CHAPTER-I
INTTRODUCTION
1
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 “toarrive” 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
2
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
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 don’t 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 can’t 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
can’t look at your mistakes and put in the work necessary to learn from them, you
probably shouldn’t be trading commodities.
3
OBJECTIVES OF THE STUDY
 To study about major exchanges trading in Indian commodity market.
 To study about participants in Indian derivative market.
 To understand the basics of commodity market and to discover the
Emerging prospects (Gold, Copper And Silver) In the Indian
commodity market.
 To empathize trading and settlement mechanism for commodities
( Gold, Copper And Silver ) In Indian stock exchange.
 To know how exactly the commodities are traded through the trading
Desks and what happens in the market.
 To identify the working procedure of the commodity trading practices
in India.
 To identify the perception of investors in commodities market.
 Study aims at understanding the governance for commodity
Derivatives exchanges, traders, investors and other participants.
4
SCOPE OF THE STUDY
The study mainly focuses on Indian commodity market, its history and latest
developments in the country in commodities market (Gold, Copper 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, Copper 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.
5
RESEARCH METHODOLOGY
The present study is conducted to provide information to the company regarding the
investor perception towards commodity market.
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, Copper 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.
6
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.
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LIMITATIONS OF THE STUDY
 The survey was confirmed to the surroundings of twin cities Hyderabad &
Secundrabad.
 The size of sample was only 50.
 The investor’s 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, Copper And Silver) can be the basis for
futures trading.
CHAPTER-II
INDUSTRY PROFILE
&
8
COMPANY PROFILE
INDUSTRY PROFILE
9
INDIAN FINANCIAL SERVICE SECTOR
“Financial stability is crucial for sustained economic growth but this cannot be achieved
without strong financial systems “.(Financial stability institute). The far-reaching changes
in the Indian economy since liberalization in the early 1990s have had a deep impact on
Indian financial sector. The financial has gone through a complex and sometimes painful
process of restructuring capitalizing on new opportunities as well as responding to new
challenges.
During the last decade, there has been a broadening and deepening of
financial markets. Several new instruments and products have been introduced. Existing
sectors have been opened to new private players. This has given a strong impetus to the
development and modernization of the financial sector. New players have adopted
international best practices and modern technology to offer a more sophisticated range of
financial services to corporate and retail customers.
Until the early nineties, corporate financial management in India was a relatively drab
and placid activity. There were not many important financial decisions to be made for the
simple reason that firms were given very little freedom in the choice of key financial
policies. The government regulated the price at which firms could issue equity, the rate of
interest which they could offer on their bonds, and the debt equity ratio that was
permissible in different industries. Moreover, most of the debt and a significant part of
the equity was provided by public sector institutions.
Working capital management was even more constrained with detailed
regulations on how much inventory the firms could carry or how much credit they could
give to their customers. Working capital was financed almost entirely by banks at interest
rate laid down by the central bank. The idea that the interest rate should be related to the
creditworthiness of the borrower was still heretical. Even the quantum of working capital
finance was related more to the credit need of the borrower then to creditworthiness on
the principle that bank credit should be used only for productive purposes.
10
THE ROLE OF THE FINANCIAL SERVICE SECTOR IN
EXPANDING ECONOMIC OPPORTUNITY
Financial services are fundamental to economic growth and development. Banking,
saving and investment, insurance, and debt and equity financing help private citizens save
money, guard against uncertainty, and build credit, while enabling businesses to start up,
expand, increase efficiency, and complete in local and international markets. For the
poor, these services reduce vulnerability and enable people to manage the assets available
to them in ways that generates income and option-ultimately creating paths out of
poverty.
The financial service sector is largest in the world in terms of earnings,
comprised of a wide range of businesses including merchant banks, credit card
companies, stock brokerages, and insurances companies, other companies. This report
focuses primarily on large domestic and multination’s commercial banks. These large
firms have the expertise, reputation, and geographic reach to have significant direct
impact and through engagement and example, to change the way entire markets operate.
They are using increasingly deliberate strategies to expand economic opportunity through
business models that serve poor individuals and SMEs as clients. They are also
developing initiatives to build human and institutional capacity and using their
experience and influence to shape policy frameworks in the regions in which they work.
Despite their potential, to date impact of large commercial banks on
expanding economic opportunity has remained limited in developing world, were a
vicious
cycle
of
insufficient
information,
inappropriate
products,
inadequate
infrastructure, and inflexible regulatory environments has kept costs, and therefore prices
high, limiting companies markets to clients within the top tiers of the economic pyramid.
11
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 public’s 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
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 Street’s 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 Street’s 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 Street’s 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
12
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
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 members—European 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
13
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
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.
14
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 firm’s links to
Washington, and how those relationships may have contributed to the $50 billion Madoff
fraud.
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
SIFMA’s 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.
15
Finances
In 2007 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 2008 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 2009 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
16
COMPANY PROFILE
17
COMPANY PROFILE
Religare is an emerging markets financial services group with a presence across Asia,
Africa, Middle East, Europe, and the Americas. In India, Religare’s largest market, the
group offers a wide array of products and services including broking, insurance, asset
management, lending solutions, investment banking and wealth management. With
10,000-plus employees across multiple geographies, Religare serves over a million
clients, including corporate and institutions, high net worth families and individuals, and
retail investors.Vision
"To be the leading emerging markets financial services group driven by innovation,
delivering superior value for all stakeholders globally".
Religare is established in the January 30th 1984. It is one of the leading integrated
financial services institutions of India, backed by a blue chip promoter pedigree and a
proven track record. Religare’s businesses are broadly clubbed across 3 key verticals, the
retail, institutional and the wealth spectrum, catering to a diverse and wide base of clients
spread across the length and breadth of the country. Structurally, all business is operated
through various subsidiaries held through the holding company Religare Enterprises
Limited.
The company offers a diverse bouquet of services and through it’s consolidated network
reach, Religare is present in more than 1300 locations across more than 400 cities and
towns.
As part of its recent initiatives the group has also started expanding globally. Religare has
also successfully partnered with Aegon, one of the global leaders to launch Life
Insurance, Mutual Fund and Pension products in India and with Macquarie Bank, for a
wealth management joint venture.
The vision of the company is to build Religare as a globally trusted brand in the financial
services domain and present it as the ‘Investment Gateway of India’. All employees of
18
the group relentlessly strive to provide financial care, driven by the core values of
diligence and transparency
Mission - To provide financial care driven by the core values of diligence & transparency
Brand Essence – the Company Core essence is diligence and ethical and dynamic
processes for wealth creation drive it.
Brand Identity
Religare is a Latin word that translates as 'to bind together'. This name has been chosen to
reflect the integrated nature of the financial services the company offers. The name is
intended to unite and bring together the phenomenon of money and wealth to co-exist and
serve the interest of individuals and institutions, alike.
Symbol
The Religare name is paired with the symbol of a four-leaf clover. The four-leaf clover is
used to define the rare quality of good fortune that is the aim of every financial plan. It
has traditionally been considered good fortune to find a single four leaf clover
considering that statistically one may need to search through over 10,000 three-leaf
clovers to even find one four leaf clover.
The first leaf of the clover represents Hope. The aspirations to succeed. The
dream of becoming. Of new possibilities. It is the beginning of every step and the
foundation on which a person reaches for the stars.
The second leaf of the clover represents Trust. The ability to place one’s own
faith in another. To have a relationship as partners in a team. To accomplish a
given goal with the balance that brings satisfaction to all, not in the binding, but
in the bond that is built.
The third leaf of the clover represents Care. The secret ingredient that is the
cement in every relationship. The truth of feeling that underlines sincerity and the
19
triumph of diligence in every aspect. From it springs true warmth of service and
the ability to adapt to evolving environments with consideration to all.
The fourth and final leaf of the clover represents Good Fortune. Signifying that
rare ability to meld opportunity and planning with circumstance to generate those
often looked for remunerative moments of success.
Hope. Trust. Care. Good Fortune. All elements perfectly combine in the
emblematic and rare, four-leaf clover to visually symbolize the values that bind
together and form the core of the Religare vision.
Top Management Team
 Mr. Sunil Godhwani - CEO & Managing Director, Religare Enterprises Limited
 Mr. Shachindra Nath - Group Chief Operating Officer, Religare Enterprises
Limited
 Mr. Anil Saxena- Group Chief Finance Officer, Religare Enterprises Limited
Board of Directors - Religare Enterprises Limited

Mr. Malvinder Mohan Singh - Chairman (Non Executive)

Mr. Sunil Godhwani - CEO & Managing Director

Mr. Shivinder Mohan Singh - Non Executive Director

Mr. Harpal Singh - Non Executive Director

Mr.Deepak Ramchand Sabnani - Independent Director

Mr.Padam Bahl - Independent Director

Mr. Baldev Singh Johal - Independent Director

Mr. R. K. Shetty - Alternate to Mr. J. W. Balani

Capt.G.P.S.Bhalla - Alternate to Mr. Deepak Sabnani
20
Awards & Accolades

Religare Finvest Limited has been awarded the Finnoviti 2012 award in the
“Innovation in Process” category.

