The basic issue now is how to strengthen the commodity regulator and speed

up the physical delivery system. True, there have been excessive

speculations, but only in commodities like guar gum, urad and mentha oil,

two of which do not directly affect ordinary people. It is also a fact that

besides wheat, dals and pulses, prices of other commodities like milk,

detergents, vegetables and oil too have gone up. And not all of these are being

traded in the futures market. Of course, part of the hike is additionally due to

seasonal factors.

The Price Management Fundamental


78

On the basis of parameters like rainfall, spread of disease, product managers

at commodity exchange inform traders of likely volumes of the crop. That is

the precise moment that big players step in - buying left, right and centre -

making prices go up. The speculators pitch in, creating volatility in the

market. Small and medium traders, who had already sold off their produce at

throwaway prices, hoping to buy it at later stage, rue the lost opportunity.

Even those who dare to buy in futures, hoping the market would still be high,

come in for a shock to find that speculators and big traders have sold off their

stocks causing the prices to crash. They have to pay the huge difference after

which traders either quit the market for good or join the speculation

bandwagon. A telling example is turmeric, where speculative futures trading

were being done for more than one year without any physical delivery of the

product.

There were clear indications from experts about a bumper crop and most

traders, including one Hyderabad-based trader who lost Rs.5 million, sold

turmeric short (in layman's terms, they gambled on turmeric prices falling in

the future). However, a selective and shadowy group of big traders cornered

the market and the small traders realized that they did not have the

resources to go on gambling. Most went bankrupt, or withdrew with heavy

losses. And without surprises, something exactly similar seems to have

happened with the commodity mentha oil. Overall, there have been four

confirmed cases of suicide amongst Delhi-based commodity traders in recent

weeks. Though one would not wish to connect, but in fact, there are many

traders who claim more than 200 small traders across India have committed

suicides.

Price Discovery is a Ruse


79

Futures trading perform two important functions:

• price discovery

• Risk management

It is useful to all segments of the economy –

• The farmer because he can get an idea of the price his produce can

fetch him after some time;

• The consumer since he gets alerted about future prices of essential

commodities

• Exporters, as it provides an advance indication of the likely price.

Commodity markets were supposed to have eliminated the risk of

being duped by a wholesale trader. However, the problem crops up

when speculators are allowed to go wild with futures trading

without any effective regulation from a body or an institution.

The commodities market regulator FMC simply doesn't have the manpower,

the resources and the expertise to effectively regulate the rapidly growing

speculation in scores of commodities across India.

There are many analysts who compare the present status in the Indian

commodities markets to the Wild West scenario that prevailed in the Indian

stock markets after the first flush of liberalization in 1991. While the

Harshad Mehta scam triggered the formation of SEBI in 1992 to more

effectively regulate the markets, It took many more scams and alleged

scamsters like C. R. Bhansali and Ketan Parekh and more than a decade for

SEBI to reach a stage where it could even claim that it is actually an effective

regulator. Even now, FMC faces the dilemma faced by SEBI in the early

1990s - it simply doesn't have the wherewithal to prevent rigging, speculation

and market fixing. These factors have led many traders to raise

uncomfortable questions:


80

• A whopping 98% of traders in commodities lost money... Why? Why

doesn't the government close down defaulting exchanges or manage

them better?

• Why don't all exchanges increase margins or stop trading? Why are

settlements of contracts still not transparent?

• Why are market regulators unaware of trade intricacies?


81

Prescriptions / suggestions

The government had proposed to amend the Forward Contracts (Regulation)

Act, 1952 that regulates the commodity markets by introducing an

Amendment Bill in the Lok Sabha on March 21 this year. Some corrective

measures proposed in the bill, and some more by some financial experts are:

• Increase number of FMC members from four to nine

• Conferring power upon the FMC to levy fees

• Make provisions for 'corporatisation' and 'demutualization' of

recognized.

• Make provisions for registration of members and intermediaries; allow

trading in options.

• Make provision for investigation, enforcement and penalty in case of

contravention of the provisions of the FCR Act.

• FIIs should not be allowed to trade in commodity futures.

• The FMC should be headed by an economist.

• The FMC should be handled by the finance ministry instead of the

consumer affairs ministry.

• All commodity exchanges should strengthen their warehousing

facilities to boost storage and prompt delivery.

• Convert warehouse receipts into a negotiable instrument.

• Settlement of futures contracts to be made transparent.

• Clearing house functioning should be improved.

• Trading of non-deliverable goods like crude oil should be stopped as it

promotes speculation and hedging.


82

Commodity Futures: An Alternative Investment Avenue

The first question which we are trying to address is the status of

commodity futures markets in present scenario in India. They have

been launched in 2003 after much consultation and much ban –allow

imbroglio. Commodities have never intended to emerge as an

investment class. Their primary aims were price discovery for various

participants of spot commodity market and also as a tool to minimize risks

involved with the price fluctuations and exigencies to traders, farmers and

other stakeholders of business. When one goes into diagnosis of commodity

derivatives, we find that even after excessive government restrictions, policy

anomalies, disinterest of participants and fragmentation of markets, they

have grown by leaps and bounds. Within 6 years of period, they have already

attained 76% of country’s GDP and the volume of 3200000 crore! Our some of

the exchanges compete with biggest in world commodity markets and are

competitive enough. Still much has to be done and commodity market in

India has to score much more in years to come in terms of penetration,

maturity, regulatory control and transparency. Also a sizable amount of

stakeholders, are still out of this business model and are still suspecting it as

a derogatory for their business interest.

However, commodities in this country were never meant to be an

investment tool for middle class. By investment tool we mean an asset

class wherein surplus money of the economy can be pooled in to generate

more growth for Economy as a whole and a capital investment for its

investor.

The prime question here then how commodities are now considered as

a serious alternative investment avenue, not only for its real

participants but also for people who do not hold any direct business


83

interest in commodities in which they are investing. They are not only

speculators but also for bourgeoning middle class with its surplus money and

expertise, who wants to take part in all pervading INDIA GROWTH STORY

and contribute in the mainstream of national economy.

The speculators are the most prominent investment class; those can be

termed as people who take commodity as their investment tool. They are very

integral part of any economical or business cycle and are also the one who are

most despised. They are blamed for their capacity of over price volatility and

inflated scenarios and are said to be hampering the business prospect of real

stakeholders.

We are analyzing the behavior and role of speculators in the

commodity market. They do good to bring liquidity in the market and are

generally the one who help in Market making.

The findings of the role of speculators in Indian commodity market are well

talked about. They are alleged for excessive price volatility and immature

behavior of market as a whole. They are also said to be keeping the real

players away from the market.

However, it should be kept in mind that forward contracts are means of

hedging against the risk of price volatility or uncertainty of supply. But

hedgers can not function without the presence of speculators. In fact, they

are the speculators to whom the real players transfer their risk. If the

market is restricted to hedgers, who are actual producers or users of

commodity, the volume of many contracts could be so low that on some days a

trade cannot occur, because a buyer cannot find a seller or vice versa. This is

where the speculators step in. They buy or sell in forward trades, not with

the intention of actually making or taking delivery, but with the idea of

transferring the contract concerned to an actual producer or user at a profit.

They can, therefore, buy and sell a large number of contracts enabling the

hedger to transfer risk with ease by injecting liquidity into the system. But

the moment speculation begins, there is the risk that prices could be


84

manipulated to move consistently in one direction for significant periods of

time, inflicting losses on some and gains for the others.

2004-05 2005-06

%

increase

Value 5.71Lakh Crore 21.34 Lakh Crore 274%

Volume 1942.1 Lakh tonns 6685 Lakh Tonns 244%

Now coming to our core question:

How efficient are commodity derivatives as an investment tool?

For this we need to compare the risks and returns of commodity futures with

other asset classes. Also we would like to emphasis that commodity markets

in India are now in the phase of a mega bull run which is going to stay for

long time. So as an asset class, they prove to be a fantastic tool in the hands

of prudent investor. If we take MCX COMDEX as a representative of

Commodity market in India and compare it with other markets n the world,

we find that other benchmarks showed negative returns, ranging from 1 per

cent to 7 per cent while MCX COMDEX gave an annualized return of 18.86%.

This implies that the Indian index has been steadily bullish compared with

its global counterparts most of which are in the negative return zone.

MCX Comdex: It was created in June 2005 to mirror the commodity prices

discovered at the Multi Commodity Exchange of India (MCX). Like the GSCI,

there is no limit on the number of underlying commodities. The MCX Comdex

now tracks 10 commodities selected on their liquidity and their importance to

the physical market. Equal weights are assigned at group level (energy,

agriculture and metals). It relies on a unique combination of liquidity on

MCX and physical market size to determine its component weighting. Only

near or near-deferred contract months are taken for the index computation.


85

Currently, gold, silver and copper represent the metals group, while energy

and agriculture groups comprise crude oil, and Soya oil, cottonseed oilcake,

wheat, and rubber, urad and guar seed. The index is not traded on any of the

exchanges in India due to regulatory constraints. Among the benchmark

indices studied only MCX Comdex and RICI had positive returns for the

period (see Table). The Indian benchmark MCX Comdex provided the highest

annualized return of about 18.33 per cent with a moderately higher

annualized risk (19.31 per cent). This was followed by the RICI, with an

annualized return of 5.56 per cent (annualized risk: 17.04 per cent).

