A Study On Commodity Market And Product Selling With Religare Commodities

A STUDY ON COMMODITY MARKET AND PRODUCT SELLING WITH RELIGARE COMMODITIES

PREPARED BY- DIBYA SAGAR PRUSTY

RELIGARE ENTERPRISERS LTD. 

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(A Ranbaxy Promoter Group Company) through Religare Securities Limited, Religare Finvest Limited, Religare Commodities Limited and Religare Insurance Advisory Services Limited provide integrated financial solutions to its corporate, retail and wealth management clients. Today, Religare provides various financial services which include Investment Banking, Corporate Finance, Portfolio Management Services, Equity & Commodity Broking, Insurance and Mutual Funds. Today, Religare has a growing network of more than 150 branches and more than 300 business partners spread across more than 180 cities in India and a fully operational international office at London. However, their target is to have 350 branches and 1000 business partners in 300 cities of India and more than 7 International offices by the end of 2011.

GROUP COMPANIES

RELIGARE COMMODITIES LTD. 

Religare Commodities Limited (RCL), a wholly owned subsidiary of Religare Enterprises Limited was initiated to spearhead Exchange based Commodity Trading. As a member of NCDEX, MCX and NMCE, RCL is a trade facilitator providing the platform to trade in commodities. Grounded in the Religare philosophy, highly skilled and dedicated professionals strive to offer the client best investment solutions across the country.

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Religare’s business philosophy is to treat each client situation as unique, requiring customized solutions. Their list of corporate clients reads like a Who’s Who of the Indian Industry and Religare has been successful in providing them with practical customized solutions for their requirements. Religare is propelled by their group vision and desire to strive tirelessly and aim to be the best within this category.

EVOLUTION OF COMMODITIES MARKET 

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Commodities futures trading have evolved from the need for ensuring continuous supply of seasonal agricultural crops in Japan, merchants stored rice in warehouses for future use. In order to raise cash, 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 concept of organized trading in commodities evolved in the middle of 19th century, in Chicago, United States. Chicago had emerged as a major commercial hub with railroad and telegraphs lines connecting it with the rest of the world, thereby attracting wheat producers from MidWest to sell their products to the dealers and distributors. However, lack of organized storage facilities and absence of a uniform weighing/ grading mechanism often confined them to the mercy of dealer’s discretion. This led to inherent need to establish a common meeting place both for framers and dealers to transact in “spot” grain-to deliver wheat and receive cash in return. This happened in 1848.

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In the 1870s and 1880s the New York Coffee, Cotton and Produce Exchanges were born. The largest commodity exchanges in USA are the Chicago Board of Trade, The Chicago Mercantile Exchange, the New York Mercantile Exchange, the New York Commodity Exchange and the New York Coffee, Sugar and Cocoa Exchange. Worldwide there are major futures trading exchanges in over twenty countries including Canada, England, India, France, Singapore, Japan, Australia and New Zealand.

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Over-the-counter:  Traditional dealer market  Electronic broking market  Proprietary trading platform market

SPOT AND FUTURES MARKET 

Commodities can be transacted in both the spot as well as in the futures markets. Although the two markets are separated, they are interrelated nevertheless. The commodities are physically bought or sold on a negotiated basis in the spot market, which is generally considered as the actual physical market for immediate delivery.

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The futures market, however, facilitates buying and selling of standardized contractual agreements (for future delivery) of the underlying asset as the specific commodity and not the physical commodity itself. The formulation of a futures contract is very specific regarding the quality of the commodity, the quantity to be delivered and the date for delivery.

EXCHANGES 

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).

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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.

PRICING COMMODITY FUTURES 

The relationship between cash price and futures price can be explained in terms of cost of carry. Cost of carry is an important element in determining pricing relationship between spot and futures prices as well as between prices of futures contracts of different expiry months. According to the cost of carry model, futures prices depend on the spot price of a commodity and the cost of storing the commodity from the date of spot price to the date of delivery of the futures contract. Cost of storage and insurance and cost of financing constitute cost of carry. Estimated cost of futures price is also called "Full carry futures price". Cost of carry model: The cost of carry model can be defined .as:

  F=S+C (Where F=Futures price S=Spot price C=Cost of carry)

PARTICIPANTS IN COMMODITY DERIVATIVES MARKET Hedgers  Futures contracts have been used as financial offsets to cash market risk for more than a century. Futures to reduce or limit the price risk of the physical asset. Hedging is an insurance used to avoid or reduce price risks associated with any kind of futures transaction.  The degree of effectiveness of a hedge is determined by the percentage of the actual gain or loss incurred in a futures transaction. Though most hedges reduce risks related to price variations, they do not eliminate them altogether.

