Commodity Markets in India

SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS,
MUMBAI – 400 020
ACADEMIC YEAR: 2006-2007
PROJECT TITLE:
STUDY ON DEVELOPMENT OF COMMODITY MARKETS
IN INDIA
SWATI GOPALAKRISHNAN IYER

TYBMS SEMESTER – V
SEAT NO: 1265
UNDER THE GUIDANCE OF

MR. DEEPAK ABHYANKAR
UNIVERSITY OF MUMBAI
SUBMITTED ON: JANUARY 2007
1
SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS,
MUMBAI – 400 020
ACADEMIC YEAR: 2006-2007
A PROJECT REPORT ON
STUDY ON DEVELOPMENT OF COMMODITY MARKETS
IN INDIA
COMPILED BY
SWATI GOPALAKRISHNAN IYER
TYBMS SEMESTER – V
SEAT NO: 1265
UNDER THE GUIDANCE OF

MR. DEEPAK ABHYANKAR
UNIVERSITY OF MUMBAI
SUBMITTED ON: JANUARY 2007
2
DECLARATION
I, Swati Gopalakrishnan Iyer of Sydenham College of Commerce &

Economics, ‘B’ Road, Churchgate, Mumbai-20 of T.Y. BMS Semester -
V, hereby declare that I have completed this project on Study on
Development of Commodity Markets in India for the Academic Year
2006-2007. This information submitted is true and original to the best of
my knowledge.
_______________________
Swati Gopalakrishnan Iyer
3
ACKNOWLEDGEMENT
I take this opportunity to thank the University of Mumbai for taking the initiative of launching
the course “Bachelors in Management Studies”. BMS has shaped our careers in a thoroughly
professional manner and has given us the required exposure to the industry.
This project has been a learning experience and it gives me immense pleasure in expressing my
gratitude to the University of Mumbai for providing us with an opportunity to do this study. This
project has helped me to understand the current scenario of commodity markets in India.
For this project I acknowledge with special thanks the help of BMS Co-ordinator, Shri Prashant
Pawar and Mr. Deepak Abhyankar (Project Guide), for the guidance provided in compiling and
completion of the project. They have showed me the right path and made me capable of
undertaking and accomplishing such challenging task. This project has been a learning
experience for me and this would not have been possible without the help of these people. I
would once again like to them for their valuable support.
The success of this project bears the imprint of efforts of many people. First of all I wish to
express my deep gratitude to my friends, Ms. Deepa Ganeshan, Mr. Arora Rajinder Singh, Mr.
Varun Aswani and Ms. Radha Seshadri, for helping me during various stages of the project. To
each of them I am most grateful. A special thanks to Mr. K. Gopalakrishnan, my dad, for
directing me, throughout the project by providing valuable insights on various segments of
commodity markets and for being my worst critic, as also for helping me in gaining the contacts
of various personnel required for the successful completion of the project. Also I would like to
extend a vote of thanks to Mr. Hemen Ruparel, my professor, who has been a valuable source for
current happenings of the market.
Above all, I will always remain grateful to Mr. Ravikumar, MD & CEO, NCDEX for the
continuous strength and guidance received in timely completion of my project.
4
CERTIFICATE
I, Mr. Deepak Abhyankar hereby certify that Swati Gopalakrishnan Iyer

of Sydenham College of Commerce & economics of TY BMS Semester
- V has completed project on Study on Development of Commodity
Markets in India for the academic year 2006-07. The information
submitted is true and original to the best of my knowledge.
______________________ ________________________
SIGNATURE OF THE SIGNATURE OF
OF PROJECT GUIDE THE PRINCIPAL
5
INDEX
Sr. CHAPER SUBJECT PAGES
No. NO. FROM TO
1. Executive Summary – Objective of
the study, Scope of the study,
Limitations of the Study, Findings of
the Study.
1 3
2. Introduction – Definition of the term
01 "Commodity" in various contexts.
4 5
3. Commodity Markets – Definition,
Evolution of commodity markets,
02 History of commodity futures, The
Indian Perspective, Key characteristics,
Participants. 6 13
4. Commodity Exchanges – Definition,
Myths about commodity exchanges,
International Commodity Exchanges,
03 Commodity Exchanges in India,
Concept of over the counter, concept of
havala markets.
14 23
5. Derivatives – Definitions, Commodity
04 Futures Market, Types of Traders,
Options Market.
24 35
6. Dematerialization and
05 Rematerialization in commodity
markets – what is a warehouse receipt,
Entities involved in the demat process,
Types of Demat Account, Process of
Demat Commodity, Concept of
International Commodity Identification
Number (ICIN), Process of Demat
Delivery, Rematerialization /
Withdrawal / Revalidation of
Commodities
36 39
7. Role of Banks in Commodity
06
Markets in India
40 41
8. Participation of FII and Mutual
07
Funds in Commodity Markets
42 43
9. Taxation Issues in Commodity
08 Market - Sales tax implications on
commodity future transactions 44 46
10. Background Information on Issues
Faced In India – Situation of the
09
Indian Commodity Exchanges,
International Trends.
47 48
11. Regulatory Issues – Broad
Government Policies, Regulatory
Perspectives - What Should the
10 Forward Markets Commission Focus
On?, The Day-to-Day Oversight of the
Exchanges, Brokerage Regulation,
Clearing. 49 54
12. 11 Conclusion 55 55
13. 12 Special Study On Chana 56 75
14. Interview with Mr. Madan Sabnavis,
13 Chief Economist, Head, Knowledge
Management Committee, NCDEX. 76 82
15. Annexure I 83 84
16. Annexure II 85 88
17. Bibliography 89 90
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EXECUTIVE SUMMARY
Objective of The Study
⇒ To present a wholesome picture of Commodity Markets in India with particular reference to
Commodity Exchanges.
⇒ To analyze various issues faced by the Commodity Markets in India.

⇒ To suggest line of improvements with regard to Commodity Trading.
⇒ To study one of the traded commodities to understand various issues involved.
Scope of The Study

Commodities are any agricultural or mining products which can be traded for cash in spot market
and futures exchanges. Commodity markets provide an avenue for their sale. Commodity
exchanges help in trading commodity in futures and options markets. CBOT, LME, NYMEX,
MCX are global exchanges on which commodity futures are traded. In India Forwards Markets
Commission (FMC) regulates the commodity exchanges (MCX, NCDEX, and NMCE) and other
regional exchanges. The scope of the study was restricted to the objectives stated earlier.
Findings of The Study

⇒ The history of commodity markets in India is more than a century old and the institution of
formal commodity market in India is almost as old as the UK and the US and such markets
have their reference is kautilaya's Arthasastra. However, currently India, a commodity based
economy where 75% of the one billion populations depend on agriculture, surprisingly has an
underdeveloped commodity market.
⇒ In 1966 Futures trade was banned in most commodities to contain speculation, which the
government thought was fuelling, to give effective powers of governmental price control. A
few select commodities saw a reintroduction of futures in 1980 following the Khusro
committee report. All that began to change with liberalization of the India economy in the
early 1990’s. In 1993 the Kabra committee was appointed to look into forward markets. The
committee recommended in 1994 that all futures banned in 1966 be reintroduced as well as
many others would also be added. But then also, till April 2003 futures trading were allowed
only in a limited number of commodities. In 2002, Government of India demonstrated its
STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 1

TYBMS 2006 - 2007
commitment to revive the Indian agriculture sector and commodity futures markets by setting
up of nation wide multi commodity exchanges and expanding list of commodities permitted
for trading under (FC(R) A).
⇒ The myths about the commodity exchange markets is that it is speculative markets and that
there are no physical deliveries, and unending arguments even by educated politicians
questioning the raison d`tre for these markets on the plea that there cannot be greater volume
in trading than the actual production. The fact remains that speculators infuse liquidity in
these markets, and there are physical deliveries and that the trading volume is only a multiple
of physical production. Further the commodity exchanges smoothens out the volatility in the
prices, which gives platform for better price discovery. Higher the open interest, deeper the
market.
⇒ The World's major commodity exchanges are The New York Mercantile Exchange
(NYMEX) London Metal Exchange (LME), The Chicago Board of Trade
(CBOT). In India there are three national commodity exchanges and 21 regional exchanges
and they are being regulated Forward Markets Commission (FMC)
⇒ Several measures have been taken by the FMC in regard to the commodity exchanges in
India such as - Limit on open position of an individual operator to prevent over-trading,
Limit on price fluctuation to prevent abrupt upswing or downswing in prices - Special
Margin deposits to be collected on outstanding purchases or sales etc.
⇒ ‘Futures’ and ‘options’ are two commodity traded types of derivatives. An ‘options’ contract
gives the owner the right to buy or sell an asset at a set price on or before a given date. On
the other hand, the owner of a ‘futures’ contract is obligated to buy or sell the asset. Unlike
the physical markets, futures markets trade in futures contracts which are primarily used for
risk management (hedging) on commodity stocks or forward physical market) purchases and
sales The two major economic functions of a commodity futures market are price risk
management and price discovery. Futures contracts ensure their liquidity by being highly
standardized
⇒ There are three types of people in future exchange market viz., the hedgers, speculators and
arbitrators

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⇒ Entities involved in the demat process are issuer i.e., an entity, which floats the physical
paper document, the Registrar and Transfer Agents who acts on behalf of the issuer as an
interface between the issuer and the depository for converting the physical warehouse receipt
in the demat form and the depository, which maintains the records of the beneficial owner in
its books. Presently there are two depositories in India i.e. National Securities Depository
Limited (NSDL) and Central Depository Services Limited (CDSL)
⇒ There are two types of demat Accounts viz., Beneficiary Owner Account and Clearing
Member Pool Account
⇒ There are several taxation and stamp duty issues in regard to derivative contracts in India
⇒ FIIs and Mutual funds are not currently allowed to take part in commodity exchanges
⇒ India must develop commodity exchanges that meet international standards in the areas of
market integrity, financial integrity and customer protection.
⇒ The thirty-year ban on futures exchanges has had an adverse repercussion on the growth and
functioning of Indian commodity exchanges.
⇒ What was appropriate for the exchanges in the mid-1990s is no longer so today. The FMC
has been trying to modernize the exchanges by requiring them to implement changes and
using the withdrawal or even suspension of approval for trading in some commodities
⇒ India needs a more efficient, more comprehensive commodity futures industry. This futures
industry should be organized in line with best international practice.
Limitations of The Study

⇒ The various sources utilized for the study, which include, websites, information from
commodity trackers, Market watchers and Economists, are subject to personal biases.
⇒ The study was not intended as a research project as it involves substantial data collection
and data analysis.
⇒ Time has played a major constraint in limiting the field of the study with regard to
presenting a wholesome picture of the Commodity Markets in India.
⇒ Lines for improvement on the various issues faced in regard to commodity trading have
been suggested based on various study reports. However no independent empherical study
has been carried out.

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1 Introduction
Ever since the dawn of civilization commodities trading have become an integral part in the lives
of mankind. The very reason for this lies in the fact that commodities represent the fundamental
elements of utility for human beings. Over the years commodities markets have been
experiencing tremendous progress, which is evident from the fact that the trade in this segment is
standing as the boon for the global economy today. The promising nature of these markets has
made them an attractive investment avenue for investors.
1.1 But then what do you mean by the term "Commodity"?

One of the first forms of trade between individuals began by what is called the barter system
where in goods were traded for goods.
'The term refers to a whole range of natural resources that are used to create the goods that
people buy and the food they eat,' says Jeremy Baker, USB's Zurich-based head of Commodity
Research'.
Any product that can be used for commerce or an article of commerce which is traded on an
authorized commodity exchange is known as commodity. The article should be movable of
value, something which is bought or sold and which is produced or used as the subject or barter
or sale. In short commodity includes all kinds of goods.
⇒ Forward Contracts (Regulation) Act (FCRA), 1952 defines “goods” as “every kind of
movable property other than actionable claims, money and securities”.
In current situation, all goods and products of agricultural (including plantation), mineral and
fossil origin are allowed for commodity trading recognized under the FCRA. The national
commodity exchanges, recognized by the Central Government, permits commodities which
include precious (gold and silver) and non-ferrous metals; cereals and pulses; ginned and un-
ginned cotton; oilseeds, oils and oilcakes; raw jute and jute goods; sugar and gur; potatoes
and onions; coffee and tea; rubber and spices. Etc.

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⇒ Different dictionary defines “commodity” as under:

Any item that can be bought and sold. Taken to refer to Exchange – traded items including
sugar, wheat, soya beans, coffee and tin.
That which affords convenience, advantage, or profit, especially in commerce, including
everything movable that is bought and sold (except animals), -- goods, wares, merchandise,
produce of land and manufactures, etc.
In the world of business, a commodity is an undifferenciated product whose market value
arises from the owner’s right to sell rather than to use. Example commodities from the
financial world include oil (sold by the barrel), wheat, bulk chemicals such as sufuric acid
and even pork-bellies.
⇒ Definition by Marxian political economy:

A commodity has a value (i.e., has been produced by human labour), is a use value, and has
exchange value. Marxian values are determined by the amount of work an average worker
using average tools would require to produce such a good. As such, a commodity directly
expresses human labour and within capitalism proletarian servitude. Marxixts see
commodities as a central element of the exploitation of labour within capitalism.

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2 Commodity Markets
2.1 Definition
Commodity market is a place where trading in commodities takes place. 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. It is similar to an Equity
market, but instead of buying or selling shares one buys or sells commodities.
2.2 Evolution of Commodity Markets

Historically, dating from ancient Sumerian use of sheep or goats, or 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 summer 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 breaking it. At which point, the number or terms written on the
outside originally 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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The modern commodity markets have their roots in the trading of agricultural products. In the
1840s, Chicago had become a commercial center with railroad and telegraph lines connecting it
with the East. Around this same time, the McCormick reaper was invented which eventually lead
to higher wheat production. Midwest farmers came to Chicago to sell their wheat to dealers who,
in turn, shipped it all over the country. He brought his wheat to Chicago hoping to sell it at a
good price. The city had few storage facilities and no established procedures either for weighing
the grain or for grading it. In short, the farmer was often at the mercy of the dealer.
1848 saw the opening of a central place where farmers and dealers could meet to deal in "spot"
grain - that is, to exchange cash for immediate delivery of wheat.
2.3 History of Commodity Futures

Commodities futures trading have evolved from the need for ensuring continuous supply of
seasonal agricultural crops. In Japan, merchants stored rice in warehouse for future use. In order
to raise case warehouse holders sold receipts against the stored rice. These were known as rice
tickets. Eventually such rice tickets became accepted as a kind of general commercial currency.
Rules came into being, to standardize the trading in rice tickets. The futures contract, as we know
it today, evolved as farmers (sellers) and dealers (buyers) began to commit to future exchanges
of grain for cash. For instance, the farmer would agree with the dealer on a price to deliver to
him 5,000 bushels of wheat at the end of June. The bargain suited both parties. The farmer knew
how much he would be paid for his wheat, and the dealer knew his costs in advance. The two
parties may have exchanged a written contract to this effect and even a small amount of money
representing a "guarantee."
Such contracts became common and were even used as collateral for bank loans. They also
began to change hands before the delivery date. If the dealer decided he didn't want the wheat, he
would sell the contract to someone who did. Or, the farmer who didn't want to deliver his wheat
might pass his obligation on to another farmer. The price would go up and down depending on
what was happening in the wheat market. If bad weather had come, the people who had
contracted to sell wheat would hold more valuable contracts because the supply would be lower;
if the harvest were bigger than expected, the seller's contract would become less valuable. It
wasn't long before people who had no intention of ever buying or selling wheat began trading the
contracts. They were speculators, hoping to buy low and sell high or sell high and buy low.