29Risks and Returns: MCX Comdex VS Global Benchmark Indices

GSCI DJAIG RICI CRB COMDE

X

Annualized Return -1.35 -5.21 5.56 -6.70 18.83

Annualized Risk 21.84 17.81 17.04 16.82 19.31

Average Max/Min

return

22.87 18.41 18.05 21.34 34.24

Max per day

drawdown

-3.77 -3.06 -2.85 -2.91 -5.05

Return /Risk Ratio -6.18 -29.26 32.63 -39.84 97.50

Return from the

date of MCX

COMDEX

inception(June

2005)

18.10 9.12 11.98 1.90 35.20

29 www.commodityindia.com


86

SUGGESTIONS TO MAKE INDIAN COMMODITY MARKETS MATURE:

• The commodity derivative market is relatively insignificant at present

to be influenced by the money/forex markets. But this may not be the

case in the near future. In the USA,the commodity futures trading

commission trading(CFTC)has jurisdiction to regulate all types of

derivative contracts-forex,government securities, interest rates,

equities ,etc.In UK,even greater convergence of regulatory authority is

achieved by vesting regulatory powers to a single agency, the Financial

Services Authority. In India, there have been occasions to disentangle

of issues of regulatory jurisdiction between RBI and SEBI.The

proposals of allowing stock brokers to trade in commodity derivatives

market and regional stock exchanges being allowed to trade commodity

futures contract are being discussed at regulatory levels. Therefore,

similar issues of regulatory jurisdiction and the desirability of

regulatory convergence are likely to become relevant.

• The long period of prohibition on forward trading in major commodities

has weakened the commodity derivatives in India. Futures markets in

commodities find themselves left far behind the derivative markets in

developed countries which have been functioning uninterruptedly.

Even the securities market in India, which was far behind the

commodity derivatives in terms of volume, level of participation etc.in

1960s, has grown rapidly. This has caused some players in commodity

markets to migrate to the securities market. The equity trading cult

was established and modern infrastructure, systems and regulations

were introduced with the emergence of NSE and SEBI.

• The challenge before the commodity markets is to make up for the loss

of growth and development during the three decades of restrictive


87

government policies, which had the effect of delaying the growth of

commodity derivative markets.

• The best practices which are being discussed to be implemented are:

� Daily mark to market margining.

� Time stamping of trades

� Novation of contracts and creation of trade guarantee

fund.

� Back-office computerization for the existing single

commodity exchange and online trading for the new

exchanges.

� Demutualization for the new exchanges.

• The market in India has been very traditional so far. These new

techniques of making market more developed are facing steep

resistance from the traders. A sizable chunk of trade often migrates to

informal system because of introduction of these measures from time

to time. A latest example could be a virtual close down of Bombay and

Kanpur commodity exchanges after enforcing new regulatory

mechanisms. The traditional players find themselves at difficulty in

changing with methods of trading, clearing and settlement suddenly.

• There is a widespread lack of awareness about the role and technique

of futures trading among the potential beneficiaries. Only massive

efforts to train younger generations in modern trading techniques and

allowing the already trained stock brokers to trade in commodity

futures can obviate the need to depend on the traditional players to

revive the commodity derivative market.


88

Latest developments in Commodity Markets in last 1 Year:

• The turnover of commodity and stocks futures grew at a scorching pace

in 2006-07, accounting for 80 per cent of the total turnover of the cash

and futures markets. The share of futures in the total turnover was 74

per cent a year ago and 60 per cent two years ago.

• The turnover of the commodity and stocks (including index futures)

futures rose 58.8 per cent in 2006-07, crossing the Rs 100 trillion mark

at Rs 110.53 trillion. The commodity futures outperformed the stocks

and index futures by posting 70 per cent growth in turnover. The

turnover of stocks and index futures rose 53.7 per cent.

• The three major commodity exchanges had a combined turnover of Rs

36.37 trillion (Rs 36,37,009 crore) during the financial year.

• This was attributed to introduction of international commodities such

as Brent Crude, natural gas and gold by the MCX. The turnover of

these commodities rose 164 per cent, and their share in the total

turnover increased from 47.6 per cent in 2005-06 to 66 per cent in

2006-07.

• On the stock markets, the BSE and the NSE clocked a total turnover of

Rs 74, 15,257 crore due to introduction of 49 new stocks futures during

the year.

• The commodity futures market has been growing at a higher pace with

its share in the total pie increasing from around two per cent in 2004-

05 to 30.7 per cent in 2005-06 and 32.9 per cent in 2006-07.

• The pace of growth of commodity futures would have been much more,

if the government had not banned futures trading in the price-sensitive

agro commodities like urad, moong, tur and wheat in the second half of

2006-07. The ban halted its pace of growth from 126.4 per cent in the

first half of 2006-07 to 32.7 per cent in second half of 2006-07.


89

• Among the five major exchanges that allow futures trading, the

National Stock Exchange accounts for 66.6 per cent, the Multi

Commodity Exchange (MCX) 20 % and the National Commodities and

Derivatives Exchange (NCDEX) 10.5 %. The BSE has a minuscule 0.50

per cent share, while the NMCE accounts for the remaining 2 %.


90

National Spot Exchange

The Concept

30

National Spot Exchange is a national level institutionalized, electronic,

transparent spot Exchange, which is poised to transform the rural economy.

National Spot Exchange is a state-of the-art unique market place providing

customized solutions to various problems faced by the farmers, traders,

processors, exporters, importers, arbitrageurs, investors and the general

mass. This project was launched by Shri Sharad Pawar, Honorable Union

Minister for Agriculture and Consumer Affairs, Food.

and Public Distribution, in a function at New Delhi on 10th February, 2005.

It has been floated by the following organizations

30 Chart no : 9 Source: National Spot Exchange


91

MCX (Multi Commodity Exchange of India Limited), the leading commodity

exchange in India, provides futures trading in more than 70 commodities. It

is also amongst the top three Exchanges in the world in bullion futures.

FTIL (Financial Technologies India Limited) is among the very few

companies globally that offers exhaustive solutions library for Exchanges,

provides technology solutions to financial markets and facilitates expansion

of stock broking terminals.

NAFED (National Agricultural Cooperative Marketing Federation of India

Limited), the leading Government agency, engages in food procurement,

distribution and storage activities.

Objectives

To provide an effective method of spot price discovery in various

commodities, in a transparent manner from across the country.

To create a market where farmers can sell their produce and realize

sale proceeds at the best prevailing price.

To create a market where the processors, end users, exporters,

corporates (both private and government) and other upcountry traders

can procure agricultural produces at the most competitive price,

without any counter party and quality risk.

To create a transparent market where financiers, investors and

arbitrageurs can invest money in buying various commodities across

the country without going through the hassles of physical market.

To provide authentic spot price of various commodities that can be

used by the futures market as the benchmark price for settlement of

their contracts on the date of expiry.

To help the futures exchanges, Forward Markets Commission (FMC)

and the Government in achieving the target of compulsory delivery in


92

all agricultural produces by way of creating a structured and

standardized spot market.

To promote grading and standardization of agricultural produces and

create a market, where banks and money lending agencies can provide

warehouse receipt financing to farmers and traders.

Services Offered By National Spot Exchange

Electronic spot trading facility in multiple commodities with specific

delivery centers.

Grading, quality certification and standardization of commodities.

Facilitating collateral financing and borrowing against warehouse

receipts.

Customized services relating to storage, transportation, logistics

handling and shipment.

Procurement and disposal of commodities through online trading

system.

Market Intelligence Reports.


93

Participants in the National Spot Exchange

31

Advantages of National Spot Exchange

32 31 Chart no: 11 Source: www.Nationalspotexchangeexchange.com ( National Spot Exchange)


94

Benefits to the Farmers

Realizing the best possible price at the time of sale for agricultural

produces.

Trade and payment guarantee.

Cost reduction in handling and other activities.

Access to a national level transparent market, where direct selling to

processors or end users would be feasible.

Increase in holding capacity due to availability of warehouse receipt

financing.

Increase in bargaining power due to availability of an alternative

market.

Benefits to the Traders

Common National Level Platform for Buying and Selling of

Commodities.

No counter party risk in trade.

Procurement and disposal of huge quantity possible.

Benefits to Corporate / Exporters / Importers

Facilitates bulk procurement operations without counter party and

quality risks.

Customized services relating to storage and logistics.

Availability of professional services for grading and standardization.

32 Chart no: 12 Source: National Spot Exchange


95

Complete avoidance of hassles relating to physical market operations.

Benefits to the Arbitrageurs

Advantage of cash-future arbitrage electronically.

Disposal of deliveries received on Future market.

Jobbing and spread trading between cash and futures.

Benefits to the Futures Exchange

Commodity exchanges would get a fair transparent spot price for

settlement of their contracts.

