FINAL PROJECT REPORT ON
COMMODITIES
A NEW INVESTMENT AVENUE PREPARED BY
Chandra Prakash 06BS 0876
Manish Rathi 06BS 1729
Prem Kumar 06BS 2402
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FINAL PROJECT REPORT
COMMODITIES
A NEW INVESTMENT AVENUE A Report submitted in partial fulfillment of the requirements of MBA Program of ICFAI Business School
DISTRIBUTION LIST: Faculty guide: Prof. C.V.A. Prasad Rao Prof. Kaushik Bhattacharjee
PREPARED BY: Chandra Prakash 06BS 0876
Manish Rathi 06BS 1729
Company guide:
Mr. Suman Kumar Adepu Branch head, UTI securities, Ameerpet
Prem Kumar 06BS 2402
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TABLE OF CONTENTS Executive Summary
6
Commodities Demystified
8
Definition and Basics
8
Characteristics
8
Spot versus futures contract
9
Difference between commodity and financial derivatives
12
Participants in the market
13
The Indian picture
16
FMC
17
Our methodology in phases
19
Step towards the Mandis
22
The pulses story
22
Meeting with the Farmers
24
Interaction with MCX and FMC
26
Bullion story
28
Base metals
29
The chilli story
31
The FAPCCI episode
46
Industries we visited
48
Sugar story
51 2
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Hyderabad Stock Exchange episode
Commodity Sutra… Our Initiative
Commodity exchanges in India
Futures trading… The growth story
The Road blocks Ban on futures Speculation Playing with the future The price management fundamentals Price discovery is a Ruse
Prescriptions/Suggestions
Commodity futures… An alternative investment avenue
Suggestions to make Indian commodity market mature
Latest developments in the last 1 year
National spot exchange (NSE) The concept Objectives Participants Advantages Operations 3 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
About the organization UTI securities Ltd. (UTISEL) Securities Trading Corp of India (STCI) STCI Commodities Ltd. Standard Chartered
Appendices Frequently asked questions (FAQs) Invitation letter for Chilli market seminar Communication details o MCX o FMC o NCDEX Business cards Zink Calculator Proposal submitted to FAPCCI
References Bibliography Webliography
LIST OF TABLES / CHARTS
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Table no. 1:
Arrivals of Chilli in Guntur market
Table no. 2:
Area, Production and Yield for Chilli in India
Table no. 3:
List of foreign exchanges and commodities traded in them
Table no. 4:
List of commodities in the Indian exchanges
Table no. 5:
Details of commodities traded in MCX and NCDEX
Chart no. 1:
Area and production for Chilli in India
Chart no. 2:
Percentage share of Chilli in total exports on India
Chart no. 3:
Spot and Futures price
Chart no. 4:
technical chart on Chilli
Chart no. 5:
Contract specification of Red Chilli
Chart no. 6:
Production, Consumption and Closing stock of Sugar in India
Chart no. 7:
Nybot Sugar 11 futures price
Chart no. 8:
web page of Commodity sutra
Chart no. 9:
National Spot Exchange for agro products (NSEAP)‌ The concept
Chart no. 10: Participants of NSEAP Chart no. 11: Advantages on NSEAP Chart no. 12: Trading operations at NSEAP Chart no. 13: Delivery operations at NSEAP
Executive summary Our endeavor is to find out the status of commodity Derivatives as they stand in the overall economical, social and demographic picture of our system. The 5 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
impact in economical system is very much obvious and beyond any dispute as commodities are themselves economical propositions. But commodities are also subject matter of our social fabrication. Any society comprises of two set of people: Traders and farmers. Commodities are affecting the lives of both set of people. Their business practices and strategies are rapidly changing and commodity market is very much influencing it. We have studied that impact. It is noteworthy that the new world economic order is of convergence. All sectors, economies and trades are being interlinked. Whether we like it or not, our businesses are no more ours. Entire world economy is involved into it. The same applies to commodities. Whether one participates into it or keeps himself aloof, he, in no ways can escape its effects. However, it has to be kept in mind that as an asset class and even as a tool of risk minimization (for Traders, Farmers and businesses); it is a very new and nascent proposition in India. Even though Commodity futures have their long history in this country, periodical bans and derogatory government policies have hindered their prospects to develop as a tool for hedgers (risk minimization), leave alone the matter of their development as an investment avenue. Their primary goal of true price discovery is also much waited.
This project aims to achieve the following objectives: •
•
To explore commodity futures as :
An investment avenue (for middle class)
A risk minimization tool (for the business class).
To find out the penetration level of commodity futures markets in Indian society taking Hyderabad as a representative market and added inputs from other parts of country
•
To explore the present status and future prospects of commodities in our economy.
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•
To develop a business development model for UTI SECURITIES as a brokerage firm by targeting key markets and business houses in and around Hyderabad, giving main emphasis on sugar and metal companies.
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A futures trading is a standardized agreement between a buyer and a seller to exchange a pre agreed and standardized grade of an asset at a specific price and future date. The item or underlying asset can be an agricultural commodity, a metal, mineral, energy or commercial commodity, a financial instrument or a foreign currency.
Characteristics
A "Futures Contract� is a highly standardized contract with certain distinct features. Some of the important features are as under:
a. Futures trading are necessarily organized under the auspices of a market association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules & Bye-laws of the association.
b. It is invariably entered into for a standard variety known as the "basis variety" with permission to deliver other identified varieties known as "tender able varieties".
c. The units of price quotation and trading are fixed in these contracts, parties to the contracts not being capable of altering these units.
d. The delivery periods are specified.
e. The seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other prespecified delivery centers. 8 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
f. In futures market actual delivery of goods takes place only in a very few cases. Transactions are mostly squared up before the due date of the contract and contracts are settled by payment of differences without any physical delivery of goods taking place.
Spot versus Future Contracts:
Every transaction has three components. •
Trading
•
Clearing
•
Settlement
A buyer and seller come together, negotiate and arrive at a price. This is trading. Clearing involves finding out the net outstanding, that is exactly how much of goods and money the two should exchange. Settlement is the actual process of exchanging money and goods. In a spot transaction, the trading, clearing and settlement happens instantaneously where as a contract by which two parties irrevocably agree to settle a trade at a future date, for a stated price and quantity. No money changes hands when the contract is signed. The exchange of money and the underlying goods only happens at the future date as specified in the contract. In a forward contract the process of trading, clearing and settlement does not happen instantaneously. The trading happens today, but the clearing and settlement happens at the end of the specified period. A forward is the most 9 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
basic derivative contract. We call it a derivative because it derives value from the price of the asset underlying the contract. A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. Derivative contracts are of different types. The most common ones are forwards, futures, options and swaps. Participants who trade in the derivatives market can be classified under the following three broad categories. •
Hedgers
•
Speculators
•
Arbitragers.
1. Hedgers: Hedgers face risk associated with the price of an asset they use for their business. They use the futures or options markets to reduce or eliminate this business risk. These are the people who have the direct interest in the underlying asset. 2. Speculators: Speculators are participants who wish to bet on future movements in the price of an asset. Futures and options contracts can give them leverage; that is, by putting in small amounts of money upfront, they can take large positions on the market. As a result of this leveraged speculative position, they increase the potential for large gains as well as large losses. 3. Arbitragers: Arbitragers work at making profits by taking advantage of discrepancy between prices of the same product across different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they would take offsetting positions in the two markets to lock in the profit. A commodity derivative derives its value from an underlying asset, which is necessarily a commodity. Commodities, in simple words are any goods that are common and unbranded. Gold, silver, rubber, pepper, jute, wheat, sugar, 10 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
cotton etc., are some of the common commodities. For e.g. apple juice can be a commodity whereas the ‘Real’ apple juice cannot be called a commodity. One may be surprised to know that in the US commodities markets there are futures available even on cattle. Commodity includes all kinds of goods. FCRA defines "goods" as "every kind of movable property other than actionable claims, money and securities". Futures' trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. The national commodity exchanges have been recognized by the Central Government for organizing trading in all permissible commodities which include precious (gold & silver) and nonferrous metals; cereals and pulses; ginned and unginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and Gur; potatoes and onions; coffee and tea; rubber and spices, etc. Commodities market essentially represents another kind of organized market just like the stock market and the debt market. However, commodities market, because of its unique nature lends to the benefits of a wide spectrum of people like investors, importers, exporters, producers, corporate etc.
Difference between Commodity and Financial derivative:
FINANCIAL DERIVATIVES Only cash settled
COMMODITY DERIVATIVE Option
of
physically
settlement 11 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
Not bulky
Bulky
Warehousing not required
Warehouse required
No variation in quality
Varying quality of assets
Unlike the physical markets, futures markets trade in futures contracts which are primarily used for risk management (hedging) on commodity stocks or forward (physical market) purchases and sales. Futures contracts are mostly offset before their maturity and, therefore, scarcely end in deliveries. Speculators also use these futures contracts to benefit from changes in prices and are hardly interested in either taking or receiving deliveries of goods.
Participants in the Market
Investor’s Perspective 12 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
Commodities futures represent a good form of investment because of the following reasons:
•
High Leverage – The margins in the commodity futures market are less than the F&O section of the equity market. This gives an investor a greater opportunity to trade and obtain economies in commodities.
•
Less Manipulations - Commodities are mostly governed by international price movements. Especially in the metals space and the bullion market, the prices of commodities mostly run in tandem with the international exchanges. So they are less prone to rigging or price manipulations.
•
Diversification – The returns from commodities market are free from the direct influence of the equity and debt market. We say this because a high degree of negative correlation is found between commodity prices and that of equity and bond market, which means that they are capable of being used as effective hedging instruments providing better diversification.
Importer or Exporter Commodities futures can be of immense help to an importer or exporter in the following ways:
•
Hedge against price fluctuations – Wide fluctuations in the prices of import or export products can directly affect their bottom-line as the price at which they import/export is fixed beforehand. Commodity futures help them to procure or sell the commodities at a price decided
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months before the actual transaction, thereby ironing out any change in prices that happen subsequently.
Producer’s Benefits •
Lock-in the price for the produce – For farmers, there is every chance that the price of their produce may come down drastically at the time of harvest. By taking positions in commodity futures they can effectively lock-in the price at which they wish to sell your produce. This is termed as hedging against the market price in future.
•
Assured demand – Any glut in the market can make them wait unendingly for a buyer. Selling commodity futures contract can give them assured demand at the time of harvest.
Consumer’s Perspective •
Cost Control – For an industrialist, the raw material cost dictates the final price of their output. Any sudden rise in the price of raw materials can compel them to pass on the hike to their customers and make their products unattractive in the market. By buying commodity futures, a producer can fix the price of its raw material thus saving the customer from a sudden price hike.
•
Ensures continuous supply – Any shortfall in the supply of raw materials can stall their production and make them default on their sale obligations. They can avoid this risk by buying a commodity futures contract by which they assured of supply of a fixed quantity of materials at a pre-decided price at the appointed time.
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The Indian Picture
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Coming to the Indian scenario, despite a long history of commodity markets, commodity markets in India are still in their initial stages of development. The essential contributors of this scenario include stringent regulatory restrictions, intermediate ban on commodity trading and policy interventions by the government. Commodity markets have a huge potential in the Indian context
particularly
because
of
the
agro-based
economy.
With
the
government's initiative for agricultural liberalization, commodities' trading in India has gained increased momentum in activities. Commodity markets are of great help not only for their participants but also the economy as a whole. The twenty year bear market for commodities has drastically reduced the prices of many commodities to their lowest levels. The present shift in trend in commodity trading complimented by the global increase in demand will certainly hold a promising future for the investments in this segment. Indian markets have recently thrown open a new avenue for retail investors and traders to participate: commodity derivatives.
For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option. Till some months ago, this wouldn't have made sense. For retail investors could have done very little to actually invest in commodities such as gold and silver, or oilseeds in the futures market. This was nearly impossible in commodities except for gold and silver as there was practically no retail avenue for punting in commodities. However, with the setting up of three multi-commodity exchanges in the country, retail investors can now trade in commodity futures without having physical stocks! Commodities actually offer immense potential to become a separate
asset
class
for
market-savvy
investors,
arbitrageurs
and
speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities 16 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option.
The Regulator Forward
Markets Commission
(FMC)
headquartered
at
Mumbai is a regulatory authority, which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952. "The Act Provides that the Commission shall consist of not less then two but not exceeding four members appointed by the Central Government out of them being nominated by the Central Government to be the Chairman thereof. Currently Commission comprises three members among whom Dr. Kewal Ram, IES, is acting as Chairman and Smt. Padma Swaminathan, CSS and Dr. (Smt.) Jayashree Gupta, CSS, are the Members of the Commission." The functions of the Forward Markets Commission are as follows To advise the Central Government in respect of the recognition or the withdrawal of recognition from any association or in respect of any other matter arising out of the administration of the Forward Contracts (Regulation) Act 1952. To keep forward markets under observation and to take such action in relation to them, as it may consider necessary, in exercise of the powers assigned to it by or under the Act To collect and whenever the Commission thinks it necessary, to publish information regarding the trading conditions in respect of goods to which any of the provisions of the act is made applicable, including information regarding supply, demand and prices, and to submit to the Central Government, periodical reports on the working of forward markets relating to such goods;
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To make recommendations generally with a view to improving the organization and working of forward markets. To undertake the inspection of the accounts and other documents of any recognized association or registered association or any member of such association whenever it considerers it necessary.
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Commodity Market: A new investment avenue
The Beginning………… Our first objective was to explore the project and plan it periodically. As the topic given to us was quite new and very less study had so far been done, it was really a difficult task to go ahead with our project…
The literature survey: Phase I The next few days were of understanding, reading and studying the commodity market and all its facets. We went through all the materials, journals, websites and literature, whatever was available and could be assessed. Building up the basics in commodity market and understanding its dynamics was the foremost important thing for us. We studied thoroughly and were able to understand the elementary things of the market after much effort.
Merely understanding and knowing the basics and even the intermediary things were not going to help us. So our next endeavor was to understand the subtle complexities of commodity markets. We would rather like to use here the more appropriate word of commodity future because the commodity market is entirely future market up to now.
Hence we tried to track the daily price movements of various commodities. We also learnt fundamental and technical analysis tools to be able to understand interpret and use those data, news and trends. We got help from our technical and fundamental experts in UTI SECURITIES in the office. I would specifically like to mention the name and contribution, we received from these experts. 19 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
Mr. Suman Kumar Adepu, (Branch Head, Ameerpet, UTI securities)
Our branch head , a technical expert in commodities and has an experience of working with companies like Kotak and Karvy, though he holds equally good command over fundamentals of various commodities as well. He taught us a number of technical analysis tools that were going to help us in our future work. From time to time, through his own contacts, he arranged for us a number of guest speakers and experts.
Mr.Rajeev Ranjan (Regional Head, Delivery, karvy comtrade Ltd.)
He shared with us minute details of delivery mechanism of Commodity exchanges. Mainly what is the procedure to be followed in taking delivery from the warehouses at the end of the contract period and all the issues involved in it.
Mr. Chirag Seth (Manager, Commodity Research, STCI commodities ltd.)
He gave us deep insight about the fundamental analysis of commodities. He is a person from the Mumbai head office and he spared some time from his business visit in discussing with us the methodology one should adopt to do the fundamental research of commodities.
Learning commodity market almost took 15 days of ours. We were now very much comfortable with the mechanism, trends, nature and analysis of commodities.
Market Survey: Phase II 20 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
The second phase of our project was to explore the real world of commodities which was not within the four walls of our office. It was neither in the commodity terminals nor with the books, journals and literatures. We had to understand the practical realities of this very nascent market. We had to go to different stakeholders, participants, traders, farmers, brokers and all the concerned people for whom the commodity market (read future) was envisaged.
The next few days were to face the hard realities of commodity trading in India. We had to gauge the progress, this market has so far made and the ground realities associated with it. It was now important for us to know whether the market is same on ground as it appears from outside. We had to enter the tough, exciting and promising terrain of commodity futures. Tough, because after 6 years of introduction, it was not mature, the real stakeholders were not fully participating. Also because. to our knowledge, the commodity markets had still not penetrated even the crust of the Indian Economy. Exciting, because, commodities market has became as big as 76 % of India’s GDP within san of 3 years. Because people out there were highest paid, it is the fastest growing sector of Indian economy and because this sector has yield the highest returns with least calculated risk to its investors. Promising because, this market promises two most difficult propositions of business: True price discovery and Risk management.
So with the theoretical tools of technical and fundamentals, a vast bookish, superficial knowledge and an inquisitive, argumentative mind, we entered the market.
Steps towards the Mandi‌. 21 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
Please note that all the suggestions and comments made here are strictly that of the traders and the people whom we interviewed, and are not influenced by any personal bias or influence.
The Pulses Story: Our first interaction was with the pulses traders in Bagumbazzar. Let us first introduce the very nature of this market (mandi). This mandi comprises almost 200 medium to big traders. Traders have there links to Rajasthan, Gujarat and mostly
Marwari-Gujraati
communities.
They trade in pulses (tur, urad, moong, gaur seeds, masoor, chana) and other agricommodities like wheat, rice, etc. They give high turnover and all the trading done here are spot in nature. They trade through local brokers at the mutually agreed price and on (credit cash) basis. Some of the traders here are in their business for more than 70 years and it is their third generation which is carrying forward their business. Some other traders are also mill –owners of Dal (pulses).
I am putting all these things across because it is very much obvious that these traders have their stake in the commodity future market. They are the one, who should have actively participated in the futures market for hedging (risk management). They have their obvious interest in the future market because futures are very much related to their business activities. Price movements in the future market reflect in their own business and they are prone to the activities and practices of the commodity exchanges.
We met a number of traders, brokers, mill owners and whole sale merchants to find out what they thought about the different commodity exchanges. We 22 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
introduced ourselves as research trainees from ICFAI business school that were there to undertake research on perceptions of people towards commodity futures trading and its comparison with other investments.