Religare Securities Limited has been awarded the "Best Investor Education &
Category Enhancement – Currency Broker" at the Bloomberg UTV Financial
Leadership Awards.

Religare Commodities Limited has been awarded the "Best Commodity Broker"
at the Bloomberg UTV Financial Leadership Awards.

Religare Broking TVC (archery creative) won Silver Abby in the Sound and
Design craft category at Goafest 2011.

Religare Capital Markets Limited has been awarded the coveted Starmine
award for the 'Best Brokerage Research House'.

Religare Commodities Ltd has been awarded the 'The Best Commodity Broker
of the year' at the Bloomberg UTV's financial Leadership awards.

Religare Enterprises Ltd presented the the Best Retail Marketing Campaign
of the Year 2010 at Asia Retail Congress.

Religare Enterprises Ltd received the coveted Master Brand Award for 2010
and Best Marketing Campaign of the year at World Brand Congress 2010.
RELIGARE SPECTUM
1. Retail spectrum

Equity Trading

Commodities Trading

Online Investment Portal

Personal Financial Services

Personal Credit
21
2. Wealth Spectrum

Wealth Advisory

Portfolio Management Services

Arts Initiative

Priority Client Equity Services
3. Institutional Spectrum

Institutional Broking Services

Investment Banking

Corporate Finance

Insurance Advisory
RETAIL SPECTRUM
Equity Trading
Trading in Equities with Religare truly empowers you for your investment needs. A
highly process driven, diligent approach backed by powerful Research & Analytics and
one of the “best in class” dealing rooms ensures that you have a superlative experience.
Further, Religare also has one of the largest retail networks, with its presence in more
than 1,217 locations across more than 392 towns & cities. This means, you can walk into
any of these branches and connect toreligare’shighly skilled and dedicated relationship
managers to get the best services. You could also choose to enjoy the freedom to execute
your own trades through Religare’s online mechanism
22
Commodities Trading
Religare Commodities Limited (RCL) was initiated to spearhead Exchange based
Commodity Trading. As a member of NCDEX, MCX and NMCE, RCL is a trade
facilitator providing the platform to trade in commodities. Grounded in the Religare
philosophy, highly skilled and dedicated professionals strive to offer the client best
investment solutions across the country.
Online Investment
Investing online will never be the same again withreligare’s360 degree portal
www.religareonline.com Now you can not just invest online in Equities, IPOs, Mutual
Funds, Commodities and much more but, also get TRADE REWARDS each time you
invest.
Personal Financial Services
Religare has recently entered into personal financial advisory services. It caters to the
financial needs of individuals by advising them on various financial plans. Religare’s
Personal financial advisors, also called financial planners or financial consultants, use
their knowledge of investments, tax laws, and insurance to recommend financial options
to individuals in accordance with the individual’s short-term and long-term goals. Some
of the issues that planners address are general investments, retirement and tax planning.
Product offerings

Mutual Funds

Insurance - Life & Non - Life

Bonds

Deposits

IPO’s

Small Savings Instruments
23
PHILOSOPHY
Define…
Refine….
Achieve
At Religare The Company believes “Our clients are people, not accounts” hence
successful investment management relationship begins with a clear understanding of each
client’s specific needs, concerns and long term objectives. Religare’s investment
philosophy applies a disciplined approach to building a customized strategy designed to
meet your individual financial goals and tolerance for risk.
PROCESS
The Religare Edge

Pan India foot print

Dedicated team of trained and skilled advisors

Strong pedigree driven by diligent processes and ethical business practices

Wide & varied platter of products & services to choose from

Backed by strong & Credible research
24
Their Process
WEALTH SPECTRUM
Wealth Management @ Religare

To provide investment advisory and execution services

To work hand in hand with clients to identify and analyze their long-term goals,
risk tolerance and existing asset base

To Utilize Religare’s full-suite platform with an open architecture along with a
fully focused client centric approach to offer customized solutions for clients

Supported by dedicated team of highly skilled and qualified wealth managers and
research professionals.
Critical Steps in Religare’s Client Centric Operating Process

Risk Profiling

Research & Asset Allocation

Product Recommendations

Review & Rebalancing
25
International Advisory Funds Management Services (AFMS) - A new horizon for
international investments Religare’s wealth clients is an opportunity to invest in
international financial instruments (currently limited to the US). Equities, Mutual Funds
and Debts are some the key instruments available and the clients have the option to
choose from various asset allocation modules.
Portfolio Management Service
Religare offers PMS to address varying investment preferences. As a focused service,
PMS pays attention to details, and portfolios are customized to suit the unique
requirements of investors.
Religare PMS currently extends five portfolio management schemes - Panther, Tortoise,
Elephant, Caterpillar and Leo. Each scheme is designed keeping in mind the varying
tastes, objectives and risk tolerance of Religare’s investors
Investment Philosophy
We believe that Religare’s investors are better served by a disciplined investment
approach, which combines an understanding of the goals and objectives of the investor
with a fine tuned strategy backed by research.

Stock specific selection procedure based on fundamental research for making
sound investment decisions.

Focus on minimizing investment risk by following rigorous valuation disciplines.

Capital preservation.

Selling discipline and use of Derivatives to control volatility.

Overall to enhance absolute return for investors.
26
Schemes
Panther
The Panther portfolio aims to achieve higher returns by taking aggressive positions across
sectors and market capitalization. It is suitable for the “High Risk High Return” investor
with a strategy to invest across sectors and take advantage of various market conditions.
Tortoise
The Tortoise portfolio aims to achieve growth in the portfolio value over a period of time
by way of careful and judicious investment in fundamentally sound companies having
good prospects. The scheme is suitable for the “Medium Risk Medium Return” investor
with a strategy to invest in companies, which have consistency in earnings, growth and
financial performance.
Elephant
The Elephant portfolio aims to generate steady returns over a longer period by investing
in Securities selected only from BSE 100 and NSE 100 index. This plan is suitable for the
“Low Risk Low Return” investor with a strategy to invest in blue chip companies, as
these companies have steady performance and reduce liquidity risk in the market.
Caterpillar
The Caterpillar portfolio aims to achieve capital appreciation over a long period of time
by investing in a diversified portfolio. This scheme is suitable for investors with a highrisk appetite. The investment strategy would be to invest in scrips which are poised to get
a re-rating either because of change in business, potential fancy for a particular sector in
the coming years/months, business diversification leading to a better operating
performance, stocks in their early stages of an upturn or for those which are in sectors
currently ignored by the market.
27
Leo
Leo is aimed at retail customers and structured to provide medium to long-term capital
appreciation by investing in stocks across the market capitalization range. This scheme is
a mix of moderate and aggressive investment strategies. Its aim is to have a balanced
portfolio comprising selected investments from both Tortoise and Panther. Exposure to
Derivatives is taken within permissible regulatory limits.
The Religare Edge
We serve you with a diligent, transparent & process driven approach and ensure that your
money gets the care it deserves.
PMS brought to you by Religare with its solid reputation of an ethical and scientific
approach to financial management. While The Company offers you the services of a
Dedicated Relationship Manager who is at your service 24x7, The Company do not
depend on individual expertise alone. For you, this means lower risk, higher
dependability and unhindered continuity. Moreover, you are not limited by a particular
individual’s investment style.
The company ensures that a part of the broking at Religare Portfolio Management
Services is through external broking houses. This means that your portfolio is not
churned needlessly. Using more broking firms gives us access to a larger number of
reports and analysis, enabling us to make better, more informed decisions. Furthermore,
your portfolio is customized to suit your investment objectives.
Religare Portfolio Management Services gives you daily updates on your investment.
You can pinpoint where your money is being invested, 24x7, instead of waiting till the
end of the month to keep track.
No charge till you profit*.So sure are The company of religare’s approach to Portfolio
Management that The company do not charge you for Religare’s services, until your
investments start showing profit. With customized investment options Religare Portfolio
Management Services invites you to invest across five broad portfolios to suit your
investment needs
28
Institutional Broking Services
The mission of this division is to institutionalize and implement a process driven
approach to cater to the needs of leading corporate houses and institutions.
The division would like to be seen as a one-stop investment gateway and knowledge
repository for its clients servicing their unique and sophisticated needs.
The division is structured as a separate SBU and is housed out of Mumbai, manned by a
small yet fleet footed and extremely skilled group of top-notch professionals drawn from
the best in the industry.
The key highlights of Religare’s service platter are:

