1

A STUDY ON COMMODITY MARKET WITH REFERENCE TO KARVY

A Project report submitted to Jawaharlal Nehru Technological University, Hyderabad, in partial fulfillment of the requirements for the award of the

degree of

MASTER OF BUSINESS ADMINISTRATION

By

T PAVAN KUMAR Reg. No. 10241E0046

Under the Guidance of Y.GAYATHRI

Associate Professor

Department of Management Studies Gokaraju Rangaraju Institute of Engineering & Technology

2

(Affiliated to Jawaharlal Technological University, Hyderabad) Hyderabad

2010-2012

CERTIFICATE

This is to certify that the project entitled A Study on Commodity Market has been submitted by Mr. T.PAVAN KUMAR (Reg. No. 10241E0046) in partial fulfillment of the requirements for the award of Master of Business Administration from Jawaharlal Nehru Technological University, Hyderabad. The results embodied in the project has not been submitted to any other University or Institution for the award of any Degree or Diploma.

(Y. Gayathri) (KVS Raju) Internal Guide Professor & HOD Associate Professor DepartmentofManagement Studies Department of Management Studies GRIET

3

GRIET

(S. Ravindra Chary) (Project Coordinator) Associate Professor Department of Management Studies GRIET

DECLARATION

I hereby declare that the project entitled A Study on COMMODITY MARKET

aatt KKAARRVVYY SSTTOOCCKK BBRROOKKIINNGG LLIIMMIITTEEDD submitted in partial fulfillment of the requirements for award of the degree of MBA at Gokaraju Rangaraju Institute of Engineering and Technology, affiliated to Jawaharlal Nehru Technological University, Hyderabad, is an authentic work and has not been submitted to any other University/Institute for award of any degree/diploma.

4

T. PAVAN KUMAR (10241E0046)

MBA, GRIET HYDERABAD

ACKNOWLEDGEMENT

Firstly I would like to express our immense gratitude towards our institution

Gokaraju Rangaraju Institute of Engineering & Technology, which created a great platform to attain profound technical skills in the field of MBA, thereby fulfilling our most cherished goal.

I would thank all the FINANCE department of KKAARRVVYY SSTTOOCCKK BBRROOKKIINNGG

LLIIMMIITTEEDD specially Mr. MUKARJI Asst Manager Finance, and the employees in the Finance department for guiding me and helping me in successful completion of the project.

I am very much thankful to our Y. Gayathri (Internal Guide) Madam for extending her cooperation in doing this project.

5

I am also thankful to our project coordinator Mr. S. Ravindra Chary for extending his cooperation in completion of Project..

I convey my thanks to my beloved parents and my faculty who helped me directly or indirectly in bringing this project successfully.

T. PAVAN KUMAR (10241E0046)

TABLE OF CONTENTS

6

CHAPTER Nos. CHAPTER NAME PAGE Nos.

EXECUTIVE SUMMARY

1

1

INTRODUCTION

2-10

2

COMMODITY INDUSTRY

11-16

2.1

COMPANY PROFILE

17-26

3

LITERATURE REVIEW

27-73

4

DATA ANALYSIS AND INTERPRETATION

74-77

4.1 ANALYSIS AND INTERPRETATION OF QUESTIONNAIRE

78-91

4.2

CROSS TABS AND CHI SQUARE TESTS

92-101

5

FAQ'S

102-104

6

FINDINGS

105-107

6.1

CONCLUSION

108

6.2

SUGGESTIONS

109-110

6.3

ANNEXURE

111-112

6.4

BIBLIOGRAPHY 113

7

CHAPTER-1 INTTRODUCTION

8

COMMODITIES MARKET

INTRODUCTION:

Commodities Futures trading! in India have a long history. The first commodity futures market appeared in 1875. But the new standardized form of trading in the Indian capital market is an attractive package for all the people who earn money through speculation by trading into FUTURES. It is a well-known fact and should be

remembered that the trading in commodities through futures exchanges is merely, Old wine in a new bottle.

The trading in commodities was started with the first transaction that took place

between two individuals. We can relate this to the ancient method of trading i.e., BARTER SYSTEM. This method faced the initial hiccups due to the problems like: store of value, medium of exchange, deferred payment, measure of wealth etc.. This led to the invention of MONEY. As the market started to expand, the problem of scarcity piled up.

The farmers/traders then felt the need to protect themselves against the fluctuations in the price for their produce. In the ancient times, the commodities traded were the Agricultural Produce, which was exposed to higher risk i.e., the natural calamities and

had to face the price uncertainty. It was certain that during the scarcity, the farmer realized higher prices and during the oversupply he had to loose his profitability. On the other hand, the trader had to pay higher price during the scarcity and vice versa. It was at this time that both joined hands and entered into a contract for the trade i.e., delivery of the produce after the harvest, for a price decided earlier. By this both had reduced the future uncertainty.

One stone still remained unturned- surety of honoring the contract on part from either of the parties. This problem was settled in the year 1848, when a group of traders

in CHICAGO came forward to standardize the trading. They initiated the concept of to-arrive contract and permitted the farmers to lock in the price upfront and deliver the grain at a contracted date later. This trading was carried on a platform called CHICAGO

9

BOARD OF TRADE, one of the most popular commodities trading exchanges today. It was this time that the trading in commodity futures picked up and never looked back.

Although in the 19th century only agricultural produce was traded as a futures contract, but now, the commodities of global or at least domestic importance are being traded over the commodity futures exchanges. This form of trading has proved useful as a device for HEDGING and SPECULATION. The commodities that are traded today are:

Agro-Based Commodities Wheat, Corn, Cotton, Oils, Oilseeds etc.. Soft Commodities.. Coffee, Cocoa, Sugar etc Livestock. Live Cattle, Pork Bellies etc

Energy.. Crude Oil, Natural Gas, Gasoline etc Precious Metals.. Gold, Silver, Platinum etc Other Metals Nickel, Aluminum, Copper etc

10

NEED AND IMPORTENCE OF STUDY

One of the single best things you can do to further your education in trading commodities is to keep thorough records of your trades. Maintaining good records requires discipline,

just like good trading. Unfortunately, many commodity traders dont take the time to track their trading history, which can offer a wealth of information to improve their odds of success Most professional traders, and those who consistently make money from trading commodities, keep diligent records of their trading activity. The same cannot be

said for the masses that consistently lose at trading commodities. Losing commodity traders are either too lazy to keep records or they cant stomach to look at their miserable results. You have to be able to face your problems and start working on some solutions if you want to be a successful commodities trader. If you

cant look at your mistakes and put in the work necessary to learn from them, you probably shouldnt be trading commode

11

.

OBJECTIVES OF THE STUDY

To study the perception of investors in commodities market.

To study about major exchanges trading in Indian commodity market.

To study the commodity trading practices in India.

To study the working procedure, trading and settlement mechanism for commodities (Gold and Silver) In Indian stock exchange.

Study aims at understanding the governance for commodity Derivatives exchanges, traders, investors and other participants.

12

SCOPE OF THE STUDY

The study mainly focuses on Indian commodity market, its history and latest

developments in the country in commodities market (Gold And Silver). The study also keeps a birds-eye view on global commodity market and its development. The study vastly covered the aspects of commodity trading (Gold And Silver), clearing and Settlement mechanisms in Indian commodity exchanges. The scope of the study is

limited to Indian commodity market

A network of 2500 business locations spread over 500 cities across India facilitates the smooth acquisition and servicing of a large customer base. Most of our offices are connected with the corporate office in Mumbai with cutting edge networking technology. The group helps service more than a million customers, over a variety of mediums viz. online, we cannot study all the data in the organization.

13

RESEARCH METHODOLOGY

The present study is conducted to provide information to the company regarding the investor perception towards commodity market.

The main objective of the study is to understand the Commodities sector of the market, it s trading in India and majorly research on How are Commodities used as Assets (Preferences on the basis of which they make a decision between equities and other investment zones and Commodities).

SOURCES OF DATA Primary data

Data was collected in systematic manner by meeting the existing investors in commodity market & other individuals. Primary and secondary data were utilized for the purpose of the study by the researcher.