We made the following observations and inferences1:
We came to know from them that they call commodity futures markets as “Dabba Trading” The found the initial perception of commodity market to be very negative and inflexible. They said that it was meant to create unnecessary volatility in the market price, and there wasn’t any correlation between spot prices and the future prices. They believed that the futures market moves only due to speculation by the few top players like ITC, Reliance etc who dominate the whole market. The idea of delivery did not suit them mainly due to the freight charges involved in delivering the goods from their respective warehouses to their place of business and moreover they were not clear regarding the procedures to be followed for delivery of commodities from the exchange. The traders shared with us their experiences where last year they lost crores of rupees due to the game in “kabuli channa”.
Farmer’s Story:
1
Source: Conversation with Pulse Traders at Begum Bazzar
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Farmer is one of the biggest stake holders of commodity (AGRI) market. So we decided to interact with farmers also. We searched on internet about Farmers association in Hyderabad and found the address and contact number. We called next morning the General Secretary of Federation of Farmers Association Mr. P Chengal Reddy and told him about our project. We got appointment with him and met him at his office at Shanthi Nager. Mr. Chengal Reddy Introduced us with many farmers representing different province of the state and producer of different crops. We were shocked by knowing that none of the farmers knew about the commodity exchanges and future derivatives. Even Mr. Reddy was also not having much idea. We understood that awareness level is key responsible factor for less participation of farmers in commodity futures. Mr. Reddy told us the various factors which are reason for farmer’s distress condition:
1.
Agriculture being Unorganized(They fall in traps of traders )
2.
No standardized production(Can’t trade with exchanges in bulk)
3.
Farmers do not get remunerative price
4.
Lack of Agro Technical Support.
5.
Lack of awareness
6.
Computer illiteracy
7.
Lack of capital (Borrow from traders and sell their produce to them only at very lower price)
8.
lack of co-operative societies
Apart from all this, many reasons were being counted but the main theme of the story was that farmers do not get remunerative price of their produce because of cartel of traders.
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2Example
1:
The sweet oranges are sold in a lot of 10 tons and there is 1 ton "chhut" on this. This “chhut� means Relaxation. It means farmers sell 10 tons of sweet orange at a price of 9 tons. Even these 9 tons also are at a distress price. This practice is running at Kothapet Market Dilshukh Nagar Hyderabad (In fact, this is the mode in entire country.)
Sweet orange farmers do not have any escape.
Example 32:
Most chilly farmers sell the red chilly at a price of 20 Rs. per Kg, while end consumers pay a price of 120-150 per kg for chilly powder. There is a large sum of 100-130 Rs. per Kg goes to multi layered middle man. Though at Guntur where MCX and NCDEX have their warehouse gets price of 50 Rs. per Kg. We understood how Exchanges can create an environment where farmers will get good prices.Once the farmers of India will get price, most of the issue related to farmers will be addressed. 4Interaction
with MCX and FMC:
2
Source: Conversation with Farmers
3
Source: Conversation with Mr. P Chengal Reddy Email communication in Appendix:
4
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We sent email questionnaire to Research and development department, MCX as well as Mr. Anupam Mishra, Director Commission
(IR) Forward Markets
about the concern raised by the trader. We got quick and positive
reply from them. This has shown us the dedication of regulators and facilitators for the reform.
Issues raised by traders were very generic in nature and only FMC or exchange was in capacity to answer it. So we raised the same concern to them.
MCX,
Mumbai
fixed
a
meeting
of
Vice
president
(Business
development) Mr. Madhav Reddy with us. In another two Days we were sitting with Mr. Madhav Reddy in his office and discussing the issue.
The main outcome of this meeting was:
1. MCX is very flexible and dedicated to shape this financial service in the benefit of participant if practical. 2. Quality norms are in place and if someone finds flaws in that they can revise and inspect the process. 3. MCX is in process of changing the Units and now accepts both 25 as well as 40 kgs bags for chilly. 4. Having warehouses in each city is not practical. Although they introduced us with concept of spot market which they are introducing very soon. These markets will have online terminals in each city where Framers and traders of any part of India can trade in a common platform. This will solve the problem of delivery complications.
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Mr. Reddy has shown the willingness to meet the traders to solve their problems. This was a very positive and constructive step towards organizing seminar at chilly mandi.
Apart from this we also had a talk on farmers issue with Mr. Madhav Reddy which was raised at farmer’s association. Mr. Reddy said that how Exchange can help farmers to get the true price. On our query, how farmers with delivery intentions at other part of country where exchange do not have their warehouses can trade through it, Mr. Reddy said we can not provide warehouse in each city as it is not financially viable. But spot market on an electronic platform which is already started in 4 states can be a solution. MCX as well as NCDEX is opening electronically integrated spot market in each city of India where farmers and traders from all over country can trade on single platform. In this case existence of trader’s cartel will not be possible.
Due to lack of Political repercussion these exchanges could not get govt. nod in Andhra Pradesh under APMC Act. (Government of Andhra Pradesh) Which comes under state legislation to open Spot markets in the state?
On Mr. Madhav request, we had meeting with farmers association again on the spot market. The outcome of the meeting was that there is need for awareness within farmers for the spot market.
Bullion Story Our next target was to cover the Bullion Markets in Hyderabad. We went to Mahan kali Street to meet and interact with Gold, 27 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
Silver and Bullion merchants. This street is known as the biggest market for precious metals in and around Hyderabad.
We expected, people here to be much aware of the commodity trading as precious metals (Gold and Silver) are the one where exchanges have proved their worth worldwide and almost 75% business of exchanges run on these metals. But here also, traders were not very friendly and aware of Exchange trading. The same old proposition of speculation was prevalent here also. Traders relied much on banks for taking deliveries of Bullions and were ready to be risk exposed to price fluctuations rather than taking resort of hedging in exchanges. It is assumed to be more risky in taking positions in exchanges rather bear the cost of price fluctuations. In stead, traders resort to block their own delivery to their customers in case of price increase. This was one practice which give them profit in case of price rise. They used to take delivery when prices are low, and stock them until prices rise.
Here, we tried to interact with traders to educate them about the benefits of using exchange as a platform for their advantage.
We also planned to arrange a seminar here with local traders to educate them and bring awareness about commodity futures.
Base Metals Our next step in this direction was towards the market of Base metals and industrialists who use these base metals in their industrial production. We did some research
on
this
field
and
headed
towards 28
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secunderabad to meet the metal traders and later on to Balanagar industrial area where we fixed appointments with a number of industrialists and big traders.
Our Discoveries: Traders here are of varying nature, some are dealers in scrap and prime metals while some others deal in ingots and finished materials. The turnover in this market runs from 1 crore to 100 crores. The big players in this market from whom these traders procure most of their materials like ingots and prime raw material are Hindustan Zinc, Adani and Sterlite copper and some traders in Whivandi in Maharashtra. The industrialists here buy a considerable quantity of goods from the local market as well in the form of scrap. Although all the traders were aware about the overview of metals in world market but still they were not exposed to exchange traded contracts. The traders here did agree with us that exchange rate and futures contracts have a great influence on the normal business but hardly anybody had the accurate understanding of how the exchange functions. Few traders who have earlier invested in the exchanges had also stopped trading after incurring huge losses. At Balanagar Industrial area, we met industrialists who manufacture metal components. They are the people who have interests in zinc, copper; aluminum and nickel. They are mainly SMEs which manufacture metal components of machines and other equipments. We found that few of these traders did actually did some study to participate in the futures market to prevent their business from market risks. 29 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
Most of the contracts here are made for a future period, which means we enter into contract with our customers to supply finished goods at an agreed fixed price within the next 5 – 6 months. Told Mr. Santosh Rungta5, an Industrialist in Balanagar. These are the class of people who are exposed to exchange trading and also participate in it. But the noticeable thing is that very less traders’ trade on MCX or NCDEX platform. Most of them trade through LME or COMEX platform When asked the reason they said that the exchanges in India were not that mature in terms of rules and regulations, proper framework and governing body. Trading through LME gives them more hedges against their business risk, since the Indian metal market is influenced by the movements in the foreign market mostly US and china. Moreover they told us that they import a large quantity of their goods so trading in MCX do not give them any major advantages since there is no delivery of goods like Zinc, copper, aluminum etc. in India now. They also pointed out to us the difference between the futures market and the spot market rates the reasons for which were not well explained.
The Chilli Story:
Next we went to the Chilli market at Malakpet in Hyderabad. Located at about 6 kms from the Secretarial, this market contributes to about 10% 5
MD, Tapasya Casting Pvt. Limited
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of the total chilli trade in AP. The other commodities traded in this market are Onion and tamarind.
Chilli is mainly traded in the months of march – may which is the harvesting season for chilli and in this season the fresh crops start coming into the market. The following table would clear the sowing and harvesting pattern of chilli in India.
Andhra Pradesh
Karnataka
Madhya Pradesh
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Harvesting Sowing season
We followed the same method of research in this market as well. First we met the president of the Andhra Pradesh grain & seeds merchants association, Mr. D. Raghavendra and he explained to us the method of operation in the spot market. He said that the market opens at 7:00 a.m. at Guntur in AP, which is the biggest market for Chilli in the world and by 9:00 a.m. they get somewhat the 31 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
market rate which is taken into consideration for further transactions in other markets like the malakpet market.
In malakpet, farmers from different places and regions bring their produce and place them for open auction. Every day about 8,000 to 10,000 bags arrive in this market in the season time which is from January to April. During this time the arrivals at Guntur is somewhere in the range of 1,00,000 to 1,20,000 bags. In the auction whichever trader, broker or the exporter makes the highest bid takes away the produce and the farmers get their price.
We Discovered That:
This was a very unscientific method of price discovery and that the farmers do not receive their right price all the time. Another draw back of the system was that the farmers are bound to sell their products at the market price because they cannot afford to take back their goods due to their huge transportation costs.
We thus discussed with them the concept of futures trading and how it can be beneficial to the traders as well as the farmers but a number of problems and issues were brought to light by those traders As a part of our endeavor to solve few of their issues, we wrote a mail to MCX India, which is a well known commodity exchange. We received a positive response from them and very soon arranged a meeting with Mr. Madhav Reddy, Vice President, Business development in MCX. We discussed with him all the issues brought forward by the traders in the chilli market and we did arrive at certain conclusions and solutions on some problems. We remained in constant touch with the MCX people from there on.
There after we again approached the Chilli association and after a series of meetings with the President and the Gen secretary of this association, we 32 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
planned to organize a seminar here with the help of the Association to educate the traders and farmers about the Commodity exchanges and futures contracts and how they can be benefited by it. We had identified that the biggest problem in this market is the lack of proper awareness and information about these exchanges and thus through this seminar we tried to address these issues and enabled the traders to get the right information straight from the horse’s mouth. The arrangements of the seminar were being done with the help of MCX (Multi Commodity Exchange) and the dates were to be finalized very soon.
The Seminar at Malekpet Mandi Our seminar was scheduled for 25th April 2007. Our guests in the seminar included:
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Mr. D. Raghevender
President
AP Grain & Seeds Merchants Association
Mr. Rajesgwar
Secretary
AP Grain & Seeds Merchants Association
Mr. Someshwar
Treasurer
AP Grain & Seeds Merchants Association
And other important board members and office bearers of the association. Our speakers were: Mr. Chirag Seth
Research head
STCI Commodities
Mr. Ali
Spices in charge
STCI Commodities
Mr. Madhav Reddy
VP, Business Development
Mr. Pradeep Reddy
All India Product head, Chilli
MCX MCX
The seminar was attended by about 50 traders including some masala company owners and cold storage owners.
The
opening
speech
was
delivered by Mr. Raghevender who introduced our team, our objective and purpose of the seminar.
He
welcomed
our
guests and introduced them to the whole association. Our first speaker was Mr. Chirag Seth, Research head, STCI commodities. He spoke at length about commodity futures and its introduction in India. He discussed in details the different strategies that should be used in the futures market by the traders and dealers namely Hedging and Arbitrage. He discussed how a trader can make use of hedging and intelligent speculation to maximize his profit and minimize the business risk.
Traders in this market buy and sell goods on every day basis and there are few instances where the traders take forward contracts of sale i.e. they enter into a contract of sale of some specified quantity of goods at an agreed price 34 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
on some specified future date. In such cases hedging should be used by taking an inverse position in the futures market to lock in the price of goods that the trader agrees to sell on a specified time.
He also discussed about Arbitrage opportunities in the futures market and that how the difference between the cash and futures price can be used for arbitrage.
He also talked about the investment involved in trading in futures market, the brokerage to be charged by UTI securities which was announced at .05 % for any account opened in the market, the initial margin to be supplied by the investors at about 5 % to 7 % and the lot size of chilli in the futures market that is 5 tons.
Our next speaker was Mr. Ali, the spices specialist at STCI commodities. He gave complete outlook on chilli, its fundamentals, and production, acreage and export figures. He also discussed the future expectations of chilli, its price targets in the medium and long term. Traders showed special interest when they were told that chilli in Guntur accounts for about 50 % of the chilli traded in the country and that the malakpet market contributes to about 10 % of the volume traded in Guntur.
Few of his important discussions are as follows:
Indian Scenario:
India is the world's largest producer, consumer and exporter of chillies in the world. India also has the largest area under chillies in the 35 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
world. Chillies are the most common spice cultivated in India. It is estimated that India produced 1060345 tons of dry chilli from an area of 8,84,183 hectares in 2003-04. 6 Almost all the states of India produce the crop. The important chilli growing states of India are Andhra Pradesh (46%), Karnataka (15%), Maharashtra, Madhya Pradesh, Orissa, West Bengal, Rajasthan and Tamil Nadu. Chillies can be grown during the entire year at one or the other part of the country. However, the major arrival season extends from February to April. The crop planting starts from August and extends till October. While, the harvesting begins from December with 5% of the arrivals usually reported in this month. The peak arrivals are reported in February to March. There are several varieties of chilli cultivated in India. The most popular among these are, Sannam, LC 334, Byadgi, Teja, Wonder Hot, Jwala etc. The major chilly growing districts of Andhra Pradesh are Guntur, Warangal, Khammam, Krishna and Prakasham.
The Indian scenario of chilli includes the fundamentals like demand and supply. Arrivals in the market form an important aspect of supply and it is shown with the help of the following table which depicts in details the arrivals in the Guntur market that forms the benchmark for all chilli traded on any exchange.
6
Source: MCX
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7
Global Scenario: Chilli • 25% of the world chilli production is contributed by India. • Besides India, the other chilli producing nations are: Pakistan, China, Spain, Turkey, Syria, Mexico and Morocco. • China is becoming a major competitor for Indian Chilli growers. • Chilli contributes almost 22% of the total world spices trade in Volume terms which is led by Pepper which contributes about 34%. He also presented the production and export statistics of chilli in India for the last 10 years:
He presented a full picture of the chilli production over a 1 year period, the reason for decline in 2005 mainly being the production area being used for other crops than chilli and there has been an increase in production due to the export demand from countries like Srilanka, Pakistan and other countries.
7
Table no: 1
Source: STCI commodities
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to 2006-07)
1500000 1300000 1100000 900000 700000 500000 300000 100000
1800 1600 1400 1200 1000 800 600 400 200
Kg/Hect
(000)
Hect & Prodn
Area & Production for Chili(1996-97
) 7 9 1 6 0 2 4 3 5 8 -9 -0 -0 (e -0 -0 -0 -9 -0 -0 -9 96 997 998 999 000 001 002 003 004 005 -07 19 1 1 1 2 2 2 2 2 2 06 20
Year A rea (Hect)
Production (Tons)
Y ield (Kg/Hect)
8
Year
Area (Hect)
Production (Tons)
Yield (Kg/Hect)
1996-97
944200
1066000
1129
1997-98
840600
870100
1035
1998-99
891200
1043200
1171
1999-00
959200
1052800
1098
2000-01
836500
983700
1176
2001-02
880000
1069000
1215
2002-03
827400
894600
1081
2003-04
758600
1287800
1698
2004-05
950000
1100000
1157.895
2005-06
759600
600000
790
2006-07 (e)
846000
800000
945.6265
9
Export of chilli has always been a very important aspect of discussion and it is one important factor which governs the price movement as well.
8
9
Chart no. 1 Table no: 2
Source: STCI commodities
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Chilli Export 169000 149000 129000 Year
109000 89000 69000 49000 29000 9000 2000-01
2003-04
2004-05
2005-06
2006-07e
2007-08p
Tons 10
This increase in exports is mainly due to fresh demand coming US and from the Asian countries. Percentage Share in Total Exports of India Nepal, 3% Malaysia, 6% Bangladesh , 13%
Others, 28%
USA, 26%
Sri Lanka, 24%
11
He also talked about the technical aspects relating to chilli some of them being the correlation between futures and the spot market at Guntur.
11
Chart no.:2
Source: STCI commodities
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Average Future Prices
7200
7200
6200
6200
5200
5200
Prices
4200 3200 2200
4200 3200 2200 1200
1200 Ja n F eb Ma r A pr Ma y J un Jul Au g S ep Oc t N ov De c
Month 2005
2006
Ja n Fe b Ma r Ap r Ma y Ju n Ju l Au g Se p Oc t No v De c
Prices
Average Spot Prices
2005
Month 2006
Table source: STCI commodities12
Finally before he wound up, he showed everybody the technical chart of chilli trading in NCDEX. This was the daily candle stick chart of chilli from January 2007 onwards which shows the trends in the price of chilli over the last few months, the fibonacci series distribution can also be seen clearly in the chart where the percentage distribution can be seen as 61.8 %, 50 %, 38.2 % and so on.
12
Chart no.: 3
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13
There after we laid emphasis on the delivery issue and we called the MCX people to answer all their queries. We had gathered from research that people in that market had the following issues and they sought clarifications on the following matters: Firstly they were not satisfied with the quality specifications of the CHILLI traded in the exchange. They said that the percentage of impurities in the exchange traded Chilli sums up to about 35% were as in the spot market that percentage comes to only about 15%. They blamed the exchange for adding extra impurities to make that percentage as 35 Secondly they said that the delivery mechanism at the exchange accredited warehouses were not up to the mark. There is lack of transparency, no proper control, hidden costs and other problems in the delivery.
13
Chart no: 4
Source: STCI commodities
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One trader told us that the exchange provides packaging of chilli in bags of 25 kg where as in the spot market it is traded in bags of 40 kg. They did not like this disparity. Last year, there was a huge mess created by NCDEX in Guntur where traders were denied delivery of goods when the prices were on a roll towards the higher side and there was a lot of unrest and confidence was breached by the traders.