Regulator wants to move towards compulsory delivery in various

commodities. National Spot Exchange would provide the stepping

stone for this purpose.

Investors can buy physical material on National Spot Exchange

and do arbitrage with future contracts traded on MCX.

Long term investors can buy physical commodities stored at

National Spot Exchange warehouses and take advantages of off

season price rise. It can create an alternative investment

instrument, just like investing in stock market.

OPERATIONS PLATFORM AT NATIONAL SPOT EXCHANGE

Trading

National Spot Exchange will provide an online screen based trading system,

which can be accessed through VSAT, leased line or internet. It will launch

daily expiry contracts, which will be traded from 10 am to 5 pm. The

positions outstanding at the end of the day will result into compulsory


96

delivery. But during the day, the transactions of offsetting nature will be

netted off and delivery will be executed 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 will be

specified by the Exchange in advance and all contracts executed on the

system would be on the basis of such terms only

33

Delivery and Settlement

All trades executed on a day will be netted off at the end of the day as per the

weighted average price of last 30 minutes. The profit / loss arising would be

settled on the basis of MTM on the next day. The net sellers have to give

delivery by way of depositing goods in the Exchange designated warehouses /

storage tanks within T + 3. The buyer's account will be debited by the

Exchange on T + 4 and delivery order will be handed over to them after

ensuring that payment is through. On T + 4, pay out will be credited to the



97

seller's account. In case the seller fails to give delivery, the position will be

auctioned / closed out at the risk and cost of the seller separately. In case the

buyer fails to make payment, the buying position would be auctioned by the

Exchange at the risk and cost of the buyer.

34

Risk Management and Surveillance

The Exchange will use various tools for risk management, margining and

surveillance to ensure market integrity. All positions outstanding in the

market would be subject to margin payable by both buyers and sellers.

However, if the sellers have deposited goods in the Exchange designated

warehouses, margin will not be applicable on such positions.



98

Settlement Guarantee Fund

The Exchange will guarantee performance of all contracts executed on the

Exchange platform. For this purpose, the Exchange will maintain a

settlement guarantee fund. Notwithstanding default of any member, the pay

out will be declared 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 is proven

class of end-to-end Exchange Trading technologies, addressing Trading /

Surveillance / Clearing and Settlement operations. It would deliver a cutting-

edge to the National Spot Exchange Trade Life Cycle i.e. Pre-Trade, Trade

and Post-Trade operations.


99

About The Organization

UTI SECURITIES LTD. (UTISEL)

UTI SECURITIES LTD. (UTISEL) was incorporated on June 28, 1994 by

Unit Trust of India as its 100% subsidiary and on April 17, 2006 the entire

share capital of the company was transferred to Securities Trading

Corporation Of India Ltd. [STCI] and its nominees. UTISEL has been

working as an independent professional entity for providing financial

intermediary and advisory services to corporate institutional and retail

clientele. The Company has built up a reputation for transparent and fair

execution of transactions, which have been well received and appreciated by

its clientele.

The Company has grown from an institutional brokerage house to a full-

fledged financial intermediary having nationwide presence in major cities

with branches and franchisees to service a wide range of clients.

SECURITIES TRADING CORPORATION OF INDIA LTD. (STCI)

Securities Trading Corporation Of India Ltd. (STCI) was established by

Reserve Bank Of India (RBI) in May 1994, jointly with public sector banks

and all-India financial institutions with objective of fostering the


100

development of an active secondary market for Government securities and

bonds issued by Public sector undertakings.

It commenced business operations in June 1994 and started dealing in

government securities. On the introduction of the system of Primary

Dealership in Government Securities, in February 1996, STCI became one of

the first two institutions to be accredited by RBI as a primary Dealer in

Government securities. Government of India have notified STCI as an

"Approved Finance Institution" for the purpose of Sections 18 and 24 of the

Banking Regulations Act, 1949 and Section 42(1) of the Reserve Bank Of

India Act, 1934. STCI's core activities comprise participation, underwriting,

market making and trading in Government Securities. The Company has

established a name for itself in the Indian Government Securities Market

and has emerged as one of the leading Primary Dealer over the period of

time. Apart from the above, the company is an active partner in the inter-

bank call money markets and Repo market.

STCI COMMODITIES LTD.

Due to regulatory restrictions, one organization cannot trade in equities as

well as commodities. Therefore UTI securities Ltd. floated STCI commodities

Ltd. as its wholly owned subsidiary.

STCI Commodities Limited was incorporated on September 20, 2004. STCI

Commodities Limited has membership on Multi Commodity Exchange of


101

India Limited (MCX) and National Commodity and Derivatives Exchange

Limited (NCDEX).

STANDARD CHARTERED

Securities Trading Corporation of India

(STCI), has decided to sell its entire

stake in UTI Securities to Standard

Chartered Bank in two years at a pre-

determined price of Rs 275 crore, according to the memorandum of

understanding (MoU) signed between both the parties. In the first stage this

year, Standard chartered will buy 49 per cent stake for Rs 135 crore.

During the next year, Standard chartered will hike the stake further to 74

per cent and it will buy the remaining 26 per cent stake in UTI Securities by

2009.35

The new company will also be going for a name change soon to reflect the

ownership of Standard Chartered in the organization.

35 http://www.business-

standard.com/common/storypage.php?autono=284476&leftnm=2&subLeft=0&chkFlg=


102

Configuration of a new financial product ( For the benefits of farmers)

If a financial product, which will be combination of

Agri research guidance + insurance + loan + future derivative

This can solve all the problems of farmers and can give full risk cover.

• Agri research support :will provide agri tec support

• Loan :financial support

• Insurance :will cover all the uncontrollable risk

• Future derivatives :ensure the market for the produce

Above all can be done with the collaboration of some financial institutions.

Points needed to keep in mind:

1. Need to take approval from

• RBI

• FMC

• IRDA

2. The future contract should match with requirement of farmers.

3. Future contract will be short in nature.

4. Kind of crop varies as per geography and season so product should take

care of these variables.

5. Lot size should match the capacity of production for the farmers.

6. Product should be very find tuned with respect to each other.

7. Farmers should be made aware of this financial product.


103

Appendix 1

Frequent Asked Questions

What are Commodity Futures?

Commodity Futures are contracts to buy specific quantity of a particular

commodity at a future date. It is similar to the Index futures and Stock

futures but the underlying happens to be commodities instead of Stocks and

indices.

Commodity Futures are recently introduced in India. Aren’t they?

Commodity futures market has been in existence in India for centuries. The

Government of India banned futures trading in certain commodities in 70s,

however trading in commodity futures was permitted again by the

government in order to help the Commodity producers, traders and investors.

World-wide, commodity exchanges originated before any other financial

exchange. Infact most of the derivatives instruments had their birth in

commodity exchanges.

What are the major commodity Exchanges?

The Government of India permitted establishment of National-level Multi-

Commodity exchanges in the year 2002 and accordingly three exchanges have

come into picture. They are

• Multi-Commodity Exchange of India Ltd, Mumbai (MCX).


104

• National Commodity and Derivatives Exchange of India, Mumbai

(NCDEX).

• National Multi Commodity Exchange, Ahmedabad (NMCE).

However there are regional commodities exchanges functioning all over the

country. STCI securities Ltd has got membership of both the premier

commodity exchanges i.e. MCX and NCDEX.

At international level there are major commodity exchanges in USA, Japan

and UK.

Some of the most popular exchanges around the world are given below along

with the major commodities traded.36

EXCHANGE MAJOR COMMODITIES TRADED

New York Mercantile Exchange

(NYMEX)

Crude Oil, Heating Oil

Chicago Board of Trade Soy Oil, Soy Beans, Corn

London Metals Exchange Aluminium, Copper, Tin, Lead

Chicago Board Option Exchange Options on Energy, Interest rate

Tokyo Commodity Exchange Silver, Gold, Crude oil, Rubber

Malaysian Derivatives Exchange Rubber, Soy Oil, Palm Oil

What are the working hours for the commodity exchanges?

Commodity Exchanges (MCX and NCDEX) function from 10.00 Am to 11.55

PM with a break of 30 minutes between 5.00 PM and 5.30 PM. However some

specific commodities with strong international price linkages (such as Gold,

Silver, Soy oil, Crude Oil etc) are allowed to be traded after 8.00 PM.

36 Table no.: 3


105

Who regulates the commodity exchanges?

Just as SEBI regulates the stock exchanges, commodity exchanges are

regulated by Forwards Market Commission (FMC); Forwards Market

Commission is under the purview of the Ministry of Food, Agriculture and

Public Distribution.

Are the trades/ settlement guaranteed by the exchanges?

YES, the commodity exchanges have got some of the most high profile

corporate as their promoters. Multi Commodity exchange of India, promoted

by Financial Technologies Ltd has got on board institutions such as SBI,

HDFC Bank, Canara Bank, Corporation Bank, Bank of India, Union Bank of

India, Bank of Baroda. The National Commodity and Derivatives Exchange

(NCDEX) has got NSE, ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank

as the major share-holders. Such a high profile share-holding provides these

exchanges valuable experience, knowledge and also high standards of

operations. Also the exchange guarantees the settlement of trades and so

eliminates the counter-party risk in the transactions. The exchange for this

purpose maintains a Settlement –Guarantee fund akin to the stock

exchanges.