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In the early 20th century, advanced communication & transportation, centralized warehouses
built in the principal markets, to distribute goods more economically, paved the way to expanded
interstate and international trade.
Agricultural commodities were the most commonly traded, but it led to the fact that a market can
flourish for any underlying a long as there is an active pool of buyers and sellers
2.4 The Indian Perspective

India, a commodity based economy where 75% of the one billion population depends on
agriculture, surprisingly has an underdeveloped commodity market. The history of commodity
markets in India is more than a century old. The institution of formal commodity market in India
is almost as old as the UK and the US. In fact such markets have their reference is kautilaya's
Arthasastra.
The first organized commodity market in India was established in the late 19th century, Bombay
Cotton Association Ltd. was set up in 1875 by the Bombay Cotton Exchange ltd. In 1893, due to
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
establishment of Gujarati Vyapari Mandali, which carried out futures trading in groundnut,
castor seed and cotton. Futures' trading in wheat was set up in Hapur in 1913. In 1919 Calcutta
Hesian Exchange was established for trading in raw jute and jute goods, followed by
establishment of East India Jute & Hesian ltd in 1927. Mumbai became the hub of Bullion
trading in India during the early 20's.
But later in 1940s, trading in forward and futures contracts as well as options, were either
outlawed or made impossible though price controls. Hence during World War II futures trading
was prohibited to contain runaway speculation and illegal hoarding. This continued till 50's. But
during the post Independence period commodity trading saw various regulatory decisions. The
Forward Contract (Regulation) Act was enacted in 1952 and the FMC or the Forward Markets
Commission was established in 1953 under the Ministry of Consumer Affairs. FMC acts as a
regulatory body, which regulates the commodity markets in India. The mid-1960s witnessed an
unprecedented rise in the prices of major oils and oilseeds as a result of a sharp fall in output. In

TYBMS 2006 - 2007
1966 Futures trade was banned in most commodities to contain speculation, which the
government thought was fuelling, to give effective powers of governmental price control.
A few select commodities saw a reintroduction of futures in 1980 following the khusro
committee report. All that began to change with liberalization of the India economy in the early
1990’s. In 1993 the Kabra committee was appointed to look into forward markets. The
committee recommended in 1994 that all futures banned in 1966 be reintroduced as well as many
others would also be added. But then also, till April 2003 futures trading were allowed only in a
limited number of commodities.
In 2002-03, the then Prime Minister, Shri. A. B. Vajpayee, in his Independence Day address to
the nation on 15th August 2002, demonstrated its commitment to revive the Indian agriculture
sector and commodity futures markets. The GOI in that very year took two steps that gave a fillip
to the commodity markets. The first one was setting up of nation wide multi commodity
exchanges and the second one was expansion of list of commodities permitted for trading under
(FC(R) A).
2.5 Commodity Markets – Key Characteristics

⇒ Nature of Commodities –
Commodities are real assets that are produced and consumed in an industrial or other process. In
contrast, other asset classes of interest rates, currency or equity represent financial claims on
different aspects of real assets. This aspect of commodities ha a number of dimensions,
including:
1. Consumption goods – commodities are primarily consumption goods rather than
investment products. This means that demand is not purely price dependent. In addition,
some commodities may display characteristics not normally found in financial assets. For
example, zero or negative price may occur in electricity markets where generators seek to
ensure that their plants are dispatched for contiguous blocks of time longer than a simple
slot for which separate time bids are accepted. This is driven by the desire of the generator
to shed excess output as electricity cannot be stored.
2. Non standard structure – commodities are generally not standardized. This reflects the
heterogeneous nature of commodity production in terms of quality or grade. This contrasts

TYBMS 2006 - 2007
with other financial assets that are homogenous. This dictates that the commodity market
has two layers. The physical or cash market that trades a range of commodities of varying
quality, location and structure, and a commodity derivatives market that trades a range of
instruments on (artificially) standardized commodities. This is driven by the need to
facilitate trading. It creates basis risk in commodity derivatives.
3. Cost of production – commodity prices frequently gravitate towards the cost of
production. This is because the market will adjust over time. If prices are significantly
above or below the cost of production (including a "normal" profit component), then
supply will adjust in the longer term.
4. Price behavior – commodity prices display seasonality and may change over different
phases of the commodity life. Seasonal patterns in consumption and production are
manifested in recurring behavior of prices and volatility. Forward prices of commodities
will generally change as time to maturity changes.
⇒ Additional Value Dimensions –

Real assets introduce significant additional complexity in value, including:
1. Limits on supply and consumption that are not purely price dependent.
2. Timing delays (lags and leads) in production and consumption.
3. Direct exposure to a variety of exogenous functions (weather, casualty events and
technological change).
4. Substitution potential between different commodities in the production or consumption
process.
5. Needs for physical access or possession of the commodity that introduces issues such as
location and transportation.
6. Additional costs including storage costs, insurance, wastage, and possession value.
7. Inability to readily store certain commodities (such as electricity).
8. Complex value/processing chains in commodity markets.
9. Opportunities to generate significant value from the shape and behavior of commodity
forward curves.
⇒ Market Structure –
The commodity market has a number of distinctive structural elements. The commodity market
is a global but also displays jurisdiction specific factors. This reflects that the market for most

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commodities (for example, energy products) is global and international focus. However, there
are a number of local factors that dictate the behavior of markets, including the (often high)
transportation cost of commodities between markets, industry regulatory factors (that vary
between jurisdictions) and currency factors.
2.6 Commodity Markets – Participants

The structure of commodity markets dictates that there are several types of participants active in
the trading of commodities and commodity derivatives. The structure of the participants and the
nature of their activities/motivations are more complex than in other asset classes.
The major participants in commodity markets include:
⇒ Commodity Producers/Consumers: These participants have natural underlying outright
long (producers) and short (consumers) positions in the relevant commodity. The inherent
risk-exposure drives the use of commodity derivatives by producers and users. The
application of commodity derivatives in frequently driven by the pattern of cash flows.
Producers must generally make significant capital investments (sometime significant in
scale) to undertake the production of the commodity. This investment must generally be
made in advance of production and sale of the commodity. This means that the producer is
exposed to the price fluctuations in the commodity.
If prices decline sharply, then revenues may be insufficient to cover the cost of servicing the
capital investment (including debt service). This means that there is a natural tendency for
producers to hedge at levels that ensure adequate returns without seeking to optimize the
potential returns from higher returns. This may also be necessitated by the need to secure
financing for the project.
Consumer hedging behavior is more complex. Consumer desire to undertake hedges is

influenced by availability of substitute products and the ability to pass on higher input costs
in its own product market. In many commodities, producer and consumer deal directly with
each other. The form of arrangement may include negotiated bilateral long term supply or
purchase contracts between the producers and consumers. The contracts may include fixed
price arrangements to reduce the price risk for both parties.
These arrangements create a number of difficulties. These include lack of transparency, low
liquidity and exposure to counterparty credit risk. The bilateral structure also creates

TYBMS 2006 - 2007
potential adverse performance incentives. This reflects the fact that the contracts combine
supply/purchase obligations and price risk elements in a single contract.
⇒ Commodity Processors: These participants have limited outright price exposure. This
reflects the fact the processors have a spread exposure to the price differential between the
cost of the input and the cost of the output. For example, oil refiners are exposed to the
differential between the price of the crude oil and the price of the refined oil products (diesel,
gasoline, heating oil, aviation fuel, etc.). The nature of the exposure drives the types of
hedging activity and the instruments used.
⇒ Commodity Traders: Commodity markets have complex trading arrangements. This may
include the involvement of trading companies (such as the Japanese trading companies and
specialized commodity traders). Where involved, the traders act as an agent or principal to
secure the sale/purchase of the commodity. Traders increasingly seek to add value to pure
trading relationship by providing derivative/risk management expertise.
Traders also occasionally provide financing and other services. Commodity traders have
complex hedging requirements, depending on the nature of their activities. A trader as a pure
agent will generally have no price exposure. Where a trader acts as a principal, it will
generally have outright commodity price risk that requires hedging. Where traders provide
ancillary services such as commodity derivatives as the principal, the market risk assumed
will need to be hedged or managed.
⇒ Financial Institution/Dealers: Dealer participation in commodity markets is primarily as a
provider of finance or provider of risk management products. The dealers' role is similar to
that in the derivative market in other asset classes. The dealers provide credit enhancement,
speed, immediacy of execution and structural flexibility. Dealers frequently bundle risk
management products with other financial services such as provision of finance.
⇒ Investors: This covers financial investors seeking to invest in commodities as a distinct and
a separate asset class of financial investment. The gradual recognition of commodities as a
specific class of investment assets is an important factor that has influenced the structure of
commodity derivatives markets.

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PRODUCERS PROCESSORS CONSUMERS
COMMODITY MARKET
COMMODITY TRADERS BANKS / DEALERS INVESTORS
COMMODITY MARKETS PARTICIPANTS
ANCILLARY SERVICES
• Commodity Trading
• Transportation / Transmission
Unprocessed Processed
Commodity Commodity
PRODUCER PROCESSOR CONSUMER
Cash Cash
FINANCIAL SERVICES
FINANCIAL
•SERVICES
Finance
• Insurance
• Hedging / Risk Management
COMMODITY MARKETS – VALUE /

PROCESS CHAIN

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3 Commodity Exchanges
3.1 Definition
A commodities exchange is an exchange where various commodities and derivatives products
are traded. Most commodity markets across the world trade in agricultural products and other
raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies,
oil, metals, etc.) and contracts based on them. These contracts can include spots, forwards,
futures and options on futures. Other sophisticated products may include interest rates,
environmental instruments, swaps, or ocean freight contracts
Myths about commodity exchanges

Myth Fact Enablers
Exchanges are Speculators infuse Hedgers price risk
speculative markets liquidity gets transferred
No physical Physical deliveries Platform for better

deliveries are incidental price discovery
How can trading Trading volume is a High open Interest

volume be greater multiple of physical (Indicator of depth
than actual production of the market)
production?
Exchange Exchange reflects the

Platform for price
responsible for price movements of discovery
price movements spot market
3.2 International Commodity Exchange

Recent years have witnessed a steep rise in the creation of the commodity exchanges along with
a consistent expansion of the existing ones. The United States, Japan, United Kingdom, Brazil,
Australia, Singapore are homes to leading commodity futures exchanges in the world.

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Worlds Major Commodity Exchanges:

⇒ The New York Mercantile Exchange (NYMEX)
The New York Mercantile Exchange is the world's biggest exchange for trading in physical
commodity futures. It is the primary trading forum for energy products and precious metals. The
Exchange has been in existence for 132 years and performs trades through two divisions, the
NYMEX divisions, which deals in energy and platinum and the COMEX division which trades
in all the other metals.
A major contribution of the Exchange has been to develop and launch energy futures and options
contract in 1978 to facilitate price transparency and risk management in this key market.
Exchange has become a significant part of the commercial, civic and cultural life of New York.
Exchange also clears trades for market participants who which to avoid counter-party credit risk
by using standardized contracts for Natural Gas, Crude Oil, Refined products and Electricity.
Commodities traded – Light Sweet Crude Oil, Natural gas, Heating Oil, Gasoline, RBOB
Gasoline, Electricity, Propane, Gold, Silver, Copper, Aluminum, Platinum, Palladium, etc.
⇒ London Metal Exchange(LME)

The London Metal Exchange (LME) is the world's premier non-ferrous market, with highly
liquid contracts. It is an innovative exchange that has maintained its traditional strengths in a
modern business environment by remaining close to its core users by ensuring that its contracts
continue to meet the high expectations of a demanding industry. It has become highly successful
with a trading turnover value of more than US$2000 billion per annum and contributes
substantially to the invisible earnings.
The Exchange was formed in 1877 as a direct consequence of the industrial revolution witnessed
in Britain in the 19th Century. The primary focus of LME is providing a market for participants
from the non-ferrous base metals related industry to safe guard against risk due to movements in
base metal prices and also arrive at a price that sets the benchmark globally. The exchange trades
24 hours a day through an inter-office telephone market and also through an electronic trading
platform. It is famous for its open-outcry trading between ring dealing members that takes place
on the market floor.

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Commodities Traded – Aluminum, Copper, Nickel, Lead, Tin, Zinc, Aluminum Alloy, North
American Special Aluminum Alloy (NASAAC), Polypropylene, Linear Low Density
Polyethylene, etc.
The LME metal futures contracts run a daily basis for a period of three months, unlike other
commodity markets that are primarily based on a monthly prompt dates. The Exchange thus
combines the convenience of settlement dates tailored to individual needs with the security of a
clearinghouse for its clearing members, The LME also offers options contracts based on each of
these futures contracts together with Traded Average Price Options contracts (TAPOs) based on
the monthly average settlement price (MASP) for all metals futures contracts.
⇒ The Chicago Board of Trade(CBOT)

The first commodity exchange established on the world was the
Chicago Board of Trade (CBOT). During the year 1848 by a group of Chicago merchants who
were keen to establish a central market place for trade. This was situated in the premises of a
flour store during its first four years, Prior to this farmers often found no buyers for the grain
they had transported to Chicago. Given the high transport cost, they have been left with little
choice but to dump the unsold produce in the near by lake.
Presently, the Chicago Board of Trade is one of the leading exchanges in the world for trading in
futures and options. More than 50 contracts on futures and options are been offered by CBOT
currently through open-outcry and/or electronically. CBOT is the oldest existing commodity
exchange in the world having established in the year 1848. Initially, CBOT dealt only in
agricultural commodities like corn, wheat, soybeans, and oats. Futures contracts in CBOT
evolved over a period of time to facilitate trading in non-storable agricultural commodities and
non-agricultural products like gold and silver. The first electronic trading system in CBOT was
introduced in 1994 after more than 150 years of open auction trading where traders used to meet
to buy and sell futures contracts.
Commodities traded Corn, Soybeans, Soybean Oil, Soybean Meal, Wheat, Oats, Ethanol,
Rough Rice, Gold, and Silver etc.
]
Like any other commodity exchange the primary role of CBOT is to provide transparency and
liquidity in its contracts to its members, clients and market participants like farmers, corporate,

TYBMS 2006 - 2007
small business men, financial service providers, international trading firms and speculators for
price delivery, risk management and investment.
⇒ Tokyo Commodity Exchange (TOCOM)

The Tokyo Commodity Exchange (TOCOM) is the second largest commodity futures exchange
in the world with trade in metals and energy contracts. It has made rapid advancements in
commodity trading globally since inception 20 years back. One of the biggest reasons for this is
the initiative TOCOM took towards establishing Asia as the benchmark for price discovery and
risk management in commodities like the Middle East Crude Oil. TOCOM's recent tie-up with
the MCX to explore cooperation and business opportunities is seen as one of the steps towards
providing a platform for futures price discovery in Asia for Asian players in Crude Oil since the
demand-supply situation in US that drives the MYMEX is different from the demand-supply in
Asia.
In January 2003, in a major overhaul over its computerized trading system, TOCOM fortified its
clearing system in June by being the first commodity Exchange in Japan to introduce an in-house
clearing system. TOCOM launched options on gold futures, the first options contract in Japanese
market, in May 2004.
Commodities Traded. Gasoline, Kerosene, Crude Oil, Gold, Silver, Platinum, Palladium,
Aluminum, Rubber, Etc.
⇒ Chicago Mercantile Exchange (CME)

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 financial futures more than 30
years ago. Today it trades heavily in interest rate futures, Stock indices and foreign exchange
futures. Its products often serve as a financial benchmark and witness the larges the open interest
in futures contracts compared to any other exchange in the world. The commodities futures
profile of CME consists of livestock, dairy and forest products and enables small family farms to
large agri-businesses to manage their price risks. Trading in the CME can be done either through
pit trading or electronically.

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Commodities Traded. Butter, Milk, Diammonium Phosphate, Feeder cattle, Frozen Pork
bellies, Lean Hogs, live Cattle, Non-fat Dry Milk, Urea, Urea Ammonium Nitrate, Etc.
For information on other major International Commodity Derivatives Exchanges,

their address and contracts traded please refer to Annexure I
3.3 Commodity Exchanges in India

⇒ Statutory Back Up
1. Regulatory structure in India
The Regulatory structure in India in regard to financial markets including Commodity markets is
given below:
Regulatory Structure in India

Ministry of
Ministry of Finance
Finance Ministry of
Ministry of Company
Company
Affairs
Affairs
Ministry of
Ministry of Consumer
Consumer
Affairs
Affairs
National
National Insurance Regulatory
Insurance Regulatory Pension
Pension Funds
Funds Regulatory
Regulatory
Company
Development
ment Authority
Authority Develop
Development
ment Authority
Authority Company
Housing Bank
Housing Bank Develop Law Board
(IRDA) (PFRDA) Law Board
(IRDA) (PFRDA)
1
1 44 FMC
FMC
22 33
10
10
Housing Finance
Housing Finance Pension
Companies Insurance Pension Corporates State
State
Companies Insurance Funds Corporates Commodity
Funds Government Commodity
Government Exchanges
Exchanges
State-wise Registrar
State-wise Registrar
NABARD
NA BARD SIDBI
SIDBI RBI
RBI SEBI
SEBI of Co-operatives
of Co-operatives
55 66 77 88
99
Co-operative Banks
Co-operative Banks && State Financial
State Financial Banking //
Banking Capital
Capital
Regional Rural Banks APMCS
APMCS
Regional Rural Banks Institutions
Institutions NBFCs/DFIs
NBFCs/DFIs Markets
Markets
Regulatory structure in India features a decentralized setup

TYBMS 2006 - 2007
2. Forward Markets Commission (FMC)

The Forward Markets Commission (FMC) headquartered at Mumbai, is the regulatory authority
for commodity derivatives in India. It is a statutory body set up in 1953 under the Forward
Contracts (Regulation) Act, 1952. FMC is in turn supervised by the Ministry of Consumer
Affairs, Food and Public Distribution, Govt. of India.
The act provides that the commission shall consist of not less than two but not exceeding four
members appointed by the Central Govt. out of them being nominated by the Central Govt. be
the chairman thereof. Currently the commission comprises four members among whom Shri. S.
Sundareshan, IAS, is the chairman and Dr. Kewal Ram, IES, Dr. (Smt.) Jayashree Gupta. CSS,
and Shri Rajeev Kumar Agarwal, IRS, are the members of the commission.
Market Structure- Futures and Spot

Ministry
Ministry of
of consumer
consumer
State
State Government
Government Affairs
Affairs
Forward
Forward Markets
Markets
Spot
Spot markets
markets Commission
Commission
Futures
Futures Market
Market
Unlike Forex and Stock markets; Spot markets in commodities

are not within the purview of the Exchanges/Regulators

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Structure of Indian Commodity Futures

Exchanges
FMC
Commodity
Commodity Exchanges
Exchanges
National
National Regional
Regional
exchanges
exchanges exchanges
exchanges
NCDEX
NCDEX NMCE
NMCE MCX
MCX NBOT
NBOT 20
20 Other
Other Regional
Regional
Exchanges
Exchanges
The functions of the Forward Markets Commission are as follows:

1. To advise the Central Government in respect of the recognition or the withdrawal of
recognition from any association or in respect of any other matter arising out of the
administration of the Forward Contracts (Regulation) Act 1952.
2. To keep forward markets under observation and to take such action in relation to them, as it
may consider necessary, in exercise of the powers assigned to it by or under the Act.
3. To collect and whenever the Commission thinks it necessary, to publish information
regarding the trading conditions in respect of goods to which any of the provisions of the
act is made applicable, including information regarding supply, demand and prices, and to
submit to the Central Government, periodical reports on the working of forward markets
relating to such goods;
4. To make recommendations generally with a view to improving the organization and
working of forward markets;
5. To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever it
considerers it necessary.

