Report On Study of Commodity market

Prepared By Amit Kumar yadav

Under the Guidance of Dr. Mihir Dash

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

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

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-:Table of Contents:-

Particulars Executive Summary Chapter : 1 Introduction & Industry Analysis

1.1 Introduction 1.2 Historical Background 1.3 Industry Overview 1.3.1 Market Structure 1.3.2 Description of various market 1.3.3 Markets Rational 1.3.4 Commodity Trading & its Mechanism 1.3.5 Regulatory issues 1.3.6 Indian Scenario 1.3.7 Global Scenario

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3 5

6 7 12 14 17 20 27

Chapter : 2

Company Overview
2.1 Introduction of the Company 2.2 Vision and Mission 2.3 Organisational Structure 2.4 Global & Indian Operation & Market share 2.5 Products & Services 2.6 SWOT Analysis 30 32 33 34 36 38
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Chapter : 3

Research Methodology
3.1 Objectives of the study 3.2 Scope of the study 3.3 Research design 3.4 Sources of data 3.5 Sampling plan 3.6 Limitations of the study 40 40 41 41 42 43

Chapter : 4 Chapter : 5 Chapter : 6 Chapter : 7 Chapter : 8

Observation & Analysis Findings & Recommendations Conclusion Learning outcome Annexure Bibliography

44 56 57 61 62 65 67 77

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

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Chapter-1 Introduction & Industry overview

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1.1 Introduction:
Commodities are the physical substance, such as food grains, metals, crude oil etc. which are interchangeable with another product of the same type, and which investors buy or sell in a market, usually through futures contracts. The price of the commodities is subject to supply and demand. Indian markets have recently thrown open a new avenue for retail investors and traders to participate through commodity derivatives. For those who want to diversify their portfolios beyond shares, bonds and real estate, commodities are the best option. Till few 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. But after 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 futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. As far as the size of commodity market of India is concerned, of the country's GDP of Rs 13, 20,730 crores (Rs 13,207.3 billion), commodities related (and dependent) industries constitute about 58 per cent. Currently, the various commodities across the country clock an annual turnover of Rs 1, 40,000 crores (Rs 1,400 billion). With the introduction of futures trading, the size of the commodities market grows many folds here on.

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

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1.2 Historical Background:

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

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1.3 Industry overview:

Commodity markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts. Usually Commodity markets cover physical assets such as precious metals, base metals, energy {oil, electricity etc.}, food {rice, wheat, pulses etc.}, agricultural products etc. Most of the trading is done using futures. However, over the last few years, an OTC market has also been growing, as an increasing number of market participants are trading in exotic options. The purpose of a commodity exchange is to provide an organized marketplace in which members can freely buy and sell various commodities in which they have an interest. The exchange itself does not operate for profit. It merely provides the facilities and ground rules for its members to trade in commodity futures and for non-members also to trade by dealing through a member broker and paying a brokerage commission.

1.3.1 Market structure:

Quality Certification Agency Warehouses Hedger

Clearing Bank

Commodities Market
Producers

Transporte rs/support agencies

Consumers (Retail/ Institutional)

Traders (Speculators)

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1.3.2 Description of the various Markets:

Commodities markets cover the assets under following categories: Energy: Mainly oil and gas like crude oil, jet fuel, gasoline, fuel oil, heating oil, Natural gas & propane etc Electricity as well as renewable forms of energies like solar and wind energy. Weather: weather is obviously not a tradable asset but we include them here because, over the last years, many derivative products whose underlying is weather (temperature, wind, precipitation) have been forth and traded. Metals: Base metals: Aluminum, Copper, Zinc, Nickel, Lead, Tin, Iron & Steel. Precious metals: Gold, Silver, Platinum, Palladium & Titanium. Agricultural: Grains: Wheat, Rice, Maize, Barley, Soya beans, Sunflower, Refined Soya oil, Crude Palm oil. Livestock: Live hogs, Cattle and Pork bellies. Spices: Cardamom, Coriander, Turmeric, Jeera, Pepper. Foodstuffs: Cocoa, Coffee, Potato, Sugar, Cheddar, Almond. Forest products: Plywood, Rubber. Pulse: Chana, Tur, Urad. Fiber: Cotton {Kapas}.
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Spot Markets: Spot markets are the organized exchanges where commodity products can be traded on the daily basis in large amount. In such types of markets, delivery of the products either takes place immediately, or with a minimum lag between the trade and delivery due to technical constraints, that is the reason, they are known as Spot markets. Major examples of Spot markets are as under: MCX {Multi Commodity Exchange}. NCDEX {National Commodity & Derivatives Exchange limited}. National Spot Exchange. CME {Chicago Mercantile Exchange}. MCE {Mid America Commodity Exchange} etc.