The research is aimed to obtain the data mainly through primary sources. Survey method has been used to obtain information.

Secondary data Secondary data was collected from companies and from commodities (Gold And Silver) trading websites.

TYPE OF RESEARCH

Based on the objectives of the study, the descriptive research method is used . Descriptive study is taken up when the researcher is interested in knowing the investor perception in commodities market. The conclusions are arrived at from the collected data. Statistical

tools were used to analyze the data collected from the survey.

SURVEY METHOD

A survey was conducted amongst the investors in Hyderabad and Secunderabad. The researcher personally met the investors, interviewed them and got their questionnaires filled.

14

INSTRUMENT DESIGN

In order to obtain information the researcher prepared a structured questionnaire. The researcher prepared a single questionnaire according to the need of the data from the respondent.

PRE-TESTING OF QUESTIONNAIRE

The researcher to remove questions that are of vague and ambiguity in the nature conducted the pre-testing. The samples of 10 respondents were selected and the questionnaire was pre-tested and the researcher made necessary modifications.

CODING AND TABULATION

After the survey was conducted, the data had to be converted in to statistical or numerical form so that inference could be drawn about the sample collected. For this, every option of every question was coded into alphabets (i.e; they would be represented in alphabets). The alphabets were used to denote the option and no ranking order was used. The coded data was entered into the data sheet. Frequencies were found out for each option and thus giving us the percentage of the option usage, etc.

15

LIMITATIONS OF THE STUDY

The survey was confirmed to the surroundings of twin cities Hyderabad & Secundrabad.

The size of sample was only 50.

The investors response could have been biased.

Time of 6 weeks was constraint for the study.

Brokers can only transact futures trades if they are registered with the CFTC and

the NFA.

Only certain types of commodities (Gold And Silver) can be the basis for futures trading.

16

CHAPTER-II INDUSTRY PROFILE

&

COMPANY PROFILE

17

INDUSTRY PROFILE

The Securities Industry and Financial Markets Association (SIFMA) is a leading securities industry trade group representing securities firms, banks, and asset management companies in the U.S. and Hong Kong. SIFMA was formed on November

1, 2006, from the merger of The Bond Market Association and the Securities Industry Association. It has offices in New York City and Washington, D. C.

In October 2008, SIFMA laid off over 25% of its staff in the United States due to the "industry upheaval" which left its member firms in financial straits, and the loss of three of it primary member firmsLehman Brothers, Bear Stearns, and Merrill Lynch. The dismissals came at the same time as the United States Congress pledged to revamp the

country's financial regulatory structure.

SIFMA announced in May 2009 that it would also shed its London-based European operation. That operation will be merged into the London Investment Banking

Association (LIBA).

The 350-member American Securitization Forum (ASF) formerly operated as a forum of SIFMA. On January 14, 2010, ASF announced that it had chosen to terminate its

affiliation with SIFMA as well.

Mission, members, and offices

US operation

SIFMA brings together the shared interests of more than 650 securities firms, banks, and asset managers. SIFMA's mission is to promote effective and efficient regulation, facilitate more open, competitive, and efficient global capital markets, champion investor education, retirement preparedness, and savings, and ensure the publics trust in the securities industry and financial markets. SIFMA represents its members interests in the

U.S. and in Hong Kong. It has offices in New York and Washington, D.C., and its

18

associated firm, the Asia Securities Industry & Financial Markets Association (ASIFMA), is based in Hong Kong.

In June 2009, SIFMA began a campaign to combat the populist overreaction against Wall Streets role in the global financial crisis. It hired two aides who had worked for Henry Paulson when he was Treasury Secretary, to help cleanse Wall Streets image in

the eyes of average Americans. The effort is aimed at policymakers and the media worldwide, and designed to beat back public skepticism over Wall Streets commitment to change. SIFMA is paying $85,000 a month for polling, lobbying, and public relations to counter the "lynch mob", according to an internal SIFMA memo. In internal memos

about confidential meetings with top financial executives, SIFMA said that the securities industry "must be perceived as part of the solution, which will allow it to better defend against populist overreaction."

In January 2010, SIFMA announced that it had hired the law firm Sidley Austin to consider filing a lawsuit challenging the Obama administration's banking levy. But an attorney familiar with the matter said: "I suspect SIFMA got out ahead of its key members." One person with a large bank said SIFMA had not consulted the bank about

its position, and that it was "wildly premature" to pursue legal action.

In October, 2010, CEO Tim Ryan announced the organization's opposition in the residential real estate market to a "system wide moratorium on all foreclosures," reacting

to problems and pullbacks in the market by a number of SIFMA members, saying a moratorium "would be catastrophic." Financial writer Felix Salmon drew attention to the position, terming it "unhelpful," detailing it as "bizarre" and "sad, ... an inchoate and unhelpful blast of opposition ... [without] constructive solutions" proposed.

Political giving and lobbying

"SIFMA's political action committees gave more than $1 million during the 2006 election season, putting the organization in the top 25 of all PACs. Its combined $8.5 million in spending on federal lobbying last year placed it in the top 30. The financial-services

19

industry is the biggest corporate player in national politics. Only organized labor donates more money to candidates for federal offices."

European operation

SIFMA also has offices in London, though it announced in May 2009 that it would shed its European operation. The European High Yield Association (EHYA) in London is a trade association representing participants in the European high yield market. Members include banks, investors, issuers, law firms, accounting firms, financial sponsors, and other participants in the European high yield market. The European Securitisation Forum (ESF) promotes the efficient growth and continued development of securitisation throughout Europe. It advocates the positions, represents the interests, and serves the needs of its membersEuropean securitisation market participants.

Groups

SIFMA has three product and customer-based groups that focus on the U.S.: Capital

Markets, Private Client, and Asset Management. The Capital Markets Group focuses on the primary and secondary markets for equity and fixed income securities. Its customer focus is issuers, underwriters, traders, and institutional investors. The Private Client Group focuses on investment products sold to private clients, as well as individual

investor education. The Asset Management Group focuses on investment products about which asset managers provide investment advice or investment management services, and on institutional investors and hedge funds.

Senior management

T. Timothy Ryan, Jr., is SIFMA's CEO & President. He took the position after pulling his name from consideration for a Treasury Department international policy advisor position in April 2007, after problems were noted concerning Ryan's financial portfolio, and he refused to take certain steps demanded by the Treasury Department's ethic lawyers.

SIFMA's other senior management consists of Kenneth E. Bentsen (EVP, Public Policy and Advocacy), Ileane F. Rosenthal (EVP, Global Communications & Member

20

Engagement), Randy Snook (EVP), and Ira Hammerman (Senior Managing Director & General Counsel).

In August 2008, SIFMA hired Michael Paese, former Deputy Staff Director of the Committee on Financial Services of the House of Representatives, as EVP, Global Advocacy; eight months later Paese left SIFMA to become director of government affairs

at Goldman Sachs. Scott DeFife, who had reported to Paese, left SIFMA in December 2009.

After the 2006 merger which created SIFMA, the organization had a co-CEO structure, with the SIA's Marc E. Lackritz and BMA's Micah S. Green filling the positions. As a 2007 report summarized it, "Lackritz [then 60] ha[d] been a friend, colleague and mentor of Green's [then 49] for two decades." However, with slower-than-hoped-for integration of the merged organization's operations, and with questions about the handling of

executive loans by BMA, Green resigned abruptly that year and Lackritz assumed the role of sole CEO. Nine months later, Lackritz retired and T. Timothy Ryan was named CEO.

Board of directors

SIFMA's Chairman of the Board is Blythe Masters (Head of Global Commodities, JPMorgan Chase), and Vice Chair is Bernard Beal (CEO of M.R. Beal & Company). Other directors include Samir Assaf (HSBC Bank plc), Shigesuki Kashiwagi (Nomura Holdings America Inc.) and Sallie Krawcheck (former Chairman & CEO, Citi Global Wealth Management), among others.