Highly skilled, dedicated dealing, research and sales teams

Dealing capabilities on the NSE, BSE and in the cash and derivatives segment

In-depth, detailed and insightful coverage of more than 60 stocks across diverse
sectors. The sectors covered are FMCG, Hotels, Media, Pharma, Auto, Cement,
Steel pipes, Logistics, Telecom, Construction and much more.
Company’s Current clientele includes some major domestic mutual funds, insurance
companies, banks and FII’s We provide innovative, integrated and best-fit solutions to
Religare’s corporate customers. It is Religare’s continuous endeavor to provide value
enhancement through diverse financial solutions on an on-going basis, through offerings
like corporate debt, private equity, IPO, ECB, FCCB, GDR/ADR etc.
Religare's Investment Banking Division offers the following services:
Corporate Finance
It focuses on finding partners for Religare’s clients, who not only help in adding value,
but also improve the future valuation of the organization. The company specializes in
structured financing and in providing advisory services related to financial planning,
modeling and advising on financial requirements.
29
Placement of Debt

Syndication of Domestic Loan / Foreign Currency Loan

Securitisation

Debt Swap & Loan Restructuring

Short Term Corporate Debt

Working Capital (Cash Credit & Short term Loan)

Capital Market Instruments

Overseas Acquisition
Placement of Equity (Private Equity)

Both for listed and unlisted companies
Merchant Banking

IPO/FPO/RIGHTS

Mergers & Acquisitions

Corporate Advisory Services

ADR/GDR/FCCB

Buy Back Of Shares
30
Service Offerings
Research Services
We at Religare believe in providing independent research for clients to make investment
decisions, with strict emphasis on self-regulation, avoiding possible conflict of interest in
objectivity.
Varied research reports are prepared on different categories of Equities like

Fundamental research

Technical research

Daily reports

Intraday trading tech calls

Intraday Derivative call

Directional F&O calls
31

Structured products

Index Arbitrage
– Arbitraging between Index (NIFTY) Futures and its constituents
(Underlying Stock Futures)

