Study of Commodity Market

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Report

OnStudy of Commodity market

Prepared

By

Amit Kumar yadav

Under the Guidance of

Dr. Mihir Dash

In partial fulfillment of the Course-Industry Internship Programme

(IIP) in Semester II of the Master of Business Administration


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Acknowledgement

Knowledge is an experience gained in life, it is the choicest possession, which

should not be shelved but should be happily shared with others. It is thesupreme art of the teacher to awaken joy in creative expression andknowledge.

The feeling of a task well done is incomplete without giving theacknowledgment where due, so before I proceed further I wish to spend sometime in expressing my gratitude to all those who have been involved in guidingme and helping me out during my report.

First and foremost I would like thank Dr. Madhukar Angur, HonoraryChancellor, Alliance University Bangalore, for granting me the opportunity tobe the part of this renowned institution.

I would like to give special thanks to Mr. Younus Saleem P, Team leader Commodities, Bonanza Portfolio Limited, Bangalore, for his guidance duringthe report. Despite of his demanding schedule, he bestowed every possible

support to us, so as to carry on the report work without any hindrance.

I have a deep sense of gratitude for Dr. Mihir Dash, Associate Professor,Alliance University Bangalore, my faculty guide, who helped me throughoutthe project and gave me ideas and direction to complete my project in asystemic manner.

I would like to thank valuable works of publishers and authors whose workhelped me during the project.


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-:Table of Contents:-

Particulars Page no.

Executive Summary 1

Chapter : 1 Introduction & Industry Analysis

1.1 Introduction 3

1.2 Historical Background 5

1.3 Industry Overview

1.3.1 Market Structure 6

1.3.2 Description of various market 7

1.3.3 Markets Rational 12

1.3.4 Commodity Trading & its Mechanism 14

1.3.5 Regulatory issues 17

1.3.6 Indian Scenario 20

1.3.7 Global Scenario 27

Chapter : 2 Company Overview

2.1 Introduction of the Company 30

2.2 Vision and Mission 32

2.3 Organisational Structure 33

2.4 Global & Indian Operation & Market share 34

2.5 Products & Services 36

2.6 SWOT Analysis 38


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Chapter : 3 Research Methodology

3.1 Objectives of the study 40

3.2 Scope of the study 40

3.3 Research design 41

3.4 Sources of data 41

3.5 Sampling plan 423.6 Limitations of the study 43

Chapter : 4 Observation & Analysis 44 56

Chapter : 5 Findings & Recommendations 5761

Chapter : 6 Conclusion 62

Chapter : 7 Learning outcome 65

Chapter : 8 Annexure 67

Bibliography 77


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EXECUTIVE SUMMARY

Investing is both Arts as well as Science. It is an Art because every individual

has some specific need and expectation based on the resources he/she has, so

how and where to invest the resources or in financial terms funds in order to

maximize the return on investment is not less than an Art. It is Science because,

there are lot of investment options are available, hence before investing in anyof these options, one need to do proper research about that particular option.

Now as far as the investment options are concerned, there are many options are

available in market, for example, one can invest in mutual funds, stock market,

commodities market, term & fixed deposits, derivatives etc. All of these options

posses different rate of return, different risks etc. over the last few years

{especially after global recession of 2008-09}, some of the above mentioned

options like mutual funds, stock markets etc. has witnessed lot of fluctuations

on return on investment, but at the same time some of the options likecommodities has shown a stable and positive performance over the years. For

example, in todays world Gold & silver has been considered as one of the

safest investment, because these options have given a stable and expected return

in last few years, that is one of the reason behind the increasing demand of these

things in the global market. So how these options especially commodities has

maintained the stable performance is the crux of the matter of this report. Apart

from this, the reports also contains the details about the types of commodities,

how trading happens in the commodities market and major exchanges in thecountry as well rest of the world. In addition to this, the report also explains

about the different regulatory aspects regarding commodity trading in both India

as well as rest of the world. Finally at the end, a survey has been done in order

to know basically the awareness level of people regarding commodity markets.


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Chapter-1

Introduction & Industry

overview


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1.1 Introduction:

Commodities are the physical substance, such as food grains, metals, crude oil

etc. which are interchangeable with another product of the same type, and which

investors buy or sell in a market, usually through futures contracts. The price of

the commodities is subject to supply and demand.

Indian markets have recently thrown open a new avenue for retail investors and

traders to participate through commodity derivatives. For those who want todiversify their portfolios beyond shares, bonds and real estate, commodities arethe best option.

Till few months ago, this wouldn't have made sense. For retail investors couldhave done very little to actually invest in commodities such as gold and silver --or oilseeds in the futures market. This was nearly impossible in commoditiesexcept for gold and silver as there was practically no retail avenue for punting incommodities. But after setting up of three multi-commodity exchanges in the

country, retail investors can now trade in commodity futures without havingphysical stocks.

Commodities actually offer immense potential to become a separate asset classfor market-savvy investors, arbitrageurs and speculators. Retail investors, whoclaim to understand the equity markets, may find commodities an unfathomablemarket. But commodities are easy to understand as far as fundamentals ofdemand and supply are concerned. Retail investors should understand the risksand advantages of trading in commodities futures before taking a leap.Historically, pricing in commodities futures has been less volatile compared

with equity and bonds, thus providing an efficient portfolio diversificationoption.

As far as the size of commodity market of India is concerned, of the country'sGDP of Rs 13, 20,730 crores (Rs 13,207.3 billion), commodities related (anddependent) industries constitute about 58 per cent. Currently, the variouscommodities across the country clock an annual turnover of Rs 1, 40,000 crores(Rs 1,400 billion). With the introduction of futures trading, the size of thecommodities market grows many folds here on.
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Like any other market, the one for commodity futures plays a valuable role ininformation pooling and risk sharing. The market mediates between buyers andsellers of commodities, and facilitates decisions related to storage andconsumption of commodities. In the process, they make the underlying marketmore liquid.

Most people have the impression that commodity markets are very complex anddifficult to understand. Actually, they are not. There are several basic facts that

one must know, and once these are understood one should have little difficultyunderstanding the nature of futures markets and how they function. So byconsidering these myths, this report aims at know-how of the commoditiesmarket and how the commodities traded on the exchange. The idea is tounderstand the importance of commodity derivatives and learn about the marketfrom both global as well as Indian point of view.


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1.2 Historical Background:

The modern commodity markets have their roots in the trading of agricultural

products. While wheat and corn, cattle and pigs, were widely traded using

standard instruments in the 19th century in the United States, other basic

foodstuffs such as soybeans were only added quite recently in most markets.

Historically, dating from ancient Sumerian use of sheep or goats, other peoples

using pigs, rare seashells, or other items ascommodity money, people havesought ways to standardize and trade contracts in the delivery of such items, to

render trade itself more smooth and predictable. Commodity money and

Commodity markets in a crude early form are believed to have originated

in Sumer where small baked clay tokens in the shape of sheep or goats were

used in trade. Sealed in clay vessels with a certain number of such tokens, with

that number written on the outside, they represented a promise to deliver that

number. This made them a form ofcommodity money - more than an I.O.U. but

less than a guarantee by a nation-state or bank. However, they were also known

to contain promises of time and date of delivery - this made them like a

modern futures contract. Regardless of the details, it was only possible to verify

the number of tokens inside by shaking the vessel or by breaking it, at which

point the number or terms written on the outside became subject to doubt.

Eventually the tokens disappeared, but the contracts remained on flat tablets.

This represented the first system of commodity accounting.

Classical civilizations built complex global markets trading gold or silver for

spices, cloth, wood and weapons, most of which had standards of quality andtimeliness. Considering the many hazards of climate, piracy, theft and abuse

ofmilitary 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.
http://en.wikipedia.org/wiki/Sumerhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Sumerhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/IOU_(debt)http://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Military_fiathttp://en.wikipedia.org/wiki/Military_fiathttp://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Futures_contracthttp://en.wikipedia.org/wiki/IOU_(debt)http://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Sumerhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Commodity_moneyhttp://en.wikipedia.org/wiki/Sumer


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1.3 Industry overview:

Commodity markets are markets where raw or primary products are

exchanged. These raw commodities are traded on regulated commodities

exchanges, in which they are bought and sold in standardized contracts.