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Regulatory Measures Evolved By FMC

Several measures have been taken by the FMC in regard to the commodity exchanges in India.
1. Limit on open position of an individual operator to prevent over-trading
2. Limit on price fluctuation to prevent abrupt upswing or downswing in prices
3. Special Margin deposits to be collected on outstanding purchases or sales to curb excessive
speculators activity through financial restraints.
4. Minimum / Maximum prices to be prescribed to prevent futures prices from falling below
the levels that are not remunerative and from rising below the levels not warranted by
genuine supply and demand factors.
5. During shortages, extreme steps like skipping trading in certain deliveries of the contracts,
closing the markets for a specified period and even closing out the contracts to overcome
the emergency situations are taken
⇒ Exchanges
In India there are 21 regional exchanges and three national level multi-commodity exchanges.
After a gap of almost three decades, Government of India has allowed forward transactions in
commodities through Online Commodity Exchanges, a modification of traditional business
known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of
commodities. The three exchanges are:
1. National Commodity & Derivatives Exchange Limited (NCDEX)

National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public
limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had
commenced its operations on December 15, 2003.This is the only commodity exchange in the
country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life
Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange of India Limited (NSE).
It is a professionally managed online multi commodity exchange. NCDEX is regulated by
Forward Market Commission and is subjected to various laws of the land like the Companies
Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other
legislations.

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2. Multi Commodity Exchange of India Limited (MCX)

Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an
independent and de-mutulised exchange with a permanent recognition from Government of
India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India,
Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online
trading, clearing and settlement operations for commodity futures markets across the country.
MCX started offering trade in November 2003 and has built strategic alliances with Bombay
Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses
Importers Association and Shetkari Sanghatana.
3. National Multi-Commodity Exchange of India Limited (NMCEIL)

National Multi Commodity Exchange of India Limited (NMCEIL) is the first de-mutualized,
Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it was granted approval by
the Government to organize trading in the edible oil complex. It has operationalized from
November 26, 2002. It is being supported by Central Warehousing Corporation Ltd., Gujarat
State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in
October 2002.
Commodity exchange in India plays an important role where the prices of any commodity are
not fixed, in an organized way. Earlier only the buyer of produce and its seller in the market
judged upon the prices. Others never had a say. Today, commodity exchanges are purely
speculative in nature. Before discovering the price, they reach to the producers, end-users, and
even the retail investors, at a grassroots level. It brings a price transparency and risk management
in the vital market.
A big difference between a typical auction, where a single auctioneer announces the bids and the
Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by
law, no one can bid under a higher bid, and no one can offer to sell higher than someone else’s
lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to
make sure no one gets the purchase or sale before they do.
For details regarding commodities which are trading in these exchanges as well as names of
other regional exchanges and the commodities traded therein please see Annexure II

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3.4 Concept of Over-The-Counter

OTC is an alternative trading platform, linked to a network of dealers who do not physically
meet but instead communicate through a network of phones and computers. Trades are usually
transacted between financial institutions that can also act as market makers for the commonly
trade instruments. All transactions over the telephone are recorded, incase of future disputes that
may arise. The buyer and seller to suit their requirements can customize the contracts traded in
these markets. Hence terms of the contract need not be specified as in the case of an exchange.
3.5 Concept of Havala Markets

These are the unofficial commodity exchanges, which, have operated for many decades and have
built up a reasonable reputation in terms of integrity and liquidity and some of these trade up to
20 to 30 times the volume of the official futures exchanges. They are often localized in close
proximity to official exchanges. The offer not only futures, but also options contracts.
Transactions costs are low, and they therefore attract many speculators and the smaller hedgers.
Absence of regulation and proper clearing arrangements, however, mean that these markets are
mostly "regulated" by the reputation of the main players.

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4 Derivatives
4.1 Definition
Commodities whose value is derived from the price of some underlying asset like securities,
commodities, bullion, currency, interest level, stock market index or anything else are known as
“Derivatives”.
In a simpler form, derivatives are financial security such as an option or future whose value is
derived in part from the value and characteristics of another security, the underlying asset.
It is a generic term for a variety of financial instruments. Essentially, this means you buy a
promise to convey ownership of the asset, rather than the asset itself. The legal terms of a
contract are much more varied and flexible than the terms of property ownership. In fact, it’s this
flexibility that appeals to investors.
When a person invests in derivative, the underlying asset is usually a commodity, bond, stock, or
currency. He bet that the value derived from the underlying asset will increase or decrease by a
certain amount within a certain fixed period of time.
‘Futures’ and ‘options’ are two commodity traded types of derivatives. An ‘options’ contract
gives the owner the right to buy or sell an asset at a set price on or before a given date. On the
other hand, the owner of a ‘futures’ contract is obligated to buy or sell the asset
4.2 Commodity Futures Market

⇒ Forward Contracts
Commodity Futures contracts are based on what’s termed "Forward" Contracts. Early on these
"forward" contracts (agreements to buy now, pay and deliver later) were used as a way of getting
products from producer to the consumer. These typically were only for food and agricultural
Products. Forward contracts have evolved and have been standardized into what we know today
as futures contracts. Although more complex today, early “Forward” contracts for example, were
used for rice in seventeenth century

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Japan. Modern "forward", or futures agreements, began in Chicago in the 1840s, with the
appearance of the railroads, Chicago being centrally located emerged as the hub between
Midwestern farmers and producers and the east coast consumer population centers.
⇒ Meaning of a future contract

A futures contract is a type of "forward contract". Forward Contract (Regulation) Act, 1952
(FCRA) defines forward contract as "a contract for the delivery of goods and which is not a
ready delivery contract". Under the Act, a ready delivery contract is one, which provides for the
delivery of goods and the payment of price therefore, either immediately or within such period
not exceeding 11 days after the date of the contract, subject to such conditions as may be
prescribed by the Central Government.
A ready delivery contract is required by law to be fulfilled by giving and taking the physical
delivery of goods. In market parlance, the ready delivery contracts are commonly known as
"spot" or "cash" contracts. All contracts in commodities providing for delivery of goods
and/or payment of price after 11 days from the date of the contract are "forward" contracts.
Forward contracts are of two types - "Specific Delivery contracts" and "Futures Contracts".
Specific delivery contracts provide for the actual delivery of specific quantities and types of
goods during a specified future period, and in which the names of both the buyer and the seller
are mentioned.
The term 'Futures contract' is nowhere defined in the FCRA. But the Act implies that it is a
forward contract, which is not a specific delivery contract. However, being a forward contract, it
is necessarily "a contract for the delivery of goods". A futures contract in which delivery is not
intended is void (i.e., not enforceable by law), and is, therefore, not permitted for trading at any
commodity exchange.
⇒ Commodity Futures Contracts

A commodity futures contract is a tradable standardized contract, the terms of which are set in
advance by the commodity exchange organizing trading in it. The futures contract is for a
specified variety of a commodity, known as the "basis", though quite a few other similar
varieties, both inferior and superior, are allowed to be deliverable or tenderable for delivery

TYBMS 2006 - 2007
against the specified futures contract. The quality parameters of the "basis" and the permissible
tenderable varieties; the delivery months and schedules; the places of delivery; the "on" and "off"
allowances for the quality differences and the transport costs; the tradable lots; the modes of
price quotes; the procedures for regular periodical (mostly daily) clearings; the payment of
prescribed clearing and margin monies; the transaction, clearing and other fees; the arbitration,
survey and other dispute redressing methods; the manner of settlement of outstanding
transactions after the last trading day, the penalties for non-issuance or non-acceptance of
deliveries, etc., are all predetermined by the rules and regulations of the commodity exchange.
Consequently, the parties to the contract are required to negotiate only the quantity to be bought
and sold, and the price. Everything else is prescribed by the Exchange. Because of the
standardized nature of the futures contract, it can be traded with ease at a moment's notice
⇒ The main differences between the physical and futures markets

The physical markets for commodities deal in either cash or spot contract for ready delivery and
payment within 11 days, or forward (not futures) contracts for delivery of goods and/or payment
of price after 11 days. These contracts are essentially party to party contracts, and are fulfilled by
the seller giving delivery of goods of a specified variety of a commodity as agreed to between
the parties. Rarely are these contracts for the actual or physical delivery allowed to be settled
otherwise than by issuing or giving deliveries. Such situations may arise when unforeseen and
uncontrolled circumstances prevent the buyers and sellers from receiving or taking deliveries.
The contracts may then be settled mutually. Unlike the physical markets, futures markets trade in
futures contracts which are primarily used for risk management (hedging) on commodity stocks
or forward physical market) purchases and sales. Futures contracts are mostly offset before their
maturity and, therefore, scarcely end in deliveries. Speculators also use these futures contracts to
benefit from changes in prices and are hardly interested in either taking or receiving deliveries of
goods.

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⇒ Difference between forward and future contracts.
BASED ON FUTURE CONTRACT FORWARD

CONTRACT
A futures contract is an Forward contract is an
agreement between two parties agreement entered between
to buy or sell a specified and the two parties to buy or
MEANING standardized quantity and sell an asset at a future date
quality of asset at a certain time for an agreed price while
on future at a certain price entering into the forward
agreed at the time of entering contract. The terms and
into the contract on the futures conditions of forward
exchange. contract is not traded on an
exchange.
Futures contract is entered on Forward contract is traded
TRADING PLACE the centralized trading platform on an OTC market.
of the exchange.
Futures contract is standardized Size of the forward contract
in terms of quantity as specified is customized as per the
SIZE OF THE CONTRACT by the exchange. terms of agreement
between the buyer and
seller.
The contract price of futures The contract price of
contract is transparent as it is forward contract is not
TRANSPERANCY IN available on the centralized transparent as it is not
CONTRACT PRICE trading screen of the exchange. publicly disclosed.
Liquidity is the measure of Forward contract is less
trades that occur in a particular liquid due to its customized
commodity futures contract. nature.
LIQUIDITY Futures contract is more liquid

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as it is traded on the exchange.

In futures contracts, the clearing In forward contracts,
house becomes the counter-party Counter-party risk is high
to each transaction, which is due to the customized and
COUNTER-PARTY RISKS called Novation. Therefore, bi-lateral nature of the
counter-party risk is almost transaction
eliminated.
A regulatory authority and the Forward contract is not
REGULATIONS exchange regulate the futures regulated by any exchange.
contract.
Futures contract is generally Forward contract is
SETTLEMENT cash settled but option of generally settled by
physical settlement is available. physical delivery.
Delivery tendered in case of Delivery in case of the
futures contract should be of forward contract is to be
DELIVERY standard quantity and quality as carried out at delivery
specified by the exchange. centre specified in the
customized bi-lateral
agreement.
⇒ Economic Function of a commodity futures market

The two major economic functions of a commodity futures market are price risk management
and price discovery.
Among these, the price risk management is by far the most important, and is the of a
commodity futures market. The need for price risk management, through what is commonly
called "hedging", arises from price risks in most commodities. The larger, the more frequent and
the more unforeseen is the price variability in a commodity, the greater is the price risk in it.
Whereas insurance companies offer suitable policies to cover the risks of physical commodity
losses due to fire, pilferage, transport mishaps, etc., they do not cover similarly the risks of value
losses resulting from adverse price variations. The reason for this is obvious. The value losses

TYBMS 2006 - 2007
emerging from price risks are much larger and the probability of the recurrence is far more
frequent than the physical losses in both the quantity and quality of goods caused by accidental
fires and mishaps, or occasional thefts. Commodity producers, merchants, stockists and
importers face the risks of large value losses on their production, purchases, stocks and imports
from the fall in prices.
Likewise, the processors, manufacturers, exporters and other market functionaries, entering into
forward sale commitments in either the domestic or export markets, are exposed to heavy risks
from adverse price changes. True, price variability may also lead to windfalls, when prices move
favorably. In the long run, such gains may even offset the losses from adverse price movements.
But the losses, when incurred, are, at times, so huge that these may often cause insolvencies. The
greater the exposure to commodity price risks, the greater is the share of the commodity in the
total earnings or production costs. Hence, the need for price risks management or hedging
through the use of futures contracts.
Price Discovery: The buyers and sellers at Futures Exchange conduct trading based on their
assessment of inputs regarding specific market information, expert views and comments, the
demand and supply equilibrium, government policies, inflation rates, weather forecasts, market
dynamics, hopes and fears which transforms into a continuous price discovery mechanism. The
execution of trades between buyers and sellers leads to assessment of the fair value of a
particular commodity that is immediately disseminated on the trading terminal.
Futures exchanges do not act as a mode for setting the prices of commodities. These are free
markets that act as a platform to bring together, in open auction, all forces that influence the
pricing of the commodity. When these markets keep on assimilating and absorbing new
information on a continuous basis throughout the trading day, this information gets transformed
into a single benchmark figure. This figure is the market price agreed upon by both the buyer and
seller. It is for this reason that rational market participants and commodity traders view futures as
a lending price indicator.
⇒ Standardization
Futures contracts ensure their liquidity by being highly standardized, usually by specifying:
1. The underlying. This can be anything from a barrel of Sweet crude oil to a short term
interest rate.

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2. The type of settlement, either cash settlement or physical settlement.

3. The amount and units of the underlying asset per contract. This can be the notional
amount of bonds, a fixed number of barrels of oil, units of foreign currency, the
notional amount of the deposit over which the short term interest rate is traded, etc.
4. The currency in which the futures contract is quoted.
5. The grade of the deliverable. In the case of bonds, this specifies which bonds can be
delivered. In the case of physical commodities, this specifies not only the quality of the
underlying goods but also the manner and location of delivery. For example, the
NYMEX Light Sweet Crude Oil contract specifies the acceptable sulfur content and
API specific gravity, as well as the location where delivery must be made.
6. The delivery month.
7. The last trading date.
8. Other details such as Commodity tick, the minimum permissible price fluctuation.
⇒ Margin
Although the value of a contract at time of trading should be zero, its price constantly fluctuates.
This renders the owner liable to adverse changes in value, and creates a credit risk to the
exchange, who always acts as counterparty. To minimize this risk, the exchange demands that
contract owners post a form of collateral, in the US formally called performance bond, but
commonly known as margin.
Margin requirements are waived or reduced in some cases for hedgers who have physical
ownership of the covered commodity or spread traders who have offsetting contracts balancing
the position.
1. Initial margin is paid by both buyer and seller. It represents the loss on that contract, as
determined by historical price changes that is not likely to be exceeded on a usual day's
trading.
Because a series of adverse price changes may exhaust the initial margin, a further margin,
usually called variation or maintenance margin, is required by the exchange. This is
calculated by the futures contract, i.e. agreeing a price at the end of each day, called the
"settlement" or mark-to-market price of the contract.

