hello frnds have made this project on commodity market in india to get know commodity market role in india

1. 1
PROJECT REPORT ON
“Study of Indian Commodity Markets”
Submitted by
Prathamesh Madhavi.
Roll Number: - 1613222
PROJECT REPORT SYBMITTED IN PARTIAL
FULFILMENT
For the Degree of
BACHELOR OF COMMERCE
FINANCIAL MARKETS
MULUND COLLEGE OF COMMERCE
ACADEMIC YEAR 2016-2017

2. 2
DECLARATION
I, Prathamesh Madhavi studying in Third year of Financial Markets course in
the academic year 2016-2017 in Mulund College of Commerce; hereby declare
that I have completed the project titled STUDY OF Indian Commodity Markets.
As part of the course of requirements of BCFM.
I further declare that the information presented in this project is true and original
to the best of my knowledge.
SIGNATURE OF STUDENT
Prathamesh Madhavi.

3. 3
INDEX
Sr.no Particulars
1. Introduction
2 Definition
3. Evolution of commodity
markets in India
4. Participants in commodity
markets
 Hedgers
 Speculators
 Arbitragers
5. Structure of Indian
commodity markets
6. National Multi
Commodity Exchange of
India
7. National Commodity &
Derivative Exchange
8. Multi National
Commodity Exchange of
India
9. Indian Commodity
Exchange of India
10. International Commodity
Exchange
11. New York Marclinte
Exchange
12 London Metal Exchange
13. Chicago Board of Trade
14. Tokyo Commodity
Exchange
15. Chicago Mercantile
Exchange
16. Different Commodity
Traded in Commodity
Markets
17. Role of Govt. in
developing Commodity

4. 4
Market
18. Responsibility of
Agricultural Product
Marketing Committee
19. Role of NABARD in
developing Commodity
Market
20. Role of Depositories
In developing Commodity
Market
21 Regulatory Framework in
Indian commodity market
22 Forward Market
Commission
23. Advantages &
Disadvantages of
Commodity Markets
24. Current Scenario
25 Conclusion
26. Bibliography

5. 5
INTRODUCTION

6. 6
A commodity is defined as anything other than the monetary unit which can
be traded. It may be a tangible product or intangible service. The commodity
market is a geographical location where the seller and buyer meet to transfer the
ownership of goods from the seller to buyer through negotiation at mutually
agreed value. For functioning of commodity market the important elements are
commodity, buyer and seller. The commodity market may be organized or
unorganized depending upon the aggregation of the buyer and seller at certain
geographical location and at a certain given time. With the development of
various means of communication, development of storage system, better means
of transportation and the advanced form of payment has broadened the
definition of the commodity market.
Commodity is divided in various categories based on the source of
production like agro and non agri. Non agro commodity is again divided among
metals and energy. Metals are divided into precious such as steel, copper etc.
Based on the storability factor, like perishable items include vegetables, fruits
and milk and non-perishable items include metals or semi perishable like
cereals and pulses. Market exits for almost all the commodities all over the
world. Commodity market is an important constituent of the financial markets
of any country. It is important to develop a vibrant, active and liquid commodity
market. This would help investors hedge their commodity risk, take speculative
positions in commodities and exploit arbitrage opportunities in the market.

7. 7
DEFINITION

8. 8
A physical or virtual marketplace for buying, selling and trading raw
or primary products. for inventors purposes there are currently about 50
major commodity markets worldwide that facilitates investment trade in nearly
100 primary commodities.
Commodities are split into two types: HARD & SOFT commodities. Hard
commodities are typically natural resources that must be mined or extracted
(gold, rubber, oil, etc) where as soft commodities are agricultural products or
livestock (corn , wheat ,coffee , sugar , soybean , pork , etc.)

9. 9
EVALUATION OF
COMMODITY
MARKET IN INDIA

10. 10
The history of organized commodity derivatives in India goes back to the
nineteenth century when Cotton Trade Association started futures trading in
1875, about a decade after they started in Chicago. Over the time derivatives
market developed in several commodities in India. Bombay Cotton Trade
Association Ltd., set up in 1875, was the first organized futures market.
Bombay Cotton Exchange Ltd. was established in 1893 following the
widespread discontent amongst leading cotton mill owners and merchants over
functioning of Bombay Cotton Trade Association. The Futures trading in
oilseeds started in 1900 with the establishment of the Gujarati Vyapari Mandali,
which carried on futures trading in groundnut, castor seed and cotton. Futures'
trading in wheat was existent at several places in Punjab and Uttar Pradesh. But
the most notable futures exchange for wheat was chamber of commerce at
Hapur set up in 1913. Futures trading in bullion began in Mumbai in 1920.
Calcutta Hessian Exchange Ltd. was established in 1919 for futures trading in
raw jute and jute goods. But organized futures trading in raw jute began only in
1927 with the establishment of East Indian Jute Association Ltd. These two
associations amalgamated in 1945 to form the East India Jute & Hessian Ltd. to
conduct organized trading in both Raw Jute and Jute goods. Forward Contracts
(Regulation) Act was enacted in 1952 and the Forwards Markets Commission
(FMC) was established in 1953 under the Ministry of Consumer Affairs and
Public Distribution. In due course, several other exchanges were created in the
country to trade in diverse commodities.