Volatility Trading
– Arbitrage between volatilities i.e. between implied volatility of
Options and forecasted volatility of underlying stock futures.
Financial Data
Historically, we conducted business as separate companies. Their business was carried on
by Fortis.
Securities Limited, Fortis Comdex Limited and Fortis Finvest Limited, some of which
were subsidiaries of certain of our Promoter Group companies. In order to integrate our
financial services operations under the Religare name, the Company acquired a
controlling stake in Fortis Securities Limited, Fortis Comdex Limited and Fortis Finvest
Limited and subsequently, acquired a 100% stake in these entities and in Religare
Insurance Broking Limited and Religare Venture Capital Private Limited.
These entities are now our Company’s subsidiaries. For further details regarding our
acquisitions and subsidiaries, see the sectionistory and Certain Corporate Matters”
We have set forth in this Draft Red Herring Prospectus the following financial
statements:
· Stand-alone financial statements of Religare Enterprises Limited for Fiscal 2003, 2004,
2005, 2006 and
2007 prepared in accordance with Indian GAAP and restated in accordance with SEBI
Guidelines;
32
· Stand-alone financial statements of Religare Securities Limited for Fiscal 2003, 2004,
2005, 2006 and
2007 prepared in accordance with Indian GAAP and restated in accordance with SEBI
Guidelines;
· Stand-alone financial statements of Religare Finvest Limited for Fiscal 2003, 2004,
2005, 2006 and
2007 prepared in accordance with Indian GAAP and restated in accordance with SEBI
Guidelines;
· Stand-alone financial statements of Religare Commodities Limited for Fiscal 2004,
2005, 2006 and
2007 prepared in accordance with Indian GAAP and restated in accordance with SEBI
Guidelines;
· Stand-alone financial statements of Religare Insurance Broking Limited for Fiscal 2006
and 2007,
Prepared in accordance with Indian GAAP and restated in accordance with SEBI
Guidelines.
Currency of Presentation
All references to “Rupees” or “Rs.” or “INR” are to Indian Rupees, the official currency
of the Republic of India. All references to “$”, “US$”, “USD”, “U.S. $”, “U.S. Dollar(s)”
or “U.S. Dollar(s)” are to United States Dollars, the official currency of the United States
of America.
This Draft Red Herring Prospectus contains translations of certain U.S. Dollar and other
currency amounts into Indian Rupees (and certain Indian Rupee amounts into U.S.
Dollars and other currency amounts).
These have been presented solely to comply with the requirements of Clause 6.9.7.1 of
the SEBI
33
Guidelines. These translations should not be construed as a representation that such
Indian Rupee or U.S.Dollar or other amounts could have been, or could be, converted
into Indian Rupees, at any particular rate, or at all. Unless otherwise specified, all
currency translations provided herein have been made based on the exchange rates
specified at www.oanda.com, a currency web site.
Industry and Market Data
Unless stated otherwise, industry data used throughout this Draft Red Herring Prospectus
has been obtained from industry publications. Industry publications generally state that
the information contained in those publications has been obtained from sources believed
to be reliable but that their accuracy and completeness are not guaranteed and their
reliability cannot be assured. Although the Company believes that the industry data used
in this Draft Red Herring Prospectus is reliable, it has not been verified by any
independent source.
Further, the extent to which the market data presented in this Draft Red Herring
Prospectus is meaningful depends on the reader’s familiarity with and understanding of
the methodologies used in compiling such data and methodologies and assumptions may
vary widely among different industry sources.
INTERNAL RISK FACTORS
1. There are certain criminal proceedings against one of our Promoters and
Directors.
Mr. Malvinder Mohan Singh, our Promoter and Director, is involved in a criminal
proceeding wherein a Mr. Tarsem Lal has claimed that Mr. Singh and others have
dishonestly received Rs. 0.40 million from him. The High Court of Punjab and Haryana
has stayed the proceedings before the concerned judicial authority. The defendants have
filed a petition in the High Court of Punjab and Haryana to quash the complaint. The
matter is currently pending. For further details, see the section
Titled “Outstanding Litigation and Material Developments” beginning on page 377.
34
2. We have been in the past and may in the future be barred by securities regulators
from dealing in the securities of certain Indian companies.
From time to time, we are subject to SEBI investigations or other regulatory scrutiny in
connection with our securities broking business. Typically, our equity broking business
involves trading on national stock exchanges. Our clients use our terminals to trade on
these stock exchanges and may engage in activities that result in price manipulation of
the securities in which they trade. While we believe that our business is conducted in
accordance with applicable regulations and market conduct norms, we cannot control
every trading activity of our clients apart from implementing the prescribed “Know Your
Client” norms. Share price manipulation by our clients may result in the SEBI or other
regulatory authority commencing investigations or imposing sanctions on us.
On January 17, 2007, the SEBI barred us along with five other day-traders from dealing
in the securities of Nissan Copper Limited (“Nissan Copper”). This prohibition has been
imposed on us as an interim measure pending SEBI investigations into allegations that
we and other entities may have Manipulated Nissan Copper’s share price following its
listing on the BSE and the NSE in December 2006. SEBI has not currently concluded that
we and other barred day-traders have manipulated Nissan Copper’s share price but the
role played by each of us in trading Nissan’s shares will be examined during the
investigation.
In the matter of Ind Tra Deco Limited, the SEBI observed a sharp increase in price and
trading volume in the scrip of Ind Tra Deco Limited and issued an interim order, dated
October 5, 2005, restraining RSL (along with other stockbrokers) and the promoters and
directors of Ind Tra Deco Limited from buying, selling or dealing in the securities of Ind
Tra Deco Limited, directly or indirectly, from October 5, 2005 until the receipt of further
orders. Subsequently, the SEBI confirmed its interim order on June 20, 2006.
The SEBI in the matters of IFSL Limited, Mega Corporation Limited, Karuna Cables
Limited and Millennium Cybertech Limited, issued orders restraining RSL, among other
stock brokers, from buying, selling or dealing in the shares of the companies mentioned
35
above, directly or indirectly, on behalf of certain promoters, directors and clients
specified by the SEBI from the date of the respective orders until the receipt of further
orders. SEBI is also investigating trading in the shares of Vijay Textile Limited, and has
directed RSL to explain its reasons for entering into transactions.
In these shares on behalf of certain clients, which allegedly resulted in artificial increases
in the Vijay Textiles’ share price? The SEBI has also directed RSL to provide reasons for
having undertaken certain transactions on behalf of its clients.
The BSE, the NSE and the NSCCL have, in the period from April 2004 till date, issued
various letters and show cause notices against RSL. An aggregate penalty/ fine of
approximately Rs. 3.15 million has been imposed upon RSL in these matters. In addition,
the National Securities Depositories Limited has levied penalties aggregating to Rs. 0.11
million on RSL.
We intend to cooperate fully with all SEBI, stock exchange and other regulatory
investigations and respond promptly to any notices. The outcome of any such
investigations cannot be predicted and could result in our being censured, fined,
deregistered, suspended or disqualified from dealing in the securities market, including as
an underwriter or an asset management company. Any such action would restrict our
trading activities and growth plans, severely impair our equity brokerage business, harm
our reputation and materially and adversely affect our business, financial condition and
results of operations. For details regarding other legal proceedings to which we are a
party, see the section titled “Outstanding Litigation and Material Developments”.
SUMMARY OF OUR BUSINESS, STRENGTHS AND STRATEGY
We are a financial services company in India, offering a wide range of financial products
and services targeted at retail investors, high net worth individuals and corporate and
institutional clients. We are promoted by the promotes of Ranbaxy Laboratories Limited.
We operate from six regional offices and 25 sub-regional offices and have a presence in
330 cities and towns controlling 979 locations managed by us and our Business
Associates all over India, as well as a representative office in London. While the majority
36
of our offices provide the full complement of our services, we also have dedicated offices
for our investment banking, institutional brokerage, portfolio management services and
priority client services.
Religare Enterprises Limited is the holding company for our subsidiaries. Our principal
subsidiaries include:
Retail Spectrum
covers equity brokerage services, commodity brokerage services, personal financial
services (financial planning for the retail investor, including the distribution of mutual
funds, savings products, life insurance and initial public offerings (“IPOs”) and personal
credit (personal loans services (“PLS”) and loans against shares (“LAS”). Historically,
the services offered in this spectrum have been the most substantial part of our business.
Our Retail Spectrum services in India are being offered through a network of 979
business locations spread across 330 cities and towns and also through our online
platform, www.religareonline.com,which is being developed as an integrated portal to
offer financial and other services. Our business locations include intermediaries, or our
“Business Associates”, who deliver a standard quality of service offering on the basis of a
pre-determined revenue sharing ratio for the business generated through them. Our Retail
Spectrum focuses on clients who keep less than Rs. 2.5 million on a continuing basis, in
the form of either equity trading account margin, mutual fund investment, portfolio
management investments or insurance premiums paid up.
We have also increased our local commodity locations (or “mandis”) to 42 as of March
31, 2007 in order to expand our retail commodity brokerage services.
Wealth Spectrum
Covers products and services which are geared to service high net worth individuals and
Provide wealth advisory services (on an asset allocation model), PMS (discretionary
equity investments), priority client equity services (non-discretionary equity trading
services), art initiatives (an art fund which we intend shortly to launch as an investment
diversification product) and international equity investment advisory services. We have
37
entered into an exclusive arrangement with Wall Street Electronics, Inc., a New York
broker dealer, to give Indian clients access through us to U.S. markets. Our Wealth
Spectrum focuses on clients who keep at least Rs. 2.5 million on a continuing basis or
more in the form of equity trading account margins, mutual fund investments, portfolio