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2. Margin-equity ratio is a term used by speculators, representing the amount of their trading
capital that is being held as margin at any particular time. Traders would rarely (and
unadvisedly) hold 100% of their capital as margin. The probability of losing their entire
capital at some point would be high. By contrast, if the margin-equity ratio is so low as to
make the trader's capital equal to the value of the futures contract itself, then they would not
profit from the inherent leverage implicit in futures trading. A conservative trader might hold
a margin-equity ratio of 15%, while a more aggressive trader might hold 40%.
3. Mark-to-Market margin
Mark-to-market margins (MTM or M2M or valan) are payable based on closing prices at the end
of each trading day. These margins will be paid by the buyer if the price declines and by the
seller if the price rises. This margin is worked out on difference between the closing/clearing rate
and the rate of the contract (if it is entered into on that day) or the previous day's clearing rate.
The Exchange collects these margins from buyers if the prices decline and pays to the sellers and
vice versa
⇒ Settlement
Settlement is the act of consummating the contract, and can be done in one of two ways, as
specified per type of futures contract:
1. Physical delivery - the amount specified of the underlying asset of the contract is delivered
by the seller of the contract to the exchange, and by the exchange to the buyers of the
contract. Physical delivery is common with commodities and bonds. In practice, it occurs
only on a minority of contracts. Most are cancelled out by purchasing a covering position -
that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract
to liquidate an earlier purchase (covering a long).
2. Cash settlement - a cash payment is made based on the underlying reference rate, such as a
short term interest rate index such as Euribor, or the closing value of a stock market index.
3. Expiry is the time when the final prices of the future are determined. For many equity index
and interest rate futures contracts (as well as for most equity options), this happens on the
third Friday of certain trading month. On this day the t+1 futures contract becomes the t
forward contract. For example, for most CME and CBOT contracts, at the expiry on

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December, the March futures become the nearest contract. This is an exciting time for
arbitrage desks, as they will try to make rapid gains during the short period (normally 30
minutes) where the final prices are averaged from. At this moment the futures and the
underlying assets are extremely liquid and any miss pricing between an index and an
underlying asset is quickly traded by arbitrageurs. At this moment also, the increase in
volume is caused by traders rolling over positions to the next contract or, in the case of equity
index futures, purchasing underlying components of those indexes to hedge against current
index positions.
⇒ Advantages of Futures Contracts

1. If price moves are favorable, the producer realizes the greatest return with this marketing
alternative.
2. No premium charge is associated with futures market contracts.
⇒ Disadvantages of Future Contracts

1. Subject to margin calls.
2. Unable to take advantage of favorable price moves.
3. Net price is subject to Basis change.
4.3 Types of Traders

⇒ Hedgers
Hedging involves buying or selling of a standardized futures contract against the corresponding
sale or purchase respectively of the equivalent physical commodity. The benefits of hedging flow
from the relationship between the prices of contracts (either ready or forward) for physical
delivery and those of futures contracts. So long as these two sets of prices move in close unison
and display a parallel (or closely parallel) relationship, losses in the physical market are offset,
either fully or substantially, by the gains in the futures market. Hedging thus performs the
economic function of helping to reduce significantly, if not eliminate altogether, the losses
emanating from the price risks in commodities.
Hedgers are those who protect themselves from the risk associated with the price of an asset by
using derivatives. A person keeps a close watch upon the prices discovered in trading and when

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the comfortable price is reflected according to his wants, he sells futures contracts. In this way he
gets an assured fixed price of his produce. In general, hedgers use futures for protection against
adverse future price movements in the underlying cash commodity. Hedgers are often businesses,
or individuals, who at one point or another deal in the underlying cash commodity.
Take an example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For
protection against higher prices of the produce, he hedge the risk exposure by buying enough
future contracts of the produce to cover the amount of produce he expects to buy. Since cash and
futures prices do tend to move in tandem, the futures position will profit if the price of the
produce raises enough to offset cash loss on the produce.
⇒ Speculators
Speculators are some what like a middle man. They are never interested in actual owing the
commodity. They will just buy from one end and sell it to the other in anticipation of future price
movements. They actually bet on the future movement in the price of an asset.
They are the second major group of futures players. These participants include independent floor
traders and investors. They handle trades for their personal clients or brokerage firms.
Buying a futures contract in anticipation of price increases is known as ‘going long’. Selling a
futures contract in anticipation of a price decrease is known as ‘going short’. Speculative
participation in futures trading has increased with the availability of alternative methods of
participation.
Speculators have certain advantages over other investments they are as follows:
If the trader’s judgment is good, he can make more money in the futures market faster because
prices tend, on average, to change more quickly than real estate or stock prices.
Futures are highly leveraged investments. The trader puts up a small fraction of the value of the
underlying contract as margin, yet he can ride on the full value of the contract as it moves up and
down. The money he puts up is not a down payment on the underlying contract, but a
performance bond. The actual value of the contract is only exchanged on those rare occasions
when delivery takes place.

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⇒ Arbitrators
According to dictionary definition, a person who has been officially chosen to make a decision
between two people or groups who do not agree is known as Arbitrator. In commodity market
Arbitrators are the people who take the advantage of a discrepancy between prices in two
different markets. If he finds future prices of a commodity edging out with the cash price, he will
take offsetting positions in both the markets to lock in a profit. Moreover the commodity futures
investor is not charged interest on the difference between margin and the full contract value.
4.4 Options
⇒ Meaning
Futures contracts are similar to Options. Both represent actions that occur in future. But Options
are contract on the underlying futures contract where as futures are either to accept or deliver the
actual physical commodity. To make a decision between using a futures contract or an options
contract, producers need to evaluate both alternatives
An option on futures gives the right to but not the obligation on the part of the holder to buy or
sell the underlying futures contract by a certain date at a certain price.
⇒ Types of Options.
There are two types of options
1. A call option is a contract that gives the owner of the call option the right, but not
obligation to buy the underlying asset by a specified date and a specified price.
2. A put option is a contract that gives the owner of the put option, the right, but not
obligation to sell the underlying asset by a specified date and a specified price.
A Commodity option gives the owner a right to buy or sell a commodity at a specified price
and before a specified time.
Options can be traded either in an exchange or over the counter. Over the counter option
contracts are tailor-made contracts matching the specific needs of investors. The initial cash
transfer (premium) is to be paid by the buyer of the option to the seller (option writer). The

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purchase of an option limits the maximum loss and at the same time allows the buyer to take
advantage of favorable price movements.
Sellers of option contracts (option writers) are exposed to margin requirements.

Commodity options are exercisable into the corresponding future contracts of the commodity
rather than the physical commodity.
⇒ Based on the exercise mode there are two types of options that are
currently traded.
1. American Style Options:
In an American option, the buyer of the option can choose to exercise his option at any given
period of time between the purchase date and the expiry date of the underlying futures contract.
2. European Style Options:
In a European option, the buyer of the option can choose to exercise his option only on the date
of expiration of the underlying futures contract.
Since the American option provides greater degree of flexibility to the investor, the premium
paid to buy an American Style Option is equal to or greater than the European Style Option.
However in India options have still not been introduced as necessary legal formalities are yet to
be completed.

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5 Dematerialization and Rematerialization in

commodity markets
5.1 Introduction
The Indian commodity futures market has grown exponentially in the recent times. With the
increase in trade volume at the Commodity Exchanges; the need to have a vibrant and efficient
settlement system was felt. This led to the concept of dematerialization of warehouse receipts.
Demat of warehouse receipt eliminates the difficulties arising out of the use of physical
warehouse receipts. Dematerialization refers to the process of conversion of the physical paper
(i.e. share certificates, warehouse receipts, etc.) into the electronic balances. In this process the
physical paper is destroyed and electronic balance is credited in the demat account owner of the
physical document. The concept of demat has been in vogue in the securities market from the
year 1996 with the setting up of the first depository i.e. National Securities Depository Limited
(NSDL) to remove the difficulties arising out of the use of physical (paper) certificates for
settlement of trades on stock exchanges and for improving settlement efficiency.
5.2 What is a Warehouse Receipt?

Warehouse receipts are title documents issued by the warehouse to the depositors against
commodities deposited in warehouses. These receipts are transferable by endorsement and
delivery. Either the original depositor or the holder in due course (transferee) can claim the
commodities from the warehouse. According to Sec.32 of the Bombay Warehouse Act, 1959, a
receipt issued by a warehouseman shall, unless otherwise specified on the receipt, be transferable
by endorsement, and shall entitle its lawful holder to receive the goods specified in it on the same
terms and conditions on which the person who originally deposited the goods would have been
entitles to receive them. The physical warehouse receipt suffers from the following deficiencies
being the paper form of title documents.
⇒ Need for splitting the warehouse receipt in case the depositor has an obligation to transfer
only a part of the commodities. A single warehouse receipt is generally issued to the
depositor for the goods deposited by him at one time hence he faces this difficulty in case of
part transfer.

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⇒ Need to physically move the warehouse receipt from one place to another with the risk of
theft, mutilation, loss in transit etc. if the transferor and the transferee are at two different
locations.
⇒ Risk of fake / forged warehouse receipt.
With the introduction of dematerialization of warehouse receipt the above deficiencies are taken
care of.
5.3 Entities involved in the demat process

⇒ Issuer: The issuer is an entity, which floats the physical paper document. It would be a
company in case of the share certificate or warehouse in case of warehouse receipt.
⇒ The Registrar and Transfer Agents: It acts on behalf of the issuer as an interface between
the issuer and the depository for converting the physical warehouse receipt in the demat
form.
⇒ The Depository: The Depository maintains the records of the beneficial owner in its books.
Presently there are two depositories in India i.e. National Securities Depository Limited
(NSDL) and Central Depository Services Limited (CDSL)
5.4 Types of Demat Account

⇒ Beneficiary Owner Account is used to hold and transact in commodity balances. The
depositor is required to quote this account number at the time of depositing commodity in the
warehouse. The commodity balances are credited in this type of account. All the investors
trading in the commodity markets are required to separately open beneficiary owner account
for commodity. The existing demat account for securities cannot be used for the purpose of
holding and transacting in the commodity. Unlike the securities demat account, the investors
need to open the commodity demat account with both the depositories i.e. NSDL and CDSL.
The basic reason behind opening the account in both the depositories is that the Depositories
have not yet started Inter-Depository transfer in case of commodities.
⇒ Clearing Member Pool Account is used for the purpose of settlement of delivery obligation.
The account is used by the member for giving or receiving delivery of commodity to or from
the Clearing House of the Exchange. In short the pay-in and pay-out of the exchange is

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settled through this account. All the members of the exchange are required to open the CM
Pool Account with both the depositories. This cannot be used for holding the commodity.
5.5 Process of Demat Commodity

The depositor at the time of deposit of commodity contacts the Exchange approved Quality
Certifying Agency (QCA) to get the quality of goods assayed in order to ascertain whether the
goods confirms to the quality specification norms of the Exchange. After receipt of the quality
certificate from the QCA the depositor is required to fill Commodity Deposit Form (CDF) which
contains the details of the quality, quantity, validity dates of both for a commodity, demat
account number of the depositor, etc. The depositor is required to ensure that all these details are
properly filled in the form to avoid any kind of delays or errors. The depositor submits the CDF,
quality certificate and warehouse receipt to the warehouse and receives acknowledgement of the
same. The warehouse management then initiates the process of demat credit in co-ordination
with the Exchange, Registrar and Transfer Agent and the Depository. The depositor is required
to check the holding statement (which can be obtained from his depository participant) after a
day or two to see whether the commodity deposited has been credited to his account under
proper Commodities Identifier - ICIN
5.6 Concept of International Commodity Identification Number

(ICIN)
ICIN refers to International Commodity Identification Number. Commodities that have been
dematerialized are identified by its unique code (i.e. ICIN) allotted by depository.
ICIN is generated on the uniqueness of the following 4 parameters:

⇒ Commodity.
⇒ Warehouse Location.
⇒ Grade / Fineness of the commodity.
⇒ Validity date of the commodity.
Change in any of the above parameters will result in the generation of new ICIN. For example,
suppose there are four designated Vaults for Gold delivery and 2 qualities of gold are tendered
for delivery then a total of 8 ICINs will be generated for Gold. The ICIN description provides the

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name of the commodity, grade of goods, the unit of measurement and the validity date of the
ICIN.
5.7 Process of Demat Delivery

If the futures contract on its expiry results into delivery, then the member having delivery
obligation is required to give delivery of the commodity to the exchange on or before the
respective pay-in date. This is done by transferring commodity from the Clearing Member Pool
Account to the Clearing House Account of the Exchange; the member is required to give the
delivery instruction to his Depository Participant before the pay-in deadline. On Payout, the
exchange credits the commodity to the Buying Member Pool Account.
5.8 Rematerialization / Withdrawal / Revalidation of Commodities

The depositor approaches the DP and makes request for withdrawal of commodity in the
prescribed form called Remat Request Form (RRF). The acknowledgement copy of RRF is given
to the depositor. The depositor will approach the vault / warehouse along with the following
documents for withdrawal of commodity.
⇒ Original copy of acknowledgement issued by DP on which RRN is written
⇒ Authority letter from the depositor (in case agent)
⇒ Proof of identification of the agent person.
All agricultural commodities have a shelf life and cannot be stored indefinitely. The "final
expiry" of commodity refers to the maximum time period for which the particular commodity
has shelf-life. "Validity / Revalidity Duration" refers to the number of times and the
corresponding duration for which the quality certification is valid. After the validity date, ICIN is
considered to have expired and the same would not be acceptable as good delivery at the
exchange.
The depositor has two options after the validity date:
⇒ The depositor can withdraw the goods from the warehouse.
⇒ The depositor can go for revalidation of the commodity.
Thus in case of revalidation of commodity, the depositor needs to submit the fresh quality
certificate as revalidation form. The relevant quantity will be credited on the new ICIN.

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6 Role of Banks in Commodity Markets in India

Agriculture is integral to economic development in India. For a long time, Indian agriculture has
remained isolated from the mainstream development. Since independence, India has come a long
way in removing technological isolation of agriculture. Efforts were made in introducing
scientific method in agriculture, including high yielding hybrid varieties. The resulting Green
Revolution has solved the problem of food security for the country. There is a growing feeling
that time has come to remove economic and financial isolation in which agricultural economy
has been functioning so far. Of the efforts being made in several directions, managing risks
through commodity derivatives and facilitating financing of agriculture by using Warehouse
Receipts has received particular attention in the recent years.
Financing of agriculture poses certain special risks for banks and so, banks need to mitigate these
risks in order to ensure effective credit delivery to the agricultural sector. One of the key risks for
banks is the commodity price risk. The volatility in the prices of agricultural commodities may
cause severe loss to the farmer who may be unable to repay his dues to the bank. If the prices
collapse, the distress in the farming community can be widespread and security obtained by the
bank may have very limited usefulness. Commodity derivatives can mitigate these risks to a
certain extent.
A well-established system of issuance of Warehouse Receipts is a pre-requisite of an efficient

market in commodity derivatives. Warehouse Receipts are also useful to the farmer in securing
timely finance from bank at economical rates.
In terms of Section 8 of the Banking Regulation Act 1949, no banking company shall directly or
indirectly deal in buying or selling or bartering of goods except in connect with realization of
securities given to or held by it, or engage in any kind of movable property, other than actionable
claims, stock, shares, money, bullion and spices and all instruments referred to in clause (a) of
sub-section (1) of section 6 of the B.R. Act, 1949. Thus, while bullion is specifically permitted
for trading under the Act, banks are prohibited from entering into commodity business and
therefore, they are not permitted to participate in the commodity derivatives marker.
Banks do have an extensive rural reach and expertise in agricultural lending which enable them
to play a big role in the development of the commodity market. As they have exposure to

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agriculture, which is a priority sector, they would be better off in case they were able to hedge
their positions. Banks can also help to fund margin or trading capital requirements. Further banks
can provide loans against commodities by accepting warehouse receipts (WR) as collateral.
The Working Group on Warehouse Receipts and Commodity Futures was set up by the Reserve
Bank of India (RBI) with the task of evolving broad guidelines, criteria, limits, risk management
system as also a legal framework for facilitating participation of banks in commodity (derivative)
market and use of WR in financing of agriculture. The group has put forward guidelines for
banks to extend loans against warehouse receipt and also offered a framework for participation in
the commodity futures market. The Group had members from the RBI, Indian Banks'
Association (IBA), Forward Markets Commission (FMC), NABARD, and selected banks active
in agricultural lending such as SBI, Punjab National Bank, Bank of Baroda and ICICI Bank.
One of major recommendations of the working group is to amend the Banking Regulation Act,
1949 permitting banks to deal in the business of agricultural commodities including derivatives.
The final report was published in April 2005. Further it also recommended that banks can
maintain proprietary positions with adequate limits in agri commodity derivatives to mitigate
their risk while lending to farmers. Besides, banks also may be granted general permission to
become professional clearing members of commodity exchanges subject to the condition that
they should not assume any exposure risk on account of offering clearing services to their trading
clients.