Usually Commodity markets cover physical assets such as precious metals, base

metals, energy {oil, electricity etc.}, food {rice, wheat, pulses etc.}, agricultural

products etc. Most of the trading is done using futures. However, over the last

few years, an OTC market has also been growing, as an increasing number ofmarket participants are trading in exotic options. The purpose of a commodity

exchange is to provide an organized marketplace in which members can freely

buy and sell various commodities in which they have an interest. The exchange

itself does not operate for profit. It merely provides the facilities and ground

rules for its members to trade in commodity futures and for non-members also

to trade by dealing through a member broker and paying a brokerage

commission.

1.3.1 Market structure:

Commodities

Market

Quality

Certification

AgencyWarehouses

Clearing

Bank

Transporte

rs/support

agencies

Hedger

Traders

(Speculators)Consumers

(Retail/Institutional

Producers
http://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodities_exchangehttp://en.wikipedia.org/wiki/Commodities_exchange


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1.3.2 Description of the various Markets:

Commodities markets cover the assets under following categories:

Energy:

Mainly oil and gas like crude oil, jet fuel, gasoline, fuel oil, heating

oil, Natural gas & propane etc

Electricity as well as renewable forms of energies like solar and

wind energy.

Weather: weather is obviously not a tradable asset but we include

them here because, over the last years, many derivative products

whose underlying is weather (temperature, wind, precipitation)

have been forth and traded.

Metals:

Base metals: Aluminum, Copper, Zinc, Nickel, Lead, Tin, Iron &

Steel.

Precious metals: Gold, Silver, Platinum, Palladium & Titanium.

Agricultural:

Grains: Wheat, Rice, Maize, Barley, Soya beans, Sunflower,

Refined Soya oil, Crude Palm oil. Livestock: Live hogs, Cattle and Pork bellies.

Spices: Cardamom, Coriander, Turmeric, Jeera, Pepper.

Foodstuffs: Cocoa, Coffee, Potato, Sugar, Cheddar, Almond.

Forest products: Plywood, Rubber.

Pulse: Chana, Tur, Urad.

Fiber: Cotton {Kapas}.


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Spot Markets:

Spot markets are the organized exchanges where commodity products can be

traded on the daily basis in large amount. In such types of markets, delivery of

the products either takes place immediately, or with a minimum lag between the

trade and delivery due to technical constraints, that is the reason, they are

known as Spot markets. Major examples of Spot markets are as under:

MCX {Multi Commodity Exchange}.

NCDEX {National Commodity & Derivatives Exchange limited}.

National Spot Exchange.

CME {Chicago Mercantile Exchange}.

MCE {Mid America Commodity Exchange} etc.

Future Markets:

Future commodity market is the market, where commodities are contracted for

purchase or sell in standardized contractual agreements. These agreements

(usually known as futures contracts) provide for delivery of a specified amount

of a particular commodity during a specified future month, but involve no

immediate transfer of ownership of the commodity involved. In other words,

one can buy and sell commodities in a futures market regardless of whether or

not one has, or owns, the particular Commodity involved. When one deals in

futures one need not be concerned about having to receive delivery (for the

buyer) or having to make delivery (for the seller) of the actual commodity,

providing of course that one does not buy or sell a future during its delivery

month. One may at any time cancel out a previous sale by an equal offsetting

purchase or a previous purchase by an equal offsetting sale. If done prior to the

delivery month the trades cancel out and thus there is no receipt or delivery of

the commodity. Actually, only a very small percentage, usually less than 2 % of

the total future contracts that are entered into are ever settled through deliveries.

For the most part they are cancelled out prior to the delivery month in the

manner just described.


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Commodity Future Contract:

Futures contracts are an improved variant of forward contracts. They are

agreements to purchase or sell a given quantity of a commodity at a

predetermined price, with settlement expected to take place at a future date.

While forward contracts are mainly over-the-counter and tailor-made which

physical delivery futures settlement standardized contracts whose transactions

are made in formal exchanges through clearing houses and generally closed out

before delivery. The closing out involves buying a different times of two

identical contracts for the purchase and sale o the commodity in question, with

each cancelling the other out. The futures contracts are standardized in terms of

quality and quantity, and place and date of delivery of the commodity. The

commodity futures contracts in India as defined by the FMC has the following

features:

(a) Trading in futures is necessarily organized under the auspices of arecognized association so that such trading is confined to or conducted

through members of the association in accordance with the procedurelaid down in the Rules and Bye-laws of the association.

(b) It is invariably entered into for a standard variety known as the basisvariety with permission to deliver other identified varieties known as

tender able varieties.

(c) The units of price quotation and trading are fixed in these contracts,parties to the contracts not being capable of altering these units.

(d) The seller in a futures market has the choice to decide whether to delivergoods against outstanding sale contracts. In case he decides to delivergoods, he can do so not only at the location of the Association throughwhich trading is organized but also at a number of other pre-specifieddelivery centers.

(e) In futures market actual delivery of goods takes place only in a very fewcases. Transactions are mostly squared up before the due date of thecontract and contracts are settled by payment of differences without anyphysical delivery of goods taking place. The terms and specifications offutures contracts vary depending on the commodity and the exchange inwhich it is traded.


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Participants in the Commodity Future Market:

The participants in the Commodity futures are as under:

Farmers/Producers.

Merchandisers/Traders.

Importers.

Exporters.

Consumers/Industry. Commodity financers.

Agriculture credit providing agencies.

Corporate having price risk exposure in commodities.

Hedging in the Future Commodity Market:

The justification for futures trading is that it provides the means for those whoproduce or deal in cash commodities to hedge, or insure, against unpredictable

price changes. There are many kinds of hedge, let us take an example tounderstand the principle of hedging in future trading.Let us take the case of a firm that is in the business of storing andmerchandising wheat. By early June, just ahead of the new crop harvest, thefirms storage bins will be relatively empty. As the new crop becomes availableIn June, July and August, these bins will again be filled and the wheat willremain in storage throughout the season until it is sold, lot-by-lot, to thoseneeding wheat. During the crop movement when the firms inventory of cashwheat is being replenished, these cash wheat purchases (to the extent that they

are in excess of merchandising sales) will be hedged by selling an equivalentamount of futures short. Then as the cash wheat is sold the hedges will beremoved by covering (with an offsetting purchase) the futures that werepreviously sold short. In this manner the storage firms inventory of cash wheatwill be constantly hedged, avoiding the risk of a possible price decline onethat could more than wipe out the storage and merchandising profits necessaryfor the firm to remain in business. But if the storage firm buys cash wheat at $4a bushel, and hedges this purchase with an equivalent sale of December wheatat $4.05, a 10-cent break in prices between the time the hedge is placed and the

time it is taken off would result in a 10-cent loss on the cash wheat and a 10-


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cent profit on the futures trade. In the event of a 10-cent advance there would bea 10-cent profit on the cash and a 10-cent loss on the futures trade. In any case,the firm would be protected against losses resulting from price fluctuations, dueto offsetting profits and losses, unless of course cash and futures prices shouldfail to advance or decline by the same amount. Usually, however, this pricerelationship is sufficiently close to make hedging a relatively safe and practicalUndertaking. In fact, if the future is selling at a normal carrying chargepremium at the time the future is sold as a hedge, the future should slowly butSteadily decline in relation to the cash as it approaches the delivery month, thus

giving to the storage interest his normal carrying charge profit in his hedgingtransaction. In connection with hedging, it must be remembered that there areunavoidable risks when large stocks of any commodity subject to pricefluctuation must be owned and stored for extended periods. Someone mustassume these risks. Usually those in the business of storing, merchandising andprocessing cash commodities in large volume are not in a position to assumethem. They are in a competitive business dependent upon relatively narrowprofit margins, profit margins that can be wiped out by unpredictable pricechanges. These risks of price fluctuation cannot be eliminated, but they can betransferred to others by means of a futures market hedge.