management investment or insurance premiums paid up.
Institutional Spectrum
Covers products and services which cater under one service offering to corporate and
institutional clients, including domestic mutual funds, FIIs, banks and corporate
customers. The Institutional Spectrum provides services to the institutional investor
community through institutional brokerage and
RISK FACTOR
· This is a public issue of 11,364,152 Equity Shares for cash at a price of Rs. per Equity
Share including a share premium of Rs. per Equity Share aggregating to Rs. million. The
Issue would constitute 15% of the post Issue paid-up capital of our Company. Our
Company is exploring the possibility of a Pre-IPO Placement. If the Pre-IPO Placement is
completed, the number of Equity Shares issued pursuant to the Pre-IPO Placement, will
be reduced from the Issue, subject to a minimum Issue size of 10% of the post-Issue
share capital.
· In terms of Rule 19 (2) (b) of the SCRR, this being an issue for less than 25% of the
post–Issue capital, the Issue is being made through the 100% Book Building Process
wherein at least 60% of the Issue will be allocated on a proportionate basis to Qualified
Institutional Buyers (“QIBs”), out of which 5% shall be available for allocation on a
proportionate basis to Mutual Funds only.
The remainder shall be available for allocation on a proportionate basis to QIBs and
Mutual Funds, subject to valid Bids being received from them at or above the Issue Price.
If at least 60% of the Issue cannot be allocated to QIBs, then the entire application money
will be refunded forthwith.
38
Further, up to 10% of the Issue will be available for allocation on a proportionate basis to
Non-Institutional Bidders and up to 30% of the Issue will be available for allocation on a
proportionate basis to Retail Individual Bidders, subject to valid Bids being received at
or above the Issue Price.
· Under-subscription, if any, in the Non-Institutional Portion and Retail Individual
Portion would be met with spill over from other categories at the sole discretion of our
Company in consultation with the BRLMs. For more information, see the section titled
“Issue Procedure - Basis of Allotment” beginning on page 444.
· The average cost of acquisition of equity shares (on ‘first in first out’ basis) by each of
our Promoters, Mr. Malvinder Mohan Singh and Mr. Shivinder Mohan Singh is Rs.
17.33. For detail see the section titled “Capital Structure” beginning on page 24. The
average cost of acquisition of Equity Shares by our Promoters has been calculated by
taking the average of the amounts paid by them to acquire the Equity Shares currently
held by them.
· The net worth of our Company, on a consolidated basis, is Rs. 3,209.88 million as at
March 31, 2007, respectively, as per restated consolidated financial statements of our
Company under Indian GAAP in the section titled “Financial Statements” beginning on
page 132.
· The net asset value/book value per Equity Share of Rs. 10 each was Rs. 49.85 as at
March 31, 2007, as per restated consolidated financial statements of our Company
included in this Draft Red Herring Prospectus. For further information, see the section
titled “Capital Structure” beginning on page 24.
· Our Promoters, Directors and key managerial personnel are interested in our Company
to the extent of remuneration and the Equity Shares held by them or their relatives and
associates or held by the companies, firms and trusts in which they are interested as
directors, member, partner and/or trustee and to the extent of the benefits arising out of
such shareholding, if any, in our Company. For further details, see the sections titled
“Capital Structure”, “Our Promoters and Promoter Group” and “Our Management”
beginning on pages 24, 105 and 92, respectively.
39
· Other ventures promoted by our Promoters are interested to the extent of their
shareholding in our Company. For details, see the section titled “Capital Structure”
· Certain of our Promoter Group entities are engaged in similar businesses as ours,
resulting in a conflict of interest with respect to our business strategies. For further
details, see the sections titled “Risk Factors” and “Our Promoters and Promoter Group”
beginning on pages xii and 105, respectively.
· Except as disclosed in the section titled “Capital Structure” beginning on page 24, we
have not issued any Equity Shares for consideration other than cash.
Industry
Industry
:
Group :
ISIN No
:
Finance - General
Religare
INE621H01010
BSE
Code :
NSE
Code :
Market
Lot :
532915
RELIGARE
Book
Closure :
Market
Cap :
Face
1
Value :
11/08/2010
Rs. 6,558.77 Cr.
Rs. 10.00
Registered & Corporate Office
Registrar & Share Transfer Agent
D3, P3B, District Centre, Saket, New Delhi,
D3, P3B, District Centre, Saket,
Delhi - 110017
New Delhi, Delhi - 110017
Tel : +91 11 39125000
Tel : +91 11 39125000
Fax : +91 11 39126050
Fax : +91 11 39126050
Email : info@religare.in
Email : info@religare.in
Website: www.religare.in
40
CHAPTER-III
LITERATURE REVIEW
41
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
42
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
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
43
local premium and making smuggling less profitable. Ten tola bars are still the preferred
form of gold in India, accounting for 95% of imports.
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.
44
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.
45
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
“India’s 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 India’s 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.
46
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
47
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 decade”. 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.
48
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
49
Associations, Producers and Traders. Where the Association used to act as counter for the
trade.
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.
50
Of the party wishes to reverse the contract, he has to go to the same counter-party, which
may result o attract some charges.
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.
51
 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.
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.
52
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
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 doesn’t 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
53
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
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 1970’s, 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 1980’s 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.
54
 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.
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
55
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.
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.
56
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
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
57
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
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.
58
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,
 The OTC contracts are generally, not regulated by a regulatory authority and the
exchange’s 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
59
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
60
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
61
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 UK’s 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 UK’s consumption of metal, which required
the import of enormous tonnages from abroad. Merchant venture’s 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.
62
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
63
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.
64
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
65
Extractors' Association of India, Pulses Importers Association, Shetkari Sanghatana,
United Planters Association of India and India Pepper and Spice Trade Association.
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.
66
COMMODITIES
SYMBOLS
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
Polypropylene
(PP),
Polyethylene
(HDPE),
Guar Seed, Guargum, Gur, Mentha Oil,
Sugar M-30, Sugar S-30,
67
Multi-Commodity Exchange, MCX
COMMODITY
UNIT
OF
UNIT
OF YIELD/Re.
PRICE
TRADING
MOVEMENT
QUOTATION
YIELD/TIC
TRADING
or
TIC
SESSION
VALUE
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
10KG
OIL
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
68
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.
69
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
Exchange
NCDEX
NBOT
MCX
NMCE
ALL EXCHANGES
2010-11
1490
53014
2456
23842
129364
70
(Rs. In Crores)
2011-12
54011
51038
30695
7943
170720
NCDEX TRADING SYSTEM
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 let’s have a look at the format of the tickers for all the commodities
that are traded in NCDEX:
GLD100MUM
SLV100DEL
SYBGR1IND
SYOREFIND
RMSGR1JPR
RMOEXPJPR
RBDPLNKAK
CPOSTDKDL
CTMJ34BTD
CTLS06ABD
: “Gold”+“100% pure”+“Mumbai”
: “Silver”+“100% pure”+“Delhi”
: “Soy Bean”+“GR1”+“Indore”
: “Soy Oil”+“Refined”+“Indore”
: “Rape/Mustard”+“GR1”+“Jaipur”
: “Rape/Mustard Oil”+“Expeller”+“Jaipur”
: “RBD”+“Palm Olein”+“Kakinada”
: “Crude Palm Oil”+“STD”+“Kandla”
: “Cotton Medium Staple Length”+“J-34”+“Bhatinda”
: “Cotton Long Staple Length”+“S-06”+“Ahmedabad”
71
“INSTRUMENT TYPE” in NCDEX is to denote whether the ticker is a futures contract
or a spot price being disseminated or an options contract
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”
72
Cotton – for buying futures of say 44 bales, you will need to enter “Quantity” as 44 and
the price in “Rs/Quintal”
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.
73
3L Order (3L) – Opposite positions taken in two different months and either buy/sell
position taken in other month. E.g. buying March contract and selling April contract and
buying in May contract. Hence in this case one position in either of the contracts is not
arbitraged.
TIME VALIDITY OF TRADES
Day-Valid only for that day.
Good Till Date (GTD) – Valid to the date specified (for specified no. of days), Max 7
days.
Good Till Canceled (GTC) – Valid till cancelled, Max 7 days.
SETTLEMENT PROCESS IN COMMODITIES FUTURES
In this Education Series, we shall have a look into how settlement is done in case
of commodities futures. The settlement procedure is more or less same as in case of stock
futures, nevertheless, there are some key differences in the procedure by the virtue of the
underlying asset, which is a commodity.
Now, we will look into key two key issues which affect the settlement process.
First being whether the underlying asset of the future is deliverable (this depends on
exchange) and the other whether the underlying asset is in a physical form or only in
electronic form.
Table.1: Comparison between stock futures and commodity futures.
Instrument
Deliverable
Electronic Form
Physical From
Stock Futures
No*
Yes
No
Commodity Futures
Yes
Yes
Yes
74
In many developed financial markets like Japan, US, UK, Euro land, stock futures can
account to delivery.
From Table.1 it is clear that the stock futures in India do not end up in delivery,
implying a person who has taken long position cannot ask for delivery of real stock after
the expiry of the contract even if he is willing for taking delivery.
Again since, the delivery is not possible, an investor cannot settle his short
position with the real stock; neither can he take delivery of stocks if he has taken long