Now, this seminar turned out to be hot debate between MCX officials and the traders. Mr. Madhav Reddy explained the delivery rules and the quality issues and specifications were taken up by Mr. Pradeep Reddy the product head of chilli. Mr. Madhav Reddy explained the contract specifications and rules to be kept in mind before trading through MCX.
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Source: http://www.mcxindia.com/RedChilli_apr07.pdf14
Most of the traders who raised issues relating to delivery suggested MCX to open warehouses and delivery centers in Hyderabad so that the traders are saved of the transportation cost in delivering goods from Guntur to Hyderabad. They even promised MCX to
14
Chart no.: 5 Source: www.mcxindia.com
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The Seminar Effect Things changed a lot after this seminar. We witnessed a very important aspect in the chilli market that the association is considered to be a bench mark and is looked upon for any important business decisions on the part of an individual trader. We found that all of a sudden the mentality and outlook of people had changed towards futures market. After the seminar, we followed up with the traders to clarify their doubts if any they had, and we learnt that breaking of ice was very important here and this ice breaker was the president himself. Owing to his bad experiences in the futures market last year, he had cautioned the rest of the traders so when we met the traders individually, they told us that though they were satisfied with the concept of hedging and other risk minimization strategies, they were still wary of investing because they were not advised to do so by their president. We then followed up with the president, Mr. Raghevender, and his son Mr. Radha Krishna, who was also the owner of cold storages in Hyderabad. We fixed up appointments and meeting with him and also asked our CEO Mr. Deepak Dave to give a small presentation to him and finally the ice was broken and this sent a positive message in the whole market and we started with opening 6 accounts in two days in the Malakpet Market. This number further went up to 15 in one week time.
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The FAPCCI Episode: An Introduction: FAPCCI started in 1917 as a Chamber of Commerce and Industry representing the entire state of Hyderabad. It represents large, medium and small scale Industries from the State. It also represents wholesale, retail and small trade organizations. It consists of companies from public, private, joint and corporate sectors. This organization is awarded ISO 9001:2000 organization. It has about 150 other Chambers and Associations at State, District levels affiliated to it. It has 2800 members on its rolls. Its indirect membership through its affiliates covers a broad spectrum of industries and trade organizations come to 20,000 members.15
Our Objective: FAPCCI is a leading consortium of all Industries and commercial firms in entire Andhra Pradesh representing all big, medium and small firms. Reaching to FAPCCI means reaching to all the industries of Andhra Pradesh in one go.
We had three objectives in our mind while approaching FAPCCI: 1. To understand business dynamics of Andhra Pradesh through FAPCCI and Industries through A.P. 2. To explore the possibility of Business Development among the member industries of FAPCCI.
15
Source: FAPCCI
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3. To create the awareness about Commodity futures among the Industries and to explore the possibility to use the Commodity futures as a hedging tool in a real industrial scenario.
Our Approach: This part of our project was indeed a very ambitious one. Getting access and targeting the entire Industry community was a giant task. But this endeavor had a great business opportunity for our organization. Hence, we contacted FAPCCI board. We met with two Deputy Secretaries of FAPCCI, Mr, Ananth Reddy & Mr. C.V.Rao.
We held a long discussion of about one hour and we discussed several issues regarding FAPCCI, its members and business community, in general. We also discussed about ways in which commodity futures contracts can be introduced to them for mitigating their price risk by hedging and locking in their profit.
We finally came with a consensus of organizing a seminar in association with FAPCCI about commodity futures. Our target audience was set as Small & Medium Enterprises (SMEs).FAPCCI suggested us to come up with a detailed proposal and submit it to the core committee of FAPCCI. We came up with the proposal the very next day. (The proposal is given in the appendices). We also discussed about the marketing of the seminar in detail. We were given the compendium of members of FAPCCI. Finally, we were told that we are allotted a slot of 20 minutes in one of their ongoing seminar scheduled on 10th may. The topic of seminar was “Exit Route for Sick SSIs�. We were asked to first present our ideas in the seminar after which FAPCCI would have to conduct a fresh seminar with us.
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For attending the seminar, the CEO of our company Mr. Deepak Dave gave his personal nod to attend. He came with his team (Mr.Chirag Seth, Head, Commodity Research, STCI commodities ltd.).
Prem Kumar (one of us) was given the opportunity to address the gathering of more than 100 industry heads. He talked about the Commodity Futures contracts as a risk mitigating tool for price risk in the business of SMEs & SSIs. Our effort was much appreciated by all the participants of the seminar. We got many participants who were inquisitive about commodity futures and its scope in their business model. We also got confirmation from the President of FAPCCI for arranging a one day workshop on commodity futures. This was a great business opportunity for our company and our efforts also got acknowledged by CEO, STCI Commodities Limited himself.
Industries: We also planned to meet as many industries as possible to get the real feed back from them. We decided to convince them individually about the viability of commodity futures in their business. In this effort, we mailed around 50 industries about commodity futures on a trial basis. We also talked to them on phone and got appointment with many of them. Our approach was to directly talk to heads of these businesses.
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Some of the key Industries, we interacted were: •
Suryavanshi Spinning Mills
Mr. J.K.Agarwal (M.D.)
•
SAMKRG Piston & Rings Ltd.
Mr.S.Karunakar ( Director)
•
ITW India Ltd.
R.V.S.Ramakrishnan (Jt.M.D.)
•
Agarvanshi Aluminum Ltd.
Mr.Rahul Agarwal (Chairman)
•
Aishu Castings pvt. Ltd.
K.Ramanaiah (M.D.)
•
CUBEX Tubings Ltd.
Mr.U.M.Bhandari (Ex. Director)
•
Darsith Agrotech Ltd.
Mr.Laxmiprashad (Chairman)
•
Kakatiya Cements/Sugar ind. Ltd.
Mr. P.Venkatashwaralu
•
Pennar Profiles Ltd.
Mr.P.B.Rao (Pres. & CEO)
•
Sujana Metals Ltd.
N.C.Krishna (V.P.Finance)
•
Tirupati Udyog Ltd.
Mr.Akash Garg (Asst. CEO)
•
Bimla Spices food industries Ltd.
Mr.Manoj Kumar Goel (Dr.)
•
Ennore Foundries Ltd.
Mr.K.Udaya Babu (V.P.)
•
Tolsariya Metals Udyog Ltd.
Mr. U. Tolasariya (M.D.)
Our meetings with all these people were very fruitful. Apart from the huge business opportunity, we generated for the company, it also gave us an exposure to the industrial scenario of A.P.
One recent Example of price risk
Example 116 There are several Transformer manufacturing companies around Hyderabad. About 6 months before, they got a huge chunk of business for manufacturing transformers and it was a good opportunity to expand their business. They entered into contracts of various sizes at a fixed price. This rosy picture suddenly changed when the metal prices rose sharply in the international market .Now this led to an altogether strange 16
Source: Mr.U.M.Bhandari.C.M.D , Cubex Tubings pvt.Lvt.
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situation. They had to now procure raw metal at a higher price. This led to their cost of production being more than the selling price. It made them incurring heavy losses in spite of having good orders.
If they would had taken commodity futures contracts earlier, they would not been suffering losses even in the worst scenario. They could have locked up their profit margin and commodity futures contracts would have covered their price risks.
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Sugar Story: A bitter situation
India is the largest producer-consumer of sugar in the world. Sugar output this year is expected about 26 million tonnes against a consumption of about 19 million tonnes. Taking into account the carry over stock of 4 million tonnes from the previous season, the surplus sugar during the year has been estimated at 6.517 million tonnes.
Main problems of sugar industry18 (From the perspectives of Sugar mill’s owners) 1. The kind of evolution (1975, Sampath Committee Incentive scheme) of sugar industry in India gave rise to only small capacity plant with further expansion. Indian sugar industry could not get the benefit of economies of scale. 2. Cane-pricing act was enforced to provide good price to farmers. The price at which sugarcane are procured by the mills is controlled by central and state government Minimum
through Price
(SMP)
Statutory and
State
Advised Prices (SAP) respectively. 3. Due to unpaid dues to cane farmers, many of them switched over to other crop that has its effect on the supply of sugar cane thereby price tends to increase.
17 18
Source: http://www.indiansugar.com/president/index.htm Source: Based on conversation with sugar mill owners
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4. Sugar as a commodity is currently faced with a peculiar situation of huge inventories, plunging prices, unpaid dues to cane farmers and mills suffering losses. We can see below the graph of production, consumption as well as surplus. 19
5. Currently, the Indian sugar industry pays the highest cane price in the world. Cost of producing one quintal of sugar is about Rs 155020 but not realizing more than 1300 Rs per quintal. For paying unpaid due to the cane grower, mill owners finding 250 Rs loss a better bet than taking a loan from any bank. The down-sliding price of sugar is not Indian specific but it is world market phenomenon. International trend
21
International future price trend as reflected on NYBOT prices.
19
Chart no. :6 Economictimes 9/05/07 21 Chart no.: 7 Source: Special Commodity Report: http://www.mcxindia.com/ 20
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In India, government policies, both at the Centre and State levels have played a crucial role in the development of the sugar industry. The sugar economy in India, like many other countries, is highly regulated, starting from sugarcane to the use of end-product sugar. Government control, covers all aspects of sugar business i.e. licensing/capacity/cane area, procurement/ pricing/sugar pricing/distribution and Imports and exports. Even the byproducts are subject to government control.
Government control Government liberalized export / import trade in sugar from 1997. Simultaneously, the government had also put sugar imports on Open General License (OGL) allowing private parties to import sugar. The policy allows free export of sugar and factories can also under take export of raw sugar in addition to mill white sugar. Other WTO compatible policy22 measures facilitating export are • Duty Entitlement Pass Book (DEPB) scheme @ 4% for export of sugar. • Reimbursement of internal transportation charges on sugar exported from factories to the port of shipment. • Fixed ocean freight reimbursement @ Rs. 350/- per tonne of the sugar exported. Sugar import is allowed under Open General License (OGL). Customs duty at 60% besides countervailing duty of Rs. 850/- per tonne equivalent to 7.5% is levied on imported sugar. Imported sugar is also subject to the monthly release mechanism & stock holding limits as applicable to domestic sugar. Importers are also required to surrender 10% of imported sugar as levy at prices notified by the Government.
22
Special Commodity Report: http://www.mcxindia.com/
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The internal sugar prices are largely governed by the releases of sugar made by the Government. Higher the release lower the price, lower the release higher the price. Since December 1979, a specified percentage of total production of each sugar factory is procured as levy sugar at notified prices for distribution through the PDS. The ratio is1585 from 1st February 2001.Levy prices are fixed by the GOI based on SMP for the year. But usually levy prices are very low and fall below the cost of production. Therefore the producers are left with only free sale sugar quota
to
run
the
business
profitably.
GOI
controls
extend
to
free market prices also through the issue of monthly dispatch orders to all the sugar mills in the country based on demand supply situation in the country. Though there is no price control on free-sale sugar, market supplies are regulated by the Government through a mechanism of monthly release quotas. Costs tend to exceed prices because many producers benefit from Government protection enabling them to survive despite the fact that their cost exceeds world price levels. The trend in world raw sugar prices is that it exhibits a clear downward trend with an annual declining rate of approximately 1.5% declined over the previous years' prices. This trend clearly poses a serious challenge to sugar producers around the world. Following acts and orders through which government regulates the sugar Industry.
23
•
Essential Commodities Act,23 1955 (Briefly Ec Act)
•
Sugar (Control) Order, 1966
•
Sugarcane (Control) Order 1966
•
Levy Sugar Supply(Control) Order 1979
•
Sugar (Packing And Marking)Order, 1970
•
Sugar Cess Act, 1982
Source: http://www.indiansugar.com/
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•
Sugar Development Fund Act, 1982
•
LSPEF Act 1976
•
Sugar
Development
Rules,
1983
enacted Development
Fund
(Government the Fund
Sugar Act
&
Rules, which provide for levy of Rs.l4/-per qtl. of sugar known as Sugar Development Fund (SDF). The SDF is utilized for granting several term loans to sugar mills for modernization and grants for research projects in the sugar industry besides creation of buffer stocks as and when required to ensure price stability.)
World Sugar Market Review 24 As per ISO (International Sugar Organization), global sugar output is estimated at 160.2 million tonnes against a consumption demand of 153 million tonnes. World consumption is projected to grow by 2.15%, only a fraction down from the 10-year average of 2.29%. For 2006/07, world export availability is projected to exceed import demand by more than 4 million tones. Unlike few other countries, which produce sugar for exports on a regular basis, Indian exports were mainly to liquidate partly its surplus stocks. There is a serious mismatch between the cost of production of sugar in India and the international price. On several occasions, international prices have been ruling way below the cost of production of even the most efficient producer of sugar.
24
Source:www.mcxindia.com
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Why Futures in Sugar Since Sugar industry is being slowly decontrolled by the government, market force would be putting its impact on the price behavior of the commodity. India is the only country in the world where sugar price goes against the sugarcane price. It indicates too much interference of the government in the industry. For the industry to become competitive, allowing future trading would lead to revivals of real market forces which will be for good health of the industry in the long term. All the factors for success of future trading such as organized and developed spot market, large number of participants, and active traders are very much present in the Indian sugar industry. By products of sugar cane industry is getting a lot of attention and it would add depth in the market. Sugar based new industry such as ethanol and its use as fuel that has been mooted by government would constantly strengthen the scope of sugar future trading.
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Practical Hedging Example Sugar: Example25 In Dec 2006 if a sugar mill owner expects an output of 5000 tonnes of sugars in May 2007. If Sugar mill Owner has done a future contract for May 2007, He might have got a sale contract at price of 1703.Today since spot price of Sugar in May2007 is nearly 1200-1300. He could have cover his short position and booked a profit of nearly 400-500 Rs. Since right now the selling price in spot market is even less than Cost price, this business loss could have turned into profit even in this worse market scenario. In case in opposite scenario if price of sugar have rose more than 1700. Let’s say 1900.Future contract may give loss. This can be effectively avoided by putting a strict stop loss at resistance say 1720. Numerically Cost of manufacturing 1550 Rs/ql On 1st Dec 2006 Spot price 1670 Rs/ql May2007 future 1703 Rs/ql Took a short Position. Senario 1. On 20th May 2007 Say Spot price 1250 Rs/ql Cover position in may 2007
25
Assumed situation with real data
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Future Price
1270 Rs/ql
Business loss 1550-1250=300 Rs/ql Profit in future contract 1703-1270=433 Rs/ql Total profit =433-300=133 Rs/ql Senario 2 On 20th May 2007 Say spot price 1900 Rs/ql Future Price 1925 Rs/ql Before reaching to 1925 from 1703 We will put strict stop loss at resistance at (say) 1720 Rs./ql Business profit 1900-1550=350 Rs/ql Loss in future contract 1720-1703=17 Rs/ql Total profit= 350-17=333 Rs/ql. So in both the scenario we are making profit.
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The South India Sugar Mills Association (SISMA) From our search in sugar from internet, we learnt about The India sugar mill association (http//www.indiansugar.com/). The Andhra chapter comes under (SISMA) The South India Sugar Mills Association. We called the General Secretary of SISMA Mr.R.S. Bhale Rao and had telephonic talk with him and fixed an appointment. At the same time we got database of sugar mills. We used the database and followed these companies.
Prudential sugar We interviewed Mr. G. Nageswar Rao (Technical Advisor of
Prudential
Sugar).We learnt that company has exposure to forward contract where it had entered into a contract to sell molasses over the period of time, which is a major source of revenue especially when sugar is sold in loss. Mr. G. Nageswar Rao was not happy with the regulation and protectionism. As per him the only solution of this is to diversify the production towards ethnol.
Rayalseema Sugars We met Mr. K Madhusudan, Chairman and managing director of KPS Group. Rayalseema sugar is one of the subsidiaries of KPS group. Since Mr. Madhusudan is already trading in copper future he was having very fair idea about the whole concept. He has also opened an account to trades in commodity with STCI Commodities Limited.
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GMR Industries
Background Note
GMR Group is one of the biggest corporate house in India with core expertise in Infrastructure, diversified in various sector like energy, manufacturing as well as agri business.
GMR Group's Agri-Business comprises of a sugar plant located at Sankili in Srikakulam district of Andhra Pradesh that has a cane crushing capacity of 5000 tonnes per day. Besides, it is also setting up two more sugar plants in Karnataka.
Two dimensional growth strategies
Forward Integration Sankili Sugar Plant has set new standards in forward integration by initiating down stream production of plantation Sugar and co-generated power, ethanol rectified spirit, bio-composted organics manure and bio-fertilizer CO2 gas in its distillery units.
Backward Integration GMR Industries Sugar business has implemented several innovative measures in backward integration. The cane development programme being one of several initiatives has transformed the socioeconomic face of the region. Date 10th May, 2007 Interview with Mr. R. Ramakrishnan
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This fact is very much of concern that Indian sugar is much out of competition in term of quality and manufacturing cost. Some times price of cane is much more than the price of refined sugar in world market.
The first reason being Kind of harvesting is done in India. “Indian socio cultural formation has ruined the agricultural system. You will find 28000 families with 28000 plots of small land in just 32 acres of land and each of them having various interest of cultivation. This is main hurdle in standard corporate cultivation with use of machinery. �says Mr R. Ramakrishnan26. Although, GMR is in talk with these small landlords to integrate lands for initiating corporate cultivation. Meeting 28000 landlords, convincing them and bring them on common platform itself is hectic task and require a big deal of time. He was not much aware about operation of future market.
26
Joint Managing Director, GMR industries Limited
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Hyderabad Stock Exchange (HSE) episode Hyderabad Stock Exchange (HSE) is one among 23 regional stock exchanges of India. It has around 300 brokers (members) affiliated with it. It works on the electronic platform of WAN and VSAT.
Before emergence of BSE and NSE, Hyderabad Stock exchange had a good volume of trading. But the pan India reach of BSE and NSE has posed a threat on these regional stock exchanges. There business has come down drastically. Hardly a few trades take place on these exchanges. This has given a crisis to the exchange.