Future Markets: Future commodity market is the market, where commodities are contracted for purchase or sell in standardized contractual agreements. These agreements (usually known as futures contracts) provide for delivery of a specified amount of a particular commodity during a specified future month, but involve no immediate transfer of ownership of the commodity involved. In other words, one can buy and sell commodities in a futures market regardless of whether or not one has, or owns, the particular Commodity involved. When one deals in futures one need not be concerned about having to receive delivery (for the buyer) or having to make delivery (for the seller) of the actual commodity, providing of course that one does not buy or sell a future during its delivery month. One may at any time cancel out a previous sale by an equal offsetting purchase or a previous purchase by an equal offsetting sale. If done prior to the delivery month the trades cancel out and thus there is no receipt or delivery of the commodity. Actually, only a very small percentage, usually less than 2 % of the total future contracts that are entered into are ever settled through deliveries. For the most part they are cancelled out prior to the delivery month in the manner just described.
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Commodity Future Contract: Futures contracts are an improved variant of forward contracts. They are agreements to purchase or sell a given quantity of a commodity at a predetermined price, with settlement expected to take place at a future date. While forward contracts are mainly over-the-counter and tailor-made which physical delivery futures settlement standardized contracts whose transactions are made in formal exchanges through clearing houses and generally closed out before delivery. The closing out involves buying a different times of two identical contracts for the purchase and sale o the commodity in question, with each cancelling the other out. The futures contracts are standardized in terms of quality and quantity, and place and date of delivery of the commodity. The commodity futures contracts in India as defined by the FMC has the following features: (a) Trading in futures is necessarily organized under the auspices of a recognized association so that such trading is confined to or conducted through members of the association in accordance with the procedure laid down in the Rules and Bye-laws of the association. (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 seller in a futures market has the choice to decide whether to deliver goods against outstanding sale contracts. In case he decides to deliver goods, he can do so not only at the location of the Association through which trading is organized but also at a number of other pre-specified delivery centers. (e) 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. The terms and specifications of futures contracts vary depending on the commodity and the exchange in which it is traded.
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Participants in the Commodity Future Market: The participants in the Commodity futures are as under: Farmers/Producers. Merchandisers/Traders. Importers. Exporters. Consumers/Industry. Commodity financers. Agriculture credit providing agencies. Corporate having price risk exposure in commodities. Hedging in the Future Commodity Market: The justification for futures trading is that it provides the means for those who produce or deal in cash commodities to hedge, or insure, against unpredictable price changes. There are many kinds of hedge, let us take an example to understand the principle of hedging in future trading. Let us take the case of a firm that is in the business of storing and merchandising wheat. By early June, just ahead of the new crop harvest, the firms storage bins will be relatively empty. As the new crop becomes available In June, July and August, these bins will again be filled and the wheat will remain in storage throughout the season until it is sold, lot-by-lot, to those needing wheat. During the crop movement when the firms inventory of cash wheat is being replenished, these cash wheat purchases (to the extent that they are in excess of merchandising sales) will be hedged by selling an equivalent amount of futures short. Then as the cash wheat is sold the hedges will be removed by covering (with an offsetting purchase) the futures that were previously sold short. In this manner the storage firms inventory of cash wheat will be constantly hedged, avoiding the risk of a possible price decline one that could more than wipe out the storage and merchandising profits necessary for the firm to remain in business. But if the storage firm buys cash wheat at $4 a bushel, and hedges this purchase with an equivalent sale of December wheat at $4.05, a 10-cent break in prices between the time the hedge is placed and the time it is taken off would result in a 10-cent loss on the cash wheat and a 10Page | 16

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

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Contracts perform the economic function of establishing a market price for the commodity. While speculative traders assume the risks that are passed on in the form of hedges, this does not mean that traders have no choice as to the risks they assume or that all of the risks passed on are bad risks. The commodity trader has complete freedom of choice and at no time is there any reason to assume a risk that he doesnt think is a good one. Ones skill in selecting good risks and avoiding poor risks is what determine ones success or failure as a commodity trader.

1.3.3 Markets Rational:

Although the primary reason of being of commodity markets was to have efficient markets for agricultural and energy goods, where producers and consumers can transact deals, commodity markets have been growing to offer Commodity - linked trading and speculative instruments. Compared to other assets like equity stock or bonds, commodities exhibit strong seasonality as well as high level of volatility (cf. the spike in oil prices in 1973, 1979 or the Gulf war), making hedging strategies a true challenge for the various market participants. The arrival of news (especially ones relating to local wars or political crises) can have a very high impact on commodity prices, especially oil. In addition, commodities present negative correlation with stocks and bonds (around 15% to 30% over the last ten years, if one looks at the correlation between the GSCI and the SP 500 for instance), making them valuable diversification investment instruments to other assets like equity stocks and bonds. With the growing volume of futures contracts, commodity futures contracts have become a very liquid instrument besides being an easy one to trade. Standard arbitrage theory provides that the price of futures contracts is equal to: [Spot Price] + [Cost of Carry] = [Futures Price] ------------ (1.1) Where the cost of carry is equal to: [Cost of Carry] = [Interest Rate Cost] - [Reinvestment Costs] like coupon or dividends + [Storage cost] ------------------- (1.2) Where under [Reinvestment costs] one should understand [coupons] and/or [dividends],

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

Backwardation and contango

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Big players in the commodity markets comprise not only raw material producers, who try to hedge their risk, but also Airlines companies that face the risk of unfavorable jet fuel price fluctuations. Utility companies, facing important risk due to the deregulation of the energy market. Various hedge funds interested in risk diversification. Moreover, the deregulation of the energy markets, after year 2000, first in the US and now in Europe & Asia, has made risk management of commodities a must for utilities, distributors and suppliers.