CONTINUED…. Speculators 

When supplies of a commodity are greater than the present demand or need, prices tend to decline. If supplies appear to fall short of demand, prices trend upward. Estimating market supply and demand conditions are the challenges faced by market participants. It is generally accepted that speculators are interested in making fast money by anticipating future price movements. Commodity futures allow speculators to create high leveraged positions. A speculator accepts the risk that hedgers seek to avoid, giving the market the liquidity required to service hedge participants effectively by providing the market with the necessary bids and offers for a continuous flow of transactions. Speculation is the opposite of hedging. A speculator holds no offsetting cash market position and deliberately incurs price risk in order to benefit from price movements.

CONTINUED… Arbitragers  Arbitragers are interested in making purchases and sales in different markets at the same time to profit from price discrepancy between the two markets. So arbitragers are interested in locking in a minimum profit by simultaneously entering into transactions in two or more markets. An arbitrager knows the minimum profit potential at the time of entering into transactions. In today’s financial markets, most arbitrage opportunities occur either between regions, delivery periods or a combination of these conditions.

REGULATORY FRAMEWORK Forward Contracts Regulation Act, 1952  The Constitution of India brought the subject of STOCK EXCHANGES AND FUTURES MARKET in Union list. As a result, the responsibility for regulation of commodity futures markets devolved on Government of India. The Commodity Exchanges in India are governed and regulated under the Forward Contracts (Regulation) Act, 1952 and Rules framed there under.  It provides for a 3 tier regulatory system, namely: . An association recognized by the Government of India on recommendation of Forward Markets Commission (FMC) . The Forward Markets Commission (it was set up in Sept 1953) and . The Central Government

FINDINGS OF SURVEY

FINDINGS 

Survey defines that 38 of investor deals with the MCX because of Metal Exchange. Where they go for different commodities like Gold, Silver Etc. And 42 deals with the NCDEX due to agri based commodities.

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In this analysis it is noticeable that nearly all the investors have invested in pepper, coffee futures.

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Most investors invest in Chilli and Jeera to spread their risks which they could face in the other commodities such as pepper etc. The investors invest in different commodities based on seasons to spread their risk. Chilli, whose marketing season begins in the first week of March, peaks during the month of April. The main producers of jeera other than India are Syria and Turkey, they harvest their new crop in the months august to September so until then Indian jeera / Cumin seeds finds good market in overseas countries. So these can be some reasons why investors are trading in chilli and jeera.

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Investors of Gold and Silver are mostly gold or silver merchants, who trade with the intentions to protect their underlying stock, from price fluctuations or price failures.

PREFERRED FORM OF TRADING 

There are 3 types of preferred form in which survey has been done:  High

risk high return  Low risk low return  Low risk high return

Investors below the age group of 30 years are more of a risk takers hoping for high return.  The investors prefer low risk but high returns, it can be said that the investors are more savings oriented.  In the age group between 40 years to 50 years that the investors attitude is different from the age group of less than 30 years but similar to the age group between 30 years to 40 years. 

CONTINUED…  84% of the investors did trading through registered

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brokers i.e. the members of the exchange. 9% did trading through agents i.e. the franchisees of the members. 7% did not trade at all. 73% of the respondents felt that the commodity derivatives market in India was average compared to the global derivatives market, this could be due to factors such as, few malpractices, contract period difference between exchanges, delivery lot difference. 78% of the respondents felt that futures’ trading has helped in improving commodities market. Only 6% was of the opinion that it did not improve the commodities market.

CONCLUSION 

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Considering the present growth rate, the total valuation of the Indian Commodity Market is estimated to cross Rs. 10,000 billion by the year 2010. Demand for commodities is likely to become four times by 2010 than what it presently is. The commodity industry requires increasing capital formation, improved availability of agricultural inputs, infrastructure facilities for agricultural business. The existence of commodity futures exchanges will refine and strengthen the database for agricultural sector, which will be helpful in bringing greater reliability to estimates and forecasts, thus, strengthening the process of planning and policy making.

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