Are there physical deliveries in commodity futures exchanges?

YES, the exchanges, in order to maintain the futures prices in line with the

spot market, have made available provisions of settlement of contracts by

physical delivery. They also make sure that the price of futures and spot

prices coincide during the settlement so that the arbitrage opportunities do

not exist.

How the deliveries are made possible?


106

The exchange has enlisted certain cities for specific commodities as the

delivery centres. The seller of commodity futures, upon expiry of the contract

may choose to deliver physical stock instead of settling the positions by cash,

in which case he would be required to deliver the stocks to the specified

warehouses. The buyer of the commodity futures, if he is interested in

physical delivery would be matched with a seller and would be required to

take delivery of the specified quantity of stock from the designated

warehouse. World-wide commodity futures are generally used for hedging

and speculation and hence physical deliveries are negligible. However the

possibility of physical delivery has made these markets more attractive in

India. Both NCDEX and MCX have successfully completed physical delivery

in bullions and various agro-commodities.

In case of NCDEX it is mandatory to open a Demat account with an approved

DP by the buyer and seller if they wish to take/ give delivery of goods.

Please note the delivery and settlement procedure differs for each exchange

and commodity. Read the delivery/ settlement procedure carefully or contact

us before deciding to give/ take physical delivery.

Do I need to pay sales tax on all trades? Is registration mandatory?

NO. If the trade is squared off no sales tax is applicable. The sales tax is

applicable only in case of trade resulting into delivery. Normally it is the

seller's responsibility to collect and pay the sales tax. The sales tax is

applicable at the place of delivery. Those who are willing to opt for physical

delivery need to have sales tax registration number.

Are any transaction duty charges imposed on commodity futures

contracts, as in case of stocks?


107

Although FMC does not levy any transaction charges as of now, the

respective commodity exchanges levy transaction charges. Transaction

charges are in the range of Rs 4 to Rs 6 per lakh/per contract, which may

differ for each commodity/ exchange.

What is the date of expiry?

At NCDEX the contracts expire on 20th day of each month. If 20th happens to

be a holiday the expiry day will be the previous working day.

At MCX the expiry day is 15th of every month. If 15th happens to be a holiday

the expiry day will be the previous working day. The expiry day also differs

for different commodities in both the exchanges.

What are the commodities on which futures trading take place?

At Present futures are available on the following commodities. 37

Bullion Gold and Silver

Oil & Oilseeds

Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil,

Soymeal, RBD Palmolein, Crude Palm Oil, Groundnut Oil,

Mustard Seed, Mustard Seed Oil,

Cottonseed Oilcake, Cottonseed

Spices Pepper, Red Chilli, Jeera, Turmeric

Metals Steel Long, Steel Flat, Copper, Nickel, Tin , Steel ingots

Fibre Kapas, Long Staple Cotton, Medium Staple Cotton

Pulses Chana, Urad, Yellow Peas, Tur , Yellow Peas

Cereals Rice, Basmati Rice, Wheat , Maize , Sarbati Rice , Jeera

Energy Crude Oil

37 Table no. 4


108

Others Rubber, Guar Seed , Guargum , Cashew, Cashew Kernel ,

Sugar , Gur, Coffee, Silk

Following is a table showing the details regarding major

commodities traded on MCX & NCDEX.38

MCX

Commodity Initial

Margin Quotation Lot Size

Delivery

Centre

Available

months

Gold 3.5% 10 Gms 1 Kg Mumbai,

Ahmedabad

Feb, Apr,

Jun, Aug,

Oct, Dec

Silver 5% 1 KG 30 KG Ahmedabad

Mar, May,

Jul, Sep,

Dec

Crude Oil 5% 1 bbl 100 bbls Mumbai All months

Soy Oil 3% 10 KG 10 MT Indore All months

Pepper 8% 10 KG 100 KG Kochi All months

Soy Seed 4% 1 MT 10 MT Indore All months

NCDEX

Commodity Initial

Margin* Quotation Lot Size

Delivery

Centre

Available

months

Guar Seed 5-10 % 100 KG 10 MT Jodhpur All months

Soy Oil 5-10 % 100 KG 10 MT Indore All months

Sugar M 5-10 % 100 KG 10 MT Muzaffarnagar All months

38 Table no. : 5


109

Gold

(Sona) 5-10 % 10 Gms 1 Kg Mumbai

Feb, Apr,

Jun, Aug,

Oct, Dec

Silver

(Chandi) 5-10 % 1 KG 30 KG New Delhi

Mar, May,

Jul, Sep,

Dec

Wheat 5-10 % 100 KG 10 MT Delhi All months

Pepper 5-10 % 100 KG 1 MT Kochi All months

Chana 5-10 % 100 KG 10 MT Delhi All months

Urad 5-10 % 100 KG 10 MT Mumbai All months

Soy Bean 5-10 % 100 KG 1 MT Indore,

Nagpur, Kota All months

* MCX Initial margins are shown above. NCDEX follows SPAN margins

which could be between 5-10% depending on volatility.

The list given above covers only the popular commodities and not exhaustive.

Are options also allowed in commodity derivatives?

No. Options in goods are presently prohibited under Section 19 of the

Forward Contracts (Regulation) Act, 1952. No exchange or person can

organize or enter into or make or perform options in goods. However the

market expects the government to permit options trading in commodities

soon.

FAQ S ON DERIVATIVES

What is a Derivative contract?


110

A derivative contract is an enforceable agreement whose value is derived

from the value of an underlying asset; the underlying asset can be a

commodity, precious metal, currency, bond, stock, or, indices of commodities,

stocks etc. Four most common examples of derivative instruments are

forwards, futures, options and swaps/spreads.

What is a forward contract?

A forward contract is a legally enforceable agreement for delivery of goods or

the underlying asset on a specific date in future at a price agreed on the date

of contract. Under Forward Contracts (Regulation) Act, 1952, all the

contracts for delivery of goods, which are settled by payment of money

difference or where delivery and payment is made after a period of 11 days,

are forward contracts.

What are standardized contracts?

Futures contracts are standardized. In other words, the parties to the

contracts do not decide the terms of futures contracts; but they merely accept

terms of contracts standardized by the Exchange.


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What are customized contracts?

Forward contracts (other than a future) are customized. In other words, the

terms of forward contracts are individually agreed between two counter-

parties.

II. FUTURES CONTRACTS

What is a futures contract?

Futures Contract is specie of forward contract. Futures are exchange – traded

contracts to sell or buy standardized financial instruments or physical

commodities for delivery on a specified future date at an agreed price.

Futures contracts are used generally for protecting against rich of adverse

price fluctuation (hedging). As the terms of the contracts are standardized,

these are generally not used for merchandizing propose.

How are futures prices determined?

Futures prices evolve from the interaction of bids and offers emanating from

all over the country – which converge in the trading floor or the trading

engine. The bid and offer prices are based on the expectations of prices on the

maturity date.

How is it possible to sell, when one doesn't own commodity?

One doesn't need to have the physical commodity or own a contract for the

commodity to enter into a sale contract in futures market. It is simply

agreeing to sell the physical commodity at a later date or selling short. It is


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possible to repurchase the contract before the maturity, thereby dispensing

with delivery of goods.

What are long positions?

In simple terms, long position is a net bought position.

What are short positions?

Short position is net sold position.

What is bull spread (futures)?

In most commodities and financial derivatives market, the term refers to

buying contracts maturing in nereby month, and selling the deferred month

contracts, to profit from the wide spread which is larger than the cost of

carry.

What is bear spread (futures)?

In most of commodities and financial derivatives market, the term refers to selling the

nearby contract month, and buying the distant contract, to profit from saving in the cost

of carry.

What is ‘Contango'?

Contango means a situation, where futures contract prices are higher than

the spot price and the futures contracts maturing earlier.

What is ‘Backwardation'?


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When the prices of spot or contracts maturing earlier are higher than a

particular futures contract, it is said to be trading at Backwardation.

What is ‘basis'?

It is normally calculated as cash price minus the futures price. A positive

number indicates a futures discount (Backwardation) and a negative number,

a futures premium (Contango). Unless otherwise specified, the price of the

nearby futures contract month is generally used to calculate the basis.

What is cash settlement?

It is a process for performing a futures contract by payment of money

difference rather than by delivering the physical commodity or instrument

representing such physical commodity (like, warehouse receipt)

What is offset?

It refers to the liquidation of a futures contract by entering into opposite

(purchase or sale, as the case may be) of an identical contract.

What is settlement price?

The settlement price is the price at which all the outstanding trades are

settled, i.e, profits or losses, if any, are paid. The method of fixing Settlement

price is prescribed in the Byelaws of the exchanges; normally it is a weighted

average of prices of transactions both in spot and futures market during

specified period.

What is convergence?


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This refers to the tendency of difference between spot and futures contract to

decline continuously, so as to become zero on the date on maturity.