Peter Madoff, brother of fraudster and "money manager" Bernard L. Madoff, and chief compliance officer and senior managing director of the Madoff investment advisor and

broker dealer businesses, stepped down from the SIFMA Board of Directors in December 2008. His resignation came amid growing criticism of the Madoff firms links to Washington, and how those relationships may have contributed to the $50 billion Madoff fraud.

21

The Madoff family had long-standing ties to SIFMA. Bernard Madoff sat on the board of directors of the Securities Industry Association, which merged with the Bond Market Association in 2006 to form SIFMA. Peter Madoff served two terms as a member of SIFMAs Board of Directors. Over the years 2000-08, the two Madoff brothers personally gave $56,000 to political action committees controlled by SIFMA or its predecessor organizations in addition to dues paid to SIFMA by their firm, and tens of thousands of dollars more to sponsor SIFMA industry meetings. In addition, Bernard

Madoff's niece Shana Madoff, who served as a compliance attorney at the Madoff firm, was active on the Executive Committee of SIFMA's Compliance & Legal Division, but resigned her SIFMA position shortly after her uncle's arrest.

Finances

In 2009 SIFMA had $105 million in both revenues and expenses. SIFMA's highest-paid officers that year were Donald Kittel (then CFO), $2.1 million, Marc Lackritz (then President & CEO), $1.5 million, and Randolph Snook (SMD), $1.1 million.

SIFMA's highest-paid officer in 2010 was its new President & CEO Tim Ryan (at approximately $2 million, for January-October). Ryan had been hired to replace Lackritz in January 2008, at a 43% ($600,000) higher level of compensation, for less than a full year. In related news, ironically, Ryan wrote in a USA Today editorial in August 2009 that compensation practices at financial services firms should align with long-term, not

short-term, performance.

SIFMA's top three highest paid officers in the fiscal year ending 31 October 2011 were

CEO Tim Ryan at $2.43 million, Executive Vice President Randolph Snook at $1.04 million and General Counsel Ira Hammerman at $777,000. SIFMA received total revenue that year of $75 million, had total expenses of $82 million, and finished the year with a fund balance of $40 million

22

COMPANY PROFILE INTRODUCTON TO KARVY

OVERVIEW

KARVY, is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, comprising the who is who of Corporate India. KARVY covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking,

Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. Karvy has a professional management team and ranks among the best in technology, operations and research of various industrial segments.

EARLY DAYS

The birth of Karvy was on a modest scale in 1981. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded the flagship company, Karvy Consultants Limited. They started with consulting and financial accounting automation, and carved inroads into the field of registry and share accounting by 1985. Since then, they have utilized their experience and superlative expertise to go from strength to strength to better their services, to provide new ones, to innovate, diversify and in the process, evolved Karvy as one of Indias premier integrated financial service enterprise.

Thus over the last 20 years Karvy has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And they have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally, totality in service.

23

Their highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for them the position of an emerging

financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world.

Their values and vision of attaining total competence in their servicing has served

as the building block for creating a great financial enterprise, which stands solid on their fortresses of financial strength - their various companies.

With the experience of years of holistic financial servicing behind them and years of complete expertise in the industry to look forward to, they have now emerged as a premier integrated financial services provider.

And today, they can look with pride at the fruits of our mastery and experience comprehensive financial services that are competently segregated to service and manage a diverse range of customer requirements.

KARVY ACHIEVEMENTS

Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the to top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

24

KARVY QUALITY POLICY

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Karvy will strive to exceed Customer's expectations.

QUALITY OBJECTIVES

As per the Quality Policy, Karvy will:

Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that will help in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with adequate knowledge & skills so as to respond to customer's needs

Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics.

Use state-of-the art information technology in developing new and innovative financial products and services to meet the changing needs of investors and clients.

Strive to be a reliable source of value-added financial products and services and constantly guide the individuals and institutions in making a judicious choice of it.

Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and regulatory authorities) proud and satisfied.

25

About KARVY Group

Karvy has traveled the success route, towards building a reputation as an

integrated financial services provider, offering a wide spectrum of services for over 20 years.

Karvy, a name long committed to service at its best. A fame acquired through the range of corporate and retail services including mutual funds, fixed income, equity investments, insurance to name a few. Our values and vision of attaining total competence in our servicing has served as a building block for creating a great financial

enterprise.

The birth of Karvy was on a modest scale in the year 1982. It began with the vision and enterprise of a small group of practicing Chartered Accountants based in

Hyderabad, who founded Karvy. We started with consulting and financial accounting automation, and then carved inroads into the field of Registry and Share Transfers.

Since then, we have utilized our quality experience and superlative expertise to go

from strength to strength to provide better and new services to the investors. And today, we can look with pride at the fruits of our experience into comprehensive financial services provider in the Country.

26

KARVY Group companies are:

Karvy Consultants Limited

he first securities registry to receive ISO 9002 certification in India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the Country. The award of being Most Admired Registrar is one among many of the acknowledgements we received for our customer friendly and competent services.

Karvy Stock Broking Limited

The company, Member of National Stock Exchange (NSE), offers a comprehensive range of services in the stock market through the benefits of in-depth

research on crucial market dynamics, done by qualified team of experts. Apart from stock broking activities, the company also provides Depository Participant Services to its corporate and retail customers.

Karvy Investor Services Limited

Registered with SEBI as a Category I Merchant Banker and ranked among the top 10 merchant bankers in the country, the company has built a reputation as a professional

advisor in structuring IPOs take over assignments and buy back exercises.

Karvy Computer share Private Limited

27

Karvy Global Services Limited

Karvy Global Services is the global services arm of the Karvy Group of Companies engaged in the business of offshore business process outsourcing in the areas

of human resource outsourcing, finance and accounting operations outsourcing, research and analytics and back office processing operations.

Karvy Comtrade Limited

The company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, we offer a wide reach through our branch network of over 225 branches located across 180 cities.

Karvy Insurance Broking Private Limited

Karvy Mutual Fund Services

Karvy Securities Limited

The company is into distribution of Financial Products. It distributes a wide range of financial products and services from insurance to credit cards and loans. The company provides sound advisory services to suit the different investment needs of customers.

28

Karvy Commodities Broking Pvt Limited

At Karvy Commodities, we are focused on taking commodities trading to new dimensions of reliability and profitability. We have made commodities trading, an

essentially age-old practice, into a sophisticated and scientific investment option.

Here we enable trade in all goods and products of agricultural and mineral origin that include lucrative commodities like gold and silver and popular items like oil, pulses

and cotton through a well-systematized trading platform.

Our technological and infrastructural strengths and especially our street-smart skills make us an ideal broker. Our service matrix is holistic with a gamut of advantages,

the first and foremost being our legacy of human resources, technology and infrastructure that comes from being part of the Karvy Group.

Our wide national network, spanning the length and breadth of India, further

supports these advantages. Regular trading workshops and seminars are conducted to hone trading strategies to perfection. Every move made is a calculated one, based on reliable research that is converted into valuable information through daily, weekly and monthly newsletters, calls and intraday alerts. A dedicated team committed to giving

hassle-free service while the brokerage rates offered are extremely competitive provides further, personalized service here.

Our commitment to excel in this sector stems from the immense importance those

commodities broking has to a cross-section of investors farmers, exporters, importers, manufacturers and the Government of India itself.

29

About Karvy Commodities Broking Private Limited

Commodities market, contrary to the beliefs of many people, has been in existence in India through the ages. However the recent attempt by the Government to permit Multi-commodity National levels exchanges has indeed given it, a shot in the arm. As a result two exchanges Multi Commodity Exchange (MCX) and National Commodity and derivatives Exchange (NCDEX) have come into being. These exchanges, by virtue of their high profile promoters and stakeholders, bundle in themselves, online trading facilities, robust surveillance measures and a hassle-free settlement system. The futures contracts available on a wide spectrum of commodities like Gold, Silver, Cotton, Steel,

Soya oil, Soya beans, Wheat, Sugar, Channa etc., provide excellent opportunities for hedging the risks of the farmers, importers, exporters, traders and large scale consumers. They also make open an avenue for quality investments in precious metals. The

commodities market, as the movements of the stock market or debt market do not affect it

provides tremendous opportunities for better diversification of risk. Realizing this fact, even mutual funds are contemplating of entering into this market.