1.3.4 Commodity Trading & its Mechanism:

Trading in commodity markets is quite similar to equity markets. The commodity market also has two constituents i.e. spot market and derivative market. In case of a spot market, the commodities are bought and sold for immediate delivery. In case of a commodities derivative market, various financial instruments having commodities as underlying are traded on the exchanges. The buy and sell orders for commodity futures are executed on the trading floor where floor brokers congregate during the trading hours stipulated by the exchange. The floor brokers/trading members on receipt of orders from clients or from their office transmits the same to others on the trading floor by hand signal and by calling out the orders (in an open outcry system they would like to place and price. After trade is made with another floor broker who takes the opposite side of the transaction for another customer or for his own account, the details of transactions are passed on to the clearing house through a transaction slip on the basis o which the clearinghouse verifies the match and adds to its records. Following the experiences of stock exchanges with electronic screen based trading commodity exchanges are also moving from outdated open outcry system to automated trading system. Many leading commodity exchanges in the world including Chicago Mercantile Exchange (CME), Chicago Board of Trade (CBOT), International Petroleum Exchange (IPE), London, have already computerized the trading activities. In India, coffee futures exchange, Bangalore
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has already put in place the screen based trading and many others are in the process of computerization. To add to modernization efforts, the Bombay Commodity Exchange (BCE) has initiated for a common electronic trading platform connecting all commodity exchanges to conduct screen based trading. In electronic trading, trading takes place through a centralized computer network system to which all buy and sell orders and their respective prices are keyed in from various terminals of trading members. The deal takes place when the central computer finds matching price quotes for buy and sell. The entire procedural steps involved in electronic trading beginning from placing the buy/sell order to the confirmation of the transaction have been given below: Order and Execution flow in electronic future trade

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

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Margins: Margins (also called clearing margins) are good -faith deposits kept with a clearinghouse usually in the form of cash. There are two types of margins to be maintained by the trader with the clearinghouse. These are: Initial margin. Maintenance or Variation margin. Initial margin: Initial margin is a fixed amount per contract and does not vary with the current value of the commodity traded. Maintenance margin: Maintenance margin is a kind of compensation in order to compensate the risk borne by the clearinghouse on account of price volatility of the commodity underlying the contract to which it is a counterparty. Maintenance margin usually ranges from 60 to 80 percent of Initial margin. A debit in the margin account due to adverse market conditions and consequent change in the value of contract would lead to initial margin falling below the maintenance level. The clearinghouse restores initial margin through margin calls to the client for collecting variation margin. In case of an increase in value of the contract, marking to- market ensures that the holder gets the payment equivalent to the difference between the initial contract value and its change over the lifetime of the contract on the basis of its daily price movements. If the member is not able to pay the variation margin, he is bound to square off his position or else the clearinghouse will be liquidating the position.

1.3.5 Regulatory issues in Commodity market:

Government policies: The government policies play a major role in the growth of commodities markets. Following are the issues related to government policies, which affects the commodity future markets: First issue is taxes. Different tax treatment of speculative gains and losses discourage many speculators from participating in official futures exchanges, thereby affecting the liquidity of the markets. Hedgers are affected as well: the necessary link between futures and physical market transactions is too rigidly defined. Tax issues need to be clarified so that futures losses can be offset against profits on the underlying physical trade and vice versa.
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 Second problem is stamp duty. Stamp duties on trade in commodity futures exchanges should be nil, except when physical delivery is made. Now, stamp duty can be arbitrarily imposed by the state in which the futures exchange is located. Clarification from the Indian states in which there are exchanges that there will be no arbitrary position on stamp duty is recommended. Third, many institutions (particularly financial institutions but also, in a less direct manner, cooperatives) are not permitted to engage in commodity futures trade. The rules which prevent such engagement need to be modified. Finally, the role of government entities directly involved in commodity trade should be reconsidered. The direct purchasing practices of these entities now damage the potential of commodity exchanges. If a federal or state government wishes to continue direct interventions in commodity markets, it could, if it wished, pass through the commodity exchanges. This would ensure effective market intervention (the effect on prices will be immediate), and, as long as done within clear policy guidelines, does not destroy market mechanisms.

Regulatory perspectives: In order to regulate the market, the regulating authorities like FMC in India, CFTC in US, needs a new focus, a stronger role, and an improved day-to-day oversight of exchanges. So for this, the regulating authorities must consider the following measures: The first issue is that the perspective of regulators should move away from a concern about preventing volatility towards protecting market integrity. The regulators must set the regulatory template under which each of the exchanges is permitted to operate and is expected to run its business. The regulators therefore must satisfy themselves that the exchange business is being conducted in a proper manner. They are likely to set guidelines for exchanges and will need to satisfy themselves at all times that exchanges are conducting their businesses in line with those guidelines.

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 Second, the authorities should change the portfolio of contracts that are

traded. It should abolish NTSD {Non-Transferable Specific Delivery Contracts} and TSD {Transferable Specific Delivery Contracts} contracts, and have only tradable futures contracts. The authorities should also allow exchanges to introduce option contracts. Knowledge has now sufficiently spread, and technology sufficiently improved, to make this possible.
Third, with respect to combating manipulation, the regulators therefore

need to be able to evaluate (proposed) contract specifications, and push for a change if these specifications are not sound, or have become inappropriate (e.g., in case the physical market for a well-established contract changes). Apart from this, Exchange management should form a first line of defence (and be punished if they do not do their job properly), but regulators should keep continuous track of market developments too. And finally with the changing environment of industry, it is quite important for regulators to check the brokerage system within their territory. So in this way, first of all the entry of international broking houses, either in joint ventures with domestic brokers or independently, should be stimulated. There should be a transition period (not exceeding One year), where each exchange sets initial standards for their brokers. Brokers (after the transition period) should meet the following requirements: Mandated capital adequacy: The regulators should seek to minimize any risk to investors and threat to the stability of the market from the failure of an institution because it becomes unable to meet its liabilities. Currently, a broker's membership at the exchange is solely dependent upon fulfilling the financial requirements (in form of upfront payment or equity participation, membership, admission fees etc.) levied by the different exchanges. There is a need for mandated capital adequacy for brokers together with measures to monitor that the capital is, in fact, maintained. Licensing: In most of the countries around the globe including India, there is no requirement of any form of licensing. A broker can start trading once he fulfills the exchange
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requirements. There is no educational requirement. It is advisable that anyone dealing in futures for clients is registered. To be registered, one would need to: - be a member/employee of an exchange - pass a character assessmente.g., no conviction of fraud. Customer agreements: Before an exchange member can operate on behalf of a customer a client agreement should be in place. The exchange or the regulator may wish to define the minimum acceptable content of such an agreement.