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7 Participation of FII and Mutual Funds in Commodity

Markets
Mutual Funds and Foreign Institutional Investors are presently not allowed to trade in
commodity markets. The Government is considering the proposal to allow these entities to trade
in commodity future markets.
For commodity markets to grow rapidly, retail participation is essential as has been the
experience in developed countries. But the extent of knowledge dissemination of commodity
futures among the mass market is at an abysmal level.
Unlike the financial derivatives market, one can enter the commodity derivatives market with a
much lower investment, since margins are lower in the range of 5-10%. The leverage that can be
obtained in the commodity futures market is much higher. In case mutual funds are allowed to
participate in commodity markets by structuring commodity funds for retail investors, this would
prove to be an added advantage for the lay investor, who may not have the knowledge and
wherewithal to trade in such markets. The commodity futures exchange remain largely in the
shadows of the booming equity market exchanges due to low awareness levels.
Tracking commodity prices is not just a balance sheet analysis or a company specific study.
Global factors and rather macro factors play a much important role in it. That demands domain
expertise in commodities, market dynamics and price forecasting. This is the reason for mutual
funds to participate in commodity markets since, they are equipped with qualified analysts and
fund management who undertake value investing and boost up the reliability for the retail
investors.
Globally, commodity markets are being acknowledged as an effective market to hedge against
the vagaries of the equity markets. The presence of foreign funds in the securities market has
been found to have correlation with the interest as well as activity in equity segment. A similar
scenario is expected to be replicated in the commodity market, in case regulation permits the
entry of Foreign Institutional Investors into this market.
Yet the other set of challenges in front of the exchanges are creating awareness and information
dissemination. While volumes are important for commodity exchanges, what is probably more

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critical is awareness. There is a need for exchanges to keep relentlessly pursuing an awareness
creation strategy. Awareness at the grassroots will be essential to materialize and sustain the
success it is foreseeing. Disseminating market discovered prices to the farmer level calls for a
mammoth structural framework and massive investments.

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8 Taxation Issues in Commodity Market

8.1 Sales tax implications on commodity future transactions
A commodity future is an agreement to buy or sell a specified quantity and quality of a
commodity in future at a certain price. Commodity futures contracts can be settled either by way
of squaring off or by physical settlement. Commodity futures contracts, which are squared off
before expiry of the contracts, do not have implications of sales tax. In other words, sales tax is
not applicable on futures contracts, because selling a futures contract means a commitment to
sale, which is different from actual sale. Therefore it is not necessary to obtain sales tax
registration prior to entering into a futures contract.
However, if the seller does not square off the position and intends to deliver the goods in respect
of his sale position, then he is required to have sales tax registration.
As per law, in respect of any commodity that attracts sales tax, only sellers having sales tax
registration can give delivery; otherwise it becomes URD (Un Registered Dealer) transaction. At
the time of sale, the seller must submit a sale bill specifying the commodity, quantity, rate, name
of the buyer, etc. and the bill must contain his LST (Local Sales Tax) and CST (Central Sales
Tax number). Such sales tax registration should pertain to the state, where the specified delivery
centre of the futures contract as per MCX rules us located.
For example, if the designated delivery centre for a commodity is Ahmedabad, a seller having
sales tax registration of Gujarat is entitled to deliver goods at Ahmedabad along with a bill
specifying Gujarat sales tax no., but a seller having sales tax registration of Delhi is not entitled
to deliver to deliver at Ahmedabad along with a bill having Delhi sales tax registration number.
Further, in case it is URD transaction, it would attract higher amount of tax, which must be
collected by the buyer from the seller in case of URD and deposited with the Sales tax
department. Due to higher tax rates, it is practically not possible to carry out URD sales.
In case the seller is not registered with the sales tax department in the relevant state, another
option available to him is to deliver through a consignment agent having relevant sales tax
registration.

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It is not necessary for the buyer to have a sales tax registration, but if the buyer takes delivery in
one contract and wants to give delivery in a subsequent contract, he needs to have sales tax
registration for offering delivery; otherwise it would URD attracting higher tax rates.
8.2 Sale tax implications in Commodity Futures Transactions

resulting in delivery from the seller and buyers point of view is
as follows.
⇒ Sellers Point of View.
1. All sellers giving delivery of the physical commodity against open positions in a futures
contract shall have the necessary Registration with the corresponding Sales tax authority of
the state where delivery is being offered.
2. In case the selling member does not have a Sales Tax Registration number, then he can
appoint n Agent / Nominee who had the required Sales tax registration and deliver the
commodity through him.
3. Goods being delivered by the seller may be of different types – taxable, tax-paid or tax-
exempted. If the goods are taxable (which means if sales tax is not already paid on such
goods in that state), then it is the seller's responsibility to pay sales tax to the State
Government on the basis of sales tax applicable on such commodity. In such cases, whether
he has to recover sales tax from the buyer will depend on the price quotation as specified in
the contract specifications. If the price quotations as per the contract is inclusive of sales tax,
then the seller cannot recover sales tax from the buyer. If the price quotation is exclusive of
sales tax, then the seller will charge sales tax from the buyer as per the applicable rate.
4. If the goods being delivered by the seller are tax paid (that is in case of resale), then the seller
is not required to pay sales tax to the state govt. provided the buyer is also located in the
same state. If the buyer is located in some other state then the seller is required to pay CST,
which will be recovered by him from the buyer, irrespective of the fact whether the price
quotation specified in the contract is exclusive or inclusive of tax.
5. If the price quotation is exclusive of tax, then the seller will claim the tax from the buyer
irrespective of the fact whether the goods were taxable or tax paid.
6. If the goods are tax exempted then there is no question of sales tax being paid.

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⇒ Buyer's Point of View.

1. It is not necessary for buyers taking delivery of the physical commodity against their
positions in the futures contract to be registered with the Sales Tax Authorities if delivery is
in the same state. But if they wish to deliver goods in future, they have to have sales tax
registration.
8.3 Service Tax

Members of Commodity Exchanges are liable to pay service tax @ 12% in addition to an
Education Cess @ 2% on the service tax. Therefore, the members are required to collect Service
Tax and Education Cess effectively @ 12.24% of the brokerage charged from client or persons
to whom they provide service relating to future contracts and receive brokerage or any other
charges for providing such services.
8.4 Bombay Stamp Act, 1948

Based on the provisions of the relevant articles of the Bombay Stamp Act 1958, the stamp duty
applicable for all commodities future transactions is Rs.1 per lakh of turnover.

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9 Background Information on Issues Faced In India.

9.1 Situation of the Indian Commodity Exchanges
India does not have a large nation-wide commodity market, but isolated regional commodity
markets. In parallel with the underlying cash markets, Indian commodity futures markets too are
dispersed and fragmented, with separate trading communities in different regions and with little
contact with one another. While the exchanges have varying degrees of success, the industry is
generally viewed as unsuccessful. The exchanges – with a few exceptions – have acknowledged
that they need to embrace new technologies, and, above all, modern – and transparent – methods
of doing business. But management often finds it difficult to chart out a route into the future,
and have had difficulties in convincing their membership. Next to the officially approved
exchanges, there are many Havala markets. Many market participants feel that as this system
has worked well for a long time, there is no reason to fear a breakdown of this system based on
trust. However, this clearly cannot be the base for government policy, which has a duty to
protect the public against the risks that use of these markets pose.
9.2 International Trends

As a result of globalization and liberalization, more and more farmers and traders are becoming
exposed to the vagaries of world commodity prices, and to heightened international competition.
As s result, the importance of commodity exchanges and other tools for the transfer of risk
(essential elements of an efficient market place) is increasing. Meanwhile, developments in,
primarily, technology and communications are driving a drastic upheaval of the commodity
exchange sector. Key factors affecting exchanges include:
1. The trend towards electronic trading; even the exchanges that have a legacy of open outcry
(and the concomitant problem of floor brokers keen on defending their turf) are now moving
towards electronic trading.
2. The emergence of Internet-based commodity exchanges and Electronic Communication
Networks (ECNs) using a combination of dedicated networks and the Internet, as competitors
to exchanges.
3. Globalization of financial markets, where players now use multiple products on multiple
exchanges.
4. Few new products available for futures exchanges to launch.

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These factors have forced exchanges to:

1. Compete with each other - many of them are now trying to steal products that are trading on
other exchanges.
2. Attempt to globalize their operations to cater to a more internationalized set of customers.
3. Seek alliances, often international, in order to compete more effectively against other
exchanges and ECNs. Futures Exchanges and stock exchanges are merging due to increased
competition and the need to get overhead costs down.
4. Become for-profit organizations and de-mutualize to be able to raise capital, in particular for
the technology necessary to adapt to new trading realities, and increase the speed of decision-
making (indeed, the largest single benefit of de-mutualization has probably been a change of
culture).
These developments have also had a dramatic impact on the way that those involved in the
futures industry, and in particular brokers, function. Key developments are as follows:
1. Futures Brokers are downsizing and cutting costs to remain profitable in the new screen
based environment.
2. Brokers have much less loyalty to any one particular exchange.
3. Large players are getting direct access to the futures markets, via exchange screens, and,
therefore, have less need for brokers.
4. Brokers have to access other markets around the world to offer full services to retain their
larger clients, who are already internationalized; further, even small trading clients have
diversified the markets that they trade and require international access.
5. Globally the industry is merging. Futures brokers who have not been profitable – and this is a
substantial number – are being sold or merged.
6. There is increasing interest by brokers in harnessing their clearing services to generate profits
from this sector. Execution is less important. Clearing margins is now the major profit
source.
7. Micro brokers are growing. This has been through either a large brokerage service
organization providing all administrative services for a number of smaller brokers or having
a small broker buy a complete brokerage [execution/ processing] facility through the internet
and using this service to offer futures trading products.

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10 Regulatory Issues
10.1 Broad Government Policies
Various government policies still hinder the growth of commodity exchanges. Given the
recognized need for India to have efficient exchanges in the face of liberalization and
globalization, FMC should take the lead in coordinating with the responsible Ministries and other
government entities a change of these policies. This would not necessarily reduce the
government's possibilities to intervene in commodity markets, but would ensure that such
intervention does not hinder, or even critically damage, commodity futures markets.
A 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.
A 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.

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10.2 Regulatory Perspectives - What Should the Forward Markets

Commission Focus On?
⇒ Focus
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.
Second, the FMC should move more aggressively to limit the Havala markets (or at least
increase their regulation to be on par with those of the futures industry).
Third, the FMC should allow exchanges to introduce option contracts. Knowledge has now
sufficiently spread, and technology sufficiently improved, to make this possible. The FMC
policy of approving futures contracts for exchanges near the regions producing the underlying
commodities should be discontinued. Instead, FMC approval should be given to exchanges with
the acceptable infrastructure and a potentially large trading community/membership, irrespective
of the exchange location in relation to the commodity-producing centre.
Furthermore, it is important that the FMC seriously re-examine its priorities in its process of
regulatory reform. The FMC’s current market monitoring system functions in a reasonably
satisfactory manner most of the time in the current environment of small, single commodity
exchanges with low volumes, contracts of short duration and exchange self-regulation. But if
exchanges are to grow and are to play a bigger role, better regulation is needed
With respect to the established exchanges, the FMC can also take a two-track approach. For
sufficiently well-managed exchanges (with strong trading, information, clearing and self-
regulatory systems) there are at least two items the FMC must change soon: One of these is the
requirement that the FMC approve a new futures contract each time a contract expires on a
commodity exchange. The other is the establishment of minimum and maximum prices for
futures contracts. Furthermore, it should consider offering these exchanges the possibility to
introduce option contracts.

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⇒ New roles for FMC

As an industry grows, as technology changes, as customer needs change the appropriate type and
scope of regulation are almost certain to change also. Thus, regulatory flexibility is critical to the
long run success of both regulation and the industry it regulates. In the particular case of FMC,
there are two key roles that it has to take on: setting up brokerage regulation, and enhancing its
promotional role.
A self-regulatory organization (a “national brokers association”) which, apart from arbitrating

disputes and the like, also sets and enforces educational standards should be set up. This is a
model that is surely advisable for India; but as brokers so far have failed to organize themselves
in this manner, the task will fall on FMC (eventually in cooperation with SEBI).
Furthermore, the exchanges will have to be marketed aggressively to a wide range of potential
users, from domestic traders and financial institutions to international traders and financial
institutions to retail speculators (again, domestic and international) and, ultimately, commodity
funds. The FMC will need to participate in this marketing process, partly to clear the regulatory
hurdles (notably tax and banking) and partly to assist the exchanges in encouraging the
development of national – and, ultimately, international – brokerages.
The FMC could encourage domestic financial institutions to build commodity trading desks.
This move has already started with gold, which should be seen as the most sensitive of
commodities. The FMC should work with RBI and SEBI to encourage the setting up of
commodity funds, either by banks, bank subsidiaries, mutual funds or NBFCs.
⇒ The broad structure of the day-to-day oversight of exchanges

FMC should try to give as much self-regulatory powers as possible to exchanges and to the
brokerage community. It should set the general framework, and have the right to ask for various
types of information from the exchange in respect of the dealing that is taking place. FMC must
be careful not to impose too restrictive or too onerous a set of responsibilities in respect of
reporting on the exchanges.
10.3 The Day-to-Day Oversight of the Exchanges

In its day-to-day oversight of exchanges, the FMC should firstly, ensure that the exchanges

TYBMS 2006 - 2007
properly follow the rules; and secondly, should deter and punish manipulation attempts.
The FMC should establish a group of surveillance and monitoring experts within its staff.
Among others, these should monitor the exchanges to ensure that trading remains open in all
contract months at all times as stipulated and impose a reporting requirement on any disruptions
or closures, the details thereof, and the reasons thereof. The board should be held responsible for
the justification and ought to be warned if it appears that the disruption was not warranted.
Furthermore, commission staff should work with exchanges to establish reportable and
speculative position limits and to be able to receive data from the exchanges in a timely manner.
The FMC must to acquire additional hardware and software, and develop programs for preparing
the necessary reports.
10.4 Brokerage Regulation

⇒ Regulating the brokers
The global futures industry is undergoing a period of immense change, and previous
international brokerage models may no longer be as appropriate a benchmark to guide India’s
development of its brokerage industry. Nevertheless, a few guidelines for stimulating this
development can be given. Firstly, the entry of international broking houses, either in joint
ventures with domestic brokers or independently, should be stimulated. Second, FMC should
stimulate the evolution of hub-and-spoke type set-ups, where a large number of micro-brokers
would share services such as centralized back office, administration, clearing and direct access
into the trading system – this will enable many of the current brokers to survive. Third, the FMC
should stimulate the brokers to organize themselves, and take on as many self-regulatory
functions as possible.
The FMC needs to set standards on an umbrella basis; but each exchange will also have to define
the minimum standards for brokers (as for market makers and other users) based on capital,
expertise and experience. There should be a transition period (not exceeding one year), where
each exchange sets initial standards for their brokers.
⇒ Protecting the customers

A key role of the regulator is to protect customers. While ultimately, customers are responsible

TYBMS 2006 - 2007
for their own actions, the regulator has to ensure that:

1. potential users of exchanges are properly informed about the benefits and risks of futures
exchanges (that is to say, there has to be a "code of conduct" for brokers);
2. users are able to obtain information about whether a particular broker is "legitimate" (so there
needs to be a licensing system, and information about brokers should be easily accessible);
3. it is easy for customers to complain when they feel their broker has not done his job properly;
4. there needs to be a good mechanism to investigate brokers, when there are such complaints;
5. brokers who break the rules are banned from the industry (which implies the need for a
nationwide brokerage registration system);
6. And there is a customer protection fund in case a broker falls bankrupt.
The regulators need to ensure that brokers follow Conduct of Business Rules. These rules seek
to regulate the way in which authorized firms conduct their business with their customers.
⇒ Combating bucket shops

Bucket shops are companies that take customer orders for buying or selling futures (or options),
but never execute these orders on the exchange. Instead, they keep the orders (or the largest part
of them) on their books, often reporting profits on initial trades so that customers increase their
investments. They commonly employ high-pressure "boiler-room" practices, making
exaggerated claims on profit potential of futures and options trading. Ultimately, they will report
to customers that all their funds have been lost in an unexpected market move. If customers try
to claim their money before this happens, they will either hold off payments (possibly using
strong-arm techniques), or disappear. They often target relatively vulnerable groups, such as
poor, recent immigrants (a practice known as "affinity trading") who have limited knowledge of
the futures industry and may not know where to find legal or regulatory recourse.
Bucket shops do not commonly use the exchanges, and thus fall outside of the normal regulatory
remit of the exchange regulator. However, given the damage that bucket shops can do to the
reputation of futures trade, and the overriding objective of the regulator to protect the public at
large, regulators commonly deal with bucket shops in an active manner. It would be advisable
for the FMC, preferably in cooperation with SEBI, to play such an active role.