Karvy Commodities Broking Private Limited is another venture of the prestigious

Karvy group. With our well established presence in the multifarious facets of the modern Financial services industry from stock broking to registry services, it is indeed a pleasure for us to make foray into the commodities derivatives market which opens yet another door for us to deliver our service to our beloved customers and the investor public at

large.

With the high quality infrastructure already in place and a committed Government providing continuous impetus, it is the responsibility of us, the intermediaries to deliver

these benefits at the doorsteps of our esteemed customers. With our expertise in financial services, existence across the lengths and breadths of the country and an enviable technological edge, we are all set to bring to you, the pleasure of investing in this burgeoning market,

30

Which can touch upon the lives of a vast majority of the population from the farmer to the corporate alike? We are confident that the commodity futures can be good.

The Company provides investment, advisory and brokerage services in Indian Commodities Markets. And most importantly, we offer a wide reach through our branch network of over 225 branches located across 180 cities.

THE KARVY CREDO.

Our Clients, Our Focus.

Clients are the reason for our being. Personalized service, professional care; pro-activeness are the values that help us

nurture enduring relationships with our clients

Respect for the individual.

Each and every individual is an essential building block of our organization. We are the kilns that hone individuals to perfection. Be they our employees, shareholders

or investors. We do so by upholding their dignity & pride, inculcating trust and achieving a sensitive balance of their professional and personal lives.

Teamwork.

None of us is more important than all of us. Each team member is the face of Karvy. Together we offer diverse services with speed, accuracy and quality to deliver only one product: excellence. Transparency, co-operation, invaluable individual contributions for a collective goal, and respecting individual uniqueness within a corporate whole, are how we deliver again and again.

Responsible Citizenship.

31

A social balance sheet is as rewarding as a business one.

As a responsible corporate citizen, our duty is to foster a better environment in the society where we live and work. Abiding by its norms, and behaving responsibly towards the environment, is some of our growing initiatives towards realizing it.

Integrity.

Everything else is secondary. Professional and personal ethics are our bedrock. We take pride in an environment that

encourages honesty and the opportunity to learn from failures than camouflage them. We insist on consistency between works and actions.

32

CHAPTER-III LITERATURE REVIEW

33

INTRODUCTION

Until 1990, the Gold Control Act forbade the private holding of gold bars in India. There was physical investment in smuggled ten tola bars, but it was limited and often amounted to keeping a few bars ready to be made into jewellery for a family wedding. Gold investment essentially was in 22 carat jewellery.

Reserve Bank of India

Since 1990, investment in small bars, both imported ten tolas and locally-made small bars, which have proliferated from local refineries, has increased substantially. GFMS

estimate that investment has exceeded 100 tonnes (3.2 million oz) in some years, although it is hard to segregate true investment from stocks held by the 16,000 or more gold dealers spread across India. Certainly gold has been used to conceal wealth, especially during the mid-1990s, when the local rupee price increased steadily.

It was also augmented in 1998 when over 40 tonnes (1.3 million oz) of gold from bonds originally issued by the Reserve Bank of India were restituted to the public.

In the cities, however, gold is having to compete with the stock market, investment in

internet industries, and a wide range of consumer goods. In the rural areas 22 carat jewellery remains the basic investment.

The Gold Deposit Scheme

The government announced a new initiative in its 1999/2000 budget to tap the hoard of private gold in India by permitting commercial banks to take gold deposits of bars, coins

or jewellery against payment of interest. Interest levels can be set by each bank, and deposits must be for three to seven years. Interest and any capital gains on the gold will be exempt from tax. The banks can lend the gold to local fabricators or sell it in the Indian market or to local banks. However, the depositor has to declare the origin of the

gold, so that metal bought illegally to hide wealth cannot be deposited. The State Bank of

34

India was the first to accept deposits. To date, the amount of gold collected under this scheme (less than 10 tonnes or 0.32 million oz) has fallen well short of the 100 tonnes (3.2 million oz) that was mentioned when it was launched.

The introduction of a modern gold market in India:

1990 Abolition of the long-standing Gold Control Act, which had forbidden the holding of 'primary' or bar gold except by authorised dealers and goldsmiths and sought to limit jewellery holdings of families.

Imports were then permitted in three stages.

1992 Non-Resident Indians (NRIs) on a visit to India were each allowed to bring in up to 5 kilos (160.7 oz) on payment of a small duty of six per cent. This allocation was raised to 10 kilos in 1997.

1994 Gold dealers could bid for a Special Import Licence (SIL) which was issued for a variety of luxury imports.

1997 Open General Licence (OGL) was introduced, paving the way for substantial direct imports by local banks from the international market, thus partly eliminating the regional supplies from Dubai, Singapore and Hong Kong.

The OGL system has also largely eclipsed imports by NRIs and SILs. Additionally, significant temporary imports are permitted under an Export Replenishment scheme for jewellery manufacturers working for export in designated special zones.

In 2001 unofficial imports fell because of a reduction in import duties, pushing down the local premium and making smuggling less profitable. Ten tola bars are still the preferred form of gold in India, accounting for 95% of imports.

35

Precious Metal bulls will tell you to buy the dips. This means, wait for the price to temporarily deflate, and then purchase your position. It is a way to maximize dollars for gold and silver purchased while maintaining a steady buying program in that metal. The

same concept could be used for any fund or stock, as well.

This morning I woke to find gold and silver had tumbled. This doesn't surprise me

anymore because gold and silver have become hotter markets, and there will be more speculation in them. As I wrote in Mr. Market Speaks: Flight to Safety, the market is slowing moving away from long term debt, looking for safety of principal and inflation protection. Gold and silver markets have benefited from this movement.

Gold has steadily been moving relatively sideways the last two days, as seen in the following Kitco chart. But also notice the sharp drop off on Jan 20th at approximately 8am.

Silver looked exactly the same. The sharp downward move happened about the same time.

So I took a look at a 5 minute gold chart and found a 15 minute sharp drop, which I circled in red.

I have written before about how sharp, quick movements in liquid markets don't signal normal price action. Even on bad news, liquid markets take time to react and respond because they are traded by people. And people take time to make decisions on the overall balance of the news in a given market in a given time frame.

So I decided to take a look at what the news was in the precious metals market. CNBC didn't have much.

36

On gold, Bloomberg Businessweek had a piece on everyone getting out of gold. Definitely bearish. The Street agreed with that assessment, commenting that interest rate hikes in Brazil and buying of US Dollars weakened gold demand domestically. But the

article also notes that China continues to buy gold in Brazil. The Wall Street Journal reports gold weakness on improving economic conditions.

Bloomberg had a piece about silver profit taking potentially lowering silver 20%. Definitely bearish and timely. I also found an article from FMX Connect on silver, discussing reasons for silver contango yesterday.

The two main reasons FMX outlines for this movement in silver would either be an interest rate move (none) or metals delivery issues. If metals delivery issues, then this is bullish for silver (and potentially gold) as a complementary inflation-protection investment.

Ben Davies has commented before on a coming short squeeze in the gold and silver markets. So has Ted Butler. And Robert Lenzner. Is it finally time, or is it profit taking in the silver market that has been hovering around $30 for a while?

On the whole, it sounds like there is bearish sentiment and bullish sentiment on gold and silver, which sounds like a perfectly normal market condition. That is why the sharp price movements over very small time frames, as noted in the charts above, is disturbing. Even

if a large share of the market decided to take profits and sell, it is not likely to have happened within a 15 minute window at 8am in the morning. This smells of market manipulation to me.

On balance, I remain bullish on gold and silver. I don't buy paper versions of these investments as I think those markets are fractional reserved upon meager physical metal backing. I recommend investing in the physical metals. And the current price action sounds like a perfect opportunity to purchase gold and silver on the cheap.