11. 11
However many feared that derivatives fuelled unnecessary speculation and were
detrimental to the healthy functioning of the market for the underlying
commodities, resulting in to banning of commodity options trading and cash
settlement of commodities futures after independence in 1952. The parliament
passed the Forward Contracts (Regulation) Act, 1952, which regulated contracts
in Commodities all over the India. The act prohibited options trading in Goods
along with cash settlement of forward trades, rendering a crushing blow to the
commodity derivatives market. Under the act only those
associations/exchanges, which are granted reorganization from the Government,
are allowed to organize forward trading in regulated commodities. The act
envisages three tire regulations:
 Exchange which organizes forward trading in commodities can
regulate trading on day-to-day basis;
 Forward Markets Commission provides regulatory oversight under
the powers delegated to it by the central Government.
 The Central Government- Department of Consumer Affairs, Ministry
of Consumer Affairs, Food and Public Distribution- is the ultimate
regulatory authority. After Liberalization and Globalization in 1990,
the Government set up a committee (1993) to examine the role of
futures trading. The Committee (headed by Prof. K.N. Kabra)
recommended allowing futures trading in 17 commodity groups. It
also recommended strengthening Forward Markets Commission, and

12. 12
certain amendments to Forward Contracts (Regulation) Act 1952,
particularly allowing option trading in goods and registration of
brokers with Forward Markets Commission. The Government
accepted most of these recommendations and futures‟ trading was
permitted in all recommended
commodities. It is timely decision since internationally the commodity cycle is
on upswing and the next decade being touched as the decade of Commodities.
Commodity exchange in India plays an important role where the prices of any
commodity are not fixed, in an organized way.

13. 13
PARTICIPANTS IN
COMMODITY
MARKET

14. 14
Participants who trade in the derivatives market can be classified under the
following three broad categories:
 Hedgers
 Speculators
 Arbitrageurs

15. 15

16. 16
HEDGERS

17. 17
A Hedger can be Farmers, manufacturers, importers and exporter. A hedger
buys or sells in the futures market to secure the future price of a commodity
intended to be sold at a later date in the cash market. This helps protect against
price risks.
The holders of the long position in futures contracts (buyers of the
commodity), are trying to secure as low a price as possible. The short holders of
the contract (sellers of the commodity) will want to secure as high a price as
possible. The commodity contract, however, provides a definite price certainty
for both parties, which reduces the risks associated with price volatility. By
means of futures contracts, Hedging can also be used as a means to lock in an
acceptable price margin between the cost of the raw material and the retail cost
of the final product sold.
Someone going long in a securities future contract now can hedge against
rising equity prices in three months. If at the time of the contract's expiration the
equity price has risen, the investor's contract can be closed out at the higher
price. The opposite could happen as well: a hedger could go short in a contract
today to hedge against declining stock prices in the future.

18. 18
SPECULATORS

19. 19
Other commodity market participants, however, do not aim to minimize risk
but rather to benefit from the inherently risky nature of the commodity market.
These are the speculators, and they aim to profit from the very price change that
hedgers are protecting themselves against. A hedger would want to minimize
their risk no matter what they're investing in, while speculators want to increase
their risk and therefore maximize their profits. In the commodity market, a
speculator buying a contract low in order to sell high in the future would most
likely be buying that contract from a hedge selling a contract low in anticipation
of declining prices in the future.
Unlike the hedger, the speculator does not actually seek to own the
commodity in question. Rather, he or she will enter the market seeking profits
by offsetting rising and declining prices through the buying and selling of
contracts.

20. 20
ARBITRAGERS

21. 21
A central idea in modern economics is the law of one price. This states that
in a competitive market, if two assets are equivalent from the point of view of
risk and return, they should sell at the same price. If the price of the same asset
is different in two markets, there will be operators who will buy in the market
where the asset sells cheap and sell in the market where it is costly. This activity
termed as arbitrage, involves the simultaneous purchase and sale of the same or
essentially similar security in two different markets for advantageously different
prices. The buying cheap and selling expensive continues till prices in the two
markets reach equilibrium. Hence, arbitrage helps to equalize prices and restore
market efficiency.
Since the cash and futures price tend to move in the same direction as they
both react to the same supply/demand factors, the difference between the
underlying price and futures price is called as basis. Basis is more stable and
predictable than the movement of the prices of the underlying or the Futures
price. Thus, arbitrageur would predict the basis and accordingly take positions
in the cash and future markets.