Can one give delivery against futures contract?

Futures contract are contracts for delivery of goods. But most of the futures

contracts, the world over, are performed otherwise than by physical delivery

of goods.

Why the proportion of futures contracts resulting in delivery is so

low?

The reason is, futures contracts may not be suitable for merchandising

purpose, mainly because these are standardized contracts; hence various

aspects of the contracts, viz., quality/grade of the goods, packing, place of

delivery, etc. may not meet the specific needs of the buyers/sellers.

Why delivery of good is permitted when futures contract by their

very nature not suitable for merchandising purposes?

The threat of delivery helps in dissuading the participants from artificially

rigging up or depressing the futures prices. For example, if manipulators rig

up the prices of a contract, seller may give his intention to make a delivery

instead of settling his outstanding contract by entering into purchase

contracts at such artificially high price.

What is “Due Date Rate”?

Due Date Rate is the weighted average of both spot and futures prices of the

specified number of days, as defined in the Byelaws of Associations.


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What is Warehouse Receipt?

It is a document issued by a warehouse indicating ownership of a stored

commodity and specifying details in respect of some particulars, like, quality,

quantity and, some times, indicating the crop season.

Why do we need speculators in futures market?

Participants in physical markets use futures market for price discovery and

price risk management. In fact, in the absence of futures market, they would

be compelled to speculate on prices. Futures market helps them to avoid

speculation by entering into hedge contracts. It is however extremely unlikely

for every hedger to find a hedger counterparty with matching requirements.

The hedgers intend to shift price risk, which they can only if there are

participants willing to accept the risk. Speculators are such participants who

are willing to take risk of hedgers in the expectation of making profit.

Speculators provide liquidity to the market; therefore, it is difficult to

imagine a futures market functioning without speculators.

What is the difference between a speculator and gambler?

Speculators are not gamblers, since they do not create risk, but merely accept

the risk, which already exists in the market. The speculators are the persons

who try to assimilate all the possible price-sensitive information, on the basis

of which they can expect to make profit. The speculators therefore contribute

in improving the efficiency of price discovery function of the futures market.

What is hedging?

Hedging is a mechanism by which the participants in the physical/cash

markets can cover their price risk. Theoretically, the relationship between


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the futures and cash prices is determined by cost of carry. The two prices

therefore move in tandem. This enables the participants in the physical/cash

markets to cover their price risk by taking opposite position in the futures

market.

Can the loss incurred on the futures market be set off against normal

business profit?

Loss incurred in futures market by entering into contracts for hedging

purposes can be set off against normal profit. The loss incurred on account of

speculative transactions in futures market cannot be set off against normal

business profit. This loss is however allowed to be carried forward for eight

years, during which it can be set off against speculative profit.

III. PARTICIPANTS IN DERIVATIVES MARKETS

Who is hedger?

Hedger is a user of the market, who enters into futures contract to manage

the risk of adverse price fluctuation in respect of his existing or future asset.

What is arbitrage?

Arbitrage refers to the simultaneous purchase and sale in two markets so

that the selling price is higher than the buying price by more than the

transaction cost, so that the arbitrageur makes risk-less profit.

Who are day-traders?

Day traders are speculators who take positions in futures or options contracts

and liquidate them prior to the close of the same trading day.


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Who is floor-trader?

A floor trader is an Exchange member or employee, who executes trade by

being personally present in the trading ring or pit floor trader has no place in

electronic trading systems.

Who is speculator?

A trader, who trades or takes position without having exposure in the

physical market, with the sole intention of earning profit is a speculator.

Who is market maker?

A market maker is a trader, who simultaneously quotes both bid and offer

price for a same commodity throughout the trading session.

57. What kinds of risks do participants face in derivatives markets?

Different kinds of risks faced by participants in derivatives markets are

• Credit risk

• Market risk

• Liquidity risk

• Legal risk

• Operational risk

What is credit risk?

Credit risk on account of default by counter party This is very low or almost

zeros because the Exchange takes on the responsibility for the performance of

contracts


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What is market risk?

Market risk is the risk of loss on account of adverse movement of price.

What is liquidity risk?

Liquidity risks is the risk that unwinding of transactions may be difficult, if

the market is illiquid

What is Legal risk?

Legal risk is that legal objections might be raised, regulatory framework

might disallow some activities.

What is operational risk?

Operational risk is the risk arising out of some operational difficulties, like,

failure of electricity, due to which it becomes difficult to operate in the

market.

IV. EXCHANGES AND THEIR ROLE

How many recognized/registered associations engaged in commodity

futures trading?

At present 21 Exchanges are recognized/registered for forward/ futures

trading in commodities.

Why are associations required to get recognized?


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Under the Forward Contracts (Regulation) Act, 1952, forward trading in

commodities notified under section 15 of the Act can be conducted only on the

Exchanges, which are granted recognition by the Central Government

(Department of Consumer Affairs, Ministry of Consumer Affairs, Food and

Public Distribution).

to obtain certificate of Registration from the Forward Markets Commission.

What is the procedure for obtaining recognition for an Association?

The application for grant of recognition will have to be made in triplicate in a

prescribed form to Secretary, Department of Consumer Affairs, Ministry of

Consumer Affairs, Food and Public Distribution, Krishi Bhavan, New Delhi –

110 00. Form A prescribed for application for the recognition is placed on the

web site of the FMC www.fmc.gov.in .The application for grant of recognition

should be forwarded through Forward Markets Commission, Everest, 3rd

Floor, 100, Marine Drive, Mumbai – 400 002.. The Government may grant

recognition to the applicant association on the basis of recommendations

made by the Forward Markets Commission. A fee of Rs. 2500/- will have to be

paid by the applicant association for grant of recognition. The fee could also

be deposited in the nearest Government Treasurer or the nearest branch of

State Bank of India; provided that at Mumbai, Kolkatta, Delhi, Kanpur and

Chennai, the amount has to be deposited in the Reserve Bank of India. The

fee can also be remitted by crossed Indian Postal Order drawn in favour of

Secretary, Forward Markets Commission. The application has to be

accompanied by 3 copies of Memorandum and Articles of Association and

Byelaws.

What is the procedure for obtaining certificate of registration from

the Forward Markets Commission?


120

Application in triplicate for grant of certificate of Registration in Form B -

placed on the web site of the FMC < www.fmc.gov.in > - should be sent to

Forward Markets Commission, Everest, 3rd Floor, 100, Marine Drive,

Mumbai – 400 002. A fee of Rs. 50/- will have to be paid by the applicant

association for grant of registration certificate. The fee could also be

deposited in the nearest Government Treasurery or the nearest branch of

State Bank of India; provided that at Mumbai, Kolkatta, Delhi, Kanpur and

Chennai, the amount has to be deposited in the Reserve Bank of India. The

fee can also be remitted by crossed Indian Postal Order drawn in favour of

Secretary, Forward Markets Commission. The application has to be

accompanied by 3 copies of Memorandum and Articles of Association and

Byelaws.

What is the role of an Exchange in futures trading?

An Exchange designs a contract, which alone would be traded on the

Exchange. The contract is not capable of being modified by participants, i.e.,

it is standardized. The Exchange also provides a trading platform, which

converges the bids and offers emanating from geographically dispersed

locations. This creates competitive conditions for trading. The Exchange also

provides facilities for clearing, settlement, arbitration facilities. The

Exchange may also provide financially secure environment by putting in

place suitable risk management mechanism (margining system etc.), and

guaranteeing performance of contract through the process of novation.

Why does Exchange collect margin money?

The aim of margin money is to minimize the risk of default by either counter

party. The amount of initial margin is so fixed as to ensure that the

probability of loss on account of worst possible price fluctuation, which cannot

be met by the amount of ordinary/initial margin is very low. The Exchanges


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fix rates of ordinary/initial margin keeping in view need to balance high

security of contract and low cost of entering into contract.

What are the different types of margins payable on futures?

Different margins payable on futures contracts are

Ordinary/initial margin, mark-to-market margin, special margin, volatility

margin, and delivery margin.

What is initial/ordinary margin?

It is the amount to be deposited by the market participants in his margin

account with clearing house before they can place order to buy or sell a

futures contracts. This must be maintained throughout the time their

position is open and is returnable at delivery, exercise, expiry or closing out.

What is Mark-to-Market margin?

Mark-to-market margins (MTM or M2M or valan) are payable based on

closing prices at the end of each trading day. These margins will be paid by

the buyer if the price declines and by the seller if the price rises. This margin

is worked out on difference between the closing/clearing rate and the rate of

the contract (if it is enterned into on that day) or the previous day's clearing

rate. The Exchange collects these margins from buyers if the prices decline

and pays to the sellers and vice versa.

Why is Mark-to-Market margin collected daily in commodity market?

Collecting mark-to-market margin on a daily basis reduces the possibility of

accumulation of loss, particularly when futures price moves only in one

direction. Hence the risk of default is reduced. Also, the participants are


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required to pay less upfront margin – which is normally collected to cover the

maximum, say, 99.9%, of the potential risk during the period of mark-to-

market, for a given limit on open position. Alternatively, for the given upfront

margin the limit on open position would have to be reduced, which has the

effect of restraining the trade and liquidity.