I will continue to follow gold and silver news and vette it out in a reasonable manner. If the markets turn bearish upon a real economic recovery, then I may change my position.

37

And I will write about it when I do. But for now, I am not buying the gold and silver markets top story. I think we are firmly going the other direction, regardless of what this morning's price activity is saying.

FINANCIAL DERIVATIVES

The term derivatives refer to a large number of financial instruments whose value is derived from the underlying assets. Derivative instruments like the options and futures facilitate the trading in financial contracts. The most important underlying instruments in the market are in the form of Equity, treasury bills, and foreign exchange. The trading in

the financial derivatives has attracted the prominent players of the equity markets.

The primary purpose of a derivative contract is to transfer risk from one party to another i.e. risk is transferred from a party that wants to get rid of it to another party i.e.

willing to take it. The major players seen in the derivatives segment are the SPECULATORS whose sole objective is to buy and sell for a profit alone. The HEDGERS are the other breeds of players, who aim merely to have a hedge positions. They are risk free investors whose intention is to have a safety mechanism and wish to

protect their portfolio. Nevertheless, they are pursued as a cheap and efficient way of moving risk within the economic system. But the world of derivatives is riddled with jargons making it more awesome.

The trading in equity through the derivatives in India was introduced in the year 2000 by the Securities and Exchange Board of India [SEBI] and this was described as the Indias derivative explosion. Although this took a definite form in 2000 but the idea was initiated in the year 1995. it was then in the year 2000 that SEBI permitted the trading the in the options on the platforms of Indias premier exchange platforms i.e., the

National Stock Exchange Of India limited [NSE] and The Bombay Stock Exchange [BSE] in the individual securities. But the futures contracts took 17 long months to get launched on November 09 2001.

38

The trading in options and futures in the individual stocks were permitted to trade on the stable stocks only. The small and highly volatile stocks were an exemption from the trade in derivatives. Futures and options are important tools that help the investors to

derive profit. The futures facilitate the investor to enter into a contract to deliver the underlying security at a future date whereas, the options allow it to his discretion as to whether he wants to buy (call) or sell (put) the contract.

The current trading behavior in the derivatives segment reveals that single stock futures continues to account for a sizeable proportion. A recent report indicates that the trading in the individual stock futures in the Indian exchanges has reached global volumes. One possible reason for such a behavior of the trader could be that futures

closely resemble the erstwhile BADLA system.

COMMODITY DERIVATIVES

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help

investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

The need for a futures market in the commodities, especially, in the primary commodities was emphasized because such a market not only provides ample

opportunities for effective management of price risk, but also, assists inefficient discovery of prices which can serve as a reference for the trade in the physical commodities in both the external as well as in the internal market.

India, a commodity based economy where two-third of the one billion population depends on agricultural commodities, surprisingly has an under developed commodity market. Unlike the physical market, futures markets trades in commodity are largely used

39

as risk management (hedging) mechanism on either physical commodity itself or open positions in commodity stock.

There was an effort to revive these markets but all went in vain due to improper infrastructure and facilities. However, after India joined the WORLD TRADE ORGANIZATION the need to protect the agricultural community against the price fluctuations cropped up. The National agricultural policy 2000 was formulated and

proposed to expand the coverage of the futures market to minimize the volatility in the commodities prices and hedging the risk arising out of the fluctuations in the prices. As a result of this there is a standardized form of commodity futures trading in the country, today and a lot number of people are active in the commodities exchanges, taking it to a

great high.

The active players in these exchanges are Traders, Speculators and the Hedgers. It is said that now-a days the prices of the commodities in the Physical Market (Mandis) is derived in accordance to the spot prices in the commodity exchanges.

Clearly, in the nascent stage, the derivatives market in India is heading in the right

direction. In the terms of the number of contracts in a single commodity/stock it is probably the largest market globally. It is no longer a market that can be ignored by any of the serious participants. The Indian economy, now, is at the verge of greater expansion the any other economies in the globe today. This has attracted a large number of

institutional investors, both the Indian as well as foreign, to invest in to the Indian stocks and commodities, thereby bringing in a lot of forex reserves. As predicted by the

popular investment Gurus and the great Economists world wide, India will be a

major player in the global economy by the end of this decad. We

can conclude that, with the institutional participation set to increase and a broader product rollout inevitable, the market can only widen and deepen further.

40

TRADING INSTRUMENTS

Derivatives in the recent times have become very popular because of their wide application. Before getting into the hard talks about the commodities trade, let us know about the trading instruments in the derivatives, as they are similarly applicable to the

commodities derivatives.

There are 4 types of Derivatives instrument:

Forward contract

Future contract

Options contract

Swap

Futures and Options are actively used in many exchanges whereas; Forwards and

Swaps are mostly trade Over the Counter (OTC).

FORWARDS CONTRACT

A spot or cash market is the most commonly used for trading. A majority of our day-to-day transactions are in the cash market. In addition to the cash purchase, another way trading is by entering into a Forward contract. A Forward contract is an agreement to buy or sell an asset on a specified date of a specified price. These contracts are usually

entered between a financial institution and its corporate clients or two financial institutions themselves. In the context to the Commodity trading, prior to the standardization, the trade was carried out as a forwards contract between the Associations, Producers and Traders. Where the Association used to act as counter for the

trade.

41

A forward contract has been in existence in the organized commodities exchanges for quite sometimes. The first forward contract probably started in Japan in the early 18th century, while the establishment of the CHICAGO BOARD OF TRADE (CBOT) in 1848 led to the start of a formal commodities exchange in the USA.

Forward contracts are very useful in HEDGING and SPECULATION. The essential idea of entering into the forward contract is to Hedge the price thereto avoid the price risk. By entering into a forward contract one is assured of the price at which the

goods/assets are bought and sold. The classic Hedging example would be that of an exporter who expects to receive payment in foreign currency after three months. As he is

exposed to greater amount of risk in the fluctuations in the exchange rates, he can, with the use of forwards, lock-in the rate today and reduce the uncertainty. Similarly, if a

speculator has the information of an upswing in the prices of the asset, he can go long on

the forward market instead of the cash market and book the profit when the target price is achieved.

The forward contract is settled at the maturity date. The holder of the short

position delivers the assets to the holder of the long position on the maturity against a cash payment that equals to the delivery price by the buyer. The price agreed in the forwards contract is the DILIVERY PRICE. Since the delivery price is chosen at the time of entering into the contract, the value of the contract becomes zero to both the parties

and costs nothing to either the holder of the long position or to the holder of the short position.

The salient features of a forwards contract are:

It is a bilateral contract and hence is exposed to counter-party risk.

Every contract is unique and is custom designed in the terms of: expiration date and the asset type and quality.

The contract price is not available in the public domain.

On the expiration, the contract is to be settled by the delivery of the asset. Of the party wishes to reverse the contract, he has to go to the same counter-party, which may result o attract some charges.

42

FUTURES CONTRACT

Financial futures represent the most significant financial

innovations of the last twenty years. - As quoted by MERTON MILLER,

a noble lauret 1999.

The father of financial derivatives is Leo Me lamed. The first exchange that traded in the financial derivatives was INTERNATIONAL MONETARY MARKET, wing of the Chicago Mercantile Exchange, Chicago, in the year 1972.

The futures market was designed to solve the problems, existing in the forwards market. A financial future is an agreement between two parties to buy or sell a standard quantity of a specified good/asset on a future date at an agreed price. Accordingly, future contracts are promises: the person who initially sells the contract promises to deliver a

specified underlying asset to a designated delivery point during a certain month, called delivery month. The underlying asset could, well be, a commodity, stock market index, individual stock, currency, interest rates etc.. The party to the contract who determines to pay a price for the goods is assumed to take a long position, while the other who agrees to sell is assumed to be taking a short position.

The futures contracts are standardized in the terms of:

Quantity of the underlying assets.

Quality of the underlying assets.

Date and month of the delivery.

Units of the price quotations and minimum price change, and

Location of the settlement.

It is due to the standardization that the futures contract has an edge with the

forward contract, in the terms of: Liquidity, safety and the security to honoring the contract which is otherwise not secured in an OTC trading forwards contract.