22. 22
STRUCTURE OF
INDIAN
COMMODITY
MARKET

23. 23

24. 24
Commodity trading in India is regulated by the Forward Markets Commission
(FMC) headquartered at Mumbai, it is a regulatory authority which is overseen
by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It
is a statutory bodyset up in 1953 under the Forward Contracts (Regulation) Act,
1952.

25. 25
NMCE
(NATIONAL MULTI
COMMODITY
EXCHANGE OF
INDIA LTD.)

26. 26
NMCE is the first demutualised electronic commodity exchange of India
granted the National exchange on Govt. of India and operational since 26th
Nov, 2002.
Promoters of NMCE are, 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 Ltd. (NOL). Main equity holders are PNB.
The Head Office of NMCE is located in Ahmadabad. There are various
commodity trades on NMCE Platform including Agro and non-agro
commodities.

27. 27
NCDEX
(NATIONAL
COMMODITY &
DERIVATIVE
EXCHANGE LTD.)

28. 28
NCDEX is a public limited co. incorporated on April 2003 under the
Companies Act 1956, It obtained its certificate for commencement of Business
on May 9, 2003. It commenced its operational on Dec 15, 2003.
Promoters shareholders are: Life Insurance Corporation of India (LIC),
National Bank for Agriculture and Rural Development (NABARD) and
National Stock Exchange of India (NSE) other shareholder of NCDEX are:
Canara Bank, CRISIL limited, Goldman Sachs, Intercontinental Exchange
(ICE), Indian farmer’s fertilizer corporation Ltd (IFFCO) and Punjab National
Bank (PNB).
NCDEX is located in Mumbai and currently facilitates trading in 57
commodities mainly in Agro product.

29. 29
MCX
(MULTI
COMMODITY
EXCHANGE OF
INDIA LTD.)

30. 30
Headquartered in Mumbai, MCX is a demutualised nation wide electronic
commodity future exchange. Set up by Financial Technologies (India) Ltd.
permanent recognition from government of India for facilitating online trading,
clearing and settlement operations for future market across the country. The
exchange started operation in Nov, 2003.
MCX equity partners include, NYSE Euronext,, State Bank of India and it’s
associated, NABARD NSE, SBI Life Insurance Co. Ltd. , Bank of India, Bank
of Baroda, Union Bank of India, Corporation Bank, Canara Bank, HDFC Bank,
etc.
MCX is well known for bullion and metal trading platform.

31. 31
ICEX
(INDIAN
COMMODITY
EXCHANGE LTD.

32. 32
ICEX is latest commodity exchange of India Started Function from 27
Nov, 09. It is jointly promote by Indiabulls Financial Services Ltd. and
MMTC Ltd. and has Indian PotashLtd. KRIBHCO and IFC among
others, as its partners having its head office located at Gurgaon
(Haryana).
Other Regional
Exchanges

33. 33
1. Bhatinda Om & Oil Gur
Exchange Ltd., Batinda.
2. The Bombay RBD Pamolein, Groundnut Oil, Sunflower
Commodity Exchange Oil, CottonSeed, Safflower, Groundnut,
Ltd.Mumbai Castoroil-Int’l, Castorseed, Cottonseed oil,
3. The RajkotSeeds oil& Groundnut Oil, Castorseed
Bullion Merchants`
AssociationLtd
4. The Meerut Agro Gur
Commodities Exchange
Co. Ltd., Meerut
5. The Spices and Oilseeds Turmeric
Exchange Ltd.
6. Ahmedabad Commodity CottonSeed
Exchange Ltd. Castorseed
7. Vijay BeoparChamber Gur
Ltd.,Muzaffarnagar Mustard Seed
8. India Pepper & Spice Pepper Domestic-MG1
Trade Pepper Domestic-500g/l
Association.Kochi Black Pepper Int’l-MLS ASTA
Black Pepper Int’l-VB ASTA
Black pepper Int’l FAQ
Pepper 550 G/L
Rubber RSS4
9. Rajdhani Oils and Gur
Oilseeds Exchange Ltd. Rapeseed/Mustardseed
Delhi
10. NationalBoard of Rapeseed/Mustardseed
Trade. Indore. Rapeseed/Mustardseed Oil
Rapeseed/Mustardseed oil-Cake
Soy bean

34. 34
INTERNATIONAL
COMMODITY
EXCHANGES

35. 35
Futures’ trading is a result of solution to a problem related to the
maintenance of a year round supply of commodities/ products that are
seasonal as is the case of agricultural produce. The United States, Japan,
United Kingdom, Brazil, Australia, Singapore are homes to leading
commodity futures exchanges in the world.