position. He has to mark-to-market at the end of future contract settlement.
But in case of commodity futures, delivery of underlying commodity is possible.
The delivery can be taken both in the electronic form and physical form.
In case of electronic form the delivery quantity is transferred to/from the
investor’s DP account.
In case of physical form, the delivery quantity is transferred to/from the stocking
point.
Now, we arrive at an important point, when and how are settlements done?
Daily Settlements are done on mark-to-market basis.
And at the expiry of the contract Final Settlement is done.
Daily Mark to Market (MTM) Settlement is done for each Client:
At the end of every trading day, for all the trades, this is done till the date of the Contract
expiry.
A daily settlement is done to take care of DAILY PRICE FLUCTUATION for all trades.
75
Final Settlement will be done for each Client:
This on expiry of the Contract will handle the FINAL obligation of the Member for all
trades in that contract.
How is Daily MTM done?
Calculating the daily profits and losses for the client/investor does the Daily Settlement.
Profits and Losses are determined on the positions for client/investor, for each client and
for each contract
All trades are marked to the market at the Daily Settlement Price which is equal to
Closing price for the day.
A total Mark to Market Profit or Loss is calculated for the every client/investor.
Table.2 Example of Daily MTM
Branch 1
Branch 2
Client 1
Contract A
Client 2
Contract B
Contract A
Client 3
Contract A
Contract B
Buy 400@50 Sell 200@150 Sell 700@48 Buy 200@63 Buy 150@160
Sell 200@55 Sell 150@190 Buy 500@40
----
Sell 150@170
Closing rate
400 X 8 =
200 X 30 =
700 X 10 =
A – 58
3200
(6000)
(7000)
200 X 5 =
3000
B – 180
200 X 3 =
150 X 10 =
500 X 18=
(1000)
150 X 10 =
(600)
1500
9000
PROFIT
PROFIT
LOSS
PROFIT
LOSS
PROFIT
/(LOSS)
2600
(4500)
2000
(1000)
1500
TOTAL
MTM
LOSS (1900)
150 X 20 =
(1500)
PROFIT 2500
76
Settlements Procedure - Daily MTM Settlement
Exchange Clearinghouse
(NCDEX/MCX)
Download of Margin
and MTM files at EOD
(End Of the Day)
TWS*
Margins
Initial
Margin Call
Any special
Margin
Daily MTM
settlement
(Collection/Refund
))))on T+1)&
Daily Profit/Loss
for
Positions
closed out
MTM of Open
positions
KARVY
Commodities
Broking Pvt. Ltd.
“Clearing
Bank A/c”
at Closing
Price
Funds transaction flow
BRANCH 1
Client 1
Makes arrangement for funds
With the Head Office
KCBPL BANK
Client 1,
2
Banks credits the funds
into KCBPL bank a/c
BRANCH 2
*TWS – Trading Work Station
Chart 1: Procedure for Daily MTM
77
Exchange
Clearing
House
(NCDEX/
MCX)
When is Daily MTM Settlement done?
The information on MTM amount (paid or received) by the Broking Member
(KCBPL) is given thru the Extranet at the end of the day, same information is passed on
to the Broking Member (KCBPL) branches.
Actual payment and receipt of funds will be made by the Client on the next
trading day i.e. T+1. (‘T’ being the trade date)
How does the Transfer of funds happen?
Payment will be done through a designated Clearing bank of the Exchange.
The Broking Member (KCBPL) makes arrangement for funds in his Settlement A/c with
the bank.
The Clearing Corporation (NSCCL) will send instruction to the Bank for
debiting/crediting the Broking Member (KCBPL) account.
What are the other payments to be made?
Besides the MTM, the Broking Member (KCBPL) will make Daily Margin
payments.
Margin files will be downloaded on the Extranet
Broking Member (KCBPL) arranges for funds in the Settlement A/c
The Clearing Corporation debits the funds on the next day after the trading date.
What happens in case of failure?
If the Broking Member (KCBPL) fails to make the payment of MTM or Margin
amount, trading terminal is disabled immediately.
Trading will commence on deposit of funds by the Broking Member (KCBPL).
Where is the information on Daily Settlement available?
All information pertaining to Settlements is available on the Broking Member
(KCBPL) Extranet.
This is available in specific folders for the Broking Member (KCBPL).
78
How do I access the Extranet?
Thru the VSAT / Leased Lines connectivity using FTP protocol
Login using Trading member Id and password during non-trading hours. (Here Trading
Member is KCBPL)
Now let’s have a brief look at the sequence of Events.
Opening new positions and
Closing of open positions by
Member
During the period of contract till
date of expiry.
Calculated at the end of every
Trading Day, Payments on T+1.
Daily
MTM Settlement and Margins
Determination of positions for
each Member
On the Date of expiry after the
trading hours.
Final Settlement of all
open positions
As per settlement calendar for each
contract.
Chart.2 Settlements - Sequence of events
From Chart.2 the last event in the sequence of events is the “Final Settlement” of
all the open positions.
“The Settlement done for Open Buy and Sell positions on the Contract Expiry
Date is called Final Settlement.”
By the virtue of commodities futures being deliverable, both in electronic form
(DP A/c) and in physical form, the final settlement in case of commodities futures varies
from stock futures.
79
The futures settlement in case of commodities futures is done in the following ways:
Cash settlement: Most of the open positions end up in cash settlement at the
end/expiry of a contract. In fact about 99% of the positions end up in cash settlement.
Electronic Form: Some positions end up in delivery, the amount /volume of a
commodity that a client marks for delivery is transferred into the clients DP A/c.
Physical Form: Very less, almost negligible delivery happens in the physical
form. (About 0.1-0.5% of total open positions)
How final positions are determined?
Broking Member A
Client 1
Broking Member B
Client 2
Client 3
Contract Y
Day 1
Contract
X
400 S
Contract
Y
700 B
Contract
X
400 S
200 B
Day 2
-
400 S
400 B
200 B
Date of
Expiry
400 S
300 B
-
400 B
Contract X 400 S
Contract Y 300 B
500 S
500 S
Contract Y
500- 400 = 100S
Can actual delivery of the commodity be done on Expiry?
A Broking Member (KCBPL) can give and take delivery of commodities for an
investor/client or on proprietary trades done, by completing the Delivery formalities and
giving delivery information to the Exchange
What are procedures required before Delivery?
Opening a Clearing Member (KCBPL) Pool account for the purpose of
settlements.
Beneficiary Demat account for own transactions.
Opening of Client’s Demat account with the empanelled DP.
80
How is the delivery information processed?
The information submitted by the Members is matched at NCDEX at the end of the day
All trades, which are matched, are locked for delivery
A Delivery Request number is generated for all delivery information submitted
Settlements – Deliveries
Exchange
Clearinghouse
Workflow
Download of KCBPL net positions
on expiry
KCBPL
Delivery
Information
Counter party
Information
Matching of
Information
Submission of
Delivery
information
and matching of
Matched
Information
Information
Direct delivery
Between
Buyers and Sellers
How does the matching of delivery information take place?
Validation of delivery information
On Client’s Net Open Position
On Delivery lot for commodity
Excess quantity is rejected and is cash settled.
Matching limited to the total capacity at the Warehouse
Matching is done for the deliveries based on
Commodity
Location
81
Delivery thru
Depository
SETTLEMENT CALENDAR
Commodity
Physical Settlement schedule for
Pay-in/Pay-outs
Soya bean
T+7
Refined Soya bean oil
T +7
Rapeseed Mustard Seed
T +7
Rapeseed Mustard Seed Oil
T +7
RBD Palmolein
T +7
PLATINUM
T +7
Medium Staple Cotton
T +10
Long Staple Cotton
T +10
Gold
T +2
Silver
T +4
Settlement Pay-in
Pay-in will take place on date as specified in Settlement Calendar.
Commodities:
Seller ensures Demat of commodities prior to pay-in.
Instruction to DP by seller to move commodities to KCBPL Pool A/c.
Pay-in of commodities on Settlement Date thru KCBPL pool A/c.
Funds:
Pay-in of funds – Thru the Clearing bank of the Member on the Pay-in day.
Settlement Pay-out
Pay-out will take place on date as specified in Settlement Calendar.
Commodities
Credit given into the Buyer member KCBPL Pool A/c.
Instruction by KCBPL to transfer from pool A/c to buyer client’s Demat account.
Subsequent Remat of commodities and physical movement handled by buyer.
Fun
82
ADVANTAGES OF TRADING/INVESTING IN COMMODITIES
Benefits to the Industry, Exporters and Importers:
1. Hedging the price risk associated with future contractual commitments. For
instance, let’s take a case of a Soy Bean exporter whose export commitment is
one month now (present market price is Rs.1700 per quintal). As per his analyst’s
recommendations, the prices are expected to rise (to an extant of Rs.1800 per
quintal) after one month, when he has committed for export. Now let’s assume
that his export commitment is 10000 quintals.
Time
Market Price
Today
Export
Commitment
Nil
After one month
10000
1800
1700
Instance 1: With no hedging.
Sale Price: Rs. 1850.
Cost Price: Rs. 1800.
So, net profit/ quintal = Rs.50.
Net Profit of deal=Rs.50x10000=Rs.5, 00,000.
Instance 2: With Hedging:
Sale Price: Rs.1850.
Cost Price: Rs.1700. (where in the exporter goes long (buys) today)
So, net profit/ quintal=Rs.150.
Net Profit of deal=Rs.150x10000=15, 00,000.
An increase of 200% net profit.
83
2. Efficient price discovery:
With the starting of national wide commodities markets, regional price
differences in commodities prices are controlled. Hence, now the cost of a commodity is
almost same throughout the country. Prior to this there was lot of price differences of
commodities at various places. Example, the price of Gold in Hyderabad was different
from price of Gold in Mumbai, but now this disparity is curbed to an extant, though some
price still exists between the exchanges.
3. Benefits to the Banks:
Now the producer and consumer of the commodity can go for ‘Hedging’ their
positions hence, the loaner of funds (Bank) is clear of the receivables. Thus, ‘Hedged’
positions of producers and consumers would reduce the risk of default faced by the
banks.
Lending for agricultural sector would go up with greater transparency in pricing
and storage.
4. Benefits to the clients:
The commodity prices move with strong broad based fundamentals. Hence, the
commodity prices do not move in an erratic fashion.
The price movements are also due to Global price movements of a particular commodity
hence, things like insider trading, and price manipulations do not exist in commodities
markets.
A commodity is always tradable. And also never a commodity price can be ‘zero’. In
case of stocks, a company may be de-listed, hence, it may go non tradable or the virtual
price being ‘zero’
84
FACTORS EFFECTING COMMODITIES MARKET
Before starting this section let’s divide commodities into different classes:
Precious Metals: Gold, Silver.
Base Metals: Steel, Aluminum*, High Grade Copper, Nickel, Zinc, Tin.
Agricultural:
Grains: Soy, Soy Oil, Rice, and Rice Oil*.
Softs: Cotton, Coffee*, Sugar.
Energy: Crude Oil, Natural Gas. **
Factors affecting the prices of commodities:
The factors affecting the prices of various commodities can be divided into two:
Generic Factors:
 These are the factors affecting all the commodity prices in general.
 Demand and Supply.
 Indian Rupee Vs other currencies.
 Export/Import parity.
 Political environment.
Specific Factors:
These are the factors affecting a particular commodity or a class of commodities.
Precious Metals:
 Stock market dynamics.
 Geo-political tensions.
 US dollar Vs other major currencies.