1.3.6 Commodity market: Indian Scenario

Organized futures market evolved in India by the setting up of "Bombay Cotton Trade Association Ltd." in 1875. In 1893, following widespread discontent amongst leading cotton mill owners and merchants over the functioning of the Bombay Cotton Trade Association, a separate association by the name "Bombay Cotton Exchange Ltd." was constituted. Futures trading in oil seeds were organized in India for the first time with the setting up of Gujarat Vyapari Mandali in 1900, which carried on futures trading in groundnut, castor seed and cotton. Before the Second World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab. After independence, a three-pronged approach has been adopted to revive and revitalize the market. Firstly, on policy front many legal and administrative hurdles in the functioning of the market have been removed. Forward trading was permitted in cotton and jute goods in 1998, followed by some oilseeds and their derivatives, such as groundnut, mustard seed, sesame, cottonseed etc. in 1999. A statement in the first ever National Agriculture Policy, issued in July, 2000 by the government that futures trading will be encouraged in increasing number of agricultural commodities was indicative of welcome change in the government policy towards forward trading. Secondly, strengthening of infrastructure and institutional capabilities of the regulator and the existing exchanges received priority. Thirdly, as the existing exchanges are slow to adopt reforms due to legacy or lack of resources, new promoters with resources and professional approach were being attracted with a clear mandate to set up dematerialized, technology driven exchanges with nationwide reach and adopting best international practices.
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But the turning point came in 2003, when the government issued notifications for withdrawing all prohibitions and opening up forward trading in all the commodities. This period also witnessed other reforms, such as, amendments to the Essential Commodities Act, Securities (Contract) Rules, which have reduced bottlenecks in the development and growth of commodity markets. Of the country's total GDP, commodities related (and dependent) industries constitute about roughly 50-60 %, which itself cannot be ignored. Most of the existing Indian commodity exchanges are single commodity platforms; are regional in nature, run mainly by entities which trade on them resulting in substantial conflict of interests, opaque in their functioning and have not used technology to scale up their operations and reach to bring down their costs. But with the strong emergence of: National Multi-commodity Exchange Ltd., Ahmadabad (NMCE), Multi Commodity Exchange Ltd., Mumbai (MCX), National Commodities and Derivatives Exchange, Mumbai (NCDEX), and National Board of Trade, Indore (NBOT), all these shortcomings will be addressed rapidly. These exchanges are expected to be role model to other exchanges and are likely to compete for trade not only among themselves but also with the existing exchanges. Structure of market:

Ministry of Consumer Affairs FMC Commodity Exchanges

National Exchanges

Regional Exchanges

MCX

NCDEX

NMCE

NBOT

20 Other Regional Exchanges

Source: Sebi Bulletin

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

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

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

National Commodity & Derivative Exchange Ltd. {NCDEX}: National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. Like MCX, it is also headquartered in Mumbai & offers facilities to its members from the centers located throughout India. NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters and shareholders of NCDEX are prominent players in their respective fields and bring with them institutional building experience, trust, nationwide reach, technology and risk management skills. It became a public limited company on April 23, 2003 under the companies act, 1956 and started its operation since December 15. 2003. The Exchange, as on May 21, 2009 when Wheat Contracts were relaunched on the Exchange platform, offered contracts in 59 commodities - comprising 39 agricultural commodities, 5 base metals, 6 precious metals, 4 energy, 3 polymers, 1 ferrous metal, and CER. The top 5 commodities, in terms of volume traded at the Exchange, were Rape/Mustard Seed, Gaur Seed, Soya bean Seeds, Turmeric and Jeera. Key promoters: Promoter shareholders: ICICI Bank Limited (ICICI)*, Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited.(NSE). Other shareholders: Canara Bank, Punjab National Bank (PNB), CRISIL Limited, Indian Farmers Fertiliser Cooperative Limited (IFFCO), Goldman Sachs, Intercontinental Exchange (ICE), Shree Renuka Sugars Limited and Jaypee Capital Services Limited.
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Average turnover: Volume {In lakh tonnes} 3137.44 Value {In Rs. Crore} 917584.71

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

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

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

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

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

Problems of Indian Commodity Market: Even though the commodity derivatives market has made good progress in the last few years, but still there are lot issues, which are yet to be resolved. Some of them are discussed below: Cash Vs Physical settlement: this is one of the major problem of commodity market in India. It is probably due to the inefficiencies in the present warehousing system that only about 1% to 5% of the total commodity derivatives trades in the country are settled in physical delivery. Therefore the warehousing problem obviously has to be handled on a war footing, as a good delivery system is the backbone of any commodity trade. A particularly difficult problem in cash settlement of commodity derivative contracts is that at present, under the Forward Contracts (Regulation) Act 1952, cash settlement of outstanding contracts at maturity is not allowed. In other words, all outstanding contracts at maturity should be settled in physical delivery. To avoid this, participants square off their positions before maturity. So, in practice, most contracts are settled in cash but before maturity. There is a need to modify the law to bring it closer to the widespread practice and save the participants from unnecessary hassles.
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 Lack of economy of scale: There are too many (3 national level and 25 regional) commodity exchanges. Though over 80 commodities are allowed for derivatives trading, in practice derivatives are popular for only a few commodities. Again, most of the trade takes place only on a few exchanges. All this splits volumes and makes some exchanges unviable. This problem can possibly be addressed by consolidating some exchanges. Also, the question of convergence of securities and commodities derivatives markets has been debated for a long time now. The Government of India has announced its intention to integrate the two markets. It is felt that convergence of these derivative markets would bring in economies of scale and scope without having to duplicate the efforts, thereby giving a boost to the growth of commodity derivatives market. It would also help in resolving some of the issues concerning regulation of the derivative markets. However, this would necessitate complete coordination among various regulating authorities such as Reserve Bank of India, Forward Markets commission, the Securities and Exchange Board of India, and the Department of Company affairs etc. Tax and legal bottlenecks: There are at present restrictions on the movement of certain goods from one state to another. These need to be removed so that a truly national market could develop for commodities and derivatives. Also, regulatory changes are required to bring about uniformity in octroi and sales taxes etc. VAT has been introduced in the country in 2005, but has not yet been uniformly implemented by all states. The Regulator: As the market activity pick-up and the volumes rise, the market will definitely need a strong and independent regular; similar to the Securities and Exchange Board of India (SEBI) that regulates the securities markets. Unlike SEBI which is an independent body, the Forwards Markets Commission (FMC) is under the Department of Consumer Affairs (Ministry of Consumer Affairs, Food and Public Distribution) and depends on it for funds. It is imperative that the Government should grant more powers to the FMC to ensure an orderly development of the commodity markets.