VI. REGULATION

What is the present system of regulation in commodity

forward/future trading in India?

At present, there are three tiers of regulations of forward/futures trading

system exists in India, namely, Government of India, Forward Markets

Commission and Commodity Exchanges.

The FC(R) Act, 1952 prohibits options in commodities. For the purpose of

forward contracts in certain commodities can be regulated by notifying those

commodities u/s 15 of the Act; forward trading in certain other commodities

can be prohibited by notifying these commodities u/s 17 of the Act.

What is the need for regulating futures market?

The need for regulation arises on account of the fact that the benefits of

futures markets accrue in competitive conditions. The regulation is needed to

create competitive conditions. In the absence of regulation, unscrupulous

participants could use these leveraged contracts for manipulating prices. This

could have undesirable influence on the spot prices, thereby affecting

interests of society at large.. Regulation is also needed to ensure that the

market has appropriate risk management system. In the absence of such a

system, a major default could create a chain reaction. The resultant financial

crisis in a futures market could create systematic risk. Regulation is also

needed to ensure fairness and transparency in trading, clearing, settlement


123

and management of the exchange so as to protect and promote the interest of

various stakeholders, particularly non-member users of the market.

What is Forward Markets Commission and where is it located?

Forward Markets Commission is a regulatory body for commodity futures/

forward trade in India. This was set up under the Forward Contracts

(Regulation) Act of 1952. It is responsible for regulating and promoting

futures/ forward trade in commodities. The Forward Markets Commission's

Head Quarter is located at Mumbai and Regional Office at Kolkata. The

Address of the contact person is as follows -

The Chairman, Forward Markets Commission, Ministry of Consumer Affairs,

Food and Public Distribution, (Department of Consumer Affairs),

Government of India, “Everest”, 3 rd floor, 100, Marine Drive, Mumbai – 400

002 . Tel (022) 22811262/22811429, Fax (022) 22812086, E-mail -

[email protected] , Web-site - www.fmc.gov.in

What are the functions of the Forward Markets Commission?

• FMC advises Central Government in respect of grant of recognition or

withdrawal of recognition of any association.

• It keeps forward markets under observation and takes such action in

relation to them as it may consider necessary, in exercise of powers assign to

it.

• It collects and publishes information relating to trading conditions in

respect of goods including information relating to demand, supply and prices

and submit to the Government periodical reports on the operations of the Act

and working of forward markets in commodities.

• It makes recommendations for improving the organization and working of

forward markets.


124

• It undertakes inspection of books of accounts and other documents of

recognized/registered associations.

What are the powers of the Commission?

The Commission has powers of deemed civil court for (a) Summoning and

enforcing the attendance of any person and examining him on oath; (b)

Requiring the discovery and production of any document; (c) Receiving

evidence on affidavits, and (d) Requisitioning any public record or copy

thereof from any office.

The following powers are vested in the Central Government, most of which

are delegated to the Commission

The powers of approving memorandum and articles of association and Bye-

laws; powers to direct to make or to make articles (Rules) or Bye-laws;

powers to suspend governing body of recognised association, and, powers to

suspend business of recognised association.

Why and what are the regulatory measures prescribed by Forward

Markets Commission?

Forward Markets Commission provides regulatory oversight in order to

ensure financial integrity (i.e. to prevent systematic risk of default by one

major operator or group of operators), market integrity (i.e. to ensure that

futures prices are truly aligned with the prospective demand and supply

conditions) and to protect & promote interest of customers /non-members.

The Forward Markets Commission prescribes following regulatory measures

Limit on net open position as on the close of the trading hours. Some

times limit is also imposed on intra-day net open position. The limit is

imposed operator-wise, and in some cases, also member-wise.

Circuit-filters or limit on price fluctuations to allow cooling of market

in the event of abrupt upswing or downswing in prices.


125

Special margin deposit to be collected on outstanding purchases or

sales when price moves up or down sharply above or below the

previous day closing price. By making further purchases/sales

relatively costly, the price rise or fall is sobered down. This measure is

imposed only on the request of the Exchange.

Circuit breakers or minimum/maximum prices These are prescribed to

prevent futures prices from falling below as rising above not

warranted by prospective supply and demand factors. This measure is

also imposed on the request of the Exchanges.

Skipping trading in certain derivatives of the contract, closing the

market for a specified period and even closing out the contract These

extreme measures are taken only in emergency situations.

What are the legal and regulatory provisions for customer

protection?

The F.C(R) Act provides that client's position cannot be appropriated by the member of

the Exchange, except a written consent is taken within three days' time. Forward Markets

Commission is persuading increasing number of Exchanges to switch over to electronic

trading, clearing and settlement, which is more customer-friendly. Commission has also

prescribed simultaneous reporting system for the Exchanges following open out-cry

system. These steps facilitate audit trail and make it difficult for the members to indulge

in malpractices like, trading ahead of clients, etc. The Commission has also mandated all

the Exchanges following open outcry system to display at a prominent place in Exchange

premises, the name, address, telephone number of the officer of the Commission who can

be contacted for any grievance. The website of the Commission also has a provision for

the customers to make complaint, send comments and suggestions to the Commission.

Officers of the Commission have been instructed to meet the members and clients on a

random basis, whenever they visit Exchanges, to ascertain the situation on the ground,

instead of merely attending meetings of the Board of Directors and holding discussions

with the office-bearers.


126

Appendix: 2

STCI COMMODITIES

IN ASSOCIATION WITH

INVITES YOU FOR THE SEMINAR ON

PROFIT MAXIMISATION & RISK MANAGEMENT

USING

FUTURES MARKET SPEAKERS AGENDA

D. Raghavender Purpose of the seminar

PRESIDENT,

AP GRAIN & SEEDS MERCHANTS ASSN.

Chirag Seth Hedging & Arbitrage

in futures market

RESEARCH HEAD,

STCI COMMODITIES

Madhav Reddy Delivery issues

through exchange

VICE PRESIDENT,

BUSINESS DEVELOPMENT, MCX

Pradeep Reddy Overview of Chilli

PRODUCT HEAD,

CHILLI, MCX

Suman K. Adepu UTI advantage

Services & support

BRANCH HEAD,

UTI SECURITIES,HYD.

VENUE: ASSOCIATION HALL,MALAKPET DATE: 28TH APRIL TIME: 12 NOON

SUMAN K. ADEPU, UTI SECURITIES. Ph: 23417s031, Cell: 9394744777

AP GRAIN & SEEDS MERCHANTS ASSOCIATION


127

Appendix 3:

Our communication with MCX

From: chandra prakash [mailto: [email protected]] Sent: Monday, April 02, 2007 1:37 AM To: [email protected] Subject: Re: Seminar in Chilly Market (Malakpet)

Dear Sir, This is Chandra Prakash, Doing MBA from ICFAI Business School, Hyderabad. As a part of curriculum we are working on a research project" Commodity market: A new investment avenue. We went to different kinds of mandis from pluses to bullion. But each of these places I found some kind of communication gap. Every one has their problems every one want to speak up but no one to listen. We also went to malakpet (Hyderabad) and came to know that many seminar had been unsuccessfully conducted here by MCX , NCDEX as well as many brokering houses . Not only Chilly but most of the Trader from pulses to bullion avoid trading through exchange. During our market Survey we found that apart from awareness there are some fundamental question that need be solved before tapping these mandis. We felt that our project is of no use if we could not find the way to break this ice. So, we are planning to conduct seminar here on 6th of April in collaboration with UTI Securities. It would be of great help and of mutual benefit if MCX will work with us. So we are looking forward to work with you to conduct this seminar. Regards Chandra Prakash


128

From: Shunmugam V/MCX/ R&D

Sent: Monday, April 02, 2007 10:43 AM To: 'Sumesh P/MCX/CBO'; Joe J/MCX/Marketing

Cc: Chiragra C/MCX/Training Subject: FW: Seminar in Chilly Market (Malakpet)

FYI.

Thanks and Regards, Shunmugam

From: Chiragra C/MCX/Training

Sent: Monday, April 02, 2007 11:30 AM To: Nitin J/MCX/Centre of Academia

Subject: FW: Seminar in Chilly Market (Malakpet)

Please talk to him what is talking about?

Thank you,

Regards,

Dr. Chiragra Chakrabarty

Vice President

Head Training & Research & Development

MCX

Phone No - 022-66497000 (Ext No-7021)

Fax No - 022-66491751


129

Mobile No - 9821420236 / 9867567508

E-mail - [email protected] www.mcxindia.com -------------------------------------------------- The information in this E-mail (which includes any files transmitted with it) is CONFIDENTIAL and may be legally PRIVILEGED. It is intended solely for the addressee and access to this email by anyone else is unauthorized. If you have received it in error, please destroy any copies of this message, including any attachments, and delete it from your system notifying the sender immediately. Any disclosure, copying, distribution, dissemination, forwarding, printing or any action taken or omitted to be taken in reliance on it or utilising the same for any purpose other than what it is intended for, is prohibited and may be unlawful. --------------------------------------------------

On 02/04/07, Nitin Joshi < [email protected] > wrote:

Dear Mr. Chandra Prakash,

We thank you very much for showing your confidence in MCX for your solution. May I request

you to pls let me know your Mobile no. or land line no. so that we could have discussed the matter over telephone?