43

In short, futures contract is an exchange-traded version of the usual forward contract. There are however, significant differences between the two and the same can be appreciated from the above discussion.

Benefits to Industry from Futures trading:

Hedging the price risk associated with futures contractual commitments.

Spaced out purchases possible rather than large cash purchases and its storage.

Efficient price discovery prevents seasonal price volatility.

Greater flexibility, certainty and transparency in procuring commodities would aid bank lending.

Facilitate informed lending.

Hedged positions of producers and processors would reduce the risk of default faced by banks.

Lending for agricultural sector would go up with greater transparency in pricing and storage.

Commodity Exchanges to act as distribution network to retail agri-finance from Banks to rural households.

Provide trading limit finance to Traders in commodities Exchanges.

OPTIONS CONTRACT

Options have existed over a long period but were traded over the counter (OTC) only. These contracts are fundamentally different from that of futures and forwards. In

the recent years options have become fundamental to the working of global capital markets. They are traded on a wide variety of underlying assets on both, the exchanges and OTC. Options like the futures are also available on many traditional products such as equities, stock indices, commodities and foreign exchange interest rates etc., options are

44

used as a derivate instrument only in financial capital market in India and not in commodity derivatives. It is in the process in introduction.

Options, like futures, also speculative in nature. Options is a legal contract which, facilitate the holder of the contract, the right but not the obligations to buy or sell the underlying asset at the fixed rate on a future date. It should be highlighted that, unlike that the futures and forward contract the options gives the buyer of the contract, the right

to enter into a contract and he doesnt have to necessarily exercise the right to give, take the delivery. When a contract is made the buyer has to pay some money as a Premium to the seller to acquire such a right.

Options are basically of two types.

Call options

Put options

Call options: A call options gives the buyer the right to buy the underlying asset at a strike price specified in the option. The profit/loss depends on the expiration date of the contract if the spot price exceeds the strike price the holder of the contract books a

profit and vice-versa. Higher the spot price more is the profit.

Put options: A put option give the buyer the right to sell the underlying asset at the strike price specified in the option. The profit/loss that the buyer makes on the option

depends on the spot price of the underlying asset. If the spot price is below the strike price he makes profit and vice-versa. If the spot price is higher than the strike price he will wait up to the expiry or else book the profit early.

SWAPS:

Swaps were developed as a long-term price risk management instrument available on the over-the-counter market. Swaps are private agreements between two parties to exchange cash flows in the future according to a pre-arranged formula. These agreements

45

are used to manage risk in the financial markets and exploit the available opportunity for arbitrage in the capital market.

A swap, generically, is an exchange. In the financial parlance it refers to an

exchange of a series of cash flows against another series of cash flows. Swaps are also used in the asset/liability management to obtain cost-effective financing and to generate higher risk-adjusted returns. With swaps, producers can effectively fix, i.e. lock in, the prices they receive over the medium to long-term, and consumers can fix the prices they have to pay. No delivery of the asset is involved; the mechanism of swaps is purely financial.

The swaps market originated in the late 1970s, when simultaneous loans were arrange between British and the US entities to bypass regulatory barriers on the movement of foreign currency .the land mark transaction

Between the World Bank and the IBM in august 1981, paved the way for the development of a market that has grown from a nominal volume in the early 1980s to an outstanding turnover of US $ 46.380tn in 1999.

The swaps market offers several advantages like:

These agreements are undertaken privately while transactions using exchange traded derivatives are public.

Since the swaps products are not standardized, counter parties can customize cash-flow streams to suit their requirements

The swaps can be regarded as portfolios of forward contracts. The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency.

46

Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

PARTICIPANTS IN THE DERIVATIVE MARKET

There are three major participants in the derivatives market. They are:

Hedgers

Speculators

Arbitragers

HEDGERS

He is the person who enters the derivatives market to lock-in their prices to avoid

exposure to adverse movements in the price of an asset. While such locking may not be extremely profitable the extent of loss is known and can be minimized. They are in the position where they face risk associated with the price of an asset. They use derivatives to reduce or eliminate risk.

For example, a farmer may use futures or options to establish the price for his crop long before he harvests it. Various factors affect the supply and demand for that crop, causing prices to rise and fall over the growing season. The farmer can watch the

prices discovered in trading at the CBOT and, when they reflect the price he wants, will sell futures contracts to assure him of a fixed price for his crop.

A perfect hedge is almost impossible. While hedging Basis risk could arise. Basis

= Spot price of asset to be hedged Futures price of the contract used. Basis risk arises as a result of the following uncertainties:

The exact date when the asset will be bought or sold may not be known.

The hedge may require that the Futures contract be closed before expiration.

47

PRICE FUTURES PRICE

BASIS

SPOT PRICE

EXPIRY DATE TIME

SPECULATORS:

A speculator is a one who accepts the risk that hedgers wish to transfer. A speculator takes positions on expectations of futures price movements and in order to make a profit. In general a speculator buy futures contracts when he expect futures prices

to rise and sell futures contract when he expects futures prices to fall, but has no desire to actually own the physical commodity.

Speculators wish to bet on the future movement in the price of an asset. They use

derivatives to get extra leverage. They take positions in the market and assume risk to profit from fluctuations in the prices. Infact, the speculators consume the information,

make forecast about the prices and put their money in these forecast. By taking positions, they are betting that the price would go up or they are betting it would go down.

Depending on their perception, they may long or short positions on the futures or /and options, or may hold spread positions.

ARBITRAGEURS

Simultaneous purchase of securities in one market where the prices thereof are low and sale thereof in another market, where the price thereof is comparatively higher. These are

done when the same securities are been quoted at different prices in the two markets, with

a view to make a profit and carried on with the conceived intention to derive advantage

48

from difference in prices of securities prevailing in the two markets. -As defined by The Institute of Chartered Accountants of India.

Arbitrageurs thrive on the market imperfections. They profit by trading on given commodities, or items, that are in the business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the future prices of an asset getting out of line with the cash price, they will take offsetting positions in the two

markets to lock in a profit.

Thus, the arbitrage involves making risk-less profit by simultaneously entering into transactions in two or more markets. With the introduction of derivate trading the

scope of arbitrageurs activities extends to arbitrage over time i.e., he can buy securities in an index today and sell the futures, maturing in the month or two.

TRADING OF COMMODITY DERIVATIVES IN INDIA

Trading of all the derivatives in India is carried over:

Exchanges

Over the counter

EXCHANGE TRADING

An asset (commodity/stock), when is traded over an organized exchange is it is termed, to be traded on the Exchange. This type of trading is the general trading which we see on the major exchanges world over. The settlement in the exchange trading is highly standardized.

OVER THE COUNTER TRADING

An asset (commodity/stock) is traded over the counter usually because the company is small and unable to meet listing requirements of the exchanges and facilitates the trading in those areas where the exchanges are not located. Also known as unlisted

49

the assets are traded by brokers/dealers who negotiate directly with one another over computer networks and by phone.

Instruments such as bonds do not trade on a formal exchange and are thus considered over-the- counter securities. Investment banks making markets for specific issues trade most debt instruments. If someone wants to buy or sell a bond, they call the bank that makes the market in that asset.

Exchange Vs OTC Trading

The OTC derivatives markets have witnessed rather sharp growth over the last few years, which have accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information

technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in

financial markets in 1998. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets. The OTC derivatives markets have the following features compared to exchange-traded derivatives:

The management of counter-party (credit) risk is decentralized and located within individual institutions.

There are no formal centralized limits on individual positions, leverage, or

margining.

There are no formal rules for risk and burden-sharing,

There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants,

50

The OTC contracts are generally, not regulated by a regulatory authority and the exchanges self-regulatory organization, although they are affected indirectly by

national legal systems, banking supervision and market surveillance.

COMMODITIES MARKET..