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1.3.7 Commodity Market: Global Scenario

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

Commodity prices {nominal, 2000 = 100}

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Between July 2008 and February 2009, prices of energy declined by two-thirds while those of metals dropped by more than half. Prices of agricultural goods retreated by more than 30 percent, with prices of edible oils dropping by 42 percent. The troughs in energy and non-energy indices broadly coincided with troughs in global economic activity (particularly in China and East Asia). Prices of energy and metals commodities began to recover in March 2009, in part responding to recovery in industrial production and other factors including strong import demand from China, large-scale production restraint in the extractive commodities, tight scrap markets, and strike-related disruptions in the case of metals. Prices of some agricultural commodities also started to rebound in 2009:Q2, in response to demand increases and, in some cases (for example, sugar and rice), the effects of adverse weather. Dollar price increases also reflected the depreciation of the dollar against major currencies. Yet, expressed in trade-weighted local currency indices, prices raised my much less.

Global Commodity Exchanges: Chicago Board of Trade: Chicago Board of Trade was established in 1948 and has trading in agricultural produce, interests, Dow, metals and US treasuries. Soya complex, wheat and corn prices across the world are referenced here. It has both electronic as well as open cry. It trades both in futures as well as options. In 2005 it became a public traded NYSE listed company. New York Board of Trade (NYBOT): New York Board of Trade (NYBOT) is the world's largest commodities exchange for Coffee, Sugar, Cotton and Frozen Concentrated Orange Juice. The exchange was founded as the New York Cotton Exchange in 1870. NYBOT also facilitates trades in foreign currencies and derivative indices for equities. Kansas Board of Trade: Kansas Board of Trade in US specializes in hard red winter wheat. Hard winter wheat constitutes the maximum of US production. This exchange is benchmark for bread wheat prices.

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

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

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Chapter-2 Company overview

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2.1 Introduction of the Company:

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

2.2 Mission & Vision:

Vision: To be one of the most trusted and globally reputed financial distribution company.

Mission: To be a Customer-centric organization. To generate clients wealth through professional advice, backed by thorough research and in-depth analysis.

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2.3 Organizational Structure:

B

Bonanza

Bonanza Portfolio Limited

Bonanza Commodity Brokers Pvt. Limited

Bonanza Insurance Brokers Pvt. Limited

Bonanza Fin invest Pvt. Limited

Stock Broking & Commodity Retail Wealth Management Broking Broking Insurance

Venture Capital & Investment Banking

Board of Directors: Mr. S. P. Goel. Mr. Shiv Kumar Goel. Mr. S. K. Goel. Mr. Vishnu Kumar Agarwal. Mr. Anand Prakash Goel.

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Affiliations: Equity: National Stock Exchange of India Ltd. (NSEIL). The Bombay Stock Exchange Ltd. (BSE). OTC Exchange of India Ltd (OTCEIL). Commodities: Multi Commodity Exchange (MCX). National Commodity & Derivative Exchange Ltd. (NCDEX). National Multi Commodity Exchange (NMCE). Dubai Gold Commodities Exchange (DGCX). Currency: National Stock Exchange of India Ltd. (NSEIL). The Bombay Stock Exchange Ltd. (BSE). MCX-SX Ltd. United Stock Exchange. Depository participant with CDSL and NSDL.

2.4 Global & Indian Operations and Market share:

As far as the operations and presence of Bonanza is concerned, it is the 4rth largest brokerage firm in the country. The company has more than 1632 outlets spread across 535 cities in the country. Corporate Office: Bonanza House Plot No. M-2, Cama Industrial Estate, Walbhat Road, Behind the Hub, Goregaon {E}, Mumbai 400063. Registered Office: 4353/4-C, Madan Mohan Street, Ansari Road, Daryaganj, New Delhi 110002.

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

Kerela

Madhya Pradesh Maharashtra Orissa Rajasthan

Tamilnadu Uttar Pradesh Uttarakhand West Bengal

Market Share:
3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 H1 FY 11

NSE & BSE F&O MCX & NCDEX

Source: bonanzonline.com

2.5 Product & Services:

Brokerage Services:

Brokerage Services
Equity Derivatives Commodity Currency

Online

Offline

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 Distribution:

Distribution
Insurance Funds Fixed Deposits IPO

Life

Non-Life

Mutual Funds

Venture Capital Funds

Wealth Management:

Wealth Management
PMS Advisory Structured Product

De-mat:

Demat
NSDL CDSL

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2.6 SWOT Analysis:

Strengths:
A diverse product range. State-of-the-art technology.