Speculations and its functions in Commodity market:

The primary function of the commodity trader, or speculator, is to assume therisks that are hedged in the futures market. To a certain extent these hedgesoffset one another, but for the most part speculative traders carry the hedgingload. Although speculation in commodity futures is sometimes referred to asgambling, this is an inaccurate reference. The generally accepted difference

between gambling and speculation is that in gambling new risks are createdwhich in no way contribute to the general economic good, whereas inspeculation there is an assumption of risks that exist and that are a necessarypart of the economy. Commodity trading falls into the latter category.Everyonewho trades in commodities becomes a party to an enforceable, legal contractproviding for delivery of a cash commodity. Whether the commodity is finallydelivered, or whether the futures contract is subsequently cancelled by anoffsetting purchase or sale, is of no real consequence. The futures contract is alegitimate contract tied to an actual commodity, and those who trade in these


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Contracts perform the economic function of establishing a market price for thecommodity. While speculative traders assume the risks that are passed on in theform of hedges, this does not mean that traders have no choice as to the risksthey assume or that all of the risks passed on are bad risks. The commoditytrader has complete freedom of choice and at no time is there any reason toassume a risk that he doesnt think is a good one. Ones skill in selecting good

risks and avoiding poor risks is what determine ones success or failure as acommodity trader.

1.3.3 Markets Rational:

Although the primary reason of being of commodity markets was to haveefficient markets for agricultural and energy goods, where producers andconsumers can transact deals, commodity markets have been growing to offerCommodity - linked trading and speculative instruments. Compared to otherassets like equity stock or bonds, commodities exhibit strong seasonality as wellas high level of volatility (cf. the spike in oil prices in 1973, 1979 or the Gulfwar), making hedging strategies a true challenge for the various market

participants. The arrival of news (especially ones relating to local wars orpolitical crises) can have a very high impact on commodity prices, especiallyoil. In addition, commodities present negative correlation with stocks and bonds(around 15% to 30% over the last ten years, if one looks at the correlationbetween the GSCI and the SP 500 for instance), making them valuablediversification investment instruments to other assets like equity stocks andbonds. With the growing volume of futures contracts, commodity futurescontracts have become a very liquid instrument besides being an easy one totrade.

Standard arbitrage theory provides that the price of futures contracts is equal to:

[Spot Price] + [Cost of Carry] = [Futures Price] ------------ (1.1)

Where the cost of carry is equal to:

[Cost of Carry] = [Interest Rate Cost] - [Reinvestment Costs] like coupon ordividends + [Storage cost] ------------------- (1.2)

Where under [Reinvestment costs] one should understand [coupons] and/or[dividends],


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However, for commodity products, the cash and carry arbitrage is very difficultto put in place and the theoretical price is often an upper bound of the tradedprice. In practice, commodity futures trade often at a substantial discount totheir fair value. This premium is referred to as the convenience yield. From aneconomic point of view, this stems from the fact that the global demand is inexcess of the supplies and that the cash-and-carry arbitrage is not easily putforward, especially in view of storage problems associated with certaincommodities. Put another way, market participants are ready to pay a premiumfor readily available commodities, reflected by the convenience yield. When the

spot trades above futures prices, one then says that the market is inBackwardation while when spot trade below futures prices, the market is inContango. The degree of contango is limited by the fair value of the futuresprices whilst there is no limit to the degree of backwardation. Backwardation isthe most frequent state of the market, although, both states can occur.

Backwardation and contango


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Big players in the commodity markets comprise not only raw materialproducers, who try to hedge their risk, but also

Airlines companies that face the risk of unfavorable jet fuel pricefluctuations.

Utility companies, facing important risk due to the deregulation of theenergy market.

Various hedge funds interested in risk diversification.

Moreover, the deregulation of the energy markets, after year 2000, first in theUS and now in Europe & Asia, has made risk management of commodities amust for utilities, distributors and suppliers.

1.3.4 Commodity Trading & its Mechanism:

Trading in commodity markets is quite similar to equity markets. Thecommodity market also has two constituents i.e. spot market and derivative

market. In case of a spot market, the commodities are bought and sold forimmediate delivery. In case of a commodities derivative market, variousfinancial instruments having commodities as underlying are traded on theexchanges.The buy and sell orders for commodity futures are executed on the trading floorwhere floor brokers congregate during the trading hours stipulated by theexchange. The floor brokers/trading members on receipt of orders from clientsor from their office transmits the same to others on the trading floor by handsignal and by calling out the orders (in an open outcry system they would like toplace and price. After trade is made with another floor broker who takes theopposite side of the transaction for another customer or for his own account, thedetails of transactions are passed on to the clearing house through a transactionslip on the basis o which the clearinghouse verifies the match and adds to itsrecords.Following the experiences of stock exchanges with electronic screen basedtrading commodity exchanges are also moving from outdated open outcrysystem to automated trading system. Many leading commodity exchanges in theworld including Chicago Mercantile Exchange (CME), Chicago Board of Trade(CBOT), International Petroleum Exchange (IPE), London, have already

computerized the trading activities. In India, coffee futures exchange, Bangalore


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has already put in place the screen based trading and many others are in theprocess of computerization. To add to modernization efforts, the BombayCommodity Exchange (BCE) has initiated for a common electronic tradingplatform connecting all commodity exchanges to conduct screen based trading.In electronic trading, trading takes place through a centralized computernetwork system to which all buy and sell orders and their respective prices arekeyed in from various terminals of trading members. The deal takes place whenthe central computer finds matching price quotes for buy and sell. The entireprocedural steps involved in electronic trading beginning from placing the

buy/sell order to the confirmation of the transaction have been given below:

Order and Execution flow in electronic future trade


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Clearing House:

Clearinghouse is the organizational set up adjunct to the futures exchange whichhandles all back-office operations including matching up of each buy and selltransactions, execution, clearing and reporting of all transactions, settlement ofall transactions on maturity by paying the price difference or by arrangingphysical delivery, etc., and assumes all counterparty risk on behalf of buyer andseller. It is important to understand that the futures market is designed toprovide a proxy for the ready (spot) market and thereby acts as a pricing

mechanism and not as part of, or as a substitute for, the ready market.The buyer or seller of futures contracts has two options before the maturity ofthe contract. First, the buyer (seller) may take (give) physical delivery of theCommodity at the delivery point approved by the exchange after the contractmatures. The second option, which distinguishes futures from forward contractsis that, the buyer (seller) can offset the contract by selling (buying) the sameamount of commodity and squaring off his position. For squaring of a position,the buyer (seller) is not obligated to sell (buy) the original contract. Instead, theclearinghouse may substitute any contract of the same specifications in the

process of daily matching. As delivery time approaches, virtually all contractsare settled by offset as those who have bought (long) sell to those who have sold(short). This offsetting reduces the open position in the account of all traders asthey approach the maturity date of the contract. The contracts, if any, whichremain unsettled by offset until maturity date are settled by physical delivery.

In fact the clearinghouse plays a major role in the process explainedabove by intermediating between the buyer and seller. There is no clearinghousein a forward market due to which buyers and sellers face counterparty risk. In afutures exchange all transactions are routed through and guaranteed by theclearinghouse which automatically becomes a counterpart to each transaction. It

assumes the position of counterpart to both sides of the transaction. It sellscontract to the buyer and buys the identical contract from the seller. Therefore,traders obtain a position vis--vis the clearing house. It ensures default risk-freetransactions and provides financial guarantee on the strength of fundscontributed by its members and through collection of margins marking-to-market all outstanding contracts, position limits imposed on traders, fixing thedaily price limits and settlement guarantee fund.


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Margins:

Margins (also called clearing margins) are good -faith deposits kept with aclearinghouse usually in the form of cash. There are two types of margins to bemaintained by the trader with the clearinghouse. These are:

Initial margin.

Maintenance or Variation margin.

Initial margin: Initial margin is a fixed amount per contract and does not varywith the current value of the commodity traded.

Maintenance margin: Maintenance margin is a kind of compensation in order tocompensate the risk borne by the clearinghouse on account of price volatility ofthe commodity underlying the contract to which it is a counterparty.Maintenance margin usually ranges from 60 to 80 percent of Initial margin.A debit in the margin account due to adverse market conditions and consequentchange in the value of contract would lead to initial margin falling below themaintenance level. The clearinghouse restores initial margin through margincalls to the client for collecting variation margin. In case of an increase in value

of the contract, marking to- market ensures that the holder gets the paymentequivalent to the difference between the initial contract value and its changeover the lifetime of the contract on the basis of its daily price movements. If themember is not able to pay the variation margin, he is bound to square off hisposition or else the clearinghouse will be liquidating the position.