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⇒ Educating brokers
The FMC should create a national education resource center which exchanges can utilize to
provide training, education and examinations in order to train and register their members and
staff.
10.5 Clearing
The regulator’s role with respect to clearing is to ensure that the system is strong enough to
defend market integrity even in times of crisis. However, in the Indian context, a more pro-
active role of FMC is defendable, or even desirable, in particular to point out the consequences
of certain choices

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11 Conclusion
India is rapidly doing away with its barriers on commodity imports and exports, opening up the
country’s commodity sector to foreign competition. In order for the domestic industry to be able
to compete on an equal footing to its counterparts in other countries, India must develop
commodity exchanges that meet international standards in the areas of market integrity, financial
integrity and customer protection. Unless these standards are met, exchanges will make only
minor contributions to the growth and stability of the Indian economy, and international firms
and large domestic firms with significant hedging needs will not use these exchanges.
The thirty-year ban on futures exchanges has had an adverse repercussion on the growth and
functioning of Indian commodity exchanges. It has forced people, skills and money to flow to
other markets, leaving an older generation of traders in charge not in tune with the new market
infrastructure and regulatory practices. While commodity exchanges have done remarkably well
in the face of adverse conditions, these conditions have now changed. What was appropriate for
the exchanges in the mid-1990s is no longer so today. The FMC has been trying to modernize
the exchanges by requiring them to implement changes and using the withdrawal or even
suspension of approval for trading in some commodities. Many of the commodity exchanges are
now responding and have been making efforts to deal with their problems and imperfections.
India needs a more efficient, more comprehensive commodity futures industry. This futures
industry should be organized in line with best international practice. That is to say, the system
must rely to the extent possible on self-regulation (with powers vested in the exchanges and in
the brokerage community, and the government's regulatory role limited to setting the general
framework and ensuring that exchange- and broker-level self-regulation works properly); enable
very low transaction costs; be financially secure; and be dynamic.

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12 Special Study on Chana

12.1 Introduction
Chana or chickpea is a highly nutritious pulse and places third in the importance list of the food
legumes that are cultivated throughout the world. It contains 25% proteins, which is the
maximum provided by any pulse and 60% carbohydrates. Light-brown beans with a nutty flavor
belonging to the chickpea family. Chickpeas, sometimes also known as garbanzo beans, are
believed to have originated in North Africa, the Middle East and India. It is a very good
supplement to cereal-based diets, especially to the poor in developing countries like ours, were
people are vegetarians or cannot afford animal protein.
12.2 History
Chana is an ancient crop that marked its origination even before 10000 B.C when it was used by
the ‘hunter-gatherer societies’ for eating and sustaining their communities. The regions of
Turkey and the ancient city of Jericho domesticated this crop around 7500 B.C and since then, it
started getting famous. Chickpea was brought to the Western Europe and was known in many
areas in the Bronze Age, most popularly, Italy and Greece. Those people consumed chickpea in
various forms like roasted as snacks, raw, carbonized or in broth. Many past writings have also
been found telling the uses and importance of chickpeas both medical and as a food crop. With
time, many other varieties of chickpea were developed as it was reached many areas of Asia and
Australia. During the First World War, Germany cultivated chickpea as a coffee substitute.
12.3 Variety
⇒ Desi chickpea – These are spilt peas and are relatively smaller in size having a thicker seed
coat. They appear dark brown in color and they can be used and served in many ways. Main
type grown in India is Desi types which have small-seeded varieties requiring 95 to 105 days
to mature on the Prairies. They make up 85 to 90 per cent of world chickpea production. Desi
are usually split and may be substituted for green or yellow peas. They may also be milled
into flour. The whole seed is boiled, roasted, pureed, puffed or sugar-coated. Split chickpeas
are mashed, pureed, fried, curried and used in sweet fillings. Chickpea flour is used for
pancakes, breading, thickeners, or fried noodles.

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⇒ Kabuli Chickpeas – Kabuli chickpeas have a whitish-cream color and are relatively bigger
in size having a thinner seed coat. They are generally used in soups /salads or as flour. Kabuli
types are large-seeded varieties that require 100 to 110 days to reach maturity. Kabulis only
make up 10% to 15% of world production. Kabuli seeds have a cream to white-colored hull
and are, ideally, 8 to 10 mm. (5/16 to 3/8 inch) in diameter. The seeds are sold whole for use
in soups and salads or ground into flour.
12.4 Plant Characteristics

Pulse proteins are rich in lysine and have low sulfur containing amino acids. It offers the most
practical means of eradicating protein malnutrition among vegetarian children and nursing
mothers.
Desi chickpea seeds are smaller (120 to 300 g/1000 seeds), more angular, and the thicker seed
coats vary in color from green to purple, brown, or black. Desi chickpea varieties usually are
shorter, higher yielding, earlier maturing and more resistant to mechanical damage, disease, frost
and insect damage than Kabuli chickpea plants.
Kabuli chickpea has large, rounded, cream to white seeds with a thin, white (zero tannin) seed
coat. The seeds are about twice the size of field pea (260 to 600 g/1000 seeds). They are usually
sold whole, and larger seeds receive a higher premium
12.5 Cultivation pattern

Chickpea is seeded in the months of September to November in India and it is harvested in
February, March and April. That is why it is comes under the category of rabi crops As chickpea
has a deep tap root which enhances its capacity to stand drought conditions, it is usually suited to
those areas having relatively cooler climatic conditions and a low level of rainfall. It yields best
when grown on sandy, loam soils having an appropriate drainage system as this crop is very
sensitive to the excess water availability and a lack of such system can hamper the yield levels.
The production of chickpea or Chana is also affected in excessive cold conditions. It also has
unique characteristic of maintaining and restoring soil fertility. Harvesting of the plant is done
when its leaves start drying and shedding and can be done directly or with the help of a
harvester. In India, They are a spring-seeded, annual legume that needs no nitrogen fertilizer.
They have excellent drought tolerance due to their two to six foot long tap root. Chickpeas have

TYBMS 2006 - 2007
indeterminate growth which means they continue flowering until stress such as drought or frost
stops growth and begins pod-set. Chickpeas are well adapted to the drier parts of the brown and
dark brown soil zones of the Prairies. They do not tolerate poorly drained or saline soils. This
crop is often cultivated as a sole crop but sometimes it is also grown rotationally with other crops
such as Jowar, Bajra, Wheat and Coriander.
12.6 Usage and consumption pattern

Chana is the most widely produced and consumed pulses in India. About 80% of the Desi Chana
produced are split in half to make Chana Dal, and 80% of this split form are ground into a flour
called ‘Besan’ and rest part is consumed for other food products like green vegetable and cattle
feed.
Chana seeds are eaten fresh as green vegetables, parched, fried, roasted, broiled, in snack foods
and condiments, and their flour Basen (made by grinding Chana) can be used as soup, dhal, and
to make bread. Small amounts of Chana are also used for livestock feeds.
The use of Chana is follows:

1. Dal: used in accompany with chapatti and rice
2. Snacks food: prepared by heating, toasting (parching) is traditional household items,
consumed with cereals.
3. Namkeen: Besan prepared from Chana is widely used in making pakoras, kadhi,
namkeens and many dishes.
4. Sweets products: Besan is the chief ingredients along with ghee, sugar and day fruits
used to make many items of Indian confectionaries.
5. Sattu: parched Chana is used for making various kind of saatu which is consumed for
culinary purpose.
6. Salad and sprouts: sprouted Chana and green salad of Chana is widely appreciated for
health food that is rich of vitamins and minerals and less in fats.
7. Medicinal use: Chana leaf extracts is rich for malic acid, is sometime used in medicine.
8. Animal feed: The plant part is used for animal feed which have high nutritional value
and it is important source of horse feed.

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12.7 Global Facts & Figures

On average, world production consisted of about 75% Desi type and 25% Kabuli type.
Production of the Kabuli type is more dispersed and therefore less variable than for the Desi
type. There has been a variable trend in the production of Chana in the world.
World Chana Production 1999-2005
9700000
9318814
Production in MT
9200000 8989288
8700000 8441945
8110022
8200000
7825266
7700000
7200000 6921785
6720751
6700000
1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
The World Production for the year 2005-06 was 8989288 MT. There is an increase of 6.43%
increase from the previous year 2005-05.
Major Producing Countries of Chana are:

• Desi (Asian countries)
o India
o Pakistan
o Burma
o Bangladesh
o Australia
• Kabuli (others)
o Turkey
o Syria
o Iran
o Mexico
o Ethiopia
Note: Canada produces both, Desi and Kabuli.

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World Production of Chana 2005-06

2.14% 1.54%
1.11%
2.63% India
0.63%
2.74% Pakistan
3.54 %
Turkey
6.97 %
Iran
Mexico
9.92 %
68.8 % Myanmar
Australia
Ethiopia
Canada
Syrian
bangladesh
India is the major producer of Chana with 68.8% in the year 2005-06 Bangladesh has the lowest
production with a negligible share of 0.11% in the year 2005-06.
EX-IM of Chana
The trade in Chana is negligible when compare to other agriculture commodities, since more
than 90% of output is consumed by the countries where it is produced. India and surrounding
countries import mainly the Desi type, while countries in North and South America, Europe, the
Middle East and Africa import mainly the Kabuli type.
World Import 1999-2004

1100000
1000000
900000
(in MT)
800000
700000
600000
500000
400000
300000
1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05

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World Export 1999-2004

1050000
950000
850000
(in MT)
750000
650000
550000
450000
1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05
12.8 Indian Facts & Figures

Chana is grown in the drier areas of the country as they are best suited for its production. Chana
are well adapted to the drier parts of the brown and dark brown soil zones. They do not tolerate
poorly drained or saline soils. It is a semiarid-sub tropical crop widely spread majority in the
states is Madhya Pradesh, Uttar Pradesh, Rajasthan and Maharashtra. It is also produced in
states like Andhra Pradesh, Karnataka & Haryana.
State-wise Harvesting Seasons of Chana
States Harvesting Seasons

Andhra Pradesh Feb-March
Haryana March-April
Karnataka Dec-April
Madhya Pradesh Feb-March
Maharashtra Jan-April
Rajasthan Feb-April
Uttar Pradesh March-April

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India Chana Production 1989-2005

7300000
6800700
P r o d u c tio n in M T
6800000 6435500
6132000 6000000
6300000
5770000
5800000 5566000 5473000
5356400
5129100 5120000
5300000 4980800 4979000
4800000 4416700
4217300 4121000 4130000
4300000 3855400
3800000
1989- 1990- 1991- 1992- 1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 2004- 2005-
90 91 92 93 94 95 96 97 98 99 2000 01 02 03 04 05 06
By enlarge India has shown a variable trend in the production from 1989-1990 till 2005-06. With
the highest production in the year 1999-2000 and lowest in the year 2001-02. The production has
grown by 3.9% compared to the last year 2004-05.
India and world Chana Production 2005-06
2989288, 33%
WORLD
INDIA
6000000, 67%

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Yield & Area under Cultivation India 1999-2006

8600 8650000
8400 8150000
(in Hectares)
8200 7650000
(in Hg/ha)
Area Under
8000 7150000 Cultivation
7800 6650000 Yield per

hectare
7600 6150000
7400 5650000
7200 5150000
1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
The area under cultivation has decreased by 17.6% when compared the year 1999-2000 & 2005-
06 but when comparing the year 2004-05 & 2005-06 the area under cultivation has decreased by
1.25%. Where as the yield per hectare has increased by 3.77% when compared the year 1999-
2000 & 2005-06 but when comparing the year 2004-05 & 2005-06 the yield has increased by
5.2%.
⇒ Import of Chana
Indian Import Of Chana 1999-2005
611000
511000
411000
(in MT)
311000
211000
111000
11000
1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
India is the largest importer of chickpeas. India accounts for over 30% of all imports. In 1999-
2000 India imported 11025 MT. The imports have doubled compared to the year 2004-05. This
is due to increased demand and less production. India is a largest producer and consumer of
Chana. The deficit between the production and the demand is met by imports. Asian countries

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account for 50% of imports for Desi Chana. India imports mainly from Myanmar, Australia,
Canada and Turkey.
⇒ Export of Chana
Indian Export Of Chana 1999-2005

60800
50800
(in MT)
40800
30800
20800
10800
800
1999- 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06
2000
The exports in the year 1999-2000 were 859 MT. The exports for the year 2005-06 are more than
double when compared to year 2005-06. India exports to US, UK, Canada, Saudi Arabia, UAE
and Sri Lanka. With bad Chana crop in Pakistan, India is expected to export Chana to Pakistan.

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12.9 Marketing Channel for trading of Chana (in Maharashtra)
Village Trader Farmer NAFED
APMC
Primary Trader
Secondary
Wholesaler Millers
Semi
Retailer
Consumer
12.10 Major Trading Centers in India

o Madhya Pradesh - Indore, Bhopal and Vidisha.
o Maharashtra - Jalgaon, Latur, Mumbai and Akola.
o Rajasthan - Jaipur, Bikaner, Kota, Jodhpur, Sriganaganagar and Hanumangarh.
o Other major centers are Delhi, Chennai, Kanpur, Hapur, Hyderabad, Vijayawada,
Gulbarga, Sirsa, Jalandhar, Ludhiana, Sangrur
Note: Also, Chana is traded in Indian commodity exchanges namely, National Commodity &
Derivatives Exchange ltd (NCDEX), Multi Commodity Exchange of India ltd (MCX), National
Multi Commodity Exchange of India ltd (NMCE) and Bikaner Commodity Exchange Ltd.,
Bikaner

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12.11 Price Trends

The price difference between Desi and Kabuli is partly related to the end user market. Kabulis
tend to be used in relatively more affluent countries. Desi are primarily consumed on the Indian
sub-continent where purchasing power isn't as great. Desi prices generally track edible yellow
pea prices but at a considerable premium.
12.12 Factors affecting the prices of Chana:
1. Chana can withstand moisture stress to a certain extent. However, the production highly
fluctuates between years, depending on the rains received and the moisture availability in
the soil.
2. Area sown and total output in the country (area under cultivation)
3. The sentiments of traders play a significant role currently, as a consequence of the lack of
free-flow of information.
4. Stocks present with stockists and the stocks-to-consumption ratio.
5. Imports and the crop situation in the countries from where imports originate, viz.,
Canada, Australia, Myanmar.
6. There is high substitutability between pulses in India among the consumers. So the price
of other major pulses like tur, yellow peas, green peas etc also influences the prices of
Chana.
7. Black-marketing and hoarding
8. Arrivals pattern in the major markets
9. Government’s Ex-Im policies and other policies.
12.13 NCDEX Futures

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12.14 MCX Futures
12.15 Volume and Open Interest Analysis
NCDEX Chana Nov and Dec futures declined very sharply on long liquidation. Nov contract
witnessed a sharp fall in OI to 5,450 tonnes, down by 1,680 tonnes, ahead of its expiry on
Nov.20. Time and sales data for NCDEX Dec indicates that apart from long liquidation there
was also a presence of fresh buying and selling. Volumes traded were up by 32% on an average
on Saturday's half day trade session.
12.16 Market Research and Analysis

The fundamental view remains bullish for Dec and Jan Chana contracts and these contracts could
touch 3,150 and 3,200 respectively. It can be reiterated that despite a good sowing and generally
good climatic conditions so far, the supplies will remain under pressure in Dec and Jan. With
Nov contract due for expiry today, Chana futures are expected to remain under pressure. This is
as NCDEX stocks as of Nov.17 were at 7,021 tonnes, while NCDEX Nov OI was at 5,540
tonnes, which points to a very high probability of being marked for delivery. However, post Nov,
expiry market attention is expected to shift back to the prevailing pressure on supply and
increase in miller demand ahead of 'Makar Sankranti' celebrations in Jan.