36. 36
THE NEW YORK
MERCANTILE
EXCHANGE
(NYMEX)

37. 37
The New York Mercantile Exchange is the world’s biggest exchange for
trading in physical commodity futures. The exchange is in existence since last
132 years and performs trades trough two divisions, the NYMEX division,
which deals in energy and platinum and the COMEX division, which trades in
all the other metals.
Commodities traded: Light sweet crude oil, Natural Gas, Heating Oil,
Gasoline, RBOB Gasoline, Electricity Propane, Gold, Silver, Copper,
Aluminium, Platinum, Palladium, etc.

38. 38
LONDON METAL
EXCHANGE

39. 39
The London Metal Exchange (LME) is the world’s premier non-ferrous
market, with highly liquid contracts. The exchange was formed in 1877 as a
direct consequence of the industrial revolution witnessed in the 19th
century
Commodities traded:- Aluminium, Copper, Nickel, Lead, Tin, Zinc,
Aluminium Alloy, North American Special Aluminium Alloy (NASAAC),
Polypropylene, Linear Low Density Polyethylene, etc.

40. 40
THE CHICAGO
BOARD OF TRADE

41. 41
The first commodity exchange established in the world was the Chicago
Board of Trade (CBOT) during 1848 by group of Chicago merchants who were
keen to establish a central market place for trade. Presently, the Chicago Board
of Trade is one of the leading exchanges in the world for trading futures and
options. More than 50 contracts on futures and options are being offered by
CBOT currently through open outcry and/or electronically.
Commodities Traded: - Corn, Soybean, Oil, Soybean meal, Wheat, Oats,
Ethanol, Rough Rice, Gold, and Silver etc.

42. 42
TOKYO
COMMODITY
EXCHANGE
(TOCOM)

43. 43
The Tokyo Commodity Exchange (TOCOM) is the second largest
commodity futures exchange in the world. It trades in to metals and energy
contracts. It has made rapid advancement in commodity trading globally since
its inception 20 years back. TOCOM’s recent tie up with the MCX to explore
cooperation and business opportunities is seen as one of the steps towards
providing platform for futures price discovery in Asia for Asian players in
Crude Oil since the demand-supply situation in U.S. that drives NYMEX is
different from demand-supply situation in Asia
Commodities traded: - Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum,
Aluminum, Rubber, etc

44. 44
CHICAGO
MERCANTILE
EXCHANGE

45. 45
The Chicago Mercantile Exchange (CME) is the largest futures exchange in
the US and the largest futures clearing house in the world for futures and
options trading. Formed in 1898 primarily to trade in Agricultural
commodities, the CME introduced the world’s first financial futures more than
30 years ago.
Commodities Traded: - Butter milk, Diammonium phosphate, Feeder cattle,
frozen pork bellies, Lean Hogs, Live cattle, Non-fat Dry Milk, Urea, Urea
Ammonium Nitrate, etc.

46. 46
DIFFERENT
COMMODITIES
TRADED IN
COMMODITY
MARKET

47. 47
World –over one will find that a market exists for almost all the commodities
known to us. These commodities can be broadly classified into the following:

48. 48
METAL Aluminum, Copper, Lead, Nickel, Sponge Iron, Steel Long,
Steel Flat, Tin, Zinc
BULLION Gold, Gold HNL, Gold M, I- Gold, Silver HNL, Silver M
FIBER Cotton L Staple, CottonM Staple, Cotton S Staple, Cotton
Yarn, Kapas
ENERGY Brent Crude Oil, Crude Oil, Furnace Oil, Natural Gas, M. E.
Sour Crude Oil
SPICES Cardamom, Jeera, Pepper, Red Chili, Turmeric
PLANTATIONS Cashew Kernel, Coffee (Robusta), Rubber
PULSES Chana, Masur, Yellow Peas
OIL & OIL SEED CastorOil, CastorSeed, CoconutCake, CoconutOil, Ctton
Seed,
Crude Palm Oil, Groundnut Oil, Kapasia Khalli, Mustered
Oil, Mustered Seed, RBD Palmolein, Refined Soya Oil,
Refined Sunflower Oil, Rice Bran Doc, Rice Bran Refined
Oil, Sesame Seed, Soya meal, Soya bean, Soya Seeds
CEREALS Maize
OTHER Guargum, Guar Seed, Gurchaku, Mentha Oil, Potato, Sugar
M-30, Sugar S-30
TO QUALIFY AS A COMMODITY FOR FUTURES TRADING, AN
ARTICLE OR A PRODUCT HAS TO MEET SOME BASIC
CRITERIA:

49. 49
1. The product must not have gone through any complicated manufacturing
activity, except for certain basic processing such as mining, cropping, etc. In
other words, the productmust be in a basic, raw, unprocessed state. There are of
course some exceptions to this rule. For example, metals, which are refined
from metal ores, and sugar, which is processed from sugarcane.
2. The product has to be fairly standardized, which means that there cannot be
much differentiation in a product based on its quality. For example, there are
different varieties of crude oil. Though these different varieties of crude oil can
be treated as different commodities and traded as separate contracts, there can
be a standardization of the commodities for futures contract based on the largest
traded variety of crude oil. This would ensure a fair representation of the
commodity for futures trading. This would also ensure adequate liquidity for the
commodity futures being traded, thus ensuring price discovery mechanism.
3. A major consideration while buying the product is its price. Fundamental
forces of market demand and supply for the commodity determine the
commodity prices.
4. Usually, many competing sellers of the product will be there in the market.
Their presence is required to ensure widespread trading activity in the physical
commodity market.
5. The product should have adequate shelf life since the delivery of a
commodity through a futures contract is usually deferred to a later date (also
known as expiry of the futures contract).

50. 50
ROLE OF
GOVERNMENT IN
DEVELOPING
COMMODITY
MARKET

51. 51
Government of India has introduced two approaches strategies to
strengthening Indian Commodity Market. The responsibility of agriculture
produce mechanism is of state government as per constitution of India.
Agriculture is a state subject. The responsibility of a central government is to
enact modern act for Agriculture Marketing which may adopted by state
government as it is or in a modified format. The responsibility of a developing
and regulating commodity exchange is of central government.
There are two board regulatory aspect of commodity market in India. The
agricultural commodity market are established and regulated under the State
Act or State Agricultural Produce Marketing Regulation Act.
The forward, future and option trading in India is governed by Forward
Contract Regulation Act, 1952. It is implemented by Forward Market
Commission (FMC). FMC is an agency constituted under the provision of
FCRA, 1952 and its function under the Ministry of Consumer Affairs, Food and
Public Distribution.
Agricultural Marketing is witnessing major changes all over the world due to
LPG. In order to make global market opportunities available in India,
Government of India decided to integrate and strengthen the internal
agricultural marketing system of the country.
Ministry of Agricultural, GOI appointed an Export committee on 19th
Dec,
2000 followed by an Inter-Ministerial Task Force to review the prevailing of
agricultural marketing and the recommend measures to make system more
efficient and competitive. After several meeting the model legislation was
drafted by the name of legislation was given state Agricultural Produce
Marketing (Developmental &Regulation) Act, 2003. This Act provides for

52. 52
establishment of private market yard, direct purchase centers, consumer/farmers
market for direct sale. These acts also provide special market for commodities
like onion, fruits, vegetable and flower. This acts prohibits commission agency
in a transaction of agricultural commodities with the producers. It redefines the
role of APMC to promote alternative marketing system such as contract
farming, direct marketing. It redefines the role of state government and state
agricultural marketing board. It requires promoting standardization of grading,
quality, certification, market led extension and training of farmers. This will
facilitate to get finance from the banks, international of E-commerce direct
purchasing, future, forward trading and introduction of negotiable warehouse
receipt system.

53. 53
RESPONSIBILITY
OF AGRICULTURE
PRODUCT
MARKETING
COMMITTEE
(APMC)

54. 54
Following are the responsibility APMC under Section 24 &27 of AMPRA :
market area.
To provide market related services to the farmers
same date.
agricultural produce.
at arrival of agricultural commodities data on products
sold by the farmers directly.
To set up and promote public private partnership in the management of
agricultural markets.

55. 55
 Section 36 of AMPRA deals with appointment of Chief Executive
Officer (CEO) of market committee.
 Section 59 of AMPRA gives permission to market committee to use
funds to create facilities like grading, standardization and quality
certification, creation of infrastructure and to promote public private
participation.
 Section 63 deals with establishment of state agricultural market board
which is responsible for setting up of marketing extension
 Section 79 provides for research and development.