1.3.5 Regulatory issues in Commodity market:

Government policies:

The government policies play a major role in the growth of commoditiesmarkets. Following are the issues related to government policies, which affectsthe commodity future markets:

First issue is taxes. Different tax treatment of speculative gains and lossesdiscourage many speculators from participating in official futuresexchanges, thereby affecting the liquidity of the markets. Hedgers areaffected as well: the necessary link between futures and physical markettransactions is too rigidly defined. Tax issues need to be clarified so that

futures losses can be offset against profits on the underlying physicaltrade and vice versa.


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Second problem is stamp duty. Stamp duties on trade in commodityfutures exchanges should be nil, except when physical delivery is made.Now, stamp duty can be arbitrarily imposed by the state in which thefutures exchange is located. Clarification from the Indian states in whichthere are exchanges that there will be no arbitrary position on stamp dutyis recommended.

Third, many institutions (particularly financial institutions but also, in aless direct manner, cooperatives) are not permitted to engage in

commodity futures trade. The rules which prevent such engagement needto be modified.

Finally, the role of government entities directly involved in commoditytrade should be reconsidered. The direct purchasing practices of theseentities now damage the potential of commodity exchanges. If a federalor state government wishes to continue direct interventions in commoditymarkets, 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, doesnot destroy market mechanisms.

Regulatory perspectives:

In order to regulate the market, the regulating authorities like FMC in India,CFTC in US, needs a new focus, a stronger role, and an improved day-to-dayoversight of exchanges. So for this, the regulating authorities must consider thefollowing measures:

The first issue is that the perspective of regulators should move awayfrom a concern about preventing volatility towards protecting marketintegrity. The regulators must set the regulatory template under whicheach of the exchanges is permitted to operate and is expected to run itsbusiness. The regulators therefore must satisfy themselves that theexchange business is being conducted in a proper manner. They are likelyto set guidelines for exchanges and will need to satisfy themselves at alltimes that exchanges are conducting their businesses in line with thoseguidelines.


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Second, the authorities should change the portfolio of contracts that aretraded. It should abolish NTSD {Non-Transferable Specific DeliveryContracts} and TSD {Transferable Specific Delivery Contracts}contracts, and have only tradable futures contracts. The authorities shouldalso allow exchanges to introduce option contracts. Knowledge has nowsufficiently spread, and technology sufficiently improved, to make thispossible.

Third, with respect to combating manipulation, the regulators thereforeneed to be able to evaluate (proposed) contract specifications, and push

for a change if these specifications are not sound, or have becomeinappropriate (e.g., in case the physical market for a well-establishedcontract changes). Apart from this, Exchange management should form afirst line of defence (and be punished if they do not do their job properly),but regulators should keep continuous track of market developments too.

And finally with the changing environment of industry, it is quiteimportant for regulators to check the brokerage system within theirterritory. So in this way, first of all the entry of international broking

houses, either in joint ventures with domestic brokers or independently,should be stimulated. There should be a transition period (not exceedingOne year), where each exchange sets initial standards for their brokers.Brokers (after the transition period) should meet the followingrequirements:

Mandated capital adequacy:The regulators should seek tominimize any risk to investors and threat to the stability of themarket from the failure of an institution because it becomes

unable to meet its liabilities. Currently, a broker's membershipat the exchange is solely dependent upon fulfilling thefinancial requirements (in form of upfront payment or equityparticipation, membership, admission fees etc.) levied by thedifferent exchanges. There is a need for mandated capitaladequacy for brokers together with measures to monitor thatthe capital is, in fact, maintained.

Licensing: In most of the countries around the globe includingIndia, there is no requirement of any form of licensing. Abroker can start trading once he fulfills the exchange


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requirements. There is no educational requirement. It isadvisable that anyone dealing in futures for clients isregistered. To be registered, one would need to:

- be a member/employee of an exchange

- pass a character assessmente.g., no conviction of fraud.

Customer agreements: Before an exchange member canoperate on behalf of a customer a client agreement should be in

place. The exchange or the regulator may wish to define theminimum acceptable content of such an agreement.

1.3.6 Commodity market: Indian Scenario

Organized futures market evolved in India by the setting up of "Bombay CottonTrade Association Ltd." in 1875. In 1893, following widespread discontentamongst leading cotton mill owners and merchants over the functioning of theBombay Cotton Trade Association, a separate association by the name

"Bombay Cotton Exchange Ltd." was constituted. Futures trading in oil seedswere organized in India for the first time with the setting up of Gujarat VyapariMandali in 1900, which carried on futures trading in groundnut, castor seed andcotton. Before the Second World War broke out in 1939 several futures marketsin oilseeds were functioning in Gujarat and Punjab. After independence, athree-pronged approach has been adopted to revive and revitalize the market.Firstly, on policy front many legal and administrative hurdles in the functioningof the market have been removed. Forward trading was permitted in cotton and

jute goods in 1998, followed by some oilseeds and their derivatives, such as

groundnut, mustard seed, sesame, cottonseed etc. in 1999. A statement in thefirst ever National Agriculture Policy, issued in July, 2000 by the governmentthat futures trading will be encouraged in increasing number of agriculturalcommodities was indicative of welcome change in the government policytowards forward trading. Secondly, strengthening of infrastructure andinstitutional capabilities of the regulator and the existing exchanges receivedpriority. Thirdly, as the existing exchanges are slow to adopt reforms due tolegacy or lack of resources, new promoters with resources and professionalapproach were being attracted with a clear mandate to set up dematerialized,

technology driven exchanges with nationwide reach and adopting bestinternational practices.


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But the turning point came in 2003, when the government issued notificationsfor withdrawing all prohibitions and opening up forward trading in all thecommodities. This period also witnessed other reforms, such as, amendments tothe Essential Commodities Act, Securities (Contract) Rules, which havereduced bottlenecks in the development and growth of commodity markets. Ofthe country's total GDP, commodities related (and dependent) industriesconstitute about roughly 50-60 %, which itself cannot be ignored.Most of the existing Indian commodity exchanges are single commodityplatforms; are regional in nature, run mainly by entities which trade on them

resulting in substantial conflict of interests, opaque in their functioning and havenot used technology to scale up their operations and reach to bring down theircosts. But with the strong emergence of: National Multi-commodity ExchangeLtd., Ahmadabad (NMCE), Multi Commodity Exchange Ltd., Mumbai (MCX),National Commodities and Derivatives Exchange, Mumbai (NCDEX), andNational Board of Trade, Indore (NBOT), all these shortcomings will beaddressed rapidly. These exchanges are expected to be role model to otherexchanges and are likely to compete for trade not only among themselves butalso with the existing exchanges.

Structure of market:

Source: Sebi Bulletin

Ministry of Consumer Affairs

FMC

Commodity Exchanges

National Exchanges Regional Exchanges

MCX NCDEX NMCE NBOT 20 Other RegionalExchan es


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Leading Commodity Market of India:

The government has now allowed national commodity exchanges, similar to theBSE & NSE, to come up and let them deal in commodity derivatives in anelectronic trading environment. So far there are 25 commodity derivativeexchange are available and dealing with around 100 commodities for trade.These exchanges are expected to offer a nation-wide anonymous, order driven;screen based trading system for trading. The Forward Markets Commission(FMC) will regulate these exchanges. Some of the leading commodityexchanges across the country with their recent turnover are given as under:

Multi Commodity Exchange {MCX}:Multi Commodity Exchange of India Ltd (MCX) is a state-of-the-artelectronic commodity futures exchange. It is headquartered in Mumbai.The demutualised Exchange set up by Financial Technologies (India) Ltd(FTIL) has permanent recognition from the Government of India tofacilitate online trading, and clearing and settlement operations for

commodity futures across the country.Having started operations in

November 2003, today, MCX holds a market share of over 80% of theIndian commodity futures market, and has more than 2100 registeredmembers operating through over 1, 80,000 trading terminals, acrossIndia. MCX offers more than 40 commodities across various segmentssuch as bullion, ferrous and non-ferrous metals, energy, weather and anumber of agri commodities on its platform. The Exchange is theworld's largest exchange in Silver, the second largest in Gold, Copper andNatural Gas and the third largest in Crude Oil futures, with respect to thenumber of futures contracts traded. MCX has been certified to three ISOstandards including ISO 9001:2008 Quality Management Systemstandard, ISO 14001:2004 Environmental Management System standardand ISO 27001:2005 Information Security Management Systemstandard. Promoted by FTIL, MCX enjoys the confidence of blue chips inthe Indian and international financial sectors. MCX's broad-basedstrategic equity partners include State Bank of India and its associates,NABARD, NSE, SBI Life Insurance Co Ltd, Bank of India (BOI), Bankof Baroda (BOB), Union Bank of India, Corporation Bank, Canara Bank,HDFC Bank, Fid Fund (Mauritius) Ltd. an affiliate of FidelityInternational, Merrill Lynch, Euronext N.V. and others.