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12.17 Contract specifications for Chana, contracts expiring in May

2007 and onwards.
Trading system NCDEX Trading System
Ticker symbol CHARJDDEL
Basis Desi ex-warehouse Delhi inclusive of all taxes and levies
Unit of trading 10 MT
Delivery Unit 10 MT
Quotation/Base Value Rs. Per Quintal
Tick size Re 1
Desi Chana
The material should be free of Mathara and Khesari and live

infestation
Foreign Matter (Other than Varietal 1% basis

admixture)
Green (Cotyledon color), Immature, 3% basis

Shrunken, Shriveled Seeds
Brokens, Splits 2% basis

Quality specification
Damaged and Weeviled 3% basis
(Weeviled 2%
max)
Moisture 10% basis
Varietal admixture 3% Max
Kantawalla Chana
The material should be free of Mathara and Khesari and live

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infestation
Foreign matter (Other than Varietal 1% basis

admixture)
Green (Cotyledon color), Immature, 3% basis

Shrunken, Shriveled Seeds
Broken, Splits 3% basis
Damaged and Weeviled 3% basis

(Weeviled max
2%)
Moisture 10% basis
Varietal admixture 3% Max
Quantity Variation +/-5%.
Desi Chana to be delivered at Delhi (up to the radius of 50 kms

Delivery centre
from the municipal limits )
Kantawalla Chana to be delivered only at Indore (up to the

radius of 50 kms from the municipal limits)
Also deliverable
Desi Chana can also be delivered at Bikaner (up to the radius of
50 Kms from municipal limit
As per directions of the Forward Markets Commission from time

to time, currently -
Mondays through Fridays:

Hours of Trading 10:00 a.m. to 5:00 p.m.
Saturdays:
10.00 a.m. to 2.00 p.m.

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The Exchange may vary the above timing with due notice.
Upon expiry of the contract all outstanding positions will result

in delivery. A penalty of minimum 5% (of the final settlement
Delivery specification
price) would be imposed on both longs and shorts if they fail to
meet their delivery obligations
Delivery Logic Compulsory delivery
Minimum 2 contracts with a Maximum of 12 contracts running

No. of active contracts
concurrently
Trading in any contract month will open on the 10th day of the
month.
Opening of contracts
If 10th day of the month happens to be a non-trading day,
contracts would open on the next trading day
20th day of the delivery month
Due date/Expiry date If 20th happens to be a holiday, a Saturday or Sunday then the
due date shall be the immediately preceding trading day of the
Exchange, which is other than a Saturday.
Upon the expiry of a contract all outstanding open positions

Closing of contract
would result in compulsory delivery
Daily price fluctuation limit is (+/-) 4%. If the trade hits the
prescribed daily price limit there will be a cooling off period for
15 minutes. Trade will be allowed during this cooling off period
within the price band. Thereafter the price band would be raised
Price band by another 50% of the existing limit i.e. (+ / -) 2%.
If the price again hits the revised price band (6%) during the day,
trade will only be allowed within the revised price band. No trade
/ order shall be permitted during the day beyond the revised limit
of (+ / -) 6%

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Member-wise: 30,000 MT for all contracts or 15% of the

market-wide open position, whichever is higher.
Client-Wise : 10,000 MT
(This limit will not apply to bonafide hedgers. For bonafide

hedgers, the Exchange will, on a case to case basis decide the
hedge limits.)
Position limits
For near month contracts:

The following limits would be applicable from one month prior
to expiry date of a contract
Member: Maximum of 3,000 MT

Client: Maximum of 1,000 MT
Quality Premium/Discount
Desi Chana
Foreign matter
Chana with Foreign Matter more than 1% acceptable but up to
2% maximum on 1:1 discount which shall be applied to such
content above 1% rounded off to the higher 0.5%
Other deliverables at
Premium/ Discount Green (Cotyledon color), Immature, Shriveled Seeds
Chana with Green (Cotyledon color), Immature, Shriveled
Seeds more than 3% acceptable but up to 4% maximum on 2:1
discount which shall be applied to such content above 3%
rounded off to the higher 0.5%

Seeds more than 4% rejected

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Brokens, Splits
Chana with Brokens, Splits more than 2% acceptable but up to
3% on 2:1 discount which shall be applied to such content above
2% rounded off to the higher 0.5%
Chana with Brokens, Splits more than 3% rejected
Moisture
Chana with Moisture more than 10% acceptable but up to 12%
on 1:1 rebate which shall be applied to such content above 10%
Chana with Moisture more than 12% rejected
Damaged, Weeviled Seeds

Chana with Damaged, Weeviled Seeds more than 3% (with
Weeviled not more than 2%) acceptable but up to 10%
maximum (with Weeviled not more than 2% ) at a discount of
2:1 which shall be applied to such content above 3% rounded off
to the higher 1%
Chana with Damaged, Weeviled Seeds more than 10% rejected
Kantawalla Chana
Foreign matter
Chana with Foreign matter more than 1% basis acceptable up to
2% maximum on 1:1 discount which shall be applied to such
content above 1% rounded off to the higher 0.5%

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Green (Cotyledon color), Immature, Shriveled Seeds

Seeds more than 3% acceptable up to 4% maximum on 2:1
discount which shall be applied to such content above 3%
Chana with Green (Cotyledon color), Immature, Shriveled Seeds

more than 4% rejected
Brokens, Splits
Chana with Brokens, Splits more than 3% acceptable up to 5%
maximum on 2:1 discount which shall be applied to such content
above 3% rounded off to the higher 0.5%
Chana with Brokens, Splits more than 5% rejected
Moisture
Chana with Moisture more than 10% acceptable up to 12%
maximum on 1:1 rebate which shall be applied to such content
above 10% rounded off to the higher 0.5%
Chana with Moisture more than 12% rejected
Damaged, Weeviled Seeds

Chana with Damaged, Weeviled Seeds more than 3% (with
Weeviled not more than 2%) acceptable but up to 10%
maximum (with Weeviled not more than 2% ) at a discount of
2:1 which shall be applied to such content above 3% rounded off
to the higher 1%

TYBMS 2006 - 2007
Chana with Damaged, Weeviled Seeds more than 10% rejected

Premium/Discount for Chana delivery at additional delivery
centers
The Premium and discount for different locations shall be

announced by the Exchange before launching of contract
In case of additional volatility, a special margin at such

percentage, as deemed fit, will be imposed in respect of
Special margins
outstanding positions, which will remain in force as long as the
volatility exists, after which the special margin may be relaxed.

TYBMS 2006 - 2007
13 Interview with NCDEX Personnel

As a part of the study on Commodity Markets in India an interview was conducted with Mr.
Madan Sabnavis, Chief Economist, Head, Knowledge Management Committee, on
December 29th, 2006.
⇒ How would you define commodity exchanges?

Commodity exchanges are institutions which provide a platform for trading in ‘commodity
futures’ just as how stock markets provide space for trading in equities and their derivatives.
They thus play a critical role in robust price discovery where several buyers and sellers interact
and determine the most efficient price for the product.
⇒ Why are exchanges required to get recognized?

Under the Forward Contracts (Regulation) Act, 1952, forward trading in commodities notified
under section 15 of the Act can be conducted only on the Exchanges, which are granted
recognition by the Central Government (Department of Consumer Affairs, Ministry of Consumer
Affairs, Food and Public Distribution).
⇒ What are the unique features of national level commodity exchanges?

The unique features of national level commodity exchanges are:
1. They are demutualized, meaning thereby that they are run professionally and there is
separation of management from ownership. The independent management does not
have any trading interest in the commodities dealt with on the exchange.
2. They provide online platforms or screen based trading as distinct from the open outcry
systems (ring trading) seen on conventional exchanges. This ensures transparency in
operations as everyone has access to the same information.
3. They allow trading in a number of commodities and are hence multi-commodity
exchanges.
4. They are national level exchanges which facilitate trading from anywhere in the
country. This is a corollary of being an online exchange.

TYBMS 2006 - 2007
⇒ How do I trade on NCDEX?

To trade on NCDEX you either can be a member of the Exchange (Contact 022-5640 6512) or
trade through a member in your locality. NCDEX is an online exchange offering screen based
trading. NCDEX terminals are connected through VSAT, leased lines and the Internet. Once you
take membership, the helpdesk personnel from NCDEX will set up the systems for you. Trade
timings on NCDEX start from 10 in the morning and continue till midnight (for some
commodities). This is to take advantage of price movements in international markets. NCDEX
offers trading on Saturdays also.
⇒ How is physical delivery of commodity made on NCDEX?

Based on the specifications of the Exchange, the seller can put in his intention to make physical
delivery on the Exchange. The Seller has to inform the exchange that he wants to deliver the
product and does so at an assigned warehouse of NCDEX which is certified by the exchange.
The goods that are stored in the warehouse are verified by an approved assayer (a grading
agency) and a certificate is given to the seller. This is facilitated in a demat mode where the
person would now hold commodity balances in an electronic account just as one holds a savings
bank account in a bank or a demat share of a company. He can draw cheques for the same when
he sells the product to a buyer.
There are 51 commodity delivery centers across the country and on an average; it is 8 to 10
delivery centers per commodity. Five days before the expiry of the contract, the buyer and the
seller have to give an intention to trade in physical commodity through a specified application
form.
⇒ Is physical delivery compulsory?

No, delivery is optional. It is only when the seller puts in the intention to deliver that delivery
takes place. Otherwise all contracts are cash settled. NCDEX specifies the warehouses where
delivery can take place. However, usually traders use the Exchange as a hedging platform. For
example, if I have to buy cotton at Rs 100 after 3 months. I am located in Mumbai but the
delivery centre is Ahmedabad. Suppose after 3 months the futures price is Rs 120, as is the spot
price. I would not like to go to Ahmedabad and pick up the cotton because of the transport cost,
tax payments, insurance etc. I therefore, sell the futures contract on the Exchange for Rs 120 and

TYBMS 2006 - 2007
make a profit of Rs 20. But, the price in the spot market is also Rs 120. I buy cotton at Rs 120 in
Mumbai spot market and the implicit loss is Rs 20 now as I had a price of Rs 100 in mind. But,
this loss is offset by the gain thus providing the perfect hedge for me.
⇒ Is there any credit facility available with the Exchange?

No. There is no credit facility available.
⇒ What is the role of an Exchange in futures trading?

An Exchange designs a contract, which alone would be traded on the Exchange. The contract is
not capable of being modified by participants, i.e., it is standardized. The Exchange also provides
a trading platform, which converges the bids and offers emanating from geographically dispersed
locations. This creates competitive conditions for trading. The Exchange also provides facilities
for clearing, settlement, arbitration facilities. The Exchange may also provide financially secure
environment by putting in place suitable risk management mechanism (margining system etc.),
and guaranteeing performance of contract through the process of novation.
⇒ Why is Mark-to-Market margin collected daily in commodity market?

Collecting mark-to-market margin on a daily basis reduces the possibility of accumulation of
loss, particularly when futures price moves only in one direction. Hence the risk of default is
reduced. Also, the participants are required to pay less upfront margin - which is normally
collected to cover the maximum, say, 99.9%, of the potential risk during the period of mark-to-
market, for a given limit on open position. Alternatively, for the given upfront margin the limit
on open position would have to be reduced, which has the effect of restraining the trade and
liquidity.
⇒ How the difference in the margin between two exchanges is resolved?

There is no commonality in margin requirement between the two exchanges. In fact, in order to
encourage competition between the two exchanges, the arbitrage opportunity is not resolved.
⇒ What is Volatility?
It is a measurement of the variability rate (but not the direction) of the change in price over a
given time period. It is often expressed as a percentage and computed as the annualized standard
deviation of percentage change in daily price.

TYBMS 2006 - 2007
⇒ What is a Demutualized Exchange?

In the demutualized Exchange, unlike the Mutual form of Exchange, the owners do not
automatically get the trading right by virtue of their ownership. Though demutualization per se
does not bar an owner (equity holder) from acquiring trading rights, he has to comply with the
admission criteria laid down by the Exchange. Also, it is a good corporate governance practice to
have, in the organization of the equity holder, a Chinese wall between the trading division and
the division dealing with the ownership of the Exchange, to avoid conflict of interest.
⇒ What is a Client Account?

Client Account is an account maintained for any individual or entity being serviced by an agent
(broker, members), for a commission. A customer's business must be segregated from the
broker's/member's/principal's own business and clients' money should be kept in segregated
accounts.
⇒ What is the 'Trade Guarantee Fund'?

The main objectives of Trade Guarantee fund are (a) to guarantee settlement of bonafide
transactions of the members of the Exchange (b) thereby, to inculcate confidence in the minds of
market participants' (c) to protect the interest of the investors. All the members of the Exchange
are required to make initial contribution towards trade guarantee fund of the Exchange.
⇒ What is the role of Clearing House?

Clearing House performs post trading functions like confirming trades, working out gains or
losses made by the participants during the course of the clearing period - usually a day-collecting
the losses from the members and paying out to other who have made gains.
⇒ What is novation?
Some Clearing Houses interpose between buyers and sellers as a legal counter party, i.e., the
clearing house becomes buyer to every seller and vice versa. This obviates the need for
ascertaining credit-worthiness of each counter party and the only credit risk that the participants
face is the risk of clearing house committing a default. Clearing House puts in place a sound risk-
management system to be able to discharge its role as a counter party to all participants.

TYBMS 2006 - 2007
⇒ How does an exchange ensure the guarantee of the performance of the

contract?
The performance of the contracts registered by the exchange are guaranteed either by the
exchange or it's clearing house. The exchange interposes itself between each buyer and seller
thereby becoming a seller to every buyer and a buyer to every seller. The Exchange In order to
safeguard its interest by imposing mark to market margin (which is clearing all the transactions
at the closing price of the day. All the profits and losses are either paid in or paid out). This
minimizes the chances of default as buyer or seller is exposed to one day of price movements.
The Exchange also maintains its own TGF / SGF which can be used in case of a default. The
Exchange also puts in place membership criteria and some of the new Exchanges have also
prescribed certain minimum capital adequacy norms.
⇒ What is the procedure of introducing new commodity in the exchange?

The Knowledge Management Group of the exchange conducts a product research based on the
data on the product such as volume of production, value, seasonality etc. (called product
calculator). Then a feasibility study is conducted by a Product Committee constituting members
of various value chains and based on their findings a product is introduced.
⇒ What is the risk management mechanism in the NCDEX?

The risk mitigating tools employed by the exchange is
1. Marked to Market margin
2. Study of Historical volatility for allowing trading in the commodity
⇒ How it warehouse receipt help the trader?

The warehouse receipts are securities defined under Securities Act, and banks lend against such
warehouse receipts as collateral.
⇒ I heard something called open interest?

Open interest is a highly technical subject and in layman's language, it operates as under:
The interest a trader has in commodity future market is called open interest. No single person
should be allowed to influence the price of a commodity. Hence only a certain percentage of the
trade defined by the exchange for various commodities is allowed to be traded by an individual.

TYBMS 2006 - 2007
Even if he in collusion with his family members/friends etc., the system aggregates all these
deals as if the deal has been entered into by one person. If the deal limit exceeds the specified
limit set by the exchange, the dealer is debarred from participating further in the deal after giving
warnings. Diversification of the number of players in the commodity trade prevents market
collapse/market manipulation.
⇒ Why Not an Indian Metal Exchange like London Metal Exchange?

When the commodity exchange market reform was initiated in 2003, the main aim was to
establish multi commodity exchanges. Over a period, an exchange tends to specialize in few
commodities, and then they become specialized exchanges.
⇒ What are the current problems/hurdles in the operation of the commodity

exchanges?
In India, since Index of commodities is a non-deliverable product, and hence it cannot be termed
as a commodity and the current regulations in India, do not permit trading in these index futures.
Since the regulatory lines for dealing in these "securities" have not been delineated, there is
regulatory overlap also. The penetration of the exchange is still at a nascent stage and with no
optionality available in these exchanges, the development of different new products does not take
place and this hinders the smooth functioning of the derivative segment of the exchange. Banks
and Mutual Funds are not currently permitted by RBI/SEBI to deal in commodity markets
⇒ I heard that the exchanges have set up weather stations. What is the role of
an exchange in regard to weather stations?
The NCDEX has set up weather stations for gaining weather index, which helps the exchange to
estimate the future production of the commodity concerned by factoring the weather forecasts
into forecast of the commodities concerned.
⇒ There is recent controversy on Chilli trade. Please comment

A warehouse in Guntur recorded bogus certification of the quality of the Chilli stored, in
collusion with an assayer. When the physical delivery took place, these bogus certifications came
to light. The exchange has taken necessary steps to avoid repetition of such happenings.