 Global macroeconomics.
 Miner’s reports.
Agricultural:
 Climatic conditions.
 Crop production.
 Government regulations.
 Export rejection/orders.
85
Softs:
 Climatic conditions.
 Crop production.
 Import duty.
Industrial Metals:
 Industrial demand.
 Substitute metals supply.
 Government regulations.
 Infrastructure projects.
Energy:
 Production.
 New excavations.
 Geo-political tensions.
 New projects.
86
CHAPTER-IV
DATA ANALYSES
AND
INTERPRETATION
87
Multi Commodities Exchange of India Ltd (MCX) Copper Price
Date
Open(Rs.) High(Rs.) Low(Rs.) Close(Rs.)
06/02/2013 452.00
05/02/2013 453.65
04/02/2013 452.95
02/02/2013 452.70
01/02/2013 448.90
31/01/2013 449.90
30/01/2013 448.85
29/01/2013 447.75
28/01/2013 446.80
25/01/2013 449.50
24/01/2013 448.50
23/01/2013 449.90
22/01/2013 447.70
21/01/2013 448.10
19/01/2013 448.90
18/01/2013 448.10
17/01/2013 447.90
16/01/2013 451.95
15/01/2013 449.95
14/01/2013 456.05
12/01/2013 454.40
11/01/2013 456.65
10/01/2013 456.15
09/01/2013 456.95
08/01/2013 459.70
07/01/2013 458.10
05/01/2013 458.90
04/01/2013 456.10
03/01/2013 460.35
02/01/2013 452.55
01/01/2013 451.05
31/12/2012 449.25
29/12/2012 447.45
28/12/2012 449.55
27/12/2012 447.15
452.55
453.80
456.00
453.00
453.40
453.70
451.50
448.50
449.55
450.40
449.20
451.00
450.20
448.75
448.90
450.70
450.05
452.00
451.05
456.40
454.80
457.15
459.45
459.20
460.00
459.00
459.25
459.80
462.20
459.90
451.70
451.70
447.45
449.95
449.30
449.15
451.70
451.55
452.60
448.30
448.50
448.05
445.40
446.30
445.00
447.00
448.10
447.55
446.50
448.90
447.80
445.60
448.15
447.50
449.65
454.25
454.05
455.60
455.50
456.30
456.30
458.55
455.50
457.00
452.55
450.65
448.20
447.45
446.60
447.15
449.45
451.95
454.35
452.95
453.20
449.10
450.85
447.70
448.30
446.60
448.25
448.55
449.75
446.65
448.90
448.60
449.15
448.40
450.80
449.95
454.55
454.30
457.25
455.60
457.25
458.65
458.95
458.40
457.30
457.65
451.40
451.45
447.45
447.45
448.70
88
TQ
188000
103000
342000
60000
395000
240000
291000
175000
123000
155000
80000
180000
58000
53000
2000
97000
217000
107000
137000
153000
13000
135000
198000
223000
154000
111000
18000
190000
335000
340000
31000
84000
0
41000
28000
TV(Rs
Lacs)
846.61
466.35
1,552.84
271.71
1,779.88
1,082.41
1,310.11
781.95
550.93
693.56
358.51
810.88
260.28
237.12
8.98
435.70
971.06
481.41
615.36
692.38
59.08
614.91
905.06
1,019.13
705.83
507.85
82.60
870.65
1,542.52
1,553.12
139.85
377.92
0.00
183.67
125.61
OI(In
Lots)
416
411
419
302
285
241
247
307
357
393
402
408
334
345
346
345
342
340
332
330
304
299
285
291
260
240
224
222
206
151
131
114
105
105
109
26/12/2012 444.90
24/12/2012 446.95
22/12/2012 446.45
21/12/2012 445.05
20/12/2012 446.15
19/12/2012 453.70
18/12/2012 456.20
17/12/2012 454.70
15/12/2012 453.50
14/12/2012 455.00
13/12/2012 467.25
12/12/2012 453.70
448.00
447.40
446.45
447.35
447.50
453.80
456.50
456.70
453.60
455.00
467.25
456.00
444.30
443.85
446.45
443.25
440.75
447.00
454.00
452.90
453.50
453.30
451.35
452.35
446.60
444.50
446.45
447.10
441.45
447.55
454.50
453.85
453.55
453.90
451.95
454.35
78000
104000
1000
78000
169000
103000
40000
43000
3000
27000
45000
48000
347.55
462.72
4.46
347.26
749.97
463.06
182.10
195.63
13.61
122.61
203.83
218.12
109
119
121
121
124
113
82
77
76
78
77
77
FUTURE MARKET
BUYER
SELLER
05/02/2013(Buying)
452.00
452.55
05/02/2013(Cl., period)
449.15
449.45
Profit
2.85
Loss
3.10
Loss 500 x2.85=1425, Profit 500 x3.10=1550.
Because buyer future price will increase so, he can get profit. Seller future price also
increase so, profit decrease, Incase seller future will decrease, and he can get profit. The
89
closing price of Copper Metal at the end of the contract period is 416.00 and this is
considered as settlement price.
Multi Commodities Exchange of India Ltd (MCX) Gold Price
Open(Rs.) High(Rs.) Low(Rs.) Close(Rs.)
05/02/2013 31,579.00
04/02/2013 31,432.00
02/02/2013 31,481.00
01/02/2013 31,551.00
31/01/2013 31,630.00
30/01/2013 31,655.00
29/01/2013 31,713.00
28/01/2013 31,714.00
25/01/2013 31,810.00
24/01/2013 32,059.00
23/01/2013 32,174.00
22/01/2013 32,800.00
21/01/2013 32,124.00
19/01/2013 32,038.00
18/01/2013 32,115.00
17/01/2013 32,125.00
16/01/2013 32,320.00
15/01/2013 32,280.00
14/01/2013 32,279.00
12/01/2013 32,234.00
11/01/2013 32,291.00
10/01/2013 32,190.00
09/01/2013 32,229.00
08/01/2013 32,270.00
07/01/2013 32,325.00
05/01/2013 32,270.00
04/01/2013 32,150.00
03/01/2013 32,529.00
02/01/2013 32,050.00
01/01/2013 32,067.00
31/12/2012 31,917.00
29/12/2012 31,916.00
31,667.00
31,626.00
31,484.00
31,648.00
31,708.00
31,683.00
31,713.00
31,739.00
31,825.00
32,059.00
32,190.00
32,800.00
32,214.00
32,072.00
32,149.00
32,190.00
32,320.00
32,298.00
32,280.00
32,234.00
32,360.00
32,360.00
32,300.00
32,273.00
32,379.00
32,270.00
32,212.00
32,529.00
32,468.00
32,131.00
32,103.00
31,918.00
31,430.00
31,345.00
31,466.00
31,438.00
31,425.00
31,410.00
31,583.00
31,646.00
31,664.00
31,816.00
32,036.00
32,116.00
32,066.00
32,038.00
32,057.00
31,990.00
32,263.00
32,266.00
32,160.00
32,234.00
32,181.00
32,172.00
32,181.00
32,220.00
32,200.00
32,270.00
32,050.00
32,264.00
32,050.00
32,067.00
31,917.00
31,895.00
90
31,485.00
31,556.00
31,475.00
31,492.00
31,460.00
31,652.00
31,658.00
31,678.00
31,726.00
31,866.00
32,082.00
32,226.00
32,135.00
32,060.00
32,093.00
32,182.00
32,291.00
32,285.00
32,202.00
32,234.00
32,237.00
32,345.00
32,213.00
32,246.00
32,309.00
32,270.00
32,151.00
32,417.00
32,414.00
32,098.00
32,029.00
31,909.00
TQ
64000
29000
4000
36000
69000
111000
33000
15000
23000
37000
17000
9000
34000
4000
12000
62000
5000
7000
16000
1000
25000
28000
18000
6000
8000
1000
33000
8000
53000
7000
32000
5000
TV(Rs
Lacs)
2,025.02
913.09
125.90
1,134.95
2,178.31
3,507.84
1,044.57
475.35
730.21
1,182.47
545.74
290.03
1,092.17
128.24
385.17
1,989.57
161.46
226.00
515.48
32.23
807.36
903.13
580.28
193.47
258.48
32.27
1,060.68
259.33
1,713.79
224.68
1,024.07
159.55
OI(In
Lots)
218
192
187
186
183
169
126
121
123
123
118
128
129
137
137
135
110
110
109
107
107
104
90
82
84
79
79
76
74
80
75
77
28/12/2012 31,950.00
27/12/2012 31,777.00
26/12/2012 31,760.00
24/12/2012 32,041.00
22/12/2012 32,005.00
21/12/2012 31,714.00
20/12/2012 32,077.00
19/12/2012 32,086.00
18/12/2012 32,550.00
17/12/2012 32,450.00
15/12/2012 32,346.00
14/12/2012 32,348.00
13/12/2012 32,319.00
12/12/2012 32,586.00
11/12/2012 32,500.00
10/12/2012 32,499.00
08/12/2012 32,356.00
07/12/2012 32,360.00
31,950.00
31,877.00
31,890.00
32,041.00
32,011.00
31,992.00
32,077.00
32,111.00
32,674.00
32,500.00
32,351.00
32,361.00
32,361.00
32,586.00
32,543.00
32,637.00
32,356.00
32,360.00
31,832.00
31,777.00
31,760.00
31,943.00
32,005.00
31,714.00
31,552.00
31,910.00
32,275.00
32,443.00
32,346.00
32,288.00
32,274.00
32,586.00
32,428.00
32,499.00
32,356.00
32,351.00
91
31,873.00
31,816.00
31,861.00
31,968.00
32,008.00
31,946.00
31,696.00
31,981.00
32,445.00
32,468.00
32,349.00
32,305.00
32,314.00
32,586.00
32,516.00
32,563.00
32,356.00
32,356.00
22000
9000
13000
4000
2000
22000
14000
38000
17000
4000
2000
30000
8000
1000
11000
5000
0
2000
701.85
286.34
414.10
127.87
64.02
701.28
444.81
1,217.23
552.56
129.87
64.70
969.04
258.51
32.59
357.66
162.82
0.00
64.71
75
62
60
60
58
58
58
55
35
33
30
30
17
15
14
7
7
7
FUTURE MARKET
BUYER
SELLER
05/02/2013(Buying)
31579.00
31667.00
05/02/2013(Cl., period)
31430.00
31485.00
Profit
149.00
Loss
182.00
Loss 500 x149.00=74500, Profit 500 x182.00=91000.
Because buyer future price will increase so, he can get profit. Seller future price also
increase so, profit decrease, Incase seller future will decrease, and he can get profit. The
closing price of Gold Metal at the end of the contract period is 16500.00 and this is
considered as settlement price.
92
Multi Commodities Exchange of India Ltd (MCX) Silver Price
Date
Open(Rs.) High(Rs.) Low(Rs.) Close(Rs.)
06/02/2013 60,875.00
05/02/2013 61,080.00
04/02/2013 61,005.00
02/02/2013 61,100.00
01/02/2013 60,670.00
31/01/2013 61,601.00
30/01/2013 60,858.00
29/01/2013 60,540.00
28/01/2013 60,989.00
25/01/2013 61,544.00
24/01/2013 62,201.00
23/01/2013 62,412.00
22/01/2013 62,045.00
21/01/2013 62,100.00
19/01/2013 61,910.00
18/01/2013 61,819.00
17/01/2013 62,069.00
16/01/2013 62,154.00
15/01/2013 61,345.00
14/01/2013 61,102.00
12/01/2013 60,872.00
11/01/2013 61,145.00
10/01/2013 60,598.00
09/01/2013 60,930.00
08/01/2013 60,870.00
07/01/2013 60,980.00
05/01/2013 60,575.00
04/01/2013 60,220.00
03/01/2013 61,898.00
02/01/2013 60,786.00
01/01/2013 60,448.00
31/12/2012 60,550.00
29/12/2012 60,290.00
28/12/2012 60,504.00
27/12/2012 60,100.00
26/12/2012 60,249.00
61,080.00
61,415.00
61,350.00
61,110.00
61,622.00
61,736.00
61,798.00
60,732.00
61,136.00
61,548.00
62,201.00
62,540.00
62,301.00
62,232.00
61,981.00
62,147.00
62,300.00
62,356.00
62,061.00
61,585.00
60,872.00
61,182.00
61,310.00
60,937.00
61,151.00
60,992.00
60,650.00
60,270.00
62,030.00
62,164.00
60,603.00
60,580.00
60,340.00
60,524.00
61,000.00
60,450.00
60,820.00
60,800.00
60,650.00
61,100.00
60,524.00
60,350.00
60,461.00
60,540.00
60,480.00
60,900.00
61,580.00
62,200.00
61,911.00
62,025.00
61,910.00
61,819.00
61,201.00
61,800.00
61,345.00
60,922.00
60,840.00
60,530.00
60,553.00
60,405.00
60,750.00
60,531.00
60,575.00
59,543.00
61,280.00
60,786.00
60,448.00
60,250.00
60,290.00
60,105.00
59,900.00
59,946.00
93
60,959.00
60,986.00
61,273.00
61,105.00
60,943.00
60,542.00
61,724.00
60,637.00
60,698.00
60,990.00
61,646.00
62,355.00
62,213.00
62,153.00
61,946.00
61,977.00
62,154.00
62,287.00
62,011.00
61,376.00
60,851.00
60,628.00
61,188.00
60,527.00
61,001.00
60,802.00
60,613.00
60,105.00
61,505.00
61,796.00
60,530.00
60,443.00
60,315.00
60,200.00
60,833.00
60,052.00
TQ
0
1000
1000
0
2000
3000
1000
1000
2000
1000
1000
1000
0
0
0
0
1000
1000
2000
1000
0
1000
1000
1000
1000
1000
0
2000
1000
2000
0
0
0
1000
1000
1000
TV(Rs
Lacs)
274.22
476.73
841.48
36.66
1,173.12
1,586.51
884.05
327.48
1,002.69
697.49
686.20
823.69
261.08
167.81
37.17
185.93
833.43
540.35
926.90
496.54
54.77
657.53
639.42
400.77
512.24
383.25
36.37
1,419.86
573.54
1,072.91
108.95
181.33
36.19
687.27
706.56
523.65
OI(In
Lots)
87
87
84
83
83
66
83
75
75
85
95
111
110
108
108
106
107
120
113
116
111
110
121
110
115
111
109
109
78
82
72
71
71
70
93
78
24/12/2012 60,699.00
22/12/2012 60,640.00
21/12/2012 60,288.00
20/12/2012 62,462.00
19/12/2012 63,206.00
18/12/2012 64,630.00
17/12/2012 64,199.00
15/12/2012 64,094.00
14/12/2012 64,653.00
13/12/2012 64,950.00
12/12/2012 65,195.00
11/12/2012 65,314.00
10/12/2012 65,750.00
08/12/2012 65,330.00
60,699.00
60,750.00
61,000.00
62,580.00
63,400.00
64,756.00
64,371.00
64,211.00
64,653.00
65,093.00
65,797.00
65,372.00
65,795.00
65,408.00
60,319.00
60,640.00
60,013.00
59,961.00
62,295.00
63,315.00
64,101.00
63,909.00
64,100.00
64,327.00
65,195.00
64,976.00
65,750.00
65,330.00
94
60,490.00
60,709.00
60,483.00
60,149.00
62,459.00
63,441.00
64,276.00
64,078.00
64,353.00
64,611.00
65,539.00
65,148.00
65,767.00
65,363.00
0
0
0
2000
1000
1000
0
0
0
1000
0
0
0
0
108.88
127.49
271.88
1,062.45
622.36
594.38
308.31
211.46
231.85
368.97
314.08
273.83
59.19
58.83
79
80
74
78
60
58
54
50
46
41
40
35
35
34
FUTURE MARKET
BUYER
SELLER
05/02/2013(Buying)
60875.00
61080.00
05/02/2013(Cl., period)
60820.00
60959.00
Profit
55.00
Loss
121.00
Loss 500 x55.00=25500, Profit 500 x121.00=60500.
Because buyer future price will increase so, he can get profit. Seller future price also
increase so, profit decrease, Incase seller future will decrease, and he can get profit. The
closing price of Silver Metal at the end of the contract period is 274.22 and this is
considered as settlement price.
95
CHAPTER-V
FINDINGS
SUGGESSIONS
CONCLUSIONS
 BIBLIOGRAPHY
96
FINDINGS