56. 56
ROLE OF NABARD
IN DEVELOPING
COMMODITY
MARKET

57. 57
NABARD is the apex financial institution of the country for agricultural &
rural development and plays a vital role in coordinating all financial institution,
banks, state agencies, etc. to develop the agricultural sector. It formulates
strategies provides information and extends financial assistance. However the
role of NABARD is indirect. It provides refinance to financing institutions. It
ensures flow of credit to small and marginal farmer by implementing different
schemes it also promotes flow of credit for activities like poultry, diary,
aquaculture, sericulture and goat farming, etc. NABARD also supports
initiatives in natural resources management. It also provides credit for
agricultural marketing, infrastructure facilities like Rythu Bazaar, TMC. It
provides refinance and co-finance for various agricultural facilities.
As per recommendation of FMC (Forward Market Commission)NABARD
plays promotional and developmental role in setting up modern, transparent and
vibrant commodity exchange. NABARD participates in spot and future markets
for efficient price discovery of farmer produce. NABARD has provided equity
to two national level commodity exchange i.e. NCDX & MCX

58. 58
Role of NABARD in promoting Agricultural Export Zone
At present, Agricultural Products Exports Development Authority
(APEDA)has setup 60 Agricultural Export Zone (AEZ) all over the country.
The crops covered under AEZ include fruits, vegetables, flowers, spices,
cashew, tea basmati rice, medicinal plants and pulses, etc. In all over 35 crops
have been identified for AEZ. The main objective of AEZ is to promote exports
of this 35 agricultural commodities. NABARD also plays active role in contract
farming and development of farmers club.

59. 59
ROLE OF
DEPOSITORIES IN
DEVELOPING
COMMODITY
MARKET

60. 60
The Indian Farming community consist of small and marginal farmers. The
studies indicate that small farmers contribute 54% of marketable surplus. The
small farmers sell their produce in a distress manner. Farmers often sell their
products to repay their debts immediately often harvesting. The solution for
these problem is to provide access to safe and scientific storage facilities and to
provide finance against the stored goods at minimum rate of interest. This is
referred as ‘Pledge Financing’. Farmers get warehousing receipt is a document
of title which represents legal rights on goods stored in warehouse. Nowadays
warehousing receipt are not issued in a paper format but in a electronic format.
Dematerialization refers to process of conversion of physical security or paper
security into electronic format. Demat helps settlement of trade on commodity
exchanges and improves settlement efficiency. Demat of warehousing receipt as
being introduced by - multi commodity exchange of India limited.

61. 61
REGULATORY
FRAMEWORK OF
INDIAN
COMMODITY
MARKET

62. 62
The need for regulation arises on account of the fact that the benefits of
futures markets accrue in competitive conditions. Proper regulation is needed to
create competitive conditions. In the absence of regulation, unscrupulous
participants could use these leveraged contracts for manipulating prices. This
could have undesirable influence on the spot prices, thereby affecting interests
of society at large.
Regulation is also needed to ensure that the market has appropriate risk
management system. In the absence of such a system, a major default could
create a chain reaction. The resultant financial crisis in a futures market could
create systematic risk.
Regulation is also needed to ensure fairness and transparency in trading,
clearing, settlement and management of the exchange so as to protect and
promote the interest of various stakeholders, particularly non-member users of
the market.
After independence, the Constitution of India brought the subject of "Stock
Exchanges and futures markets" in the Union list. As a result, the responsibility
for regulation of commodity futures markets devolved on Govt. of India. A Bill
on forward contracts was referred to an expert committee headed by Prof.
A.D.Shroff and Select Committees of two successive Parliaments and finally in
December 1952 Forward Contracts (Regulation) Act, 1952, was enacted. The
Act provided for 3-tier regulatory system;
(a) An association recognized by the Government of India on the
recommendation of Forward Markets Commission,
(b) The Forward Markets Commission (it was set up in September 1953) and

63. 63
(c) The Central Government.
Forward Contracts (Regulation) Rules were notified by the Central Government
in July, 1954.The Act divides the commodities into 3 categories with reference
to extent of regulation, viz.:
* The commodities in which futures trading can be organized under the
auspices of recognized association.
* The Commodities in which futures trading is prohibited.
* Those commodities which have neither been regulated for being traded
under the recognized association nor prohibited are referred as Free
Commodities and the association organized in such free commodities is
required to obtain the Certificate of Registration from the Forward Markets
Commission.

64. 64
FORWARD
MARKETS
COMMISSION

65. 65
Forward Markets Commission (FMC) headquartered at Mumbai, is a
regulatory authority which is overseen by the Ministry of Consumer Affairs,
Food and Public Distribution, Govt. of India. It is a statutory body set up in
1953 under the Forward Contracts (Regulation) Act, 1952.
Forward Markets Commission provides regulatory oversight in order to
ensure financial integrity (i.e. to prevent systematic risk of default by one major
operator or group of operators), market integrity (i.e. to ensure that futures
prices are truly aligned with the prospective demand and supply conditions) and
to protect and promote interest of customers/ non-members. It prescribes the
following regulatory measures:
1) Limit on net open position as on the close of the trading hours.
Sometimes limit is also imposed on intra-day net open position. The limit
is imposed operator-wise, and in some cases, also member wise.
2) Circuit-filters or limit on price fluctuations to allow cooling
3) Special margin deposit to be collected on outstanding purchases or
sales when price moves up or down sharply above or below the previous
day closing price. By making further purchases/sales relatively costly,
the price rise or fall is sobered down. This measure is imposed only on
the request of the exchange.
4) Circuit breakers or minimum/maximum prices: These are prescribed to
prevent futures prices from falling below as rising above not warranted
by prospective supply and demand factors. This measure is also imposed
on the request of the exchanges.