TYBMS 2006 - 2007
⇒ What is the effect of Full convertibility of rupee on the commodity

exchanges in India?
Considering the high volume of turnover, the full convertibility might help the exchange by
increased players in the exchange.
National Commodity and Derivatives Exchange Limited:

Registered office: Exchange Plaza, C-1, Block G, Bandra Kurla Complex
Bandra East, Mumbai 400 051
Telephone numbers: +91-22-5640 6789, 5640 6512
Fax number: +91-22-5640 6899
E-mail: [email protected]
Website: http://www.ncdex.com

TYBMS 2006 - 2007
ANNEXURE I - Complete list of International Commodity

Derivatives Exchange, their address and contracts traded.
Sr No. Name Contracts traded

1. Chicago Mercantile Butter, Milk, Diammonium Phosphate, Feeder
Exchange(CME) cattle, Frozen Pork bellies, Lean Hogs, live
Cattle, Non-fat Dry Milk, Urea, Urea
Ammonium Nitrate, etc.
2. New York Mercantile Exchange Light Sweet Crude Oil, Natural gas, Heating
(NYMEX) Oil, Gasoline, RBOB Gasoline, Electricity,
Propane, Gold, Silver, Copper, Aluminum,
Platinum, Palladium, etc.
3. London International Financial Cocoa, Robusta Coffee, Corn, Potato,
Futures and Options Rapeseed, White Sugar, Feed Wheat, Milling
Exchange(LIFFE) Wheat, etc.
4. Chicago Board of Trade(CBOT) Corn, Soybeans, Soybean Oil, Soybean Meal,
Wheat, Oats, Ethanol, Rough Rice, Gold, and
Silver etc.
5. London Metal Exchange(LME) Aluminum, Copper, Nickel, Lead, Tin, Zinc,
Aluminum Alloy, North American Special
Aluminum Alloy (NASAAC), Polypropylene,
Linear Low Density Polyethylene, etc.
6. New York Board of Cocoa, Coffee, Cotton, Ethanol, Sugar,
Trade(NYBOT) Frozen Concentrated Orange Juice, Pulp etc.
7. Tokyo Commodity Exchange Gasoline, Kerosene, Crude Oil, Gold, Silver,
Platinum, Palladium, Aluminum, Rubber, etc.
8. Sydney Futures Exchange Greasy Wool, Fine Wool, Broad Wool, Cattle
etc.
9. Dubai Gold and Commodities Gold, Silver, Fuel Oil, Steel, Freight Rates,
Exchange(DGCX) Cotton etc.
10. Bursa Malaysia Berhad Refined Bleached Deodorized Palmolein,

TYBMS 2006 - 2007
Crude Palm Oil, Palm Kernel Oil etc.

11. Winnipeg Commodity Exchange Canola, Feed Wheat, Western Barley, etc.
12. Dalian Commodity Exchange Corn, Soybean, Soybean Meal, Soy Oil etc.
13. Zheng Zhou Commodity Wheat, Cotton, Sugar etc.
Exchange(CZCE)
14. Central Japan Commodity Gasoline, Kerosene, Gas Oil, Eggs, Ferrous
Exchange Scraps etc.
15. Shanghai Futures Exchange Copper, Aluminum, Natural Rubber,
(SHFE) Plywood, & Long Grained Rice etc.
16. Braczilian Mercantile and Anhydrous Fuel Alcohol, Arabia Coffee,
Futures Exchange Robusta-Conillon Coffee, Corn, Cotton,
Feeder Catttle, live Cattle, Soybean, Crystal
Sugar, Gold etc.
17. Kansai Commodity Exchange soybean, Raw Sugar, Raw Silk, Shrimp
(frozen), Coffee, Corn, Azuki Beans (Red)
etc.
18. Osaka Mercantile Exchange (Ribbed Smoked Sheets) RSS3, (Technically
Specified Rubber) TSR20, Nickel,
Aluminum, Rubber Index etc.
19. Singapore Commodity Exchange Coffee, Rubber (RSS 1, 2, 3)
20. Tokyo Grain Exchange(TGE) Corn, Soybean Meal, Soybeans, Red Beans,
Coffee, Sugar, Raw Silk, Vegetables etc.
21. Intercontinental Exchange (ICE) Brent Crude Oil, Electricity, Emissions, Gas
Oil, Heating Oil, Gasoline (RBOB), Natural
Gas, WTI and all the futures contracts of its
subsidiary – The International Petroleum
Exchange(IPE)

TYBMS 2006 - 2007
Annexure II – Commodities Traded in Commodity Exchanges
⇒ National Level Multi Commodity Exchanges

Sr No. NAME COMMODITIES
1. Multi Commodity Gold, Silver, Aluminum, Copper, Nickel, Sponge Iron,
Exchange of India Steel Flat, Steel Long (Bhavnagar), Tin, Castor oil,
Ltd., Mumbai. Castor Oil Cake, Castor Seed, Castor Seeds (Disa),
Cottonseed, Crude Palm Oil, Groundnut Oil, Kapasia
Khalli (Cottonseed Oilcake), Mustard Seed (Hapur),
Mustard Seed (Jaipur), Mustard/ Rapeseed Oil,
Mustard Seed (Sirsa), RBD Palmolein, Refined Soy
Oil, Sesame seed, Soymeal, Soy Seeds, Chana, Masur,
Tur, Urad, Yellow Peas, Rice, Basmati Rice, Wheat,
Maize, Sarbati Rice, Blackpepper, Red Chilli, Jeera,
Turmeric, Cashew Kernel, Rubber, Kapas, Cotton
(long staple, Medium staple, Short Staple), Guar seed,
Guargum, Gur, Mentha Oil, Sugar, High Density
Polythene (HDPE), Polyproplylene (PP), Brent Crude
Oil, Crude Oil, Furnace Oil, Natural Gas, Art Silk
Yarn, Arhar Chuni, Aniseed Bajra, Barley, Betelnuts
Celery Seed, Camphor, Chara or Berseem, Cardamom,
Cinnamon, Corriander Seed, Jowar, Jute Goods, Jute
Sacking, Kulthi Kapas, Khandsari Sugar, Lakh
(Khesari), Lead Linseed, Linseed Oil, Linseed
Oilcake, Masur, Mung Chuni, etc
2. National Commodity Barley, Cashew, Castor Seed, Chana, Chilli LCA334,
& Derivatives Coffee - Arabica, Coffee - Robusta, Cotton Seed
Exchange Ltd., Oilcake, Crude Palm Oil, Groundnut (in shell),
Mumbai Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur,
Jeera, Jute sacking bags, Indian 28 mm Cotton , Indian

TYBMS 2006 - 2007
31 mm Cotton , Lemon Tur, Masoor Grain Bold,

Medium Staple Cotton, Mentha Oil , Mulberry Green
Cocoons ,Rapeseed - Mustard Seed ,Pepper ,Potato
,Raw Jute, Indian Parboiled Rice(IR-36/IR-64), Indian
Raw Rice(ParmalPR-106),Indian Pusa Basmati Rice,
Indian Traditional Basmati Rice, RBD Palmolein,
RMSeed Oil Cake, Refined Soy Oil, Rubber, Sesame
Seeds, Soy Bean, Sponge Iron, Expeller Mustard
Oil ,Mulberry Raw Silk,V-797 Kapas, Sugar,
Turmeric, Urad, Wheat, Yellow Peas, Yellow Red
Maize, Yellow Soybean Meal, Electrolytic Copper
Cathode, Aluminum Ingot, Nickel Cathode, Zinc
Metal Ingot, Mild Steel Ingots, Gold KG, Silver,
Brent Crude Oil, Furnace Oil.
3. National Multi Gur, RBD Palmolein, Groundnut Oil, Sunflower Oil,
Commodity Rapeseed / Mustard seed, Rapeseed / Mustard seed
Exchange Of India Oil, Rapeseed / Mustard Seed Oilcake, Soy Bean, Soy
Limited, Ahmedabad Oil, Copra, Cotton seed, Safflower, Groundnut, Sugar,
Sacking, Coconut oil, Castor seed, Castor-oil,
Groundnut Oilcake, Cottonseed Oil, Sesamum,
Sesamum Oil, Sesamum Oilcake, Safflower Oilcake,
Rice Bran Oil, Safflower Oil, Sunflower Oilcake,
Sunflower Seed, Pepper, Crude Palm Oil, Guar seed,
Castor Oilcake, Cottonseed Oilcake, Aluminum
Ingots, Nickel, Vanaspati, Soybean Oilcake, Rubber,
Copper, Zinc, Lead, Tin, Linseed, Linseed Oil,
Linseed Oilcake, Coconut Oilcake, Gram, Gold,
Silver, Rice, Wheat, Cardamom, Masur, Urad, Tur,
etc.

TYBMS 2006 - 2007
⇒ Regional Exchanges
Sr. No. NAME AND ADDRESS COMMODITIES
1. Bhatinda Om & Oil Exchange Ltd., Gur
Bhatinda
2. The Bombay Commodity Exchange Ltd., Groundnut Oil, Sunflower Oil,
Mumbai Cottonseed, Safflower,
Groundnut, Castor Oil, Castor
Seed, Cottonseed Oil, Sesamum
Oil, Sesamum Oilcake,
Safflower Oilcake, Rice Bran,
Rice Bran Oil, Rice Bran
Oilcake, Safflower oil, Crude
Palm Oil
3. The Rajkot Seeds oil & Bullion Merchants' Groundnut Oil, Castor seed
Association Ltd., Rajkot
4. The Meerut Agro Commodities Exchange Gur
Co. Ltd., Meerut
5. The Spices and Oilseeds Exchange Ltd. Turmeric
6. Ahmedabad Commodity Exchange Ltd., Cottonseed, Castor seed
Ahmedabad
7. Vijay Beopar Chamber Ltd., Muzaffarnagar Gur, Mustard seed
8. India Pepper & Spice Trade Association. Pepper, Domestic-MG1,
Kochi Pepper, Domestic-500g/I, Black
Pepper Int'I-MLS ASTA, Black
Pepper Int'I-VB ASTA, Black
Pepper Int'I FAQ, Rubber RSS
4
9. Rajdhani Oils and Oilseeds Exchange Ltd., Gur, Rapeseed / Mustard seed.
Delhi
10. National Board of Trade, (NBOT), Indore Rapeseed / Mustard seed,

TYBMS 2006 - 2007
Rapeseed / Mustard seed Oil,

Rapeseed / Mustard Seed
Oilcake, Soy bean, Soy Meal,
Soy Oil, Crude Palm Oil.
11. Chamber of Commerce, Hapur Gur, Rapeseed / Mustard Seed
12. The East India Cotton Association, Mumbai Indian Cotton
(EICA)
13. The Central India Commercial Exchange Gur, Rapeseed / Mustard Seed
Ltd., Gwalior
14. The East India Jute & Hessain Exchange Hessain Sacking
Ltd., Kolkotta
15. First Commodity Exchange of India Ltd., Copra, Coconut Oil, Copra cake
Kochi
16. Bikaner Commodity Exchange Ltd., Rapeseed / Mustard seed,
Bikaner Rapeseed / Mustard seed Oil,
Rapeseed / Mustard Seed
Oilcake, Guarseed, Gram, Gaur
Gum.
17. The Coffee Futures Exchange India Ltd. Coffee – Plantation A, Coffee –
(COFC), Bangalore Robusta Cherry AB, Raw
Coffee Arabica Parchment, Raw
Coffee Robusta Cherry
18. E-sugar –India Ltd. Sugar Grade –M, Sugar Grade –
S
19. Surrendranagar Cotton Oil and Oilseeds Kapas
Assoc. Ltd., Surendranagar
20. Haryana Commodities Ltd., Hissar Rapeseed / Mustard seed,
Rapeseed / Mustard seed Oil
21. E – Commodities Ltd. and Bombay Bullion -
Association

TYBMS 2006 - 2007
Bibliography:
Main Project
• Web:
⇒ http://finance.indiamart.com/markets/commodity/definition_cacommodity.html
⇒ http://www.utisel.com/utiseccomm.html
⇒ http://en.wikipedia.org/wiki/Commodity_markets
⇒ http://en.wikipedia.org/wiki/Image:Chicago_bot.jpg
⇒ http://en.wikipedia.org/wiki/Futures_contract
⇒ http://www.fmc.gov.in/
⇒ http://www.ncdex.com/
⇒ http://www.mcxindia.com/
⇒ http://futures.tradingcharts.com/tafm/
⇒ http://web.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/EXTGB
LPROSPECTS/0,,contentMDK:20666033~menuPK:615470~pagePK:2904583~piPK:29045
98~theSitePK:612501,00.html
⇒ http://www.libraries.rutgers.edu/rul/rr_gateway/research_guides/busi/stocks.shtml
⇒ http://finance.indiamart.com/markets/commodity/commodity_exchanges.html
⇒ http://finance.indiamart.com/markets/commodity/traders_derivatives_market.html
⇒ http://finance.indiamart.com/markets/commodity/future_contracts.html
⇒ http://www.manage.gov.in/pgpabm/spice/may2k3.pdf
⇒ http://www.nmce.com/publication/reports/fmc.htm
⇒ http://www.prsindia.org/pdfs/the_warehousing_bill/Report_ofRBI_working_group_on_ware
house_receipts_and_commodity_futures.pdf
⇒ http://sify.com/finance/commodities/fullstory.php?id=13429672
• Other Sources:
⇒ MCX Basic Reference Material
⇒ Swaps/ Financial Derivatives by Satyajit Das
⇒ Presentation on Commodity Markets in India To the Reserve Bank of India, by Mr.
Ravikumar, MD & CEO, NCDEX

TYBMS 2006 - 2007
Chana
• Web:
⇒ http://trade.indiainfoline.com/Commexwebsite/mcx/pdf/chana.pdf
⇒ http://www.crnindia.com/commodity/chickpea.html
⇒ http://onlypunjab.com/fullstory2k5-insight-news-status-25-newsID-1701.html
⇒ http://finance.indiamart.com/markets/commodity/chana.html
⇒ http://www.apeda.com/apeda/monthly%20export/December%202005.xls
⇒ http://faostat.fao.org/faostat/form?collection=Production.Crops.Primary&Domain=Productio
n&
⇒ http://www.fao.org/es/ess/top/country.html;jsessionid=CE9B57AD138D5871E22BEE4F67A
A6150?lang=en&country=100&year=2005
⇒ http://www.fao.org/es/ess/top/commodity.html?item=191&lang=en&year=2005
⇒ http://www.fao.org/es/ESS/toptrade/trade.asp
⇒ http://www.fao.org/es/ESS/toptrade/trade.asp?disp=countrybycomm&dir=imp&resource=19
1&ryear=2004
⇒ http://www.fao.org/countryprofiles/maps.asp?iso3=IND&lang=en\
⇒ http://www.fao.org/es/ess/toptrade/trade.asp?lang=EN&country=100\
⇒ http://www.fao.org/es/ess/toptrade/trade.asp?disp=countrybycomm&dir=imp&resource=191
&ryear=2004
⇒ http://www.fao.org/countryprofiles/index.asp?lang=en&iso3=IND&subj=4
⇒ http://faostat.fao.org/faostat/form?collection=Production.Crops.Primary&Domain=Productio
n&servlet=1&hasbulk=&version=ext&language=EN
⇒ http://agebb.missouri.edu/mgt/risk/introfut.htm
⇒ http://faostat.fao.org/site/340/default.aspx
• Other Sources:
⇒ Main Financial Pulses Daily Report, Nov 20, 2006

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SYDENHAM COLLEGE OF COMMERCE AND ECONOMICS,

MUMBAI – 400 020

ACADEMIC YEAR: 2006-2007

SWATI GOPALAKRISHNAN IYER

UNDER THE GUIDANCE OF

ACADEMIC YEAR: 2006-2007

UNDER THE GUIDANCE OF

I, Swati Gopalakrishnan Iyer of Sydenham College of Commerce &

I, Mr. Deepak Abhyankar hereby certify that Swati Gopalakrishnan Iyer

⇒ To analyze various issues faced by the Commodity Markets in India.

 Scope of The Study

 Findings of The Study

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 1

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 2

 Limitations of The Study

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 3

1.1 But then what do you mean by the term "Commodity"?

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 4

⇒ Different dictionary defines “commodity” as under:

⇒ Definition by Marxian political economy:

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 5

2.2 Evolution of Commodity Markets

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 6

2.3 History of Commodity Futures

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 7

2.4 The Indian Perspective

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 8

2.5 Commodity Markets – Key Characteristics

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 9

⇒ Additional Value Dimensions –

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 10

2.6 Commodity Markets – Participants

Consumer hedging behavior is more complex. Consumer desire to undertake hedges is

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 11

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 12

PRODUCERS PROCESSORS CONSUMERS

COMMODITY TRADERS BANKS / DEALERS INVESTORS

COMMODITY MARKETS PARTICIPANTS

COMMODITY MARKETS – VALUE /

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 13

Myths about commodity exchanges

No physical Physical deliveries Platform for better

How can trading Trading volume is a High open Interest

Exchange Exchange reflects the

3.2 International Commodity Exchange

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 14

Worlds Major Commodity Exchanges:

⇒ London Metal Exchange(LME)

STUDY ON DEVELOPMENT OF COMMODITY MARKETS IN INDIA 15

⇒ The Chicago Board of Trade(CBOT)

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⇒ Tokyo Commodity Exchange (TOCOM)

⇒ Chicago Mercantile Exchange (CME)

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For information on other major International Commodity Derivatives Exchanges,

3.3 Commodity Exchanges in India

Regulatory Structure in India

Regulatory structure in India features a decentralized setup

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Scope of The Study

Findings of The Study

Limitations of The Study