I understand from your email that you are interested in organizing a seminar at ICFAI Business

School . Please let me know the following details to enables us to take a decision on this issue.

1. Approval of the Head of the Department / Director. 2. Main objective of the seminar 3. Topics 4. No. of participants in the seminar. 5. Qualification of the participants. 6. Duration of the Talk.

An early response will be highly appreciated.

Warm Regards Nitin Joshi

Phone: 66497000 ( Extn 7054 ) Mobile No:9867567550 E Mail: nitin.joshi @mcxindia.com URL: www.mcxindia.com --------------------------------------------- The information in this E-mail (which includes any files transmitted with it) is CONFIDENTIAL and may be legally PRIVILEGED. It is intended solely for the addressee and access to this email by anyone else is unauthorized. If you have received it in error, please destroy any copies of this message, including any attachments, and delete it from your system notifying the sender immediately. Any disclosure, copying, distribution, dissemination, forwarding, printing or any action taken or omitted to be taken in reliance on it or utilising the same for any purpose other than what it is intended


130

for, is prohibited and may be unlawful. --------------------------------------------------

---------- Forwarded message ---------- From: chandra prakash <[email protected]> Date: 02-Apr-2007 18:32 Subject: Re: Seminar in Chilly Market (Malakpet) To: Nitin Joshi <[email protected]> Dear Sir, Thank you for your Quick Reply. In fact we are doing summer internship with Uti Securities. As a part of project we went to various markets. But let me talk about Chilly market at Malakpet. Our Basic objective of the project was: 1. To know Awareness level of Trader 2. Risk appetite 3. Their trade strategies 4. What are the motive (speculation/hedging/arbitrage) of their participation in commodity exchanges. 5. If required, we would have made them aware about different financial products. But when we started making market survey we found. This in not just awareness level or risk appetite, reason was something else which make them avoid exchange trading. Reasons: 1. Difference in units (They trade in 40kg unit and mcx in 25)...which I heard some days back ……MCX is working on this. 2.qualityspecification: this was raised by one of the trader that In the MCX and NCDEX warehouses Water is purposely sprayed over chilly by using the limit of 14% humidity and limits of other impurities to increase the weight. 3. Seller's option. Trader with intention to take delivery is discouraged by delivery logic "seller's option". They also suggested 4. Delivery in Hyderabad in place of Guntur make the trade more feasible 5.They wanted to know date When the spot trading will start as proposed By MCX Apart form these there was many other concern which has been raised. But one thing we have seen common in all these market (bullion, pulses as well as spices) Most of the trader either have traded or know about this kind of trading through exchanges. They all did it through Local broker without any research calls. It was pure speculation and almost all of them lost their money and business. We(myself with two of my batch mates working on same project) met to our company guide( Mr. suman kumar adepu ,Branch manger,UTI Securities,Ameerpet, mobile:9394744777)


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We discussed to the matter and came to conclusion that we can tell them the difference between speculation and Hedging. So we approached the chilly market and met with President: DHADUVAI RAGHVENDRA : 9246215498 Gen Sec : DEVARA RAJESHWER :9393324666 Trader: RADHAKRISNA 9246500963 and finally decided to conduct a seminar with all the trader of chilly market. We got consent of the President. Mr. adepu (Br. Manager ,Uti Sec) contacted Mumbai to call a research team to be part of this seminar. But Sir we Still doubt the success if Exchange will not come forward for this. Let me answer you the questions which have been asked in your letter. 1. Since we are conducting seminar not in ICFAI Campus but in Chilly market (MALAKPET) and this is part of our project so no need of special approval from Director. Even if you feel it is required, there will not be any problem in getting such approval. 2. Our objective was to convince them that Hedging is different than speculation and how can they use hedging for the purpose of diversifying their business risk. But we feel that more than this, it is important to listen their problems and work on it which only Exchange can do. 3. Topic: Commodity market: a new Investment Avenue. 4. No. of participant: a. We 3 intern b. Branch manager, U Sec c. Research Team, Usec,(Number Not Yet confirmed) Qualification: We are doing PGDBA from ICFAI Hyderabad. Qualification of research team not known to us 5.Duration : 1-2 Hours Sir we expect from you to actively participate in the seminar to address the problem raised by them. We suggest you to have a meeting with us before this seminar and work out the agenda of the seminar if you are convince with our proposal. Please talk to Mr. suman in this regard. Regards Chandra Prakash mobile no. 9290674658 Suman Kr adepu mobile no. 9394744777


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Our Communication with FMC Director, Mr. Anupam Mishra

from chandra prakash <[email protected]> hide details 09-Mar to [email protected] < [email protected]>, [email protected] <[email protected]> date 09-Mar-2007 23:22 subject Research on Commodity market mailed-by gmail.com

Dear sir,

This is Chandra Prakash,doing MBA from ICFAI Business School, Hyderabad. As a part of our curriculum we are working on our research project"Commodity:A new investment avenue."

While working on our project we made a market survey at different "Mandis" at Hyderabad including "Chilly and Chana Mandi".We interacted to traders and tried to get some insight.

The result was shocking, at least for me.

As i studied,Commodity Exchange gives excellent platform for farmers as well as traders to trades on and it is the most appreciable financial invention so far.But when talked to these traders,it seems cursh.

Commodity market is named as Dabba Trading, because trade is done through computer"Dabba".

These were some of the unanswered questions:

1. Exchange are not made for real trading,they are just for speculation.

Example: if a trader at somewhere in deep south trading in channa with intention to take delivery, will it be viable to get delivery at delhi and paying 10,000 Rs as transportation?

2.Even after stringent quality norms, quality never match.Always be downgraded.

3.Units, do not match. Example.chilly are traded in units of 40 KG.Exchange gives in Units of 25 KG.

This is a very silly difference but it is changing the whole story.

4.Speculation is at its extreme, and it really defaming the market.

Banning the commodity Future trade is not a great option. Government should take steps to stop speculation especially into agri commodity.

One option may be ,if for some time if exchange will make it mandatory to take the delivery, will eliminate the speculator and will give way for trader to come forward. Once market will take the healthy shape,the current condition can be resumed.


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I read about an awareness programme dated in 2006. I really don't know the twist of the whole story. but if I am right story can be re written and scenario can be changed.

Regards

anupam mishra <[email protected]> 10-Mar to [email protected] date 10-Mar-2007 13:42 subject RE: Research on Commodity market mailed-by hotmail.com

Dear Chandra,

Thanks for the mail and sharing of your views. We appreciate the concerns raised by you. We would definitely like to have furthur suggestions in the matter. If you ever happen to be in Mumbai you could give me a ring and we could share our perceptions of the markets.

Anupam Mishra Director(IR) Forward Markets Commission Government of India "Everest", 3rd floor, 100, Marine Drive, Mumbai - 400 002 INDIA Phone: +91 22 22026541 / 22795307 Fax: +91 22 22812086 E-mail: [email protected] [email protected]


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Our Communication with NCDEX

-----Original Message----- From: chandra prakash ([email protected]) Date: Friday, March 30, 2007 02:35 PM To: [email protected] ( [email protected]) Subject: Educational Seminar for farmer in Hyderabad Dear Sir, This is Chandra Prakash, Doing MBA from ICFAI Business School,Hyderabad. As a part of curriculum we are working on a research project" Commodity market: A new investment avenue. We went to different kinds of mandis from pulses to bullion. But each of these places we found some kind of communication gap. Every one has problems. We met to many farmers and farmer association as well and we found that proper education and awareness is required. I read the news about NCDEX that it is planning to educate farmers in Punjab. If NCDEX would prefer to plan same kind of educational Seminar here in Hyderabad and nearby village, we can help arranging that and that would be part of our project. Please respond if Exchange is having any such plan. Adding the News below. Regards Chandra Prakash Source: Economic Times "MOGA: Undeterred by the suspension of futures trading, related foreign brokerage such as FMI Financial Markets International and future NCDEX National Commodity & Derivatives Exchange (NCDEX) are going ahead with their plans to educate the farmers in the hinterlands of Punjab. An effort is being made to empower the farmers with information technology. BKU Bharat Kissan union activists also seems to be supporting these companies. Addressing the farmers here in Moga, Mr Sharad Joshi, Member of Parliament, said, "I do not mind future trading provided it benefits the farmers. After all Punjab provides wheat to entire India. "Thing that is going in the favour of these farmers is that the companies like NCDEX are ready to bear the hoarding cost as well. Normally the debt ridden farmers in the state try to sell their produce as soon as possible so as to pay back the loan they had borrowed from the Artiyas and money lenders. "Now with companies ready to pay the hoarding cost the debt ridden farmers can always wait. Earlier their was no option before them." Says Balwant Singh, GS, BKU, (Punjab). Top FMI and NCDEX officials impressed upon the participants, numbering over 1,000, the fact that futures trading in commodities on an online commodity exchange like NCDEX results in transparent and fair price discovery due to large scale participation of farmers/producers, traders, processors, exporters/ importers and end users of a commodity and reflects the views and


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expectations of a wider cross-section of people related to that commodity. Mr Narendra Gupta, chief strategy, NCDEX, said farmers can use the online trading platform of NCDEX to hedge the price risk by selling forward their expected production. He emphasised that NCDEX provides an effective platform for price risk management for all segments of players farmers/producers, traders, processors, exporters/importers and end users of the commodity even as farmers can use price signals on the exchange platform to decide which crop to grow in the next season. However, Mr Sharad Joshi, accepted that the future trading can pave a way to the price rise. "To make farmers come out of the debt trap I do not mind if the consumers have to pay bit more." Said Mr Joshi. Also for these companies both agrarian states Punjab and Haryana are important markets. "

The phone and fax number on NCDEX side have been changed from 5xxx xxxx to 6xxx xxxx. Kindly take a note of the same.