Weaknesses:
Higher brokerage charge as Compare to other companies in the industry. Lesser presence in the eastern part of the country.

A vast network across India. A young dynamic team.

Opportunities:
Growing financial services Industrys share of wallet for disposable income. Regulatory reforms would aid greater participation by all class of Investors. Leveraging technology to enable best practices and processes. Increased appetite of Indian Corporate for growth capital.

Threats:
Execution Risk. Slowdown in global liquidity flows. Increased intensity of competitors from local and global players. Unfavorable economic condition.

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Chapter-3 Research Methodology

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3.1 Objectives of the study:

To understand the structure and functioning of Commodity market in India & rest of the world. To gain an idea about the peoples preference regarding investment in commodities over the other financial products like equity, currency etc. To clearly state the awareness level of people about commodities. To know about the trading/demat account for trading in different financial markets and its benefits. To study how to build a relationship marketing in Capital market. To understand the importance of the role of a brokerage firm in various financial market.

3.2 Scope of the study:

Globalization of the financial market has led to a manifold increase in investment. New markets have been opened; new instruments have been developed; and new services have been launched. But at the same time, a number of opportunities and challenges have also been thrown open. For example the rapidly advancing technology, particularly the Internet, has drastically changed the social and economic landscapes and every aspect of our daily lives. In the Securities Industry & Futures Commodities, the Internet has facilitated on-line trading, changing the way the market works, as well as the way the investors access the market. Having taken advantage of information technology at an opportune time, India has emerged as a front-running country of on-line trading in the global securities & commodities markets. Online Commodities trading is new as compared to Equity market in India. Mainly three exchanges are involved in online commodities trading MCX, NCDEX & NMCE. Apart from this, after equity, commodity is the market on which investors have shown their faith and invested in commodities like gold, silver, crude oil etc. in order to get the maximum return on their investment.
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3.3 Research design of the study:

The study is based on survey technique. The study consists of analysis about customers awareness and satisfaction of Bonanza commodities Ltd. For the purpose of the study 100 customers were picked up at random and their views solicited on different parameters. The methodology adopted includes: Questionnaire. Random sample survey of customers. Discussions with the concerned. Personal interviews and informal discussions were held when I was interacting with new customers through phone and sometimes personally to ascertain the awareness and existing consumers satisfaction level. Further applying simple statistical techniques has processed the data collected.

3.4 Sources of Data:

Primary data: Collected through the structured questionnaire. Secondary data: I had made phone calls to the clients from the data base that I was given by the company in order to get the accurate information regarding their investment and their preference. Another method to get the information was a direct approach in which I approached the clients and got a direct response from them. Official websites of MCX, NCDEX, Ministry of Consumer Affairs, Food & Public distribution, Published materials of Bonanza Portfolio & finally Newspapers.

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3.5 Sampling plan:

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

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3.6 Limitations of the study:

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

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Chapter 4 Observation & Analysis

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 Occupation: Total no. of person = 100

4

30

43

Bussinessman 23 Prefessionals Employed {both govt. as well as pvt. Sector} others

Interpretation & Analysis: From the above chart it is crystal clear that, there are majority of service class people participated in the survey. They are the key investors. After that, businessmen and others which mainly consist of small shopkeepers have participated. And finally professionals comes which constitutes around 4 percent.

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 Annual Income: Total no. of person = 100

40 35

38

31
30 25 20 15 10 5 0

22

< 2 lakh

2 - 5 lakh

5 - 10 lakh

> 10 lakh

Interpretation & Analysis: As per the occupations chart, most of the people in my survey are from service class people & businessman, and majority of them earn between 2 to 10 lakhs per annum, which shows that there are a majority of medium class people. As far as the higher income group is concerned, they are less in number as compare to middle income group. Their less number indirectly indicates that, they are less interested in investing in various investment avenues as compare to their middle counterpart.
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 Investment Objective: Total no. of person = 100

30

39

8 23
To enhance the income level For future wefare Retirement protection Tax benefit

Interpretation & Analysis: In my survey, I found that, most of the people want to invest their money for increasing their current income level, it is also clear from the above chart, apart from this; another major objective of investment is to avail the tax benefit, as we have seen in the previous chart, most of the people in my survey are from service class, so it is obvious that they would try to maximise the tax benefit. And finally a reasonable number of people want to secure their future through investment in various options.

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 Investment portion of Income: Total no. of person = 100

50 45 40 35 30 25 20 29 47

15
10 5 0 < 25 % 25 - 50 %

14 10

50 - 75 %

>75 %

Interpretation & Analysis: From the above chart it is clear that, people are less interested in investing the bigger part of their income. Avery few number who have invested more than rth of their income indicates that, people usually believe on saving their income rather than investing in several investment avenues.
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 Preference to various investment avenues: Total no. of person = 100

Insurance 11% Debentures 10%

Bank deposits 33%

Mutual funds 13%

Commodities 14%

Shares 19%

Interpretation & Analysis: This was one of the important segment of my survey. As it is clear from the above chart, bank deposits are still considered as the one of the safest investment among all financial avenues of investment, but after the emergence of Indian economy, people are showing their interest towards other options like shares, debentures, commodities etc. in order to enhance their portfolio. However it will take some time, but with the time, I am confident that it will play a key role among all investment avenues.
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 Most preferred commodities: Total no. of persons = 100