66. 66
5) Skipping trading in certain derivatives of the contract, closing
The market for a specified period and even closing out the contract:
These
Extreme measures are taken only in emergency situations.
Besides these regulatory measures, the F.C(R) Act provides that a client's
position cannot be appropriated by the member of the exchange, except when a
written consent is taken within three days time. The FMC is persuading
increasing number of exchanges to switch over to electronic trading, clearing
and settlement, which is more customer-friendly. The FMC has also prescribed
simultaneous reporting system for the exchanges following open out-cry
system. These steps facilitate audit trail and make it difficult for the members to
indulge in malpractices like trading ahead of clients, etc. The FMC has also
mandated all the exchanges following open outcry system to display at a
prominent place in exchange premises, the name, address, telephone number of
the officer of the commission who can be contacted for any grievance. The
website of the commission also has a provision for the customers to make
complaint and send comments and suggestions to the FMC. Officers of the
FMC have been instructed to meet the members and clients on a random basis,
whenever they visit exchanges, to ascertain the situation on the ground, instead
of merely attending meetings of the board of directors and holding discussions
with the office-bearers.

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ADVANTAGES OF
COMMODITY
MARKET

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1) Price Discovery:- Based on inputs regarding specific market
information, the demand and supply equilibrium, weather forecasts,
expert views and comments, inflation rates, Government policies, market
dynamics, hopes and fears, buyers and sellers conduct trading at
commodity exchanges. This transforms in to continuous price discovery
mechanism. The execution of trade between buyers and sellers leads to
assessment of fair value of a particular commodity that is immediately
disseminated on the trading terminal.
2) Price Risk Management: - Hedging is the most common method of
price risk management. It is strategy of offering price risk that is inherent
in spotmarket by taking an equal but oppositeposition in the futures
market. Futures markets are used as a mode by hedgers to protecttheir
business from adverse price change. This could dent the profitability of
their business. Hedging benefits who are involved in trading of
commodities like farmers, processors, merchandisers, manufacturers,
exporters, importers etc.
3) Import- Export competitiveness:- The exporters can hedge their price
risk and improve their competitiveness by making use of commodity
market. A majority of traders which are involved in physical trade
internationally intend to buy forwards. The purchases made from the
physical market might exposethem to the risk of price risk resulting to
losses. The existence of futures market would allow the exporters to
hedge their proposed purchaseby temporarily substituting for actual
purchase till the time is ripe to buy in physical market. In the absenceof
commodity market

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DIS- ADVANTAGES
OF COMMODITY
MARKET

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1) You need a mentor: - With this lack of guidance, it is only natural to
expect that many traders will be prone to repeating the same mistakes
which eventually costthem their capital. Trading in commodities
requires a trader to have firm knowledge of the factors that affect the
demand and supply of a particular commodity. Having an
experienced broker with whom you can discuss trading strategies is
likely to keep you out of trouble. This seeking an advice of a mentor
is crucial if we want to improve our trading proficiency.
2) Leverage: - Commodity futures operate on margin, meaning that to
take a position only a small percentage of the total value needs to be
available in cash in trading account. High leverage means high risk
attached to the account. It acts as a double edge sword where benefit
of low margin can result in poormoney management.
3) Over trading: - The third disadvantage of online trading relates to the
issue of over trading. Online commodity trading can be risky if you
are not disciplined. There is a tendency for a trader to deviate from his
original trading strategy and switch o day trading after he gets bored
of holding market position for a considerable period if time