"This e-mail message may contain confidential, proprietary or legally privileged information. It should not be used by anyone who is not the original intended recipient. If you have erroneously received this message, please delete it immediately and notify the sender. The recipient acknowledges that NCDEX or its subsidiaries or associated companies, are unable to exercise control or ensure or guarantee the integrity of/over the contents of the information contained in e-mail transmissions and further acknowledges that any views expressed in this message are those of the individual sender and no binding nature of the message shall be implied or assumed unless the sender does so expressly with due authority of NCDEX.Before opening any attachments please check them for viruses and defects."

---------- Forwarded message ---------- From: John <[email protected]> Date: 30-Mar-2007 15:15 Subject: RE:'NCDEX=442-270' Educational Seminar for farmer in Hyderabad To: chandra prakash <[email protected]>

Dear Sir, We acknowledge the receipt of your e mail requesting for an educational seminar in Hyderabad. We have forwarded your request to the concerned authorities and they

would be contacting you if any decision is arrived upon. Do revert for any further queries. Thanks and regards, Customer Service Group (022) 66406609-6612


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Appendix: 4

As part of the work in our company, we had active talks and meetings with

the following dignitaries in our company: They also include the CEO, our

Research Head, VP of MCX and other important people

Deepak V. Dave Chirag Seth

CEO, STCI Commodities Research Head, STCI

Madhav Reddy Anjani Sinha

Vice President, Business Development, CEO, National Spot Exchange

MCX

Nitin Joshi, MCX


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Following is the list of important companies that we visited and gave

presentations to their top honchos.


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We had a series of meetings and talks with the AP Grain and Seeds

merchants Association which helped us arrange the seminar in the Malakpet

mandi. Following is the list of some important association members.

As a part of the task given to us by the CEO, STCI Commodities, Mr. Deepak

Dave, we arranged meetings with key personnel in the Hyderabad Stock

Exchange. Following is their list:

These are the people who made our meeting with the FAPCCI association

possible:


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Our meeting with the Farmers Association enabled us to interact with the

following people in the association:

Apart from the above Industrialists

and Association people, we also met enumerable traders and whole sellers,

with whom we exchanged our views and also brought business from them:


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APPENDIX 5:

ZINK CALCULATOR PREPARED BY US FOR BALAANAGAR INDUSTRIAL AREA

ZINC Calculator

S.No Particulars

1 International spot price 3420 2 Ex Rate –Say 43.1 3 Final Settlement 144000 147402 For Delivery 4 Premium CIF - ($125) 5387.5 5 Ex Rate 43.1 152789.5

Caliculating custom duty

6 Landing charge 1527.895 7 Assessable Value 154317.4

8 Basic customs duty(7.5%) 11573.80463

9 CVD Plus 2 % cess(16.32) 25184.59886

custom cess on aggrete of

10 Duties(2%) 735.1680698 11 Total Custom duty(8+10) 12308.97269 166626.4

12 Wharfage Charges(.20%) 246.1794539

13 Landed Cost (Re/Mt) 166872.5 Per Kg cost 166.8725


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APPENDIX 6:

PROPOSAL SUBMITTED TO FAPCCI (Federation of A.P.Chamber of Commerce and Industries)

Dear Sir, In reference to the discussion we had with your office, (Dpt. Secretary), we at UTI securities propose to conduct a seminar in active collaboration with FAPCCI, on “Commodity Futures market”. Our theme for the presentation is:

“COMMODITY FUTURES - A STRATEGIC RISK MANAGEMENT TOOL”

A brief introduction about our company: UTI SECURITIES LTD. (UTISEL) was incorporated on June 28, 1994 by Unit Trust of India as its 100% subsidiary and in the year 2006, it was taken over by the “Securities Trading Corporation of India” (STCI), which was established by Reserve Bank of India (RBI) in May 1994. It was one of the first two institutions to be accredited by RBI as a primary Dealer in Government securities. Its core activities comprise participation, underwriting, market making and trading in Government Securities. UTISEL has been working as an independent professional entity for providing financial intermediary and advisory services to corporate institutional and retail clientele. The Company has built up a reputation for transparent and fair execution of transactions, which have been well received and appreciated by its clientele. We are also one of the top players in Equity and Commodity trading. A brief overview of commodity future: Commodity trading in India has been formally started in the year 2003 under the regulatory authority of FORWARD MARKET COMMISSION. Since then it has been growing at a phenomenal rate, with its turnover crossing 36 lakhs crore in the year 2006-2007. The commodity derivatives have been a very operational tool in the hands of industries and businesses all over the world.Industries; both agro and metal based have been using these tools to fight the adverse impacts of price fluctuations and risk factors. Of late, it has also developed as an investment avenue for maximizing their corporate and individual profits. To put the point more clearly, a large part of metal trading in Europe is done through LME (London Metal Exchange).Internationally Commodity Marketsare around 40 times larger than Equity Markets.


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In India, the commodity futures have been faced with several resistances. It is alleged to be still in the influence of speculators and real players are still wary off entering the market.Hence, commodity futures are even now far away from its championed objectives of True price discovery and risk minimization in the wake of price volatility. It is often asked that why Commodity futures in India has not attained its goal and could not give much benefits to industries and businesses. Our researches show that unawareness and faulty strategies have led to loss and finally disinterest among traders and industries. As a repercussion, our industries are not able to derive full benefits of these tools to minimize their risks and profit maximization. Our other findings are:

1. Misperception regarding commodity futures in India in the minds of traders. 2. People assume commodity futures as a mere speculative tool. 3. Risk minimizing strategies (Hedging and Arbitrage) not adopted by the majority

of traders and industrialists. 4. Lack of Education and awareness regarding commodity futures in investors. 5. Ignorance towards professional research and advisory

Our Objective: As part of our national campaign, we have been conducting several seminars and other activities to create awareness among traders, farmers and industrialists regarding true benefits and proper strategies of commodity futures. In Hyderabad itself, we are conducting seminar in Chilli markets (Malakpet) with A.P.Seeds and Grains Merchants Association on 25th April. A similar kind of seminar is scheduled for Bullion traders in the 1st week of May. We are also in active talk with Andhra Pradesh farmers association to conduct similar activities among farmers of Andhra Pradesh. We have been active through different platforms to address the issues of unawareness and strategic risk management among all stakeholders of economy, be it farmer, trader or industries. Sir, we have learnt that FAPCCI is a leading consortium of all Industrialists and businesses of Andhra Pradesh and its role in bringing forward the issues and problems concerning the industrial community as a whole has been very well appreciated. Therefore sir, we recognize it to be an ideal forum for addressing the issues of commodity futures amongst the industrialists of AP. Sir, we propose to conduct a seminar on “Futures market” with your active association where in we will be inviting research analysts, commodity experts and representatives from different commodity exchanges. Regards UTI SECURITIES LTD.

Ph: (+91) 9394744777


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REFERENCES BIBLIOGRAPHY: Commodity and derivative, monthly magazine Volume 02, issue 4, April 2007 Commodity markets: A new Investment avenue - ICFAI university press Commodity reports from UTISEL Economic survey: 2005/2006/2007 Reports of Public Information Bureau: Government of India The Indian Express: 17th April, 2007


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WEBLIOGRAPHY: http://www.basemetals.com http://www.blonnet.com/iw/2007/04/01/20hdline.htm http://www.commoditycontro.com http://www.contentlinks.asiancerc.com/utisecurities/product_services.asp http://www.crnindia.com http://www.fmc.gov.in http://www.karvycomtrade.com/why_commodities.asp http://www.karvycomtrade.com/mcx.asp http://www.karvycomtrade.com/commoditiesFAQ.asp http://www.karvycomtrade.com/indian_commodities_market.asp http://www.karvycomtrade.com/101FAQfromFMC.asp http://www.lme.co.uk http://www.mcxindia.com http://www.mcxcomnews_annual07.pdf http://www.ncdex.com http://www.nationalspotexchange.com http://www.usectrade.com/


Commodity Project

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