45 45 40 35 29

30
25 20 15 10 5 0 Precious Metals Energy Base Metals Agricultural Products 19

17

Interpretation & Analysis: The above graph clearly describes that, commodities of precious metals category {basically gold & silver} are considered as the most preferred commodities by respondents. 45 out of 100 people have shown their interest in trading in gold, silver & other precious metals. Then after, agricultural products are in demand. From the above chart, it can be inferred that, people usually trade in bullions and agricultural commodities as compare to the other two categories, i.e. energy & base metals.
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 Awareness of Commodity market: Total no. of person = 100

Fully aware 21%

Not aware 42%

Partially aware 37%

Interpretation & Analysis: This was the main part of my survey. From the above chart one can easily observe that, a large number of people are not aware about the markets like commodity. If some of them know, then their knowledge is incomplete. From this information it can be said that, the commodity market are yet to become a major destination of investment in the country. But I hope with the time it will become a hot spot market for both large as well small investors.
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 Sources of Investment advice:

27.5 27 26.5 26 25.5 25 24.5 24 23.5 23 22.5 Friends Family Consultants Others 24 24 25

Total no. of person = 100

27

Interpretation & Analysis: In the survey, I found that, most of the respondent revealed that, their investment decision depends upon various sources like by keeping track of market or through Ads/ SMS alerts. Around rth of the respondents said they take advice from professional consultants, while around half of them said they take any decision after consulting with their family & friends.
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 Risk taking capacity: Total no. of person = 100

60 55

50

40 30 30

20

15

10

0 Low Medium High

Interpretation & Analysis: Risk is one of the important factor while making investment in any financial market. In fact the return on investment depends upon it. Here in my survey, I found that, around more than half of them are moderate while investing in the markets like Commodities & Equities. More than rth of them are not willing to take any kind of risk, only 15 % of people, I surveyed, prefers to take higher risk. Hence in a nutshell, it can be said that people do not want to take too much risk while investing in the different kind of financial markets like equities & commodities.
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 Re investment of the income earned by the Investment Portfolio: Total no. of person = 100

39 28

33

Re - invest at least 75 % of earnings Re - invest at between 25 to 75 % of earnings Receive at least 75 % of earnings as income

Interpretation & Analysis: This was one of interesting but important part of the survey. As per the above mentioned chart, it can be infer that, a majority of the people re-invest their earnings, while around rth of them keeps some part of their earnings and again around 1/3rd of the people I surveyed prefers to keep their earnings as income. Such kind of attitude also shows the risk taking nature of the people while making an investment.

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 Return on Investment: Total no. of person = 100

35
35

29
30 25 20

21 15

15 10 5 0 <5% 5 - 10 % 10 - 15 % > 15 %

Interpretation & Analysis: As per the above mentioned graph, most of the respondents are getting 5-10 % of their investment as return, while another 29 % are getting return between 10-15 % of their investment. Only 21 % are getting a good return on their investment. One of the probable reason for this could be the risk taking nature and the unstable movement of market in last few months, because the respondents have given their responses on the return they got in the last 3-4 months.
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 Satisfaction level with the services of Bonanza Portfolio Ltd.: Total no. of person = 100

23%

10% 67%

Satisfied

unsatisfied

Neither satisfied nor unsatisfied

Interpretation & Analysis: From the above chart it is quite clear that, around 2/3rd of the respondents are satisfied with the services of Bonanza Portfolio Ltd., Which is not a bad figure for a brokerage firm. Around rth of the respondents rated the company as neither satisfied nor unsatisfied, which could be a considerable issue for the company, while 10 % said that they are not happy with the services of the company, which is may be due to past inconvenience.

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Chapter - 5 Findings & Recommendations

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

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

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Chapter 6 Conclusion

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

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

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Chapter 7 Learning Outcome

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Learning Outcome:
The IIP was one of the most precious and fruitful period of my life. In fact it was a practical application of whatever I had studied in the classroom. Here is the snapshot of my learning during the IIP: First of all, first time I experienced the atmosphere & culture of corporate world during the ten weeks of my Internship. Then I learnt the basic concept of stock broking and role of a brokerage firm in financial market. After that I came to know about the structure & functioning of commodity markets in India as well as rest of the world. How to open a trading/de-mat account for trading in different financial markets like equities, commodities, currencies etc. Got the basic concepts about how to trade in commodities market. In addition to this, I also got to know about the practical exposure of different kind of trading aspects like short-selling, buying on margin etc. this was the crux of my whole learning. During the internship, I learnt how to pitch the customer, in other words, how to convince the customer in order to sell your product. It was one of the toughest experiences of my life. And finally I learnt about the importance of money as Bonanza Portfolio Limited - the company from where I did my internship believe in making money not mistakes.
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Chapter- 8 Annexure

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Annexure: 1 -:Questionnaire:1) Name : _____________________________

2) Age: [ ] 20 30 [ ] 30 50 [ ] 50 & above

3) Gender: [ ] Male [ ] Female

4) Occupation: [ ] Businessman [ ] Employed [ ] Professional [ ] Others

5) Educational Qualification: [ ] Under Graduate [ ] Post Graduate [ ] Graduate

6) Annual Income: [ ] < 2 lakhs [ ] 5 10 lakhs [ ] 2 5 lakhs [ ] > 10 lakhs

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7) Investment Objective: [ ] To enhance the income level [ ] For future welfare [ ] Retirement protection [ ] Tax benefit

8) Investment portion of your income: [ ] < 25 % [ ] 50 75 % [ ] 25 50 % [ ] > 75 %

9) Your most preferred investment avenue: [ ] Bank deposit [ ] Commodities [ ] Debentures [ ] Shares [ ] Mutual funds [ ] Insurance

10) Your awareness about Commodity Market: [ ] Fully aware [ ] Partially aware

[ ] Not aware

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11) From whom you get your investment advice: [ ] Friends [ ] Family