To sustain in the market and grow, HSE has taken several restructure measures. It is in the process of demutualization. It has floated a 100 % owned subsidiary named HSE Securities Ltd. This new company acts as a broker of NSE and BSE. It gives the facility to its brokers to trade in NSE & BSE through its own platform. By this way, it has managed to keep it relevant in this market scenario and also is a very good source of revenue generation for it.
Introducing Commodity to Stock Exchanges is an innovative idea. Our company is already working on the idea to provide terminals and franchise to some regional exchanges so that they can trade in commodity derivatives through our terminals. This will give exchanges an alternate avenue of business and a facility to its broker to also deal in commodity futures. Our company is already in talk with three regional stock exchanges for this possible partnership. They are •
Madras Stock Exchange
•
Bangalore Stock Exchange 62
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•
Interconnected Stock Exchange
We were assigned the task to explore the possibility of similar kind of tie up with Hyderabad Stock Exchange also. Our CEO Himself briefed us about the possible intricacies of such possible collaborations and mandated us to approach HSE on behalf of the company.
Hence, we approached HSE officials in this regard. We had a meeting with two deputy CEOs of HSE and HSE Securities. Mr.V.R.Bhaskar Reddy and Mr. Someshwar Rao. We also discussed this issue with their administrative head Mr.K.Sri Hari. We got a positive feedback from them and we scheduled a high powered next round of talks with them in couple of days. Our CEO himself came for the meeting on 16th May.
The outcome of the meeting was that they were convinced with this idea but at the same time all complication of legal aspect needed to be addressed. So, we were told to submit a detailed proposal for this joint partnership and for due diligence.
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Commodity Sutra‌ An Initiative We found in all these interviews and meeting that there is a communication gap which is mother of all this complications. So there should be a forum to speak on the concern where everyone is listening. To just understand the reaction of market participation and to work on the bridging this communication gap we launched a web site as apart of our project.
www.commoditysutra.forum5.com
We received good response and appraisal to whomever we discussed about this website. We believe that there can be many these kinds of small steps to boost the pace of awareness level.
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Commodity exchange in India27 The list of exchanges that has been allowed to trade in commodities are 1. Bhatinda Om & Oil Exchange Ltd., Batinda. 2. The Bombay Commodity Exchange Ltd.Mumbai 3. The Rajkot Seeds oil & Bullion Merchants` Association Ltd 4. The Kanpur Commodity Exchange Ltd., Kanpur 5. The Meerut Agro Commodities Exchange Co. Ltd., Meerut 6. The Spices and Oilseeds Exchange Ltd. 7. Ahmedabad Commodity Exchange Ltd. 8. Vijay Beopar Chamber Ltd.,Muzaffarnagar 9. India Pepper & Spice Trade Association. Kochi 10. Rajdhani Oils and Oilseeds Exchange Ltd. , Delhi 11. National Board of Trade. Indore. 12. The Chamber Of Commerce, Hapur 13. The East India Cotton Association Mumbai. 14. The Central India Commercial Exchange Ltd, Gwaliar 15. The East India Jute & Hessian Exchange Ltd, 16. First Commodity Exchange of India Ltd, Kochi 17. Bikaner Commodity Exchange Ltd., Bikaner 18. The Coffee Futures Exchange India Ltd, Bangalore. 19. Esugarindia Limited. 20. National Multi Commodity Exchange of India Limited. 21. Surendranagar Cotton oil & Oilseeds Association Ltd, 22. Multi Commodity Exchange of India Ltd. 23. National Commodity & Derivatives Exchange Ltd. 24. Haryana Commodities Ltd., Hissar 25. e-Commodities Ltd.
Out of these 25 commodities the MCX, NCDEX and NMCE are large exchanges and MCX is the biggest among them.
27
Source: PTI / New Delhi April 11, 2007
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Future Trading: the Growth story •
Futures trading on commodity exchanges rose by more than 70 per cent to Rs 36.76 lakh crore in 2006-07 compared with Rs 21.55 lakh crore registered in 2005-06. In 2004-05, the total turnover on the three national and 20 regional commodity bourses stood at Rs 5.70 lakh crore.
•
According to data released by commodity market regulator Forward Markets Commission (FMC), during March 16-31 of the last financial year total turnover from futures trading was Rs 1.67 lakh crore. In the first half of March, the turnover stood at Rs 1.82 lakh crore.
•
The turnover would have hit the Rs 37 lakh crore level, but for this decline in business in the second half of March, a commodity analyst said.
•
The overall surge in the turnover of commodity exchanges in 2006-07 has been primarily led by the three leading national bourses, Multi Commodity Exchange (MCX), National Commodity and Derivatives Exchange (NCDEX) and National Multi Commodity Exchange of India (NMCE), which together account for more than 97 per cent of the business. •
MCX has emerged as the top commodity bourse in the last fiscal with a share of 62.3 per cent in the total turnover of
futures trading followed by NCDEX with 31.7 per cent share.
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•
Leading agri-commodity exchange NCDEX continued to march ahead with its turnover rising to Rs 42,982 crore during March 16-31 from Rs 41,665 crore during Mar 1-15 and Rs 33,632 crore in February 16-28.
•
Futures market size relative to GDP in the US is about 90%, in China about 85%, in Brazil about 200%, and in India? 5.81% in 2003-04, 20.14% in 2004-05 and 66% during 2005-06.28
•
Participation of banks, mutual funds and FIIs, along with introduction of options trading with amendments to the FCR Act, 1952, will boost the commodity futures trading further in the coming years
Commodities to surpass equities in the next 2-3years – Even when stock exchanges are enjoying an unprecedented boom and increasing investors’ wealth, it is the commodities that are making a steady progress. Commodity exchanges have not logged as much volume of trade and as much value as securities have done, but there is no doubt that in the next five years or so the commodity exchanges will overtake stock exchanges in terms of volume and value. •
The turnover of commodity and stocks futures grew at a scorching pace in 2006-07, accounting for 80 per cent of the total turnover of the cash and futures markets. The share of futures in the total turnover was 74 per cent a year ago and 60 per cent two years ago.
•
The turnover of the commodity and stocks (including index futures) futures rose 58.8 per cent in 2006-07, crossing the Rs 100 trillion mark at Rs 110.53 trillion. The commodity futures outperformed the stocks and index futures by posting 70 per cent growth in turnover. The turnover of stocks and index futures rose 53.7 per cent.
28
http://www.pib.nic.in/release/release.asp?relid=17932&kwd
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•
The three major commodity exchanges had a combined turnover of Rs 36.37 trillion (Rs 36, 37,009 crore) during the financial year.
•
This was attributed to introduction of international commodities such as Brent Crude, natural gas and gold by the MCX. The turnover of these commodities rose 164 per cent, and their share in the total turnover increased from 47.6 per cent in 2005-06 to 66 per cent in 2006-07.
•
On the stock markets, the BSE and the NSE clocked a total turnover of Rs 74, 15,257 crore due to introduction of 49 new stocks futures during the year.
•
The commodity futures market has been growing at a higher pace with its share in the total pie increasing from around two per cent in 200405 to 30.7 per cent in 2005-06 and 32.9 per cent in 2006-07.
•
The pace of growth of commodity futures would have been much more, if the government had not banned futures trading in the price-sensitive agro commodities like urad, moong, tur and wheat in the second half of 2006-07. The ban halted its pace of growth from 126.4 per cent in the first half of 2006-07 to 32.7 per cent in second half of 2006-07.
•
Among the five major exchanges that allow futures trading, the National Stock Exchange accounts for 66.6 per cent, the Multi Commodity
Exchange
(MCX)
20
per
cent
and
the
National
Commodities and Derivatives Exchange (NCDEX) 10.5 per cent. The BSE has a minuscule 0.50 per cent share, while the NMCE accounts for the remaining 2 per cent.
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The Roadblocks: Commodity trading despised Ban on Futures: •
The government banned futures trading in wheat and rice on February 28 when the Budget was presented in Parliament while announcing a freeze on launching new contracts till an expert committee submits it report. Earlier, urad and chana futures were banned.
A five-member committee headed by Planning Commission Member Abhijit Sen has been asked to study “the extent of impact, if any, of futures trading on wholesale and retail prices of agricultural commodities”
The report submitted found an explicit relationship between wholesale price and commodity future trading. For some commodities like metal,( those were in line with the global prices and the factors ),exchanges were able to discount all the parameters associated in WPI. As the entire metal trading in the world market is done through exchanges and commodity exchanges in India being a representative of global metal exchanges, they were able to synchronize themselves with the WPI. For agri commodities Exchanges were based on the factored and averaged out inputs in the spot markets, hence were able to reflect WPI.
As report discovered, in a short span of around 30 months, future commodity trade has grown to an average daily turnover of Rs.7, 000 crores with a highest daily turnover of Rs.17, 988 crores. It emphasized on the emergence of a pan-Indian market for commodities in India that will have unique prices for the entire country. While highlighting the importance of strategic alliances that MCX has already gone into with exchanges like NYMEX, LME, Tokyo Commodity Exchange, Chicago Climate Exchange etc., he expressed
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his satisfaction at the performance of MCX and hoped that India will become global hub of commodity trading in near future.
Speculation For a long time since the Forwards Contract (Regulation) Act 1952, commodity trading was in disrepute because of unregulated speculative activity. The attitude towards commodity trading was one of suspicion and frown. Now things are changing for the better as both the government and other stakeholders such as traders, investors, farmers, regulators and financial institutions have realized that it is not enough to set up commodity exchanges but a strong regulatory mechanism should be in place for orderly functioning of these exchanges so that both individuals and institutions participate on a large scale to bring about price discovery and stability to the market. The ultimate beneficiaries in this scenario will be farmers who deserve a fair deal in a predominantly agricultural economy of India.
There is no doubt that the situation is a far cry from the one that prevailed towards the end of the 1960s. Then, commodities trading were looked upon with suspicion. Traders were seen more as speculators in commodities rather than market makers. This was because of high speculation that was order of the day then. Largely, wrong perception owed to the absence of regulatory mechanism. Today the situation is different as there is a regulatory mechanism in the form of Forward Markets Commission. But there is still a need to strengthen regulatory mechanism. There is also another aspect of speculation. No market can thrive without speculation; much less futures. Care should be taken to see that unrestrained speculation does not create unwarranted volatility in prices to the detriment of stakeholders. Commodities are no longer seen as speculators’ heaven as more and more investors - both individuals and institutional - coming into commodities markets on a large scale. That is the volume of trade on commodities exchanges such as NCDEX, NMCE and National Board of Trade (NBOT) has 70 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
reached Rs 7.5 lakh crore during the first five and a half month till September 15 of the current fiscal. The trading volumes on commodity exchanges surpassed that of futures on the capital market in August 2005 for the first time in the history of the domestic derivatives in the market. If the current trend in growth continues it is said that the trade volume will cross Rs.10 lakh crore by 2010.
Excerpts from an interview taken with FMC Member, Mr.Kewal Ram throws some light on the issue Regulatory Aspect:
“I feel strongly that for orderly functioning of commodities exchanges there is a greater need for efficient regulatory bodies.SEBI and other bodies have regulatory powers over the functioning of stock exchanges in the country. But it would be a mistake to draw a parallel between these two sectors. After all stocks are derivatives and commodities are real. So I feel there is a need for greater participation of financial institutions, banks, FIIs and general investors in commodities spot and futures, apart from of course, traders. This will ensure broadening as well as deepening of the commodities markets. Both price discovery as well as a fair return to farmers, the real actors in the entire drama, will be possible if there is wider participation of these bodies. We, at FMC have prepared a plan to strengthen regulatory mechanism more or less on the lines of SEBI but differing in some details in view of differential nature of stocks and commodities. After all the primary function of a commodity exchange is to facilitate the spread of correct information for all stakeholders so that transparency in transactions makes price discovery possible. A strong regulatory mechanism is also needed to check price-rigging, circulatory trading etc. Forward Contract (Regulation) Act 1952 is being amended to factor in changes in subsequent period. Once a legal framework is put in order commodities exchanges will become better and more efficient conduits of right information for stakeholders. We have developed software
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somewhat like SEBI’s to facilitate online information. But it is not fair to compare our software with SEBI’s as that body has spent Rs.20 crore on it. It has also a long experience in stock regulation. Prospects for commodities in this country are really bright. We have already overtaken the Mumbai Stock Exchange (BSE) in terms of value. I am sure that in the next 2-3 years will see an exponential growth of commodities trading.”
Ban on Commodity futures: A case of excessive political intervention in the Economic subsystem
INDIA is unlikely to shut down its agricultural commodity futures anytime soon, if accolades from the Economic Survey are any indication. Calling the ban on urad and tur futures ‘temporary’, the survey has forecast that exchanges are likely to see even higher volumes and value of items traded in the coming fiscal. The total turnover of commodity derivatives market has already crossed 76% of India's GDP. "Futures market, as observed from the cross-country experience of active commodity futures markets, helps in efficient price discovery of the respective commodities and does not impair the long-term equilibrium price of commodities," the survey has stated.
Referring to fears about speculators distorting the market, the survey said, "At times, price behavior of a commodity in the futures market might show some aberrations... but it quickly reverts to long-run equilibrium price, as information flows in, reflecting fundamentals of the respective market." Giving speculators a clean chit, the survey said they play a role in providing liquidity to markets and may sometimes benefit from price movements, but do not have a "systematic causal influence on prices" .
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Ironically, in the last one year, the government has clamped down heavily on farm futures contracts by increasing the margins, reducing volatility or simply banning them, as in the case of tur and urad to prevent 'unhealthy' speculation.
All eyes are now on the proposed amendments to the Forward Contracts (Regulation Act), 1952. The survey believes the amended Act, expected to be passed in this session of Parliament, will ensure "orderly conditions" in commodity futures. The Act intends to substantially enhance the surveillance and monitoring powers of the regulator Forward Markets Commission. It also allows the government to introduce options in commodity futures. The market has been looking forward to the introduction of options as a more sophisticated way of trading in commodity derivatives. Meanwhile, though farmers are meant to be the chief beneficiaries of commodity exchanges, gold has been the real star of the show this year. Punters playing on geo-political tensions ensured that gold and silver had 50% share in terms of volume. Guar (11%) and chana (10%) were the only farm commodities with doubledigit figures. Due to the frequent clampdowns and uncertainty in farm futures, there has been a sharply divergent pattern of growth between MCX, which derives its market share from metals, energy and bullion, and NCDEX, which is the biggest in farm commodities. For the first time in three years, NCDEX saw reduced volumes. Up to December 31, the turnover on NCDEX shrank from Rs 10 lakh crore in 2005-06 to Rs 9.44 lakh crore in 2006-07.
On the other hand, MCX turnover rose from Rs 9.6 lakh crore in 2005-06 to Rs 16 lakh crore in 2006-07. Riding on the back of a global boom in metals, energy and bullion, the growth of MCX in 2006-07 is comparable with some of the international commodity indexes such as Goldman Sachs Commodity Index, Dow Jones AIG Commodity Cash Index and Reuters/Jefferies Commodity Research Bureau, the survey has pointed out. Though punters on metals and gold have been the biggest players in the market till now, the
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survey is hopeful of farm commodities getting their share of the spotlight. "Agricultural commodities are expected to gain importance, helping their price discovery process and thereby providing an opportunity to farmers," the survey said. That may well come true. Last year, technology allowed India's online commodity markets to reach the smallest investor's doorsteps. This is something even bourses in Chicago and New York are just catching on. Traditional regional exchanges, using the open outcry method, now have just 3% share of the total commodity derivative business.
Playing With Futures: Market Manipulation in Commodities Markets
Farmer could not make money despite having a better harvest of Arhar dal this year because there was a glut in the market. A trader in wholesale grains market in Who sold his stocks at much lower prices than last year, hoping he would buy fresh stock at further lower prices. To his dismay, the market went up instead of down, and so much so that he couldn't afford to buy fresh stocks at such high prices. Housewives are testing out alternative food concoctions on her family because she can't afford to prepare sambhar, as pulses are being sold at exorbitant prices between Rs.45 to Rs.60 per kg. In spite of high price of produce the fact is devastated by poor returns and a mountain of debt, the Indian farmer is preferring suicide to a life of misery and penury.
Fortunately, most Indian housewives don't exercise that option and instead curse their fate while buying more than Rs.60 a kg for daal (pulses), more than Rs.40 per kg for tomatoes; and a further amount of around Rs.60 a kg for capsicum. Even rising wheat prices are triggering alarm bells with the government announcing wheat imports.
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The obvious question is, if the farmer is not getting better returns and the housewife is paying through her nose, where is the money going? If neither production has gone down, nor has the consumption skyrocketed, then why are prices hitting the roof? Most Traders acerbically blames it on futures trading in the commodity market.
Vindicating the point, so does Ashish, A pulse trader at the BegumBazar (Hyderabad), is alleging that prices of commodities are not being fixed as per demand or supply, but by the commodity exchanges in order to book profits. Traders like Ajay, accusing commodity exchanges of manipulating markets, have angrily demanded a ban on their operations. Even the UPA Chairperson, Sonia Gandhi, while chairing the Core Ministerial meeting of the government to review price rise, flatly put the onus of unprecedented inflation on commodity markets. But the Chairman of commodity futures regulator, the Forward Markets Commission (FMC), S. Sundaresan, copiously doesn't think so. The increase in prices is, how do we put it, "In sync with market trends," as he sassed recently rising up to defend the futures markets.
Sundaresan's point could well put rhetoric to shame, considering the fact that there are clear indications that speculation is rampant. And least of all being the memorandum to the President of India submitted on July 5, 2006, by Confederation of All India Traders, who allege, "The regulator has totally failed to monitor abnormal increase in prices of commodities in the market." And most of all, the following: •
The closing price for mentha oil in October 2005 was about Rs.450 per tonne; and the trading volume was 'zero'. By March 2006, the volume traded in mentha oil had skyrocketed to about 400,000 tonnes and the price had gone up to more than Rs.800 per tonne. Most surprisingly, the price fell to Rs.420 (a sign?) in the next two months.
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•
Often, the volumes traded in commodity exchanges are 40 to 50 times the actual supply of the commodity.
•
In turmeric, trading went on for more than one year without any physical delivery of the commodity.