Due to the increasing of inflation in the country the Gold , copper and silver got
very much importance and it was increased and the commodities market.
It shown that the more of the given share is known as commodities i.e. 67% and
other got very less as compared to commodities.

The value of the commodity market increased because of increasing in the values
of the commodities and also the availability is also not easy because it is a
prestigious metal.


Due to the increase in the purchase of products got very much importance for
commodity and it was increased
Majority of the Investor’s trade in the Commodities Market but few Done & Left
due to Losses & Settlement Problems.

Investors purchased commodities from Religare Enterprises Ltd because of the
company’s policies and information availability.

Due to the increase in the population in the country the commodity products got
very much importance and it was increased and also increased interest in the
purchase of oil and oil seeds..


Most of the investors feel that commodity trading id very good and remaining
says good for investing
Trading in Commodities Futures is More Beneficial & More Leveraging got more
percentage.

Due to the increase in the services in the country the Services they prefer from a
Financial Advisory Institution is telephone.

Due to the increase in the population in the country the general market got very
much importance and it was increased and also increased interest in the purchase
of Jewelers.

Most of the investors preferring Religare Enterprises Ltd for investing in the
commodity market.
97
CONCLUSION
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.
Commodity includes all kinds of goods. FCRA defines “goods” as “every kind of
movable property other than actionable claims, money and securities”. Futures
trading are organized in such goods or commodities as are permitted by the Central
Government. Firstly, the price movements are more predictable, purely based on
demand and supply of that commodity, unlike in other markets where price
manipulations are very much possible, hence the investor is fixed.
To that extent market price risk is reduced. Secondly, the markets are working
virtually round the clock,(NCDEX works from 10:00 AM to 4:00 PM and next
session from 7:00 PM to 11:00PM)so any drastic news is digested. In case of other
markets this provision is not there, just think of September 11th episode, next day
equity markets opened far down and the Investors are left hanging. The future
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 formers ,importers, exporters, traders and
large scale consumer. Religare Enterprises Ltd is another venture of the prestigious
Religare Enterprises Ltd. With our well establish presence in the multifarious facets
of the modern financial services industry from Stock Broking to registry services.
98
SUGGESTIONS
 Commodity market presently deals with FUTURES contract and most probably
OPTIONS are provided, it would be convenient to the investors.
 As the fund managers take decisions with mutual fund investment, it would be
another option for him to invest through mutual funds in commodity market.
 If Government takes this commodity market into awareness for the farmers, it
would be better for them to take their own decisions for commodity which they
want to trade.
 As there is an option for the trader to take the physical delivery, it would be better
if the Government cuts the tax rate for the physical delivery of goods.
 Avoid buying shares of the company which are not traded on your stock
exchange.
 Investor must show interest in steady and fast growth shares only.
 Avoid buying Turn rounds (making loss continuously), Cyclical (cycles of good
and bad performance), Dog shares (very inactive or passive).
 Avoid companies with low PIE ratio relative to the market as always.
 If the investor is confident of EPS moving up and expects PIE to increase as well
stick to the shares and be patients.
99
BIBLIOGRAPHY
1. Donald E. Fisher, Ronald J. Jordan, Securities Analysis and
Portfolio Management,, 1999, sixth edition, futures and options
Page no: 404-435,489,493. Prentice hall of India
2. Sharpe W.F. Alexander J. Bailey, investments, 1998, 5th edition, Derivatives,
Prentice Hall of India,.
3. SCHAUM"S out lines, investments,2nd edition, new chapters on future
And options.
Religare finapolies, Monthly editions, Broachers of Religare trade.
WEBSITES:
RELIGARE LEARNING CENTRE
www.icrier.org/pdf/Working%20Paper%20249.pdf
www.icrier.org/pdf/Working%20Paper%20249.pdf
www.iimahd.ernet.in/~jrvarma/papers/vik23-1.pdf
www.religare.com
www.religarecommodities.com
www.ncdex.com
www.mcx.com
100