[ ] Consultants

[ ] Others

12) Your risk taking capacity: [ ] Low [ ] Medium

[ ] High

13) How do you intend to use the income earned by your investment Portfolio: [ ] Re invest at least 75 % of earnings [ ] Re invest between 25 75 % of earnings [ ] Receive at least 75 % of earnings as income 14) How much return usually you get on your investment: [ ]<5% [ ] 10 15 % [ [ ] 5 10 % ] > 15 %

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

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Annexure 2:
:-Frequently Asked Questions:-

Where do I need to go to trade in commodity futures? You have three options - the National Commodity and Derivative Exchange, the Multi Commodity Exchange of India Ltd and the National Multi Commodity Exchange of India Ltd. All three have electronic trading and settlement systems and a national presence. How do I choose my broker? Several already-established equity brokers have sought membership with NCDEX and MCX. For example, Bonanza commodities Ltd., ICICI Securities, Sherkhan etc. Some of them also offer trading through Internet just like the way they offer equities. You can also get a list of more members from the respective exchanges and decide upon the broker you want to choose from. What is the minimum investment needed? You can have an amount as low as Rs 5,000. All you need is money for margins payable upfront to exchanges through brokers. The margins range from 5-10 per cent of the value of the commodity contract. For trading in bullion, that is, gold and silver, the minimum amount required is Rs 650 and Rs 950 for on the current price of approximately Rs 65,00 for gold for one trading unit (10 gm) and about Rs 9,500 for silver (one kg). The prices and trading lots in agricultural commodities vary from exchange to exchange (in kg, quintals or tonnes), but again the minimum funds required to begin will be approximately Rs 5,000. Do I have to give delivery or settle in cash? You can do both. All the exchanges have both systems - cash and delivery mechanisms. The choice is yours. If you want your contract to be

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cash settled, you have to indicate at the time of placing the order that you don't intend to deliver the item. If you plan to take or make delivery, you need to have the required warehouse receipts. The option to settle in cash or through delivery can be changed as many times as one wants till the last day of the expiry of the contract. What do I need to start trading in commodity futures? As of now you will need only one bank account. You will need a separate commodity de-mat account from the National Securities Depository Ltd to trade on the NCDEX just like in stocks. What are the other requirements at broker level? You will have to enter into a normal account agreements with the broker. These include the procedure of the Know Your Client format that exist in equity trading and terms of conditions of the exchanges and broker. Besides you will need to give you details such as PAN no., bank account no, etc. What are the brokerage and transaction charges? The brokerage charges range from 0.10-0.25 per cent of the contract value. Transaction charges range between Rs 6 and Rs 10 per lakh/per contract. The brokerage will be different for different commodities. It will also differ based on trading transactions and delivery transactions. In case of a contract resulting in delivery, the brokerage can be 0.25 - 1 per cent of the contract value. The brokerage cannot exceed the maximum limit specified by the exchanges. Where do I look for information on commodities? Daily financial newspapers carry spot prices and relevant news and articles on most commodities. Besides, there are specialized magazines on agricultural commodities and metals available for subscription. Brokers also provide research and analysis support. But the information easiest to access is from websites. Though many websites are subscription-based, a few also offer information for free. You can surf the web and narrow down you search.
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 In which commodities can I trade? Though the government has essentially made almost all commodities eligible for futures trading, the nationwide exchanges have earmarked only a select few for starters. While the NMCE has most major agricultural commodities and metals under its fold, the NCDEX, has a large number of agriculture, metal and energy commodities. MCX also offers many commodities for futures trading. Do I have 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 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. What happens if there is any default? Both the exchanges, NCDEX and MCX, maintain settlement guarantee funds. The exchanges have a penalty clause in case of any default by any member. There is also a separate arbitration panel of exchanges. Are any additional margin/brokerage/charges imposed in case I want to take delivery of goods? Yes. In case of delivery, the margin during the delivery period increases to 20-25 per cent of the contract value. The member/ broker will levy extra charges in case of trades resulting in delivery. Is stamp duty levied in commodity contracts? What are the stamp duty rates? As of now, there is no stamp duty applicable for commodity futures that have contract notes generated in electronic form. However, in case of delivery, the stamp duty will be applicable according to the prescribed laws of the state the investor trades in. This is applicable in similar fashion as in stock market.
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 How much margin is applicable in the commodities market? As in stocks, in commodities also the margin is calculated by (value at risk) VaR system. Normally it is between 5 per cent and 10 per cent of the contract value. The margin is different for each commodity. Just like in equities, in commodities also there is a system of initial margin and mark-to-market margin. The margin keeps changing depending on the change in price and volatility. Are there circuit filters? Yes the exchanges have circuit filters in place. The filters vary from commodity to commodity but the maximum individual commodity circuit filter is 6 per cent. The price of any commodity that fluctuates either way beyond its limit will immediately call for circuit breaker.

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Bibliography

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Websites:
www. mcx. com www. ncdex. com www. fmc. gov. in www. commodityonline.com www. bonanzaonline.com www. sebi. gov. in www.fcamin. nic. in

Articles & Journals:

Commodity insight yearbook 2010. Commodity Derivatives Market in India: Development, Regulation and Future prospects, International Research Journal of Finance and Economics - Issue 2 (2006), Narendra L. Aahuja, Institute of Integrated learning in Management, New Delhi. Annual Report: 2009 10, Forward Market Commission & Ministry of Consumer affairs and Public distribution, Govt. of India. Global Commodity Markets: Review & Price forecast, The World Bank. The Mechanics of Commodity Future markets: What they are & How they function, Robert L. Lerner.

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