•
There are persistent allegations that about 250 small commodity traders across India have committed suicide after going bankrupt in 2005-06.
•
The trading volume in the commodities exchanges went up by a staggering 274% in 2005-06. The rate of growth continues to be very high even now.
Commodity markets were permitted by the government to free farmers from the clutches of local traders, who used to form a cartel and buy the farmer's produce at prices much lesser than market prices. The online version of commodity trading was intended to ensure that such "bonded" farmers could sell their produce online to millions of prospective traders across the world in an internet based commodity exchange for price discovery of their produce. And if they felt that they were still not getting the right price, they could sell it in futures market - at an agreed price they felt could be fetched after a few months when the demand for their produce could go up, increasing the market prices of the commodity. The exchange also provided a platform to foreign traders to buy Indian goods for their own markets. But hardly any farmer trades his produce on the exchange.
It's again the same for wholesalers - medium and big - who have been trading their agri-produce after buying it from farmers and small wholesalers. And it is this group that has been suffering the most due to the entry of FIIs and other big stock market players in commodity trading. As mentioned before, not only is this group now demanding a ban on futures commodity markets, but are also pleading for warning to be given to various similarly stuck traders. A spice merchant from Delhi provides an incriminating insight,
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"Total produce of small cardamom in India is 12,000 tonne, valued at Rs.480 million. A big trader can corner 80-90% of the produce through commodity exchanges making the prices skyrocket in open market..." The spice man may not be too much off the mark.
The weakening of rupee and non-availability of pepper outside the exchange resulted in the prices of this sibling of salt zooming up to Rs.7,150 from Rs.6,850 per unit (per 10 tonne) on June 26. Ajay, a Bullion trader at Mahan kali, blames futures trading for the upward swing in gold prices from Rs.6,200 six months ago to Rs.11,500 per 10 grams last month, and silver from Rs.12,200 per kg to Rs.19,800. There are also allegations of some tainted stock market players like Ketan Parikh manipulating the commodity market to book heavy profits. The NCDEX Managing Director P. H. Ravi Kumar denies this. In any case the exchange itself imposes margins to ward off speculators. Recently, NCDEX imposed a margin of 45% on urad daal and 18.5% on tur daal to discourage speculators. Trading on mentha oil had to be suspended for sometime on July 9.
The basic issue now is how to strengthen the commodity regulator and speed up the physical delivery system. True, there have been excessive speculations, but only in commodities like guar gum, urad and mentha oil, two of which do not directly affect ordinary people. It is also a fact that besides wheat, dals and pulses, prices of other commodities like milk, detergents, vegetables and oil too have gone up. And not all of these are being traded in the futures market. Of course, part of the hike is additionally due to seasonal factors.
The Price Management Fundamental
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On the basis of parameters like rainfall, spread of disease, product managers at commodity exchange inform traders of likely volumes of the crop. That is the precise moment that big players step in - buying left, right and centre making prices go up. The speculators pitch in, creating volatility in the market. Small and medium traders, who had already sold off their produce at throwaway prices, hoping to buy it at later stage, rue the lost opportunity. Even those who dare to buy in futures, hoping the market would still be high, come in for a shock to find that speculators and big traders have sold off their stocks causing the prices to crash. They have to pay the huge difference after which traders either quit the market for good or join the speculation bandwagon. A telling example is turmeric, where speculative futures trading were being done for more than one year without any physical delivery of the product.
There were clear indications from experts about a bumper crop and most traders, including one Hyderabad-based trader who lost Rs.5 million, sold turmeric short (in layman's terms, they gambled on turmeric prices falling in the future). However, a selective and shadowy group of big traders cornered the market and the small traders realized that they did not have the resources to go on gambling. Most went bankrupt, or withdrew with heavy losses. And without surprises, something exactly similar seems to have happened with the commodity mentha oil. Overall, there have been four confirmed cases of suicide amongst Delhi-based commodity traders in recent weeks. Though one would not wish to connect, but in fact, there are many traders who claim more than 200 small traders across India have committed suicides.
Price Discovery is a Ruse
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Futures trading perform two important functions: •
price discovery
•
Risk management
It is useful to all segments of the economy – •
The farmer because he can get an idea of the price his produce can fetch him after some time;
•
The consumer since he gets alerted about future prices of essential commodities
•
Exporters, as it provides an advance indication of the likely price. Commodity markets were supposed to have eliminated the risk of being duped by a wholesale trader. However, the problem crops up when speculators are allowed to go wild with futures trading without any effective regulation from a body or an institution.
The commodities market regulator FMC simply doesn't have the manpower, the resources and the expertise to effectively regulate the rapidly growing speculation in scores of commodities across India.
There are many analysts who compare the present status in the Indian commodities markets to the Wild West scenario that prevailed in the Indian stock markets after the first flush of liberalization in 1991. While the Harshad Mehta scam triggered the formation of SEBI in 1992 to more effectively regulate the markets, It took many more scams and alleged scamsters like C. R. Bhansali and Ketan Parekh and more than a decade for SEBI to reach a stage where it could even claim that it is actually an effective regulator. Even now, FMC faces the dilemma faced by SEBI in the early 1990s - it simply doesn't have the wherewithal to prevent rigging, speculation and market fixing. These factors have led many traders to raise uncomfortable questions: 79 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
•
A whopping 98% of traders in commodities lost money... Why? Why doesn't the government close down defaulting exchanges or manage them better?
•
Why don't all exchanges increase margins or stop trading? Why are settlements of contracts still not transparent?
•
Why are market regulators unaware of trade intricacies?
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Prescriptions / suggestions The government had proposed to amend the Forward Contracts (Regulation) Act, 1952 that regulates the commodity markets by introducing an Amendment Bill in the Lok Sabha on March 21 this year. Some corrective measures proposed in the bill, and some more by some financial experts are: •
Increase number of FMC members from four to nine
•
Conferring power upon the FMC to levy fees
•
Make
provisions
for
'corporatisation'
and
'demutualization'
of
recognized. •
Make provisions for registration of members and intermediaries; allow trading in options.
•
Make provision for investigation, enforcement and penalty in case of contravention of the provisions of the FCR Act.
•
FIIs should not be allowed to trade in commodity futures.
•
The FMC should be headed by an economist.
•
The FMC should be handled by the finance ministry instead of the consumer affairs ministry.
•
All commodity exchanges should strengthen their warehousing facilities to boost storage and prompt delivery.
•
Convert warehouse receipts into a negotiable instrument.
•
Settlement of futures contracts to be made transparent.
•
Clearing house functioning should be improved.
•
Trading of non-deliverable goods like crude oil should be stopped as it promotes speculation and hedging.
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Commodity Futures: An Alternative Investment Avenue The first question which we are trying to address is the status of commodity futures markets in present scenario in India. They have been launched in 2003 after much consultation and much ban –allow imbroglio. Commodities have never intended to emerge as an investment class. Their primary aims were price discovery for various participants of spot commodity market and also as a tool to minimize risks involved with the price fluctuations and exigencies to traders, farmers and other stakeholders of business. When one goes into diagnosis of commodity derivatives, we find that even after excessive government restrictions, policy anomalies, disinterest of participants and fragmentation of markets, they have grown by leaps and bounds. Within 6 years of period, they have already attained 76% of country’s GDP and the volume of 3200000 crore! Our some of the exchanges compete with biggest in world commodity markets and are competitive enough. Still much has to be done and commodity market in India has to score much more in years to come in terms of penetration, maturity, regulatory control and transparency. Also a sizable amount of stakeholders, are still out of this business model and are still suspecting it as a derogatory for their business interest.
However, commodities in this country were never meant to be an investment tool for middle class. By investment tool we mean an asset class wherein surplus money of the economy can be pooled in to generate more growth for Economy as a whole and a capital investment for its investor.
The prime question here then how commodities are now considered as a serious alternative investment avenue, not only for its real participants but also for people who do not hold any direct business
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interest in commodities in which they are investing. They are not only speculators but also for bourgeoning middle class with its surplus money and expertise, who wants to take part in all pervading INDIA GROWTH STORY and contribute in the mainstream of national economy. The speculators are the most prominent investment class; those can be termed as people who take commodity as their investment tool. They are very integral part of any economical or business cycle and are also the one who are most despised. They are blamed for their capacity of over price volatility and inflated scenarios and are said to be hampering the business prospect of real stakeholders. We are analyzing the behavior and role of speculators in the commodity market. They do good to bring liquidity in the market and are generally the one who help in Market making. The findings of the role of speculators in Indian commodity market are well talked about. They are alleged for excessive price volatility and immature behavior of market as a whole. They are also said to be keeping the real players away from the market.
However, it should be kept in mind that forward contracts are means of hedging against the risk of price volatility or uncertainty of supply. But hedgers can not function without the presence of speculators. In fact, they are the speculators to whom the real players transfer their risk. If the market is restricted to hedgers, who are actual producers or users of commodity, the volume of many contracts could be so low that on some days a trade cannot occur, because a buyer cannot find a seller or vice versa. This is where the speculators step in. They buy or sell in forward trades, not with the intention of actually making or taking delivery, but with the idea of transferring the contract concerned to an actual producer or user at a profit. They can, therefore, buy and sell a large number of contracts enabling the hedger to transfer risk with ease by injecting liquidity into the system. But the moment speculation begins, there is the risk that prices could be
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manipulated to move consistently in one direction for significant periods of time, inflicting losses on some and gains for the others.
% 2004-05
2005-06
increase
Value
5.71Lakh Crore
21.34 Lakh Crore
274%
Volume
1942.1 Lakh tonns
6685 Lakh Tonns
244%
Now coming to our core question:
How efficient are commodity derivatives as an investment tool? For this we need to compare the risks and returns of commodity futures with other asset classes. Also we would like to emphasis that commodity markets in India are now in the phase of a mega bull run which is going to stay for long time. So as an asset class, they prove to be a fantastic tool in the hands of prudent investor. If we take MCX COMDEX as a representative of Commodity market in India and compare it with other markets n the world, we find that other benchmarks showed negative returns, ranging from 1 per cent to 7 per cent while MCX COMDEX gave an annualized return of 18.86%. This implies that the Indian index has been steadily bullish compared with its global counterparts most of which are in the negative return zone. MCX Comdex: It was created in June 2005 to mirror the commodity prices discovered at the Multi Commodity Exchange of India (MCX). Like the GSCI, there is no limit on the number of underlying commodities. The MCX Comdex now tracks 10 commodities selected on their liquidity and their importance to the physical market. Equal weights are assigned at group level (energy, agriculture and metals). It relies on a unique combination of liquidity on MCX and physical market size to determine its component weighting. Only near or near-deferred contract months are taken for the index computation.
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Currently, gold, silver and copper represent the metals group, while energy and agriculture groups comprise crude oil, and Soya oil, cottonseed oilcake, wheat, and rubber, urad and guar seed. The index is not traded on any of the exchanges in India due to regulatory constraints. Among the benchmark indices studied only MCX Comdex and RICI had positive returns for the period (see Table). The Indian benchmark MCX Comdex provided the highest annualized return of about 18.33 per cent with a moderately higher annualized risk (19.31 per cent). This was followed by the RICI, with an annualized return of 5.56 per cent (annualized risk: 17.04 per cent). 29Risks
and Returns: MCX Comdex VS Global Benchmark Indices GSCI
DJAIG
RICI
CRB
COMDE X
Annualized Return
-1.35
-5.21
5.56
-6.70
18.83
Annualized Risk
21.84
17.81
17.04
16.82
19.31
Max/Min 22.87
18.41
18.05
21.34
34.24
day -3.77
-3.06
-2.85
-2.91
-5.05
-29.26
32.63
-39.84
97.50
9.12
11.98
1.90
35.20
Average return Max
per
drawdown Return /Risk Ratio Return date
the 18.10
from of
-6.18
MCX
COMDEX inception(June 2005)
29
www.commodityindia.com
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SUGGESTIONS TO MAKE INDIAN COMMODITY MARKETS MATURE:
•
The commodity derivative market is relatively insignificant at present to be influenced by the money/forex markets. But this may not be the case in the near future. In the USA,the commodity futures trading commission trading(CFTC)has jurisdiction to regulate all types of derivative
contracts-forex,government
securities,
interest
rates,
equities ,etc.In UK,even greater convergence of regulatory authority is achieved by vesting regulatory powers to a single agency, the Financial Services Authority. In India, there have been occasions to disentangle of issues of regulatory jurisdiction between RBI and SEBI.The proposals of allowing stock brokers to trade in commodity derivatives market and regional stock exchanges being allowed to trade commodity futures contract are being discussed at regulatory levels. Therefore, similar issues of regulatory jurisdiction and the desirability of regulatory convergence are likely to become relevant. •
The long period of prohibition on forward trading in major commodities has weakened the commodity derivatives in India. Futures markets in commodities find themselves left far behind the derivative markets in developed countries which have been functioning uninterruptedly. Even the securities market in India, which was far behind the commodity derivatives in terms of volume, level of participation etc.in 1960s, has grown rapidly. This has caused some players in commodity markets to migrate to the securities market. The equity trading cult was established and modern infrastructure, systems and regulations were introduced with the emergence of NSE and SEBI.
•
The challenge before the commodity markets is to make up for the loss of growth and development during the three decades of restrictive
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government policies, which had the effect of delaying the growth of commodity derivative markets. •
The best practices which are being discussed to be implemented are:
Daily mark to market margining.
Time stamping of trades
Novation of contracts and creation of trade guarantee fund.
Back-office
computerization
for
the
existing
single
commodity exchange and online trading for the new exchanges. •
Demutualization for the new exchanges.
The market in India has been very traditional so far. These new techniques of making market more developed are facing steep resistance from the traders. A sizable chunk of trade often migrates to informal system because of introduction of these measures from time to time. A latest example could be a virtual close down of Bombay and Kanpur
commodity
exchanges
after
enforcing
new
regulatory
mechanisms. The traditional players find themselves at difficulty in changing with methods of trading, clearing and settlement suddenly. •
There is a widespread lack of awareness about the role and technique of futures trading among the potential beneficiaries. Only massive efforts to train younger generations in modern trading techniques and allowing the already trained stock brokers to trade in commodity futures can obviate the need to depend on the traditional players to revive the commodity derivative market.
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Latest developments in Commodity Markets in last 1 Year: •
The turnover of commodity and stocks futures grew at a scorching pace in 2006-07, accounting for 80 per cent of the total turnover of the cash and futures markets. The share of futures in the total turnover was 74 per cent a year ago and 60 per cent two years ago.
•
The turnover of the commodity and stocks (including index futures) futures rose 58.8 per cent in 2006-07, crossing the Rs 100 trillion mark at Rs 110.53 trillion. The commodity futures outperformed the stocks and index futures by posting 70 per cent growth in turnover. The turnover of stocks and index futures rose 53.7 per cent.
•
The three major commodity exchanges had a combined turnover of Rs 36.37 trillion (Rs 36,37,009 crore) during the financial year.
•
This was attributed to introduction of international commodities such as Brent Crude, natural gas and gold by the MCX. The turnover of these commodities rose 164 per cent, and their share in the total turnover increased from 47.6 per cent in 2005-06 to 66 per cent in 2006-07.
•
On the stock markets, the BSE and the NSE clocked a total turnover of Rs 74, 15,257 crore due to introduction of 49 new stocks futures during the year.
•
The commodity futures market has been growing at a higher pace with its share in the total pie increasing from around two per cent in 200405 to 30.7 per cent in 2005-06 and 32.9 per cent in 2006-07.
•
The pace of growth of commodity futures would have been much more, if the government had not banned futures trading in the price-sensitive agro commodities like urad, moong, tur and wheat in the second half of 2006-07. The ban halted its pace of growth from 126.4 per cent in the first half of 2006-07 to 32.7 per cent in second half of 2006-07.
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•
Among the five major exchanges that allow futures trading, the National Stock Exchange accounts for 66.6 per cent, the Multi Commodity Exchange (MCX) 20 % and the National Commodities and Derivatives Exchange (NCDEX) 10.5 %. The BSE has a minuscule 0.50 per cent share, while the NMCE accounts for the remaining 2 %.
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National Spot Exchange The Concept
30
National Spot Exchange is a national level institutionalized, electronic, transparent spot Exchange, which is poised to transform the rural economy. National Spot Exchange is a state-of the-art unique market place providing customized solutions to various problems faced by the farmers, traders, processors, exporters, importers, arbitrageurs, investors and the general mass. This project was launched by Shri Sharad Pawar, Honorable Union Minister for Agriculture and Consumer Affairs, Food. and Public Distribution, in a function at New Delhi on 10th February, 2005. It has been floated by the following organizations
30
Chart no : 9 Source: National Spot Exchange
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MCX (Multi Commodity Exchange of India Limited), the leading commodity exchange in India, provides futures trading in more than 70 commodities. It is also amongst the top three Exchanges in the world in bullion futures.
FTIL (Financial Technologies India Limited) is among the very few companies globally that offers exhaustive solutions library for Exchanges, provides technology solutions to financial markets and facilitates expansion of stock broking terminals.
NAFED (National Agricultural Cooperative Marketing Federation of India Limited), the leading Government agency, engages in food procurement, distribution and storage activities.
Objectives To provide an effective method of spot price discovery in various commodities, in a transparent manner from across the country. To create a market where farmers can sell their produce and realize sale proceeds at the best prevailing price. To create a market where the processors, end users, exporters, corporates (both private and government) and other upcountry traders can procure agricultural produces at the most competitive price, without any counter party and quality risk. To create a transparent market where financiers, investors and arbitrageurs can invest money in buying various commodities across the country without going through the hassles of physical market. To provide authentic spot price of various commodities that can be used by the futures market as the benchmark price for settlement of their contracts on the date of expiry. To help the futures exchanges, Forward Markets Commission (FMC) and the Government in achieving the target of compulsory delivery in 91 PDF Created with deskPDF PDF Writer - Trial :: http://www.docudesk.com
all agricultural produces by way of creating a structured and standardized spot market. To promote grading and standardization of agricultural produces and create a market, where banks and money lending agencies can provide warehouse receipt financing to farmers and traders.