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CURRENT
SCENARIO

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The growth paradigm of India’s commodity markets is best reflected by the
figures from the regulator’s official website, which indicated that the total value
of trade on the commodity futures market in the financial year 2008/09 was
INR52.49 lakh crore (over US$1 trillion) as against INR 40.66 lakh crore in the
preceding year, registering a growth of 29.09%, even under challenging
economic conditions globally. The main drivers of this impressive growth in
commodity futures were the national commodity exchanges. MCX, NCDEX
and NMCE along with two regional exchanges – NBOT Indore and ACE,
Ahmedabad – contributed to 99.61% of the total value of commodities traded
during 2008/09. So far, this year’s volumes have seen a significant jump over
the last year in agro-commodities, as well as „international‟ commodities like
gold, silver, crude oil and copper. Of course, more than 100 commodities are
today available for trading in the commodity futures market and more than 50
of them are actively traded. These include bullion, metals, agricultural
commodities and energy products. Most importantly, an archaic market has
suddenly turned into an organized, service-oriented set-up with shooting
volumes. The unqualified success of the futures market has ensured the next
step, i.e., the launch of electronic spot markets for agro-products. Being in a
time-zone that falls in the gap left by the major commodity exchanges in the
US, Europe and Japan has also worked in India’s favor because commodity
business by its very nature is a 24/7 business. Innovation coupled with modern
and successful financial market environment has ensured the beginning of a
success story in commodities which will eventually see India becoming a price-
setter in major commodities on the strength of its large production and
consumption.

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It is pertinent to note that India and China are being projected as the major
drivers for the initiation of yet another commodity super-cycle. Tracking price
trends and analyzing the statistics have always been key areas of economic
research; but in each cycle – whether defined by Jim Rogers, Kondratieff or
Dewey & Dakin – the trigger is always different, and in this case it may well be
increase in regional consumption, some of which we have already seen. One
outcome of the recent boom-bust cycle has been that mergers and acquisitions
have gained speed and the biggest beneficiaries will likely be large companies
from historically conservative countries, like India. This phase is likely to
propel India into the international big league quicker and on a firmer footing. In
fact, India did well to weather the global financial crisis over the last year and a
half, with GDP growing at 6% at the worst of times, compared to almost every
other country which showed negative growth in one or more quarters during this
period. Growth did fall from 9% to 6% but was way above the
World Bank’s forecast of 4%, demonstrating economic resilience, a sure sign of
things to come.
Turnover at Indian commodity bourses rose 49.80 percent to 73.51 trillion
rupees in the first eleven-and-a-half months of fiscal 2009/10, regulator
Forward Markets Commission (FMC) said on its website (as on 25th March
2010).
Turnover rose 44.12 percent to 3.79 trillion rupees in the fortnight ending
March. 15, data showed on Thursday.
Active trade was seen in gold, silver, copper and crude oil in the energy and
metals pack during the March ’10 first fortnight.

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Guar seed, chana, soybean, turmeric and jeera saw maximum trade among
agricultural commodities.
Turnover at India's 23 commodity bourses, including four operating at the
national level, grew from 1.29 trillion rupees in 2003/04 to 52.49 trillion rupees
in 2008/09.
The regulator said it has approved Fid Fund (Mauritius) Ltd, an affiliate of
Fidelity International's sale of 1.62 percent stake in Multi Commodity Exchange
of India (MCX) to Intel Capital (Mauritius) Ltd.
FMC had last month allowed Fid Fund (Mauritius) Ltd's sale of 2.03 percent
stake in MCX to Passport India Investments (Mauritius) Ltd.

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CONCLUSION

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This decade is termed as Decade of Commodities. Prices of all commodities are
heading northwards due to rapid increase in demand for commodities.
Developing countries like China are voraciously consuming the commodities.
That’s why globally commodity market is bigger than the stock market. India is
one of the top producers of large number of commodities and also has a long
history of trading in commodities and related derivatives. The Commodities
Derivatives market has seen ups and downs, but seems to have finally arrived
now. The market has made enormous progress in terms of Technology,
transparency and trading activity. Interestingly, this has happened only after the
Government protection was removed from a number of Commodities, and
market force was allowed to play their role. This should act as a major lesson
for policy makers in developing countries, that pricing and price risk
management should be left to the market forces rather than trying to achieve
these through administered price mechanisms. The management of price risk is
going to assume even greater importance in future with the promotion of free
trade and removal of trade barriers in the world.
As majority of Indian investors are not aware of organized commodity market;
their perception about is of risky to very risky investment. Many of them have
wrong impression about commodity market in their minds. It makes them
specious towards commodity market. Concerned authorities have to take
initiative to make commodity trading process easy and simple. Along with
Government efforts NGO‟s should come forward to educate the people about
commodity markets and to encourage them to invest in to it. There is no doubt
that in near future commodity market will become Hot spot for Indian farmers
rather than spot market. And producers, traders as well as consumers will be

77. 77
benefited from it. But for this to happen one has to take initiative to standardize
and popularize the Commodity Market

78. 78
BIBLOGRAPHY

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WWW.GOOGLE.COM
WWW.MCX.COM
WWW.NCDEX.COM
WWW.YAHOO.COM
WWW.ETMARKETS.COM