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Average turnover:

Volume {In lakh tonnes} Value {in Rs lakh}

6149.034 6393302.17Source: Ministry of Consumer affairs, Food and public distribution, Govt. Of India

Note: The above mentioned figures are for financial year 2009-10.

National Commodity & Derivative Exchange Ltd. {NCDEX}:National Commodity & Derivatives Exchange Limited (NCDEX) is aprofessionally managed on-line multi commodity exchange. Like MCX,it is also headquartered in Mumbai & offers facilities to its members fromthe centers located throughout India. NCDEX is the only commodityexchange in the country promoted by national level institutions. Thisunique parentage enables it to offer a bouquet of benefits, which arecurrently in short supply in the commodity markets. The institutionalpromoters and shareholders of NCDEX are prominent players in theirrespective fields and bring with them institutional building experience,

trust, nationwide reach, technology and risk management skills. It becamea public limited company on April 23, 2003 under the companies act,1956 and started its operation since December 15. 2003.The Exchange, as on May 21, 2009 when Wheat Contracts were re-launched on the Exchange platform, offered contracts in 59 commodities- comprising 39 agricultural commodities, 5 base metals, 6 preciousmetals, 4 energy, 3 polymers, 1 ferrous metal, and CER. The top 5commodities, in terms of volume traded at the Exchange, wereRape/Mustard Seed, Gaur Seed, Soya bean Seeds, Turmeric and Jeera.

Key promoters:Promoter shareholders: ICICI Bank Limited (ICICI)*, Life InsuranceCorporation of India (LIC), National Bank for Agriculture and RuralDevelopment (NABARD) and National Stock Exchange of IndiaLimited.(NSE).Other shareholders: Canara Bank, Punjab National Bank (PNB),CRISIL Limited, Indian Farmers Fertiliser Cooperative Limited (IFFCO),Goldman Sachs, Intercontinental Exchange (ICE), Shree Renuka Sugars

Limited and Jaypee Capital Services Limited.


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Average turnover:

Volume {In lakh tonnes} Value {In Rs. Crore}


Note: The above mentioned figures are for financial year 2009-10

National Multi Commodity Exchange {NMCE}.National Multi Commodity Exchange of India Ltd. (NMCE) waspromoted by commodity-relevant public institutions, viz., CentralWarehousing Corporation (CWC), National Agricultural CooperativeMarketing Federation of India (NAFED), Gujarat Agro-IndustriesCorporation Limited (GAICL), Gujarat State Agricultural MarketingBoard (GSAMB), National Institute of Agricultural Marketing (NIAM),and Neptune Overseas Limited (NOL). NMCE has many unique features,like it is a zero-debt company; following widely accepted prudentaccounting and auditing practices. It is the only Commodity Exchange inthe world to have received ISO 9001:2000 certification from BritishStandard Institutions (BSI).NMCE commenced futures trading in 24 commodities on 26thNovember, 2002 on a national scale and the basket of commodities hasgrown substantially since then to include cash crops, food grains,plantations, spices, oil seeds, metals & bullion among others. It was thefirst Exchange to complete the contractual groundwork fordematerialization of the warehouse receipts.

Average turnover:

Volume {In lakh tonnes} Value {In Rs. Crore}

495.91 227901.48Source:Ministry of Consumer affairs, Food and public distribution, Govt. Of India

Note:The above figures are for financial year 2009-10.


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Indian Commodity Exchange {ICEX}:Indian Commodity Exchange Limited is a screen based on-linederivatives exchange for commodities and has established a reliable, timetested, and a transparent trading platform. It is also in the process ofputting in place robust assaying and warehousing facilities in order tofacilitate deliveries. It has Reliance Exchangenext Ltd. as anchor investorand has MMTC Ltd., Indiabulls Financial Services Ltd., Indian PotashLtd., KRIBHCO and IDFC among others, as its partners. The exchange isheadquartered at Gurgaon.

Average turnover:

Volume {In lakh tonnes} Value {In Rs crores}


Note: The above mentioned figures are for financial year 2009-10.

Problems of Indian Commodity Market:Even though the commodity derivatives market has made good progress in thelast few years, but still there are lot issues, which are yet to be resolved. Someof them are discussed below:

Cash Vs Physical settlement: this is one of the major problem ofcommodity market in India. It is probably due to the inefficiencies in thepresent warehousing system that only about 1% to 5% of the totalcommodity derivatives trades in the country are settled in physicaldelivery. Therefore the warehousing problem obviously has to be handled

on a war footing, as a good delivery system is the backbone of anycommodity trade. A particularly difficult problem in cash settlement ofcommodity derivative contracts is that at present, under the ForwardContracts (Regulation) Act 1952, cash settlement of outstanding contractsat maturity is not allowed. In other words, all outstanding contracts atmaturity should be settled in physical delivery. To avoid this, participantssquare off their positions before maturity. So, in practice, most contractsare settled in cash but before maturity. There is a need to modify the lawto bring it closer to the widespread practice and save the participants from

unnecessary hassles.


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Lack of economy of scale: There are too many (3 national level and 25regional) commodity exchanges. Though over 80 commodities areallowed for derivatives trading, in practice derivatives are popular foronly a few commodities. Again, most of the trade takes place only on afew exchanges. All this splits volumes and makes some exchangesunviable. This problem can possibly be addressed by consolidating someexchanges. Also, the question of convergence of securities andcommodities derivatives markets has been debated for a long time now.The Government of India has announced its intention to integrate the two

markets. It is felt that convergence of these derivative markets wouldbring in economies of scale and scope without having to duplicate theefforts, thereby giving a boost to the growth of commodity derivativesmarket. It would also help in resolving some of the issues concerningregulation of the derivative markets. However, this would necessitatecomplete coordination among various regulating authorities such asReserve Bank of India, Forward Markets commission, the Securities andExchange Board of India, and the Department of Company affairs etc.

Tax and legal bottlenecks: There are at present restrictions on themovement of certain goods from one state to another. These need to beremoved so that a truly national market could develop for commoditiesand derivatives. Also, regulatory changes are required to bring aboutuniformity in octroi and sales taxes etc. VAT has been introduced in thecountry in 2005, but has not yet been uniformly implemented by allstates.

The Regulator: As the market activity pick-up and the volumes rise, themarket will definitely need a strong and independent regular; similar tothe Securities and Exchange Board of India (SEBI) that regulates thesecurities markets. Unlike SEBI which is an independent body, theForwards Markets Commission (FMC) is under the Department ofConsumer Affairs (Ministry of Consumer Affairs, Food and PublicDistribution) and depends on it for funds. It is imperative that theGovernment should grant more powers to the FMC to ensure an orderlydevelopment of the commodity markets.