Services Offered By National Spot Exchange Electronic spot trading facility in multiple commodities with specific delivery centers. Grading, quality certification and standardization of commodities. Facilitating collateral financing and borrowing against warehouse receipts. Customized services relating to storage, transportation, logistics handling and shipment. Procurement and disposal of commodities through online trading system. Market Intelligence Reports.
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Participants in the National Spot Exchange
31
Advantages of National Spot Exchange
32 31
Chart no: 11 Source: www.Nationalspotexchangeexchange.com ( National Spot Exchange)
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Benefits to the Farmers
Realizing the best possible price at the time of sale for agricultural produces. Trade and payment guarantee. Cost reduction in handling and other activities. Access to a national level transparent market, where direct selling to processors or end users would be feasible. Increase in holding capacity due to availability of warehouse receipt financing. Increase in bargaining power due to availability of an alternative market.
Benefits to the Traders Common National Level Platform for Buying and Selling of Commodities. No counter party risk in trade. Procurement and disposal of huge quantity possible.
Benefits to Corporate / Exporters / Importers Facilitates bulk procurement operations without counter party and quality risks. Customized services relating to storage and logistics. Availability of professional services for grading and standardization.
32
Chart no: 12 Source: National Spot Exchange
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Complete avoidance of hassles relating to physical market operations.
Benefits to the Arbitrageurs Advantage of cash-future arbitrage electronically. Disposal of deliveries received on Future market. Jobbing and spread trading between cash and futures.
Benefits to the Futures Exchange Commodity exchanges would get a fair transparent spot price for settlement of their contracts. Regulator wants to move towards compulsory delivery in various commodities. National Spot Exchange would provide the stepping stone for this purpose. Investors can buy physical material on National Spot Exchange and do arbitrage with future contracts traded on MCX. Long term investors can buy physical commodities stored at National Spot Exchange warehouses and take advantages of off season price rise. It can create an alternative investment instrument, just like investing in stock market.
OPERATIONS PLATFORM AT NATIONAL SPOT EXCHANGE
Trading National Spot Exchange will provide an online screen based trading system, which can be accessed through VSAT, leased line or internet. It will launch daily expiry contracts, which will be traded from 10 am to 5 pm. The positions outstanding at the end of the day will result into compulsory
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delivery. But during the day, the transactions of offsetting nature will be netted off and delivery will be executed only with respect to the net quantity outstanding at the end of the day. All the terms relating to quality specifications, place of delivery, date of delivery and other conditions will be specified by the Exchange in advance and all contracts executed on the system would be on the basis of such terms only
33
Delivery and Settlement All trades executed on a day will be netted off at the end of the day as per the weighted average price of last 30 minutes. The profit / loss arising would be settled on the basis of MTM on the next day. The net sellers have to give delivery by way of depositing goods in the Exchange designated warehouses / storage tanks within T + 3. The buyer's account will be debited by the Exchange on T + 4 and delivery order will be handed over to them after ensuring that payment is through. On T + 4, pay out will be credited to the 33
Chart no: 12 Source: National Spot Exchange
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seller's account. In case the seller fails to give delivery, the position will be auctioned / closed out at the risk and cost of the seller separately. In case the buyer fails to make payment, the buying position would be auctioned by the Exchange at the risk and cost of the buyer.
34
Risk Management and Surveillance The Exchange will use various tools for risk management, margining and surveillance to ensure market integrity. All positions outstanding in the market would be subject to margin payable by both buyers and sellers. However, if the sellers have deposited goods in the Exchange designated warehouses, margin will not be applicable on such positions.
34
Chart no: 13 Source: National Spot Exchange
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Settlement Guarantee Fund The Exchange will guarantee performance of all contracts executed on the Exchange platform. For this purpose, the Exchange will maintain a settlement guarantee fund. Notwithstanding default of any member, the pay out will be declared as per the Exchange schedule.
Technology National Spot Exchange gets the strategic advantage of having Financial Technologies
(India)
Ltd.
as
its
technology
partner
for
delivering
technologically advanced solutions to market participants. FTIL is proven class of end-to-end Exchange Trading technologies, addressing Trading / Surveillance / Clearing and Settlement operations. It would deliver a cuttingedge to the National Spot Exchange Trade Life Cycle i.e. Pre-Trade, Trade and Post-Trade operations.
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About The Organization
UTI SECURITIES LTD. (UTISEL)
UTI SECURITIES LTD. (UTISEL) was incorporated on June 28, 1994 by Unit Trust of India as its 100% subsidiary and on April 17, 2006 the entire share capital of the company was transferred to Securities Trading Corporation Of India Ltd. [STCI] and its nominees. UTISEL has been working as an independent professional entity for providing financial intermediary and advisory services to corporate institutional and retail clientele. The Company has built up a reputation for transparent and fair execution of transactions, which have been well received and appreciated by its clientele.
The Company has grown from an institutional brokerage house to a fullfledged financial intermediary having nationwide presence in major cities with branches and franchisees to service a wide range of clients.
SECURITIES TRADING CORPORATION OF INDIA LTD. (STCI) Securities Trading Corporation Of India Ltd. (STCI) was established by Reserve Bank Of India (RBI) in May 1994, jointly with public sector banks and
all-India
financial
institutions
with
objective
of
fostering
the
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development of an active secondary market for Government securities and bonds issued by Public sector undertakings. It commenced business operations in June 1994 and started dealing in government securities. On the introduction of the system of Primary Dealership in Government Securities, in February 1996, STCI became one of the first two institutions to be accredited by RBI as a primary Dealer in Government securities. Government of India have notified STCI as an "Approved Finance Institution" for the purpose of Sections 18 and 24 of the Banking Regulations Act, 1949 and Section 42(1) of the Reserve Bank Of India Act, 1934. STCI's core activities comprise participation, underwriting, market making and trading in Government Securities. The Company has established a name for itself in the Indian Government Securities Market and has emerged as one of the leading Primary Dealer over the period of time. Apart from the above, the company is an active partner in the interbank call money markets and Repo market.
STCI COMMODITIES LTD.
Due to regulatory restrictions, one organization cannot trade in equities as well as commodities. Therefore UTI securities Ltd. floated STCI commodities Ltd. as its wholly owned subsidiary. STCI Commodities Limited was incorporated on September 20, 2004. STCI Commodities Limited has membership on Multi Commodity Exchange of
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India Limited (MCX) and National Commodity and Derivatives Exchange Limited (NCDEX).
STANDARD CHARTERED Securities Trading Corporation of India (STCI), has decided to sell its entire stake in UTI Securities to Standard Chartered Bank in two years at a predetermined price of Rs 275 crore, according to the memorandum of understanding (MoU) signed between both the parties. In the first stage this year, Standard chartered will buy 49 per cent stake for Rs 135 crore. During the next year, Standard chartered will hike the stake further to 74 per cent and it will buy the remaining 26 per cent stake in UTI Securities by 2009.35
The new company will also be going for a name change soon to reflect the ownership of Standard Chartered in the organization.
35
http://www.business-
standard.com/common/storypage.php?autono=284476&leftnm=2&subLeft=0&chkFlg=
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Configuration of a new financial product ( For the benefits of farmers) If a financial product, which will be combination of Agri research guidance + insurance + loan + future derivative This can solve all the problems of farmers and can give full risk cover. •
Agri research support
:will provide agri tec support
•
Loan
:financial support
•
Insurance
:will cover all the uncontrollable risk
•
Future derivatives
:ensure the market for the produce
Above all can be done with the collaboration of some financial institutions. Points needed to keep in mind: 1. Need to take approval from •
RBI
•
FMC
•
IRDA
2. The future contract should match with requirement of farmers. 3. Future contract will be short in nature. 4. Kind of crop varies as per geography and season so product should take care of these variables. 5. Lot size should match the capacity of production for the farmers. 6. Product should be very find tuned with respect to each other. 7. Farmers should be made aware of this financial product.
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Appendix 1 Frequent Asked Questions
What are Commodity Futures?
Commodity Futures are contracts to buy specific quantity of a particular commodity at a future date. It is similar to the Index futures and Stock futures but the underlying happens to be commodities instead of Stocks and indices.
Commodity Futures are recently introduced in India. Aren’t they?
Commodity futures market has been in existence in India for centuries. The Government of India banned futures trading in certain commodities in 70s, however trading in commodity futures was permitted again by the government in order to help the Commodity producers, traders and investors. World-wide, commodity exchanges originated before any other financial exchange. Infact most of the derivatives instruments had their birth in commodity exchanges.
What are the major commodity Exchanges?
The Government of India permitted establishment of National-level MultiCommodity exchanges in the year 2002 and accordingly three exchanges have come into picture. They are •
Multi-Commodity Exchange of India Ltd, Mumbai (MCX).
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•
National Commodity and Derivatives Exchange of India, Mumbai (NCDEX).
•
National Multi Commodity Exchange, Ahmedabad (NMCE).
However there are regional commodities exchanges functioning all over the country. STCI securities Ltd has got membership of both the premier commodity exchanges i.e. MCX and NCDEX. At international level there are major commodity exchanges in USA, Japan and UK. Some of the most popular exchanges around the world are given below along with the major commodities traded.36 EXCHANGE New
York
MAJOR COMMODITIES TRADED Mercantile
Exchange Crude Oil, Heating Oil
(NYMEX) Chicago Board of Trade
Soy Oil, Soy Beans, Corn
London Metals Exchange
Aluminium, Copper, Tin, Lead
Chicago Board Option Exchange
Options on Energy, Interest rate
Tokyo Commodity Exchange
Silver, Gold, Crude oil, Rubber
Malaysian Derivatives Exchange
Rubber, Soy Oil, Palm Oil
What are the working hours for the commodity exchanges?
Commodity Exchanges (MCX and NCDEX) function from 10.00 Am to 11.55 PM with a break of 30 minutes between 5.00 PM and 5.30 PM. However some specific commodities with strong international price linkages (such as Gold, Silver, Soy oil, Crude Oil etc) are allowed to be traded after 8.00 PM.
36
Table no.: 3
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Who regulates the commodity exchanges?
Just as SEBI regulates the stock exchanges, commodity exchanges are regulated by Forwards Market Commission (FMC); Forwards Market Commission is under the purview of the Ministry of Food, Agriculture and Public Distribution.
Are the trades/ settlement guaranteed by the exchanges?
YES, the commodity exchanges have got some of the most high profile corporate as their promoters. Multi Commodity exchange of India, promoted by Financial Technologies Ltd has got on board institutions such as SBI, HDFC Bank, Canara Bank, Corporation Bank, Bank of India, Union Bank of India, Bank of Baroda. The National Commodity and Derivatives Exchange (NCDEX) has got NSE, ICICI, NABARD, CRISIL, LIC, PNB, Canara Bank as the major share-holders. Such a high profile share-holding provides these exchanges valuable experience, knowledge and also high standards of operations. Also the exchange guarantees the settlement of trades and so eliminates the counter-party risk in the transactions. The exchange for this purpose maintains a Settlement –Guarantee fund akin to the stock exchanges.
Are there physical deliveries in commodity futures exchanges?
YES, the exchanges, in order to maintain the futures prices in line with the spot market, have made available provisions of settlement of contracts by physical delivery. They also make sure that the price of futures and spot prices coincide during the settlement so that the arbitrage opportunities do not exist.
How the deliveries are made possible?
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The exchange has enlisted certain cities for specific commodities as the delivery centres. The seller of commodity futures, upon expiry of the contract may choose to deliver physical stock instead of settling the positions by cash, in which case he would be required to deliver the stocks to the specified warehouses. The buyer of the commodity futures, if he is interested in physical delivery would be matched with a seller and would be required to take delivery of the specified quantity of stock from the designated warehouse. World-wide commodity futures are generally used for hedging and speculation and hence physical deliveries are negligible. However the possibility of physical delivery has made these markets more attractive in India. Both NCDEX and MCX have successfully completed physical delivery in bullions and various agro-commodities. In case of NCDEX it is mandatory to open a Demat account with an approved DP by the buyer and seller if they wish to take/ give delivery of goods. Please note the delivery and settlement procedure differs for each exchange and commodity. Read the delivery/ settlement procedure carefully or contact us before deciding to give/ take physical delivery.
Do I need to pay sales tax on all trades? Is registration mandatory?
NO. If the trade is squared off no sales tax is applicable. The sales tax is applicable only in case of trade resulting into delivery. Normally it is the seller's responsibility to collect and pay the sales tax. The sales tax is applicable at the place of delivery. Those who are willing to opt for physical delivery need to have sales tax registration number.
Are any transaction duty charges imposed on commodity futures contracts, as in case of stocks?
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Although FMC does not levy any transaction charges as of now, the respective commodity exchanges levy transaction charges. Transaction charges are in the range of Rs 4 to Rs 6 per lakh/per contract, which may differ for each commodity/ exchange.
What is the date of expiry?
At NCDEX the contracts expire on 20th day of each month. If 20th happens to be a holiday the expiry day will be the previous working day. At MCX the expiry day is 15th of every month. If 15th happens to be a holiday the expiry day will be the previous working day. The expiry day also differs for different commodities in both the exchanges.
What are the commodities on which futures trading take place?
At Present futures are available on the following commodities. 37 Bullion
Gold and Silver Castor Seeds, Soy Seeds, Castor Oil, Refined Soy Oil,
Oil & Oilseeds
Soymeal, RBD Palmolein, Crude Palm Oil, Groundnut Oil, Mustard
Seed,
Mustard
Seed
Oil,
Cottonseed Oilcake, Cottonseed Spices
Pepper, Red Chilli, Jeera, Turmeric
Metals
Steel Long, Steel Flat, Copper, Nickel, Tin , Steel ingots
Fibre
Kapas, Long Staple Cotton, Medium Staple Cotton
Pulses
Chana, Urad, Yellow Peas, Tur , Yellow Peas
Cereals
Rice, Basmati Rice, Wheat , Maize , Sarbati Rice , Jeera
Energy
Crude Oil
37
Table no. 4
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Rubber, Guar Seed , Guargum , Cashew, Cashew Kernel ,
Others
Following
Sugar , Gur, Coffee, Silk
is
a
table
showing
the
details
regarding
major
commodities traded on MCX & NCDEX.38
MCX Commodity
Gold
Silver
Initial Margin
3.5%
5%
Quotation Lot Size
10 Gms
1 KG
1 Kg
30 KG
Delivery
Available
Centre
months
Mumbai, Ahmedabad
Ahmedabad
Feb,
Apr,
Jun,
Aug,
Oct, Dec Mar,
May,
Jul,
Sep,
Dec Crude Oil
5%
1 bbl
100 bbls
Mumbai
All months
Soy Oil
3%
10 KG
10 MT
Indore
All months
Pepper
8%
10 KG
100 KG
Kochi
All months
Soy Seed
4%
1 MT
10 MT
Indore
All months
NCDEX Commodity
Initial Margin*
Quotation Lot Size
Delivery
Available
Centre
months
Guar Seed
5-10 %
100 KG
10 MT
Jodhpur
All months
Soy Oil
5-10 %
100 KG
10 MT
Indore
All months
Sugar M
5-10 %
100 KG
10 MT
Muzaffarnagar All months
38
Table no. : 5
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Gold (Sona)
Silver (Chandi)
5-10 %
10 Gms
1 Kg
Mumbai
Feb,
Apr,
Jun,
Aug,
Oct, Dec
5-10 %
1 KG
30 KG
New Delhi
Mar,
May,
Jul,
Sep,
Dec
Wheat
5-10 %
100 KG
10 MT
Delhi
All months
Pepper
5-10 %
100 KG
1 MT
Kochi
All months
Chana
5-10 %
100 KG
10 MT
Delhi
All months
Urad
5-10 %
100 KG
10 MT
Mumbai
All months
Soy Bean
5-10 %
100 KG
1 MT
Indore, Nagpur, Kota
All months
* MCX Initial margins are shown above. NCDEX follows SPAN margins which could be between 5-10% depending on volatility. The list given above covers only the popular commodities and not exhaustive.
Are options also allowed in commodity derivatives?
No. Options in goods are presently prohibited under Section 19 of the Forward Contracts (Regulation) Act, 1952. No exchange or person can organize or enter into or make or perform options in goods. However the market expects the government to permit options trading in commodities soon.
FAQ S ON DERIVATIVES
What is a Derivative contract?
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A derivative contract is an enforceable agreement whose value is derived from the value of an underlying asset; the underlying asset can be a commodity, precious metal, currency, bond, stock, or, indices of commodities, stocks etc. Four most common examples of derivative instruments are forwards,
futures,
options
and
swaps/spreads.
What is a forward contract?
A forward contract is a legally enforceable agreement for delivery of goods or the underlying asset on a specific date in future at a price agreed on the date of contract. Under Forward Contracts (Regulation) Act, 1952, all the contracts for delivery of goods, which are settled by payment of money difference or where delivery and payment is made after a period of 11 days, are forward contracts.
What are standardized contracts?
Futures contracts are standardized. In other words, the parties to the contracts do not decide the terms of futures contracts; but they merely accept terms of contracts standardized by the Exchange.
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What are customized contracts?
Forward contracts (other than a future) are customized. In other words, the terms of forward contracts are individually agreed between two counterparties.
II. FUTURES CONTRACTS
What is a futures contract?
Futures Contract is specie of forward contract. Futures are exchange – traded contracts to sell or buy standardized financial instruments or physical commodities for delivery on a specified future date at an agreed price. Futures contracts are used generally for protecting against rich of adverse price fluctuation (hedging). As the terms of the contracts are standardized, these are generally not used for merchandizing propose.
How are futures prices determined?
Futures prices evolve from the interaction of bids and offers emanating from all over the country – which converge in the trading floor or the trading engine. The bid and offer prices are based on the expectations of prices on the maturity date.
How is it possible to sell, when one doesn't own commodity?
One doesn't need to have the physical commodity or own a contract for the commodity to enter into a sale contract in futures market. It is simply agreeing to sell the physical commodity at a later date or selling short. It is
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possible to repurchase the contract before the maturity, thereby dispensing with delivery of goods.
What are long positions?
In simple terms, long position is a net bought position.
What are short positions?
Short position is net sold position.
What is bull spread (futures)?