Global Perspective

Oil accounts for 40 per cent of the world's total energy demand. The world consumes about 76 million bbl/day of oil. United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan (5.4 million bbl/d) are the top oil consuming countries. Balance recoverable reserve was estimated at about 142.7 billion tons (in 2002), of which OPEC was 112 billion tons

51

The major commodities trading exchanges globally are:

Chicago Board Of Trade (COBOT). U.S.A.

New York Mercantile Exchange (NYMEX). U.S.A.

London Metal Exchange (LME). United Kingdom.

Tokyo Commodity Exchange (TOCOM). Japan

International Petroleum Exchange (IPE).

London Metal Exchange (LME). United Kingdom

Sydney Futures Exchange (SFE). Australia

Brazilian Futures Exchange (BBF). Brazil

Winnipeg Commodity Exchange (WCE). Canada

Marche a Terme International de France (MATIF). France

Hong Kong Futures Exchange (HKFE). Hong Kong

New Zealand Futures & Options Exchange (NZFOE). New Zealand

Russian Commodity and Raw Materials Exchange. Russia

Singapore International Monetary Exchange (SIMEX). Singapore

South African Futures Exchange (SAFEX). South Africa

Dalian Commodity Exchange. China

Shanghai Metal Exchange (SME). China

52

Chicago Board Of Trade (CBOT)

The Chicago Board of Trade (CBOT), established in 1848, is a leading futures and options on futures exchange. More than 3,600 CBOT members trade 50 different futures and options products at the exchange through open auction and/or electronically. Volume at the exchange in 2003 was a record breaking 454 million contracts.

In its early history, the CBOT traded only agricultural commodities such as corn, wheat, oats and soybeans. Futures contracts at the exchange evolved over the years to include non-storable agricultural commodities and non-agricultural products like gold

and silver. The CBOT's first financial futures contract, launched in October 1975, was based on Government National Mortgage Association mortgage-backed certificates. Since that introduction, futures trading has been initiated in many financial instruments, including U.S. Treasury bonds and notes, stock indexes, and swaps, to name but a few.

Another market innovation, options on futures, was introduced in 1982.

For more than 150 years, the primary method of trading at the CBOT was open auction, which involved traders meeting face-to-face in trading pits to buy and sell

futures contracts. But to better meet the needs of a growing global economy, the CBOT successfully launched its first electronic trading system in 1994. During the last decade, as the use of electronic trading has become more prevalent, the exchange has upgraded its electronic trading system several times. Most recently, on January 1, 2004, the CBOT

debuted its new electronic platform powered by the cutting-edge trading technology. As of 1st January 2004, the Chicago Mercantile Exchange is providing clearing and related services for all CBOT products

53

New York Mercantile Exchange (NYMEX)

The NYMEX in its current form was created in 1994 by the merger of the former New York Mercantile Exchange and the Commodity Exchange of New York (COMEX). Together the represent one of the world's largest markets in commodities trading.

It deals in futures (and options) in oil products, such as crude oil, heating oil, leaded regular gasoline, natural gas, propane and in rare metals, such as platinum and palladium. It also deals in gold and silver, aluminum and copper, sharing with the

London Metal Exchange a dominant role in the world metal trading.

London Metals Exchange The London Metal Exchange is the world's premier non-ferrous metals market

with highly liquid contracts and a worldwide reputation. It is innovative while maintaining its traditional strengths and remains close to its core users by ensuring its contracts continue to meet the high expectations of industry. As a result, it is highly

successful with a turnover in excess of US$3,000 billion per annum. It also contributes to the UKs invisible earnings to the sum of more than 250 million in overseas earnings each year.

The origins of the London Metal Exchange can be traced as far back as the

opening of the Royal Exchange in 1571. This is where metal traders first began to meet on a regular basis. However, it was in 1877 that the London Metal Market and Exchange Company were formed as a direct result of Britain's industrial revolution of the 19th century. This led to a massive increase in the UKs consumption of metal, which required

the import of enormous tonnages from abroad. Merchant ventures were investing large sums of money in this activity and were exposed to great risk, not only because the voyages were hazardous but also because the cargoes could lose value if there was a fall in price during the time it took for the metal to reach Britain.

54

INDIAN PERSPECTIVE

There are three major exchanges for the commodity trading in India. They are:

The National Commodities and Derivatives Exchange Ltd. (NCDEX)

Multi Commodities Exchange of India Ltd. (MCX)

National Multi-Commodity Exchange Ltd. (NMCE)

National Commodity & Derivatives Exchange Limited (NCDEX)

The National Commodities and Derivatives Exchange Ltd is a professionally managed

online multi commodity exchange promoted by ICICI Bank Limited (ICICI Bank), Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). Punjab National Bank (PNB), CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Indian Farmers Fertilizer Cooperative Limited (IFFCO) and Canara Bank by subscribing to the equity shares have joined the initial promoters as shareholders of the Exchange. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets.

The institutional promoters of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills.

NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It has commenced its operations on December 15,2003

55

NCDEX is a nation-level, technology driven de-mutuali zed on-line commodity exchange with an independent Board of Directors and professionals not having any vested interest in commodity markets. It is committed to provide a world-class

commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

Forward Market Commission regulates NCDEX in respect of futures trading in

commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working.

NCDEX is located in Mumbai and offers facilities to its members in more than 390 centers throughout India. The reach will gradually be expanded to more centers. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard

Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed, Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal. At subsequent phases trading in more commodities would be facilitated.

56

Multi Commodities Exchange of India Ltd (MCX)

MCX an independent and de-mutulised multi commodity

exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key

shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, NABARD, NSE, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank.

Head quartered in Mumbai, an expert management team with deep domain knowledge of the commodity futures markets leads MCX. Through the integration of dedicated resources, robust technology and scalable infrastructure, since inception MCX has recorded many first to its credit.

Inaugurated in November 2003 by Mr. Mukesh Ambani, Chairman & Managing Director, Reliance Industries Ltd, MCX offers futures trading in the following commodity categories:

Agri Commodities, Bullion, Metals- Ferrous & Non-ferrous, Pulses,

Oils & Oilseeds,

Energy, Plantations,

Spices

MCX has built strategic alliances with some of the largest players in commodities

eco-system, namely, Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana, United Planters Association of India and India Pepper and Spice Trade Association.

57

Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders,

Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure, is well placed to tap this vast potential.

Vision and Mission of the Multi Commodities exchange of India.

The vision of MCX is to revolutionize the Indian commodity markets by empowering the market participants through innovative product offerings and business rules so that the benefits of futures markets can be fully realized. Offering 'unparalleled

efficiencies', 'unlimited growth' and 'infinite opportunities' to all the market participants.

At MCX we believe that performance excellence and affordability would be the key drivers in promoting and popularizing Commodities Futures trading in the country. Exchanges in the new economy will be driven by strong service availability backed by

superior technology and MCX is well poised to emerge as the "Exchange of Choice" for the commodity futures trading community.

58

SYMBOLS COMMODITIES

Gold, Gold HNI, Gold M, I-Gold, Silver, Silver HNI, Silver M

Castor Oil, Castor Seeds, Castor Seeds (Disa), Cottonseed, Crude Palm Oil, Groundnut Oil, Kapasia Khalli (Cottonseed Oilcake), Mustard Seed (Hapur), Mustard Seed (Jaipur), Mustard /Rapeseed Oil, Mustard Seed (Sirsa), RBD Palmolein, Refined Soy Oil, Sesame Seed, Soyameal Soya Seed

Cardamom, Jeera, Pepper, Red Chilli, Turmeric

Aluminium, Copper, Nickel, Sponge Iron, SteelFlat, Steel Long (Bhavnagar), Steel Long (Gobindgarh), Tin