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1.3.7 Commodity Market: Global Scenario

Most commodity prices reached historical highs in mid-2008, giving rise to thelongest and broadest commodity boom of the post-WWII period. Apart fromstrong and sustained economic growth, the boom was fuelled by numerousfactors including years of low prices and low investment; a weak dollar; andinvestment fund activity. Rapid economic growth caused global stocks of manycommodities to fall to levels not seen since the early 1970s, in turn acceleratingthe price increases that peaked in 2008. Further exacerbating the demand and

supply mismatch were the diversion of some food commodities to theproduction of bio-fuels, adverse weather conditions, and government policiessuch as export bans and prohibitive taxes.The financial crisis that erupted in September 2008 and the subsequent globaleconomic downturn relieved most of the demand-side pressures and inducedsharp price declines across most commodity sectors. The largest declinesoccurred in industrial commodities such as metals (which had also registeredthe greatest gains in the early 2000s).

Commodity prices {nominal, 2000 = 100}


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Between July 2008 and February 2009, prices of energy declined by two-thirdswhile those of metals dropped by more than half. Prices of agricultural goodsretreated by more than 30 percent, with prices of edible oils dropping by 42percent. The troughs in energy and non-energy indices broadly coincided withtroughs in global economic activity (particularly in China and East Asia). Pricesof energy and metals commodities began to recover in March 2009, in partresponding to recovery in industrial production and other factors includingstrong import demand from China, large-scale production restraint in theextractive commodities, tight scrap markets, and strike-related disruptions in the

case of metals. Prices of some agricultural commodities also started to reboundin 2009:Q2, in response to demand increases and, in some cases (for example,sugar and rice), the effects of adverse weather. Dollar price increases alsoreflected the depreciation of the dollar against major currencies. Yet, expressedin trade-weighted local currency indices, prices raised my much less.

Global Commodity Exchanges:

Chicago Board of Trade:Chicago Board of Trade was established in 1948 and has trading in agriculturalproduce, interests, Dow, metals and US treasuries. Soya complex, wheat andcorn prices across the world are referenced here. It has both electronic as well asopen cry. It trades both in futures as well as options. In 2005 it became a publictraded NYSE listed company.

New York Board of Trade (NYBOT):New York Board of Trade (NYBOT) is the world's largest commodities

exchange for Coffee, Sugar, Cotton and Frozen Concentrated Orange Juice. Theexchange was founded as the New York Cotton Exchange in 1870. NYBOTalso facilitates trades in foreign currencies and derivative indices for equities.

Kansas Board of Trade:

Kansas Board of Trade in US specializes in hard red winter wheat. Hard winterwheat constitutes the maximum of US production. This exchange is benchmarkfor bread wheat prices.


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Winnipeg Commodity Exchange:Winnipeg Commodity Exchange is located in Manitoba and trades only infutures and options of canola, wheat and barley.

alian Commodity Exchange:Dalian Commodity Exchange in China trades in corn and soybean. Theexchange is planning to introduce futures and options in crude oil, power, steeland plastic.

Bursa Malaysia Derivatives exchange:Bursa Malaysia Derivatives exchange trades in crude palm oil futures, crudepalm kernel oil futures, Index futures and options and government securities.

Singapore Commodity Exchange (SICOM):Singapore Commodity Exchange (SICOM) specializes in rubber and Robustacoffee.

Chicago Mercantile Exchange (CME):Chicago Mercantile Exchange (CME) is the largest futures exchange in US. The

exchange trades on interest rates, equities, foreign exchange and agriculturalcommodities. It has both open cry as well as electronic trading. Agriculturalcommodities traded on the exchange include dairy products (butter, milkcheese) and live stock futures (cattle and pork).

London Metal Exchange:London Metal Exchange trades in Metals and non ferrous metals like aluminum,copper, lead, nickel, tin and zinc. Consumers as well as producers of metals usethe official prices of LME for their long term contracts pricing. There are over400 LME approved warehouse in some 32 locations covering USA, Europe, themiddle & the Far East. (At the moment there is none in India) has both openoutcries as well as electronic.

New York Mercantile Exchange (NYMEX):New York Mercantile Exchange in its current form was created in 1994 by themerger of the former New York Mercantile Exchange and the CommodityExchange of New York (COMEX). Together they represent one of worldslargest exchanges for precious metals and energy.


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Tokyo Commodity Exchange (TOCOM):Tokyo Commodity Exchange (TOCOM) is the largest exchange in Japan andsecond largest commodity exchange in the world for futures and options. Crudeoil, gasoline, kerosene, gas oil, gold, silver, aluminum, platinum and rubber arethe commodities that are actively traded.

Shanghai Futures Exchange:Shanghai Futures Exchange is one of biggest exchange for copper pricedetermination. It also deals in aluminum, fuel oil, rubber, etc.

Sydney Futures Exchange:Sydney Futures Exchange deals in interest rates, equities, currencies andcommodities. Wool and cattle futures are its specialty.

London International Financial Futures and Options Exchange (LIFFE):London International Financial Futures and Options Exchange (LIFFE) alsoknow as Euro next. Among actively commodities trades are cocoa, robustacoffee, corn, potato, rapeseed, sugar and wheat. Robusta coffee prices aredetermined through this exchange.

Multi Commodity Exchange of India Limited (MCX):Multi Commodity Exchange of India Limited (MCX). Formed in Nov 10,2003.The exchange has developed its reputation for trading in bullion, crude oiland mentha oil.

ubai Gold & Commodity Exchange (DGCX):Dubai Gold & Commodity Exchange (DGCX) was formed in Dubai. It isdeveloped jointly by Dubai government as well as MCX and FTIL. At themoment it is trading in Gold but plans to trade in others also. Dubai has an

advantage of its location of serving all time zones.

ubai Mercantile Exchange (DME):Dubai Mercantile Exchange (DME) is a joint venture between Dubai holdingand the New York Mercantile Exchange (NYMEX). It is still to be launchedand is likely to be an active exchange for oil futures as it is in the centre of oilproducing nations.


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Chapter-2

Company overview


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2.1 Introduction of the Company:Bonanza Portfolio Limited is one of the leading brokerage firm in India.

Established in the year 1994, Bonanza developed into one of the largestfinancial services and broking house in India within a short span of time. Today,Bonanza is the fastest growing financial service with 5 mega group companiesunder it. With diligent effort, acknowledged industry leadership and experience,Bonanza has spread its trustworthy tentacles all over the country with pan-Indiapresence across more than 1611 outlets spread across 550 cities.With a smorgasbord of services across all verticals in finance, Bonanzas offersthe perfect blend of financial services right from Equity Broking, AdvisoryServices that cover Portfolio Management Services, Mutual Fund Investments,and Insurance to exceptional Depository Services. The company is affiliatedwith the best in the industry right from the NSE, BSE MCX, MCX - SX toCDSL, NSDL, etc. These affiliations prove the worth in the market and makeBonanza a name to reckon with.Bonanza believes in being technologically advanced so that it can offer anintegrated and innovative platform to trade online as well as offline to its tech-savvy customers. Besides, the company has one of the finest and most dedicated

research teams with experts who have in-depth, unsurpassed knowledge of themarket place. All this and more makes Bonanza the perfect place for the peopleto take their first step in the direction of financial success.

2.2 Mission & Vision:

Vision:

To be one of the most trusted and globally reputed financial distributioncompany.

Mission:

To be a Customer-centric organization.

To generate clients wealth through professional advice, backed by

thorough research and in-depth analysis.


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2.3 Organizational Structure:

B

Board of Directors:

Mr. S. P. Goel.

Mr. Shiv Kumar Goel.

Mr. S. K. Goel.

Mr. Vishnu Kumar Agarwal.

Mr. Anand Prakash Goel.

Bonanza

Bonanza

Portfolio

Limited

Bonanza

Commodity

Brokers

Pvt. Limited

Bonanza

Insurance

Brokers

Pvt. Limited

Bonanza

Fin invest

Pvt. Limited

Stock Broking &

Retail Wealth

Management

Commodity

Broking

Insurance

Broking

Venture Capital

&

Investment

Banking


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Affiliations:

Equity:

National Stock Exchange of India Ltd. (NSEIL). The Bombay Stock Exchange Ltd. (BSE). OTC Exchange of India Ltd (OTCEIL).

Commodities: Multi Commodity Exchange (MCX).

National Commodity & Derivative Exchange Ltd. (NCDEX). National Multi Commodity Exchange (NMCE). Dubai Gold Commodities Exchange (DGCX).