In most commodities and financial derivatives market, the term refers to buying contracts maturing in nereby month, and selling the deferred month contracts, to profit from the wide spread which is larger than the cost of carry.
What is bear spread (futures)?
In most of commodities and financial derivatives market, the term refers to selling the nearby contract month, and buying the distant contract, to profit from saving in the cost of carry.
What is ‘Contango'?
Contango means a situation, where futures contract prices are higher than the spot price and the futures contracts maturing earlier.
What is ‘Backwardation'?
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When the prices of spot or contracts maturing earlier are higher than a particular futures contract, it is said to be trading at Backwardation.
What is 窶話asis'?
It is normally calculated as cash price minus the futures price. A positive number indicates a futures discount (Backwardation) and a negative number, a futures premium (Contango). Unless otherwise specified, the price of the nearby futures contract month is generally used to calculate the basis.
What is cash settlement?
It is a process for performing a futures contract by payment of money difference rather than by delivering the physical commodity or instrument representing such physical commodity (like, warehouse receipt)
What is offset?
It refers to the liquidation of a futures contract by entering into opposite (purchase or sale, as the case may be) of an identical contract.
What is settlement price?
The settlement price is the price at which all the outstanding trades are settled, i.e, profits or losses, if any, are paid. The method of fixing Settlement price is prescribed in the Byelaws of the exchanges; normally it is a weighted average of prices of transactions both in spot and futures market during specified period.
What is convergence?
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This refers to the tendency of difference between spot and futures contract to decline continuously, so as to become zero on the date on maturity.
Can one give delivery against futures contract?
Futures contract are contracts for delivery of goods. But most of the futures contracts, the world over, are performed otherwise than by physical delivery of goods.
Why the proportion of futures contracts resulting in delivery is so low?
The reason is, futures contracts may not be suitable for merchandising purpose, mainly because these are standardized contracts; hence various aspects of the contracts, viz., quality/grade of the goods, packing, place of delivery, etc. may not meet the specific needs of the buyers/sellers.
Why delivery of good is permitted when futures contract by their very nature not suitable for merchandising purposes?
The threat of delivery helps in dissuading the participants from artificially rigging up or depressing the futures prices. For example, if manipulators rig up the prices of a contract, seller may give his intention to make a delivery instead of settling his outstanding contract by entering into purchase contracts at such artificially high price.
What is “Due Date Rate�?
Due Date Rate is the weighted average of both spot and futures prices of the specified number of days, as defined in the Byelaws of Associations.
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What is Warehouse Receipt?
It is a document issued by a warehouse indicating ownership of a stored commodity and specifying details in respect of some particulars, like, quality, quantity and, some times, indicating the crop season.
Why do we need speculators in futures market?
Participants in physical markets use futures market for price discovery and price risk management. In fact, in the absence of futures market, they would be compelled to speculate on prices. Futures market helps them to avoid speculation by entering into hedge contracts. It is however extremely unlikely for every hedger to find a hedger counterparty with matching requirements. The hedgers intend to shift price risk, which they can only if there are participants willing to accept the risk. Speculators are such participants who are willing to take risk of hedgers in the expectation of making profit. Speculators provide liquidity to the market; therefore, it is difficult to imagine a futures market functioning without speculators.
What is the difference between a speculator and gambler?
Speculators are not gamblers, since they do not create risk, but merely accept the risk, which already exists in the market. The speculators are the persons who try to assimilate all the possible price-sensitive information, on the basis of which they can expect to make profit. The speculators therefore contribute in improving the efficiency of price discovery function of the futures market.
What is hedging?
Hedging is a mechanism by which the participants in the physical/cash markets can cover their price risk. Theoretically, the relationship between
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the futures and cash prices is determined by cost of carry. The two prices therefore move in tandem. This enables the participants in the physical/cash markets to cover their price risk by taking opposite position in the futures market.
Can the loss incurred on the futures market be set off against normal business profit?
Loss incurred in futures market by entering into contracts for hedging purposes can be set off against normal profit. The loss incurred on account of speculative transactions in futures market cannot be set off against normal business profit. This loss is however allowed to be carried forward for eight years, during which it can be set off against speculative profit.
III. PARTICIPANTS IN DERIVATIVES MARKETS
Who is hedger?
Hedger is a user of the market, who enters into futures contract to manage the risk of adverse price fluctuation in respect of his existing or future asset.
What is arbitrage?
Arbitrage refers to the simultaneous purchase and sale in two markets so that the selling price is higher than the buying price by more than the transaction cost, so that the arbitrageur makes risk-less profit.
Who are day-traders?
Day traders are speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day.
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Who is floor-trader?
A floor trader is an Exchange member or employee, who executes trade by being personally present in the trading ring or pit floor trader has no place in electronic trading systems.
Who is speculator?
A trader, who trades or takes position without having exposure in the physical market, with the sole intention of earning profit is a speculator.
Who is market maker?
A market maker is a trader, who simultaneously quotes both bid and offer price for a same commodity throughout the trading session.
57. What kinds of risks do participants face in derivatives markets?
Different kinds of risks faced by participants in derivatives markets are • Credit risk • Market risk • Liquidity risk • Legal risk • Operational risk
What is credit risk?
Credit risk on account of default by counter party This is very low or almost zeros because the Exchange takes on the responsibility for the performance of contracts
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What is market risk?
Market risk is the risk of loss on account of adverse movement of price.
What is liquidity risk?
Liquidity risks is the risk that unwinding of transactions may be difficult, if the market is illiquid
What is Legal risk?
Legal risk is that legal objections might be raised, regulatory framework might disallow some activities.
What is operational risk?
Operational risk is the risk arising out of some operational difficulties, like, failure of electricity, due to which it becomes difficult to operate in the market.
IV. EXCHANGES AND THEIR ROLE
How many recognized/registered associations engaged in commodity futures trading?
At present 21 Exchanges are recognized/registered for forward/ futures trading in commodities.
Why are associations required to get recognized?
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Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified under section 15 of the Act can be conducted only on the Exchanges, which are granted recognition by the Central Government (Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution). to obtain certificate of Registration from the Forward Markets Commission.
What is the procedure for obtaining recognition for an Association?
The application for grant of recognition will have to be made in triplicate in a prescribed form to Secretary, Department of Consumer Affairs, Ministry of Consumer Affairs, Food and Public Distribution, Krishi Bhavan, New Delhi – 110 00. Form A prescribed for application for the recognition is placed on the web site of the FMC www.fmc.gov.in .The application for grant of recognition should be forwarded through Forward Markets Commission, Everest, 3rd Floor, 100, Marine Drive, Mumbai – 400 002.. The Government may grant recognition to the applicant association on the basis of recommendations made by the Forward Markets Commission. A fee of Rs. 2500/- will have to be paid by the applicant association for grant of recognition. The fee could also be deposited in the nearest Government Treasurer or the nearest branch of State Bank of India; provided that at Mumbai, Kolkatta, Delhi, Kanpur and Chennai, the amount has to be deposited in the Reserve Bank of India. The fee can also be remitted by crossed Indian Postal Order drawn in favour of Secretary, Forward Markets Commission. The application has to be accompanied by 3 copies of Memorandum and Articles of Association and Byelaws.
What is the procedure for obtaining certificate of registration from the Forward Markets Commission?
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Application in triplicate for grant of certificate of Registration in Form B placed on the web site of the FMC < www.fmc.gov.in > - should be sent to Forward Markets Commission, Everest, 3rd Floor, 100, Marine Drive, Mumbai â&#x20AC;&#x201C; 400 002. A fee of Rs. 50/- will have to be paid by the applicant association for grant of registration certificate. The fee could also be deposited in the nearest Government Treasurery or the nearest branch of State Bank of India; provided that at Mumbai, Kolkatta, Delhi, Kanpur and Chennai, the amount has to be deposited in the Reserve Bank of India. The fee can also be remitted by crossed Indian Postal Order drawn in favour of Secretary, Forward Markets Commission. The application has to be accompanied by 3 copies of Memorandum and Articles of Association and Byelaws.
What is the role of an Exchange in futures trading?
An Exchange designs a contract, which alone would be traded on the Exchange. The contract is not capable of being modified by participants, i.e., it is standardized. The Exchange also provides a trading platform, which converges the bids and offers emanating from geographically dispersed locations. This creates competitive conditions for trading. The Exchange also provides facilities for clearing, settlement, arbitration facilities. The Exchange may also provide financially secure environment by putting in place suitable risk management mechanism (margining system etc.), and guaranteeing performance of contract through the process of novation.
Why does Exchange collect margin money?
The aim of margin money is to minimize the risk of default by either counter party. The amount of initial margin is so fixed as to ensure that the probability of loss on account of worst possible price fluctuation, which cannot be met by the amount of ordinary/initial margin is very low. The Exchanges
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fix rates of ordinary/initial margin keeping in view need to balance high security of contract and low cost of entering into contract.
What are the different types of margins payable on futures?
Different margins payable on futures contracts are Ordinary/initial margin, mark-to-market margin, special margin, volatility margin, and delivery margin.
What is initial/ordinary margin?
It is the amount to be deposited by the market participants in his margin account with clearing house before they can place order to buy or sell a futures contracts. This must be maintained throughout the time their position is open and is returnable at delivery, exercise, expiry or closing out.
What is Mark-to-Market margin?
Mark-to-market margins (MTM or M2M or valan) are payable based on closing prices at the end of each trading day. These margins will be paid by the buyer if the price declines and by the seller if the price rises. This margin is worked out on difference between the closing/clearing rate and the rate of the contract (if it is enterned into on that day) or the previous day's clearing rate. The Exchange collects these margins from buyers if the prices decline and pays to the sellers and vice versa.
Why is Mark-to-Market margin collected daily in commodity market?
Collecting mark-to-market margin on a daily basis reduces the possibility of accumulation of loss, particularly when futures price moves only in one direction. Hence the risk of default is reduced. Also, the participants are
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required to pay less upfront margin â&#x20AC;&#x201C; which is normally collected to cover the maximum, say, 99.9%, of the potential risk during the period of mark-tomarket, for a given limit on open position. Alternatively, for the given upfront margin the limit on open position would have to be reduced, which has the effect of restraining the trade and liquidity.
VI. REGULATION
What
is
the
present
system
of
regulation
in
commodity
forward/future trading in India?
At present, there are three tiers of regulations of forward/futures trading system exists in India, namely, Government of India, Forward Markets Commission and Commodity Exchanges. The FC(R) Act, 1952 prohibits options in commodities. For the purpose of forward contracts in certain commodities can be regulated by notifying those commodities u/s 15 of the Act; forward trading in certain other commodities can be prohibited by notifying these commodities u/s 17 of the Act.
What is the need for regulating futures market?
The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. The regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby affecting interests of society at large.. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement
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and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market.
What is Forward Markets Commission and where is it located?
Forward Markets Commission is a regulatory body for commodity futures/ forward trade in India. This was set up under the Forward Contracts (Regulation) Act of 1952. It is responsible for regulating and promoting futures/ forward trade in commodities. The Forward Markets Commission's Head Quarter is located at Mumbai and Regional Office at Kolkata. The Address of the contact person is as follows The Chairman, Forward Markets Commission, Ministry of Consumer Affairs, Food
and
Public
Distribution,
(Department
of
Consumer
Affairs),
Government of India, “Everest”, 3 rd floor, 100, Marine Drive, Mumbai – 400 002 . Tel
(022) 22811262/22811429, Fax
(022) 22812086, E-mail -
fmc@bom5.vsnl.nic.in , Web-site - www.fmc.gov.in
What are the functions of the Forward Markets Commission?
• FMC advises Central Government in respect of grant of recognition or withdrawal of recognition of any association. • It keeps forward markets under observation and takes such action in relation to them as it may consider necessary, in exercise of powers assign to it. • It collects and publishes information relating to trading conditions in respect of goods including information relating to demand, supply and prices and submit to the Government periodical reports on the operations of the Act and working of forward markets in commodities. • It makes recommendations for improving the organization and working of forward markets.
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â&#x20AC;˘ It undertakes inspection of books of accounts and other documents of recognized/registered associations.
What are the powers of the Commission?
The Commission has powers of deemed civil court for (a) Summoning and enforcing the attendance of any person and examining him on oath; (b) Requiring the discovery and production of any document; (c) Receiving evidence on affidavits, and (d) Requisitioning any public record or copy thereof from any office. The following powers are vested in the Central Government, most of which are delegated to the Commission The powers of approving memorandum and articles of association and Byelaws; powers to direct to make or to make articles (Rules) or Bye-laws; powers to suspend governing body of recognised association, and, powers to suspend business of recognised association.
Why and what are the regulatory measures prescribed by Forward Markets Commission?
Forward Markets Commission provides regulatory oversight in order to ensure financial integrity (i.e. to prevent systematic risk of default by one major operator or group of operators), market integrity (i.e. to ensure that futures prices are truly aligned with the prospective demand and supply conditions) and to protect & promote interest of customers /non-members. The Forward Markets Commission prescribes following regulatory measures Limit on net open position as on the close of the trading hours. Some times limit is also imposed on intra-day net open position. The limit is imposed operator-wise, and in some cases, also member-wise. Circuit-filters or limit on price fluctuations to allow cooling of market in the event of abrupt upswing or downswing in prices.
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Special margin deposit to be collected on outstanding purchases or sales when price moves up or down sharply above or below the previous day closing price. By making further purchases/sales relatively costly, the price rise or fall is sobered down. This measure is imposed only on the request of the Exchange. Circuit breakers or minimum/maximum prices These are prescribed to prevent futures prices from falling below as rising above not warranted by prospective supply and demand factors. This measure is also imposed on the request of the Exchanges. Skipping trading in certain derivatives of the contract, closing the market for a specified period and even closing out the contract These extreme measures are taken only in emergency situations.
What
are
the
legal
and
regulatory
provisions
for
customer
protection?
The F.C(R) Act provides that client's position cannot be appropriated by the member of the Exchange, except a written consent is taken within three days' time. Forward Markets Commission is persuading increasing number of Exchanges to switch over to electronic trading, clearing and settlement, which is more customer-friendly. Commission has also prescribed simultaneous reporting system for the Exchanges following open out-cry system. These steps facilitate audit trail and make it difficult for the members to indulge in malpractices like, trading ahead of clients, etc. The Commission has also mandated all the Exchanges following open outcry system to display at a prominent place in Exchange premises, the name, address, telephone number of the officer of the Commission who can be contacted for any grievance. The website of the Commission also has a provision for the customers to make complaint, send comments and suggestions to the Commission. Officers of the Commission have been instructed to meet the members and clients on a random basis, whenever they visit Exchanges, to ascertain the situation on the ground, instead of merely attending meetings of the Board of Directors and holding discussions with the office-bearers.
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Appendix: 2
STCI COMMODITIES IN ASSOCIATION WITH INVITES YOU FOR THE SEMINAR ON
AP GRAIN & SEEDS MERCHANTS ASSOCIATION
PROFIT MAXIMISATION & RISK MANAGEMENT USING FUTURES MARKET SPEAKERS D. Raghavender
AGENDA Purpose of the seminar
PRESIDENT, AP GRAIN & SEEDS MERCHANTS ASSN.
Chirag Seth
Hedging & Arbitrage in futures market
RESEARCH HEAD, STCI COMMODITIES
Madhav Reddy
Delivery issues through exchange
VICE PRESIDENT, BUSINESS DEVELOPMENT, MCX
Pradeep Reddy
Overview of Chilli
PRODUCT HEAD, CHILLI, MCX
Suman K. Adepu
UTI advantage Services & support
BRANCH HEAD, UTI SECURITIES,HYD.
VENUE: ASSOCIATION HALL,MALAKPET DATE: 28TH APRIL TIME: 12 NOON
SUMAN K. ADEPU, UTI SECURITIES. Ph: 23417s031, Cell: 9394744777
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Appendix 3:
Our communication with MCX From: chandra prakash [mailto: chandra5911@gmail.com] Sent: Monday, April 02, 2007 1:37 AM To: research@mcxindia.com Subject: Re: Seminar in Chilly Market (Malakpet)
Dear Sir, This is Chandra Prakash, Doing MBA from ICFAI Business School, Hyderabad. As a part of curriculum we are working on a research project" Commodity market: A new investment avenue. We went to different kinds of mandis from pluses to bullion. But each of these places I found some kind of communication gap. Every one has their problems every one want to speak up but no one to listen. We also went to malakpet (Hyderabad) and came to know that many seminar had been unsuccessfully conducted here by MCX , NCDEX as well as many brokering houses . Not only Chilly but most of the Trader from pulses to bullion avoid trading through exchange. During our market Survey we found that apart from awareness there are some fundamental question that need be solved before tapping these mandis. We felt that our project is of no use if we could not find the way to break this ice. So, we are planning to conduct seminar here on 6th of April in collaboration with UTI Securities. It would be of great help and of mutual benefit if MCX will work with us. So we are looking forward to work with you to conduct this seminar.
Regards Chandra Prakash
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From: Shunmugam V/MCX/ R&D Sent: Monday, April 02, 2007 10:43 AM To: 'Sumesh P/MCX/CBO'; Joe J/MCX/Marketing Cc: Chiragra C/MCX/Training Subject: FW: Seminar in Chilly Market (Malakpet)
FYI. Thanks and Regards, Shunmugam
From: Chiragra C/MCX/Training Sent: Monday, April 02, 2007 11:30 AM To: Nitin J/MCX/Centre of Academia Subject: FW: Seminar in Chilly Market (Malakpet)
Please talk to him what is talking about?
Thank you,
Regards, Dr. Chiragra Chakrabarty Vice President Head Training & Research & Development MCX
Phone No - 022-66497000 (Ext No-7021) Fax No - 022-66491751
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Mobile No - 9821420236 / 9867567508 E-mail - chiragra.chakrabarty@mcxindia.com www.mcxindia.com -------------------------------------------------The information in this E-mail (which includes any files transmitted with it) is CONFIDENTIAL and may be legally PRIVILEGED. It is intended solely for the addressee and access to this email by anyone else is unauthorized. If you have received it in error, please destroy any copies of this message, including any attachments, and delete it from your system notifying the sender immediately. Any disclosure, copying, distribution, dissemination, forwarding, printing or any action taken or omitted to be taken in reliance on it or utilising the same for any purpose other than what it is intended for, is prohibited and may be unlawful. --------------------------------------------------
On 02/04/07, Nitin Joshi < nitin.joshi@mcxindia.com > wrote:
Dear Mr. Chandra Prakash, We thank you very much for showing your confidence in MCX for your solution. May I request you to pls let me know your Mobile no. or land line no. so that we could have discussed the matter over telephone? I understand from your email that you are interested in organizing a seminar at ICFAI Business School . Please let me know the following details to enables us to take a decision on this issue. 1. 2. 3. 4. 5. 6.