Cotton Long Staple , Cotton Medium Staple, Cotton Short Staple, Kapas

Chana, Masur, Tur, Urad, Yellow Peas,

Basmati Rice, Maize, Rice, Sarbati Rice, Wheat

Brent Crude Oil, Crude Oil, Furnace Oil

Cashew Kernel, Rubber

High Density Polyethylene (HDPE), Polypropylene (PP),

Guar Seed, Guargum, Gur, Mentha Oil, Sugar M-30, Sugar S-30,

59

Multi-Commodity Exchange, MCX

COMMODITY UNIT OF PRICE QUOTATION

UNIT OF TRADING

YIELD/Re. MOVEMENT

YIELD/TIC or TIC VALUE

TRADING SESSION

PRECIOUS METALS

GOLD-M 10gm 100gm 10.00 1.00 10.00 10:00AM-11:30PM

GOLD 10gm 1000gm 100.00 1.00 100.00 10:00AM-11:30PM SILVER-M 1KG 5KG 5.00 1.00 5.00 10:00AM-11:30PM SILVER 1KG 30KG 30.00 1.00 30.00 10:00AM-11:30PM

AGRICULTURAL PRODUCTS

SOYA 1QT 10QT 10.00 0.05 0.50 10:00AM-5:00PM &

SOYA OIL 10KG 1000KG 100.00 0.05 5.00 10:00AM-5:00PM & PALMOLEIN OIL CRUDE 10KG 1000KG 100.00 0.05 5.00

10:00AM-5:00PM &

PALMOLEIN OIL RBD 10KG 1000KG 100.00 0.05 5.00

10:00AM-5:00PM &

CASTOR 100KG 1MT 10.00 0.25 2.50 10:00AM-5:00PM &

CASTOR OIL 10KG 1MT 100.00 0.10 10.00 10:00AM-5:00PM & GROUND NUT OIL 10KG 1MT 100.00 0.10 10.00

10:00AM-5:00PM &

GAUR SEED 100KG 5MT 50.00 1.00 50.00 10:00AM-5:00PM & BLACK PEPPER 100KG 1MT 10.00 1.00 10.00

10:00AM-5:00PM &

KAPAS 20KG 4MT 200.00 0.10 20.00 10:00AM-5:00PM & INDUSTRIAL METALS

STEEL LONG 1MT 25MT 25.00 0.50 12.50 10:00AM-5:00PM &

STEEL FLAT 1MT 25MT 25.00 0.50 12.50 10:00AM-5:00PM & COPPER 1KG 1MT 1000.00 0.05 50.00 10:00AM-11:30PM

NICKEL 1KG 250KG 250.00 0.50 125.00 10:00AM-5:00PM & TIN 1KG 500KG 500.00 0.25 125.00 10:00AM-5:00PM

60

The National Multi Commodity Exchange of India ltd.

The first state-of-the-art de-mutualized multi-commodity Exchange, NMCE commenced futures trading in 24 commodities on 26th November, 2002 on a national scale and the basket of commodities has grown

substantially since then to include cash crops, food grains, plantations, spices, oil seeds, metals & bullion among others. NMCE was the first Exchange to take up the issue of differential treatment of speculative loss. It was also the first Exchange to enroll

participation of high net-worth corporate securities brokers in commodity derivatives market. NMCE has also made immense contribution in raising awareness about and catalyzing implementation of policy reforms in the commodity sector.. It was the Exchange, which showed a way to introduce warehouse receipt system within existing

legal and regulatory framework. It was the first Exchange to complete the contractual groundwork for dematerialization of the warehouse receipts. Innovation is the way of life at NMCE.

National Multi Commodity Exchange of India Ltd. (NMCE), promoted by commodity-relevant public institutions, viz., Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). The Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. These institutions are represented on the Board of Directors of the Exchange and also on various

committees set up by the Exchange. The experienced and qualified professionals with impeccable integrity and expertise manage the day-to-day operations of the Exchange. None of them have any trading interest.

61

Vision National Multi-Commodity Exchange of India Limited is committed to provide

world class services of on-line screen based Futures Trading of permitted commodities and efficient Clearing and guaranteed settlement, while complying with Statutory / Regulatory requirements. We shall strive to ensure continual improvement of customer

services and remain quality leader amongst all commodity exchanges.

Mission

Continuous improvement in Customer Satisfaction. Improving efficiency of marketing through on-line trading in Dematerialization form.

Minimizing of settlement risks.

Improving efficiency of operations by providing best infrastructure. Rationalizing the transaction fees to optimum level.

Implementing best quality standards and testing in tune with trade practices.

Improving facilities for structured finance. Improving quality of services rendered by suppliers. Promoting awareness about on-line features trading services of NMCE across the length and breadth of the country.

Turn over of the Indian commodity futures market

Turnover on Commodity Futures Markets

(Rs. In Crores) Exchange 2009-10 2010-11 NCDEX 1490 54011 NBOT 53014 51038 MCX 2456 30695 NMCE 23842 7943 ALL EXCHANGES 129364 170720

NCDEX TRADING SYSTEM

62

A trading system is a system of rules and guidelines of the whole trading process.

The system includes: First in the system, the TICKER for each commodity is shown on the trading

terminal. Generally it is standardized for all the exchanges in a country, but nevertheless, it may differ between the exchanges in same country.

Firstly, the Format for Tickers is like this:

CCCGGGLLL

CCC three letters for the commodity. GGG three letters for the grade.

Wherever there is no particular grade, either STD (standard) or GR1 (grade 1) has been used. LLL three letters for the delivery location. Eg. SYOREFIND -- SYO: Soy Oil, REF: Refined, IND: Indore

Now lets have a look at the format of the tickers for all the commodities that are traded in NCDEX:

GLD100MUM : Gold+100% pure+Mumbai SLV100DEL : Silver+100% pure+Delhi SYBGR1IND : Soy Bean+GR1+Indore SYOREFIND : Soy Oil+Refined+Indore RMSGR1JPR : Rape/Mustard+GR1+Jaipur RMOEXPJPR : Rape/Mustard Oil+Expeller+Jaipur RBDPLNKAK : RBD+Palm Olein+Kakinada CPOSTDKDL : Crude Palm Oil+STD+Kandla CTMJ34BTD : Cotton Medium Staple Length+J-34+Bhatinda CTLS06ABD : Cotton Long Staple Length+S-06+Ahmedabad

INSTRUMENT TYPE in NCDEX is to denote whether the ticker is a futures contract or a spot price being disseminated or an options contract

63

COMDTY used for commodity spot price dissemination FUTCOM used for futures on commodity

OPTCOM used for options on futures on commodity

CONTRACT EXPIRY:

Contract Expiry for the Futures & Options contract will be written as 20mmmYYYY. 20 -- 20th of every month a contract expires. mmm used to denote the month, e.g. DEC, JAN etc YYYY used to denote the year e.g. 2003, 2004 etc

For the spot price, no expiry date will be displayed or required as the positions in spot market are for perpetuity (Spot market not yet started).

WHAT TO QUOTE FOR BUY/SELL

Gold for buying futures of say 500 gm, you will need to enter Quantity as 500, and price in Rs/10gm

Silver for buying futures of say 25 Kg, you will need to enter Quantity as 25 and the price in Rs/Kg

All oils and oilseeds for buying futures of say 5 MT, you will need to enter Quantity as 5 and The price for Soy Bean in Rs/Quintal The price for Rapeseed/Mustard Seed in Rs/20 Kg

The price for all edible oils in Rs/10 Kg

Cotton for buying futures of say 44 bales, you will need to enter Quantity as 44 and the price in Rs/Quintal

64

ORDER TYPES:

There are major, two types of orders, regular lot orders and qualifiers.

Regular lot order

Market Order: It is a type of order where in both the buyer and seller agrees for a transaction at current market price (CMP).

Limit Order: An order that can be executed only at a specified price or one favorable for the investor. Hence for a seller a limit price is above Current Market Price (CMP) and for a buyer it is below the Current Market Price (CMP)

Qualifier

Stop Loss: An order that is put to curb excess loss to the customer. Hence for a seller

(who already has a buy) a stop-loss order is below CMP and for buyer (who already holds a sell) a stop-loss order is above CMP.

Futures Spread (SB) specified difference between two different calendar months in same commodity. It also called just Spreads betting.

Immediate or Cancel (IOC)

2L Order (2L) Opposite positions taken in two different months (arbitraging) e.g. buying March contract and selling April contract.

3L Order (3L) Opposite positions taken in two diffe