Currency: National Stock Exchange of India Ltd. (NSEIL). The Bombay Stock Exchange Ltd. (BSE). MCX-SX Ltd. United Stock Exchange.

Depository participant with CDSL and NSDL.

2.4 Global & Indian Operations and Market share:

As far as the operations and presence of Bonanza is concerned, it is the 4rthlargest brokerage firm in the country. The company has more than 1632 outletsspread across 535 cities in the country.

Corporate Office:Bonanza HousePlot No. M-2, Cama Industrial Estate, Walbhat Road,Behind the Hub, Goregaon {E}, Mumbai400063.

Registered Office:4353/4-C, Madan Mohan Street,Ansari Road, Daryaganj, New Delhi110002.


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The state wise presence of the company is given as under:

Name of the state City

Andhra PradeshHyderabad, Anantpur,

Kurnool, Tirupati,Visakhapatnam

Bihar Patna, ArahChhattisgarh Bhilai

Delhi Delhi

GujratAhmadabad, Rajkot, Nadiad,

Surat, Anand, Baroda, Gandhi nagar,Jamnagar, Junagadh,

Haryana PanchkulaHimachal Pradesh SirmourJammu & Kashmir Srinagar, Jammu

Jharkhand RanchiKarnataka Bangalore, Hubli, Mangalore

Kerela

Kochi, Angamalay, Calicut,Kamjirappaly, Kattapana, Kottayam,

Kumily, Muttom, Nedumkandam,Pala, Thodupuzha, Truchur,Moovattupuzha, Tellicherry,

Trivandrum, VadakaraMadhya Pradesh Indore, Bhopal

Maharashtra Mumbai, Nagpur, Pune, Jalna, Thane,Orissa Bhubaneswar,

RajasthanJaipur, Ajmer, Alwar,

Bikaner, Jodhpur, Kota, Sujangarh,Uaipur.

TamilnaduChennai, Tirupur, Coimbatore,

Madurai, Nagarcoil, Pondicherry,Salem, Theni, Thirunelveli, Tuticorin

Uttar Pradesh Lucknow, Gorakhpur, Kanpur,Allahabad, Varanasi,

Uttarakhand Dehradun, Haridwar.

West Bengal Kolkata, Siliguri


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Market Share:

Source: bonanzonline.com

2.5 Product & Services:

Brokerage Services:

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10 H1 FY 11

NSE & BSE

F&O

MCX & NCDEX

Brokera e Services

Equity Derivatives Commodity Currency

Online Offline


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Distribution:

Wealth Management:

De-mat:

Distribution

Insurance Funds Fixed Deposits IPO

Life Non-Life Mutual

Funds

Venture

Capital Funds

Wealth Management

PMS Advisory Structured

Product

Demat

NSDL CDSL


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2.6 SWOT Analysis:

Strengths: Weaknesses:

A diverse product range. Higher brokerage charge asCompare to other companies

in the industry. State-of-the-art technology.

Lesser presence in the easternpart of the country.

A vast network across India.

A young dynamic team.

Opportunities: Threats:

Growing financial services Execution Risk.Industrys share of wallet for

disposable income. Slowdown in global liquidityflows.

Regulatory reforms would aid

greater participation by all class of Increased intensity of competitorsInvestors. from local and global players.

Leveraging technology to enablebest practices and processes. Unfavorable economic condition.

Increased appetite of IndianCorporate for growth capital.


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Chapter-3

Research Methodology


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3.1 Objectives of the study:

To understand the structure and functioning of Commodity market inIndia & rest of the world.

To gain an idea about the peoples preference regarding investment in

commodities over the other financial products like equity, currency etc.

To clearly state the awareness level of people about commodities.

To know about the trading/demat account for trading in different financialmarkets and its benefits.

To study how to build a relationship marketing in Capital market.

To understand the importance of the role of a brokerage firm in variousfinancial market.

3.2 Scope of the study:

Globalization of the financial market has led to a manifold increase ininvestment. New markets have been opened; new instruments have beendeveloped; and new services have been launched. But at the same time, anumber of opportunities and challenges have also been thrown open. Forexample the rapidly advancing technology, particularly the Internet, hasdrastically changed the social and economic landscapes and every aspect of our

daily lives. In the Securities Industry & Futures Commodities, the Internet hasfacilitated on-line trading, changing the way the market works, as well as theway the investors access the market. Having taken advantage of informationtechnology at an opportune time, India has emerged as a front-running countryof on-line trading in the global securities & commodities markets. OnlineCommodities trading is new as compared to Equity market in India. Mainlythree exchanges are involved in online commodities trading MCX, NCDEX &NMCE. Apart from this, after equity, commodity is the market on whichinvestors have shown their faith and invested in commodities like gold, silver,

crude oil etc. in order to get the maximum return on their investment.


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3.3 Research design of the study:The study is based on survey technique. The study consists of analysis aboutcustomers awareness and satisfaction of Bonanza commodities Ltd. For thepurpose of the study 100 customers were picked up at random and their viewssolicited on different parameters. The methodology adopted includes:

Questionnaire.

Random sample survey of customers.

Discussions with the concerned.

Personal interviews and informal discussions were held when I was interactingwith new customers through phone and sometimes personally to ascertain theawareness and existing consumers satisfaction level. Further applying simplestatistical techniques has processed the data collected.

3.4 Sources of Data:

Primary data:

Collected through the structured questionnaire.

Secondary data:

I had made phone calls to the clients from the data base that I was

given by the company in order to get the accurate informationregarding their investment and their preference.

Another method to get the information was a direct approach inwhich I approached the clients and got a direct response fromthem.

Official websites of MCX, NCDEX, Ministry of Consumer Affairs,Food & Public distribution, Published materials of BonanzaPortfolio & finally Newspapers.


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3.5 Sampling plan:

Sampling: Since Bonanza Portfolio Ltd. has many segments I selectedcommodities segment as per my profile to do the survey. 100% coveragewas difficult within the limited period of time. Hence sampling surveymethod was adopted for the purpose of the study.

Population: Universe {Existed as well as Non-existed Clients of

Bonanza Portfolio Ltd.}.

Sample size: A sample size of 100 was chosen for the purpose of thestudy. Sample consists of both small as well as large investors.

Sampling unit: To define sample unit, one must answer the question thatwho is to be surveyed. In this project sampling units are government aswell as private firms employees, small & large businessmen,

shopkeepers etc.

Sampling methods: Since probability sampling requires completeknowledge of all sampling units in the universe which was not possibledue to time constraint, so non-probability sampling was chosen for thestudy.

Sampling procedure: From a large number of client {existed & non-existed of Bonanza Portfolio Ltd.}, sample lot were randomly picked byme.

Field study: Directly approached respondents. The group of respondentsconsists of businessmen, small as well as large shopkeepers, physicalcommodity traders & service class people.


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3.6 Limitations of the study:

The survey was restricted to Bangalore city.

The sample size of the survey was limited to 100 respondents, whichmight not be representing the whole country.

The results are totally derived from the respondents answers. There

might be a difference between the actual and projected results.

Information is partly based on secondary data and hence the authenticityof the study can be visualized and is measurable.


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Chapter 4

Observation & Analysis


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Occupation:

Interpretation & Analysis: From the above chart it is crystal clear that, there

are majority of service class people participated in the survey. They are the key

investors. After that, businessmen and others which mainly consist of small

shopkeepers have participated. And finally professionals comes which

constitutes around 4 percent.

30

23

43

4

Total no. of person = 100

Bussinessman

Prefessionals

Employed {both govt.as well as pvt. Sector}others


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Annual Income:

Interpretation & Analysis: As per the occupations chart, most of the people in

my survey are from service class people & businessman, and majority of them

earn between 2 to 10 lakhs per annum, which shows that there are a majority of

medium class people. As far as the higher income group is concerned, they are

less in number as compare to middle income group. Their less number

indirectly indicates that, they are less interested in investing in various

investment avenues as compare to their middle counterpart.