Approval of the Head of the Department / Director. Main objective of the seminar Topics No. of participants in the seminar. Qualification of the participants.
Duration of the Talk.
An early response will be highly appreciated.
Warm
Regards
Nitin Joshi Phone: 66497000 ( Extn 7054 ) Mobile No:9867567550 E Mail: nitin.joshi @mcxindia.com URL: www.mcxindia.com --------------------------------------------The information in this E-mail (which includes any files transmitted with it) is CONFIDENTIAL and may be legally PRIVILEGED. It is intended solely for the addressee and access to this email by anyone else is unauthorized. If you have received it in error, please destroy any copies of this message, including any attachments, and delete it from your system notifying the sender immediately. Any disclosure, copying, distribution, dissemination, forwarding, printing or any action taken or omitted to be taken in reliance on it or utilising the same for any purpose other than what it is intended
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for, is prohibited and may be unlawful. ----------------------------------------------------------- Forwarded message ---------From: chandra prakash <chandra5911@gmail.com> Date: 02-Apr-2007 18:32 Subject: Re: Seminar in Chilly Market (Malakpet) To: Nitin Joshi <nitin.joshi@mcxindia.com>
Dear Sir, Thank you for your Quick Reply. In fact we are doing summer internship with Uti Securities. As a part of project we went to various markets. But let me talk about Chilly market at Malakpet. Our Basic objective of the project was: 1. To know Awareness level of Trader 2. Risk appetite 3. Their trade strategies 4. What are the motive (speculation/hedging/arbitrage) of their participation in commodity exchanges. 5. If required, we would have made them aware about different financial products. But when we started making market survey we found. This in not just awareness level or risk appetite, reason was something else which make them avoid exchange trading. Reasons: 1. Difference in units (They trade in 40kg unit and mcx in 25)...which I heard some days back â&#x20AC;Śâ&#x20AC;ŚMCX is working on this. 2.qualityspecification: this was raised by one of the trader that In the MCX and NCDEX warehouses Water is purposely sprayed over chilly by using the limit of 14% humidity and limits of other impurities to increase the weight. 3. Seller's option. Trader with intention to take delivery is discouraged by delivery logic "seller's option". They also suggested 4. Delivery in Hyderabad in place of Guntur make the trade more feasible
5.They wanted to know date When the spot trading will start as proposed By MCX Apart form these there was many other concern which has been raised. But one thing we have seen common in all these market (bullion, pulses as well as spices) Most of the trader either have traded or know about this kind of trading through exchanges. They all did it through Local broker without any research calls. It was pure speculation and almost all of them lost their money and business. We(myself with two of my batch mates working on same project) met to our company guide( Mr. suman kumar adepu ,Branch manger,UTI Securities,Ameerpet, mobile:9394744777)
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We discussed to the matter and came to conclusion that we can tell them the difference between speculation and Hedging. So we approached the chilly market and met with President: DHADUVAI RAGHVENDRA : 9246215498 Gen Sec : DEVARA RAJESHWER :9393324666 Trader: RADHAKRISNA 9246500963 and finally decided to conduct a seminar with all the trader of chilly market. We got consent of the President. Mr. adepu (Br. Manager ,Uti Sec) contacted Mumbai to call a research team to be part of this seminar. But Sir we Still doubt the success if Exchange will not come forward for this. Let me answer you the questions which have been asked in your letter. 1. Since we are conducting seminar not in ICFAI Campus but in Chilly market (MALAKPET) and this is part of our project so no need of special approval from Director. Even if you feel it is required, there will not be any problem in getting such approval. 2. Our objective was to convince them that Hedging is different than speculation and how can they use hedging for the purpose of diversifying their business risk. But we feel that more than this, it is important to listen their problems and work on it which only Exchange can do. 3. Topic: Commodity market: a new Investment Avenue. 4. No. of participant: a. We 3 intern b. Branch manager, U Sec c. Research Team, Usec,(Number Not Yet confirmed) Qualification: We are doing PGDBA from ICFAI Hyderabad. Qualification of research team not known to us 5.Duration : 1-2 Hours Sir we expect from you to actively participate in the seminar to address the problem raised by them. We suggest you to have a meeting with us before this seminar and work out the agenda of the seminar if you are convince with our proposal. Please talk to Mr. suman in this regard. Regards Chandra Prakash
mobile no.
9290674658
Suman Kr adepu
mobile no.
9394744777
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Our Communication with FMC Director, Mr. Anupam Mishra from chandra prakash <chandra5911@gmail.com> hide details 09-Mar to anupam@fmc.gov.in < anupam@fmc.gov.in>, anupam_mishra@hotmail.com <anupam_mishra@hotmail.com> date 09-Mar-2007 23:22 subject Research on Commodity market mailed-by gmail.com Dear sir, This is Chandra Prakash,doing MBA from ICFAI Business School, Hyderabad. As a part of our curriculum we are working on our research project"Commodity:A new investment avenue." While working on our project we made a market survey at different "Mandis" at Hyderabad including "Chilly and Chana Mandi".We interacted to traders and tried to get some insight. The result was shocking, at least for me. As i studied,Commodity Exchange gives excellent platform for farmers as well as traders to trades on and it is the most appreciable financial invention so far.But when talked to these traders,it seems cursh. Commodity market is named as Dabba Trading, because trade is done through computer"Dabba". These were some of the unanswered questions: 1. Exchange are not made for real trading,they are just for speculation. Example: if a trader at somewhere in deep south trading in channa with intention to take delivery, will it be viable to get delivery at delhi and paying 10,000 Rs as transportation? 2.Even after stringent quality norms, quality never match.Always be downgraded. 3.Units, do not match. Example.chilly are traded in units of 40 KG.Exchange gives in Units of 25 KG. This is a very silly difference but it is changing the whole story. 4.Speculation is at its extreme, and it really defaming the market.
Banning the commodity Future trade is not a great option. Government should take steps to stop speculation especially into agri commodity. One option may be ,if for some time if exchange will make it mandatory to take the delivery, will eliminate the speculator and will give way for trader to come forward. Once market will take the healthy shape,the current condition can be resumed.
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I read about an awareness programme dated in 2006. I really don't know the twist of the whole story. but if I am right story can be re written and scenario can be changed.
Regards
anupam mishra <anupam_mishra@hotmail.com> to chandra5911@gmail.com date 10-Mar-2007 13:42 subject RE: Research on Commodity market mailed-by hotmail.com
10-Mar
Dear Chandra, Thanks for the mail and sharing of your views. We appreciate the concerns raised by you. We would definitely like to have furthur suggestions in the matter. If you ever happen to be in Mumbai you could give me a ring and we could share our perceptions of the markets.
Anupam Mishra Director(IR) Forward Markets Commission Government of India "Everest", 3rd floor, 100, Marine Drive, Mumbai - 400 002 INDIA Phone: +91 22 22026541 / 22795307 Fax: +91 22 22812086 E-mail: anupam_mishra@hotmail.com anupam.fmc@nic.in
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Our Communication with NCDEX
-----Original Message----From: chandra prakash (chandra5911@gmail.com) Date: Friday, March 30, 2007 02:35 PM To: askus@ncdex.com ( askus@ncdex.com) Subject: Educational Seminar for farmer in Hyderabad Dear Sir, This is Chandra Prakash, Doing MBA from ICFAI Business School,Hyderabad. As a part of curriculum we are working on a research project" Commodity market: A new investment avenue. We went to different kinds of mandis from pulses to bullion. But each of these places we found some kind of communication gap. Every one has problems. We met to many farmers and farmer association as well and we found that proper education and awareness is required. I read the news about NCDEX that it is planning to educate farmers in Punjab. If NCDEX would prefer to plan same kind of educational Seminar here in Hyderabad and nearby village, we can help arranging that and that would be part of our project. Please respond if Exchange is having any such plan. Adding the News below. Regards Chandra Prakash
Source: Economic Times "MOGA: Undeterred by the suspension of futures trading, related foreign brokerage such as FMI Financial Markets International and future NCDEX National Commodity & Derivatives Exchange (NCDEX) are going ahead with their plans to educate the farmers in the hinterlands of Punjab. An effort is being made to empower the farmers with information technology. BKU Bharat Kissan union activists also seems to be supporting these companies. Addressing the farmers here in Moga, Mr Sharad Joshi, Member of Parliament, said, "I do not mind future trading provided it benefits the farmers. After all Punjab provides wheat to entire India. "Thing that is going in the favour of these farmers is that the companies like NCDEX are ready to bear the hoarding cost as well. Normally the debt ridden farmers in the state try to sell their produce as soon as possible so as to pay back the loan they had borrowed from the Artiyas and money lenders. "Now with companies ready to pay the hoarding cost the debt ridden farmers can always wait. Earlier their was no option before them." Says Balwant Singh, GS, BKU, (Punjab). Top FMI and NCDEX officials impressed upon the participants, numbering over 1,000, the fact that futures trading in commodities on an online commodity exchange like NCDEX results in transparent and fair price discovery due to large scale participation of farmers/producers, traders, processors, exporters/ importers and end users of a commodity and reflects the views and
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expectations of a wider cross-section of people related to that commodity. Mr Narendra Gupta, chief strategy, NCDEX, said farmers can use the online trading platform of NCDEX to hedge the price risk by selling forward their expected production. He emphasised that NCDEX provides an effective platform for price risk management for all segments of players farmers/producers, traders, processors, exporters/importers and end users of the commodity even as farmers can use price signals on the exchange platform to decide which crop to grow in the next season. However, Mr Sharad Joshi, accepted that the future trading can pave a way to the price rise. "To make farmers come out of the debt trap I do not mind if the consumers have to pay bit more." Said Mr Joshi. Also for these companies both agrarian states Punjab and Haryana are important markets. " The phone and fax number on NCDEX side have been changed from 5xxx xxxx to 6xxx xxxx. Kindly take a note of the same.
"This e-mail message may contain confidential, proprietary or legally privileged information. It should not be used by anyone who is not the original intended recipient. If you have erroneously received this message, please delete it immediately and notify the sender. The recipient acknowledges that NCDEX or its subsidiaries or associated companies, are unable to exercise control or ensure or guarantee the integrity of/over the contents of the information contained in e-mail transmissions and further acknowledges that any views expressed in this message are those of the individual sender and no binding nature of the message shall be implied or assumed unless the sender does so expressly with due authority of NCDEX.Before opening any attachments please check them for viruses and defects."
---------- Forwarded message ---------From: John <askus@ncdex.com> Date: 30-Mar-2007 15:15 Subject: RE:'NCDEX=442-270' Educational Seminar for farmer in Hyderabad To: chandra prakash <chandra5911@gmail.com>
Dear Sir, We acknowledge the receipt of your e mail requesting for an educational seminar in Hyderabad. We have forwarded your request to the concerned authorities and they would be contacting you if any decision is arrived upon. Do revert for any further queries. Thanks and regards, Customer Service Group (022) 66406609-6612
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Appendix: 4 As part of the work in our company, we had active talks and meetings with the following dignitaries in our company: They also include the CEO, our Research Head, VP of MCX and other important people
Deepak V. Dave
Chirag Seth
CEO, STCI Commodities
Research Head, STCI
Madhav Reddy
Anjani Sinha
Vice President, Business Development,
CEO, National Spot Exchange
MCX
Nitin Joshi, MCX
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Following is the list of important companies that we visited and gave presentations to their top honchos.
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We had a series of meetings and talks with the AP Grain and Seeds merchants Association which helped us arrange the seminar in the Malakpet mandi. Following is the list of some important association members.
As a part of the task given to us by the CEO, STCI Commodities, Mr. Deepak Dave, we arranged meetings with key personnel in the Hyderabad Stock Exchange. Following is their list:
These are the people who made our meeting with the FAPCCI association possible:
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Our meeting with the Farmers Association enabled us to interact with the following people in the association:
Apart from the above Industrialists and Association people, we also met enumerable traders and whole sellers, with whom we exchanged our views and also brought business from them:
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APPENDIX 5: ZINK CALCULATOR PREPARED BY US FOR BALAANAGAR INDUSTRIAL AREA ZINC Calculator S.No 1 2 3
Particulars International spot price Ex Rate â&#x20AC;&#x201C;Say Final Settlement
3420 43.1 144000
147402
4 5
For Delivery Premium CIF - ($125) Ex Rate
5387.5 43.1
152789.5
6 7 8 9
10 11 12 13
Caliculating custom duty Landing charge Assessable Value Basic customs duty(7.5%) CVD Plus 2 % cess(16.32) custom cess on aggrete of Duties(2%) Total Custom duty(8+10) Wharfage Charges(.20%) Landed Cost (Re/Mt)
1527.895 154317.4 11573.80463 25184.59886
735.1680698 12308.97269
166626.4
246.1794539 Per Kg cost
166872.5 166.8725
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APPENDIX 6: PROPOSAL SUBMITTED TO FAPCCI (Federation of A.P.Chamber of Commerce and Industries)
Dear Sir, In reference to the discussion we had with your office, (Dpt. Secretary), we at UTI securities propose to conduct a seminar in active collaboration with FAPCCI, on “Commodity Futures market”. Our theme for the presentation is:
“COMMODITY FUTURES A STRATEGIC RISK MANAGEMENT TOOL” A brief introduction about our company: UTI SECURITIES LTD. (UTISEL) was incorporated on June 28, 1994 by Unit Trust of India as its 100% subsidiary and in the year 2006, it was taken over by the “Securities Trading Corporation of India” (STCI), which was established by Reserve Bank of India (RBI) in May 1994. It was one of the first two institutions to be accredited by RBI as a primary Dealer in Government securities. Its core activities comprise participation, underwriting, market making and trading in Government Securities. UTISEL has been working as an independent professional entity for providing financial intermediary and advisory services to corporate institutional and retail clientele. The Company has built up a reputation for transparent and fair execution of transactions, which have been well received and appreciated by its clientele. We are also one of the top players in Equity and Commodity trading. A brief overview of commodity future: Commodity trading in India has been formally started in the year 2003 under the regulatory authority of FORWARD MARKET COMMISSION. Since then it has been growing at a phenomenal rate, with its turnover crossing 36 lakhs crore in the year 20062007. The commodity derivatives have been a very operational tool in the hands of industries and businesses all over the world.Industries; both agro and metal based have been using these tools to fight the adverse impacts of price fluctuations and risk factors. Of late, it has also developed as an investment avenue for maximizing their corporate and individual profits. To put the point more clearly, a large part of metal trading in Europe is done through LME (London Metal Exchange).Internationally Commodity Marketsare around 40 times larger than Equity Markets.
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In India, the commodity futures have been faced with several resistances. It is alleged to be still in the influence of speculators and real players are still wary off entering the market.Hence, commodity futures are even now far away from its championed objectives of True price discovery and risk minimization in the wake of price volatility. It is often asked that why Commodity futures in India has not attained its goal and could not give much benefits to industries and businesses. Our researches show that unawareness and faulty strategies have led to loss and finally disinterest among traders and industries. As a repercussion, our industries are not able to derive full benefits of these tools to minimize their risks and profit maximization. Our other findings are: 1. Misperception regarding commodity futures in India in the minds of traders. 2. People assume commodity futures as a mere speculative tool. 3. Risk minimizing strategies (Hedging and Arbitrage) not adopted by the majority of traders and industrialists. 4. Lack of Education and awareness regarding commodity futures in investors. 5. Ignorance towards professional research and advisory Our Objective: As part of our national campaign, we have been conducting several seminars and other activities to create awareness among traders, farmers and industrialists regarding true benefits and proper strategies of commodity futures. In Hyderabad itself, we are conducting seminar in Chilli markets (Malakpet) with A.P.Seeds and Grains Merchants Association on 25th April. A similar kind of seminar is scheduled for Bullion traders in the 1st week of May. We are also in active talk with Andhra Pradesh farmers association to conduct similar activities among farmers of Andhra Pradesh. We have been active through different platforms to address the issues of unawareness and strategic risk management among all stakeholders of economy, be it farmer, trader or industries. Sir, we have learnt that FAPCCI is a leading consortium of all Industrialists and businesses of Andhra Pradesh and its role in bringing forward the issues and problems concerning the industrial community as a whole has been very well appreciated. Therefore sir, we recognize it to be an ideal forum for addressing the issues of commodity futures amongst the industrialists of AP. Sir, we propose to conduct a seminar on â&#x20AC;&#x153;Futures marketâ&#x20AC;? with your active association where in we will be inviting research analysts, commodity experts and representatives from different commodity exchanges. Regards UTI SECURITIES LTD. Ph: (+91) 9394744777
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REFERENCES BIBLIOGRAPHY: Commodity and derivative, monthly magazine Volume 02, issue 4, April 2007 Commodity markets: A new Investment avenue ICFAI university press Commodity reports from UTISEL Economic survey: 2005/2006/2007 Reports of Public Information Bureau: Government of India The Indian Express: 17th April, 2007
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WEBLIOGRAPHY: http://www.basemetals.com http://www.blonnet.com/iw/2007/04/01/20hdline.htm http://www.commoditycontro.com http://www.contentlinks.asiancerc.com/utisecurities/product_services.asp http://www.crnindia.com http://www.fmc.gov.in http://www.karvycomtrade.com/why_commodities.asp http://www.karvycomtrade.com/mcx.asp http://www.karvycomtrade.com/commoditiesFAQ.asp http://www.karvycomtrade.com/indian_commodities_market.asp http://www.karvycomtrade.com/101FAQfromFMC.asp http://www.lme.co.uk http://www.mcxindia.com http://www.mcxcomnews_annual07.pdf http://www.ncdex.com http://www.nationalspotexchange.com http://www.usectrade.com/
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