9

31

38

22

0

5

10

15

20

25

30

35

40

< 2 lakh 2 - 5 lakh 5 - 10 lakh > 10 lakh



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Investment Objective:

Interpretation & Analysis: In my survey, I found that, most of the people wantto invest their money for increasing their current income level, it is also clear

from the above chart, apart from this; another major objective of investment is

to avail the tax benefit, as we have seen in the previous chart, most of the people

in my survey are from service class, so it is obvious that they would try to

maximise the tax benefit. And finally a reasonable number of people want to

secure their future through investment in various options.

39

23

8

30


To enhance the income level

For future wefare

Retirement protection

Tax benefit


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Investment portion of Income:

Interpretation & Analysis: From the above chart it is clear that, people are less

interested in investing the bigger part of their income. Avery few number who

have invested more than rth of their income indicates that, people usually

believe on saving their income rather than investing in several investment

avenues.

47

29

14

10

0

5

10

15

20

25

30

35

40

45

50

< 25 % 25 - 50 % 50 - 75 % >75 %



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Preference to various investment avenues:

Interpretation & Analysis: This was one of the important segment of my

survey. As it is clear from the above chart, bank deposits are still considered as

the one of the safest investment among all financial avenues of investment, but

after the emergence of Indian economy, people are showing their interest

towards other options like shares, debentures, commodities etc. in order to

enhance their portfolio. However it will take some time, but with the time, I am

confident that it will play a key role among all investment avenues.

Bank deposits33%

Shares19%

Commodities14%

Mutual funds13%

Debentures10%

Insurance11%



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Most preferred commodities:

Interpretation & Analysis:

The above graph clearly describes that, commodities of precious metals

category {basically gold & silver} are considered as the most preferred

commodities by respondents. 45 out of 100 people have shown their interest in

trading in gold, silver & other precious metals. Then after, agricultural products

are in demand. From the above chart, it can be inferred that, people usually

trade in bullions and agricultural commodities as compare to the other two

categories, i.e. energy & base metals.

0

5

10

15

20

25

30

35

40

45

PreciousMetals

Energy Base Metals AgriculturalProducts

45

1719

29

Total no. of persons = 100


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Awareness of Commodity market:

Interpretation & Analysis: This was the main part of my survey. From the

above chart one can easily observe that, a large number of people are not aware

about the markets like commodity. If some of them know, then their knowledge

is incomplete. From this information it can be said that, the commodity market

are yet to become a major destination of investment in the country. But I hope

with the time it will become a hot spot market for both large as well small

investors.

Fully aware21%

Partially aware37%

Not aware42%



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Sources of Investment advice:

Interpretation & Analysis: In the survey, I found that, most of the respondent

revealed that, their investment decision depends upon various sources like by

keeping track of market or through Ads/ SMS alerts. Around rth of the

respondents said they take advice from professional consultants, while around

half of them said they take any decision after consulting with their family &

friends.

24 24

25

27

22.5

23

23.5

24

24.5

25

25.5

26

26.5

27

27.5

Friends Family Consultants Others



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Risk taking capacity:

Interpretation & Analysis: Risk is one of the important factor while making

investment in any financial market. In fact the return on investment depends

upon it. Here in my survey, I found that, around more than half of them are

moderate while investing in the markets like Commodities & Equities. More

than rth of them are not willing to take any kind of risk, only 15 % of people,

I surveyed, prefers to take higher risk. Hence in a nutshell, it can be said that

people do not want to take too much risk while investing in the different kind of

financial markets like equities & commodities.

0

10

20

30

40

50

60

Low Medium High

30

55

15



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Re

investment of the income earned by theInvestment Portfolio:

Interpretation & Analysis: This was one of interesting but important part of the

survey. As per the above mentioned chart, it can be infer that, a majority of the

people re-invest their earnings, while around rth of them keeps some part of

their earnings and again around 1/3rd of the people I surveyed prefers to keep

their earnings as income. Such kind of attitude also shows the risk taking nature

of the people while making an investment.

33

28

39


Re - invest at least 75 % of earnings

Re - invest at between 25 to 75 % of earnings

Receive at least 75 % of earnings as income


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Return on Investment:

Interpretation & Analysis: As per the above mentioned graph, most of the

respondents are getting 5-10 % of their investment as return, while another 29

% are getting return between 10-15 % of their investment. Only 21 % are

getting a good return on their investment. One of the probable reason for this

could be the risk taking nature and the unstable movement of market in last few

months, because the respondents have given their responses on the return they

got in the last 3-4 months.

0

5

10

15

20

25

30

35

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

15

35

29

21



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Satisfaction level with the services of BonanzaPortfolio Ltd.:

Interpretation & Analysis: From the above chart it is quite clear that, around

2/3rd of the respondents are satisfied with the services of Bonanza Portfolio Ltd.,

Which is not a bad figure for a brokerage firm. Around rth of the respondents

rated the company as neither satisfied nor unsatisfied, which could be a

considerable issue for the company, while 10 % said that they are not happy

with the services of the company, which is may be due to past inconvenience.

67%

10%

23%


Satisfied unsatisfied Neither satisfied nor unsatisfied


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Chapter - 5

Findings & Recommendations


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Findings:

Commodity derivatives have a crucial role to play in the price riskmanagement process. Especially in any agriculture dominated economy.Derivatives like forwards, futures, options, swaps etc are extensively usedin many developed as well as developing countries in the world.However, they have been utilized in a very limited scale in India.

The most important thing that I have observed is the unawareness offuture commodity trading. Most of the people do not know what even themeaning of commodity is, and if some of them know by the way, theybelieve that operators and big players drive the market.

The depository participants will allow an investor to trade through anybroker of his/her choice registered with the commodity exchange MCX,NCDEX, NMCE.

People have many motives for investing. Some people invest in order toincrease their income level while some wants to gain tax benefit. It is alsofollowed by the savings and safety in return.

Among the investors, investment in banks deposits is the most preferredinvestment option. After this they prefer to invest in equities. Howeverthey have other investment avenues like derivatives and commodity

trading, but they are not interested too much in these options.

Investors can be classified on the basis of their bearing capacity. Investorsin the financial market have different attitudes towards risk and hencevarying levels of risk-bearing capacity. Some investors are risk averse,while some may have an affinity for risk.

The physical delivery centers of commodities are very less in India ascompare to developed countries. In fact it is not evenly distributedthroughout the country.


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Around half of the commodity traded at various exchanges in the country,are from base & precious metals, especially gold & silver.

It was understood during the study that good services provided by thecompany to the clients play an important role while assessing the worthof the company. Not only this but brand name and the research work doneby the broking house also affects the investment decision of the client.


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Recommendations:The company Bonanza Portfolio Ltd. is one of the largest brokerage firm inthe country and performing exceptionally well since its inception in 1994. Thefollowing recommendations may help the company to enhance its functioningand customer base:

The survey that I have done during my project reveals that most of thecustomers are not aware about the commodities market. I found that the

normal tendency of customers was to prefer equity as compared tocommodity. So here my first recommendation to Bonanza Portfolio Ltd.as well as the FMC - the regulatory body of commodity market in India-should take some initiative in order to make commodities market as onethe most preferred destination of investment.

During trading, I found the network problem at many occasions. The

company must take it seriously & improve its infrastructure so that it can,

it can attract customers.

Many brokerage firms maintain a research library in which their clients

can check those companies which are interested in them. Such facilities

are important to an investor, therefore, Bonanza Portfolio Ltd. Should

also go for such service.

As a brokerage firm, the company must keep a watch on the different

strategies adopted by its competitors. This will not only help them to keep

them updated about the new trends but will also help them in order to

retain their customers & to find new one.

In order to sustain in the market and to face cut throat competition, it is

essential for a brokerage firm to update its technology as well as

methodology.

Finally this is the most important recommendation; I would like to give

here to all investors. There are abundant investment opportunities in the


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commodities market. It is for the investor to use the available informationand analyze it to make meaningful as well as fruitful investment decisions

by using numerous tools & techniques available.


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Chapter 6

Conclusion


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Conclusion:

Commodity markets, contrary to the beliefs of many people, have been in

existence in India through the ages and still have to go a long way ahead.

Perceptions of investors towards commodity trading might change quite a lot

with time.

The project reveals that the commodity market works in delivery base and intra-

day base. In addition to this, it also works in future and derivative, in whichinvestors invest money thr

Documents

Study of Commodity Market