Major Research Project

A Major Research Project Report On

Submitted to: Prof. Sanjay Diddee

Submitted by:Lokesh Choudhary PGDM II Roll No. 07 Batch (2007-2009) Date 10/04/2009

ARAVALI INSTITUTE OF MANAGEMENT (An institution of Marwar Education Foundation) Marwar Bhawan, Polo No. 2, Paota, Jodhpur (Raj.)

TABLE OF CONTENTS Executive Summary Acknowledgment

3 4

Title of Project and Objectives

5

Research Design

7

Company Profile of

9

Competitive Analysis Analysis and Interpretation

18 19

Findings

27

Recommendation

28

Bibliography

29

Questionnaire

30

EXECUTIVE SUMMARY MCX, NCDEX and NMCEIL are the three major commodity exchanges. These exchanges provide online commodity trading in India. THE NMCEIL is the oldest online commodity exchange. From my research I found that MCX is dealing in 51 commodity categories where as NCDEX is dealing in 57 commodities categories.. NCDEX is a nation-level, technology driven online commodity exchange with an independent Board of Directors and professional management - both not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency 82% of the turnover came from food and fibre crops in NCDEX . MCX is trading mainly in Zinc and Gold.

ACKNOWLEDGMENT I would like to thank my project guide Prof. Sanjay Diddee for guiding me through my major research project. His encouragement, time and effort are greatly appreciated. I would like to thank Prof. Varun Arya, Prof. M. M. Mehta and Prof. Amit Bhati for supporting me during this project and providing me an opportunity to learn outside the class room. It was a truly wonderful learning experience. I would like to dedicate this project to my parents. Without their help and constant support this project would not have been possible.

Title of the project and objective Topic: - A critical study of Potential Market for Online Trading in India Objective: - To do the comparative study of NCDEX and MCX

RESEARCH DESIGN INTRODUCTION

A Research Design is the framework or plan for a study which is used as a guide in collecting and analyzing the data collected. It is the blue print that is followed in completing the study. The basic objective of research cannot be attained without a proper research design. It specifies the methods and procedures for acquiring the information needed to conduct the research effectively. It is the overall operational pattern of the project that stipulates what information needs to be collected, from which sources and by what methods. RESEARCH METHODOLOGY Qualitative as well as quantitative Primary source: - These include the survey or questionnaire method as well as the personal interview methods of data collection. Secondary sources: - These include books, the internet, the company website, competitor’s websites etc, newspaper articles etc.

Brief description about commodity trading in India The concept of Commodity Trading is not new in India. Commodity Trading was very much existent in earlier times in India. In fact it was one the most vibrant forms of markets till the early 70s. However due to numerous restrictions the Commodity Trading market could not develop further. Recently most of these restrictions have been removed, and therefore this allows for the development and growth of the commodity market in India.The usefulness of Commodity Trading in futures is that it results in transparent and fair price discovery on account of large-scale participations of entities associated with different value chains. It also reflects views and expectations of a wider section of people who may be related to a particular commodity. Commodity Trading in futures also provides an effective platform for price risk management to all the segments of players who participate in the Commodity Trading ranging from producers, traders and processors to exporters/importers and end-users of a commodity. Commodity Trading also provides hedging, trading and arbitrage opportunities to market players. The Forward Markets Commission (FMC) is the regulatory body for Commodity Trading in futures/forward trade in India. The Forward Markets Commission is responsible for regulating and promoting futures trade in commodities. The FMC has its headquarters in Mumbai and the regional office is located in Kolkata. There are some 21 commodity exchanges in India. But most of these commodity exchanges are regional, offline and commodity specific. The government has recently allowed four national level multi-commodity exchanges to trade in all permitted commodities.

Commodity Exchanges A brief description of commodity exchanges are those which trade in particular commodities, neglecting the trade of securities, stock index futures and options etc. In the middle of 19th century in the United States, businessmen began organizing market forums to make the buying and selling of commodities easier. These central marketplaces provided a place for buyers and sellers to meet, set quality

and quantity standards, and establish rules of business. Agricultural commodities were mostely traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products. In 1933, during the Great Depression, the Commodity Exchange, Inc., was established in New York through the merger of four small exchan ges – the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange. The major commodity markets are in the United Kingdom and in the USA. In india there are 25 recognised future exchanges, of which there are three national level multi-commodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are:

Company profile National Commodity & Derivatives Exchange Limited (NCDEX) is a professionally managed on-line multi commodity exchange. The shareholders are:Promoter shareholders: Life Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE) . Other shareholders: Canara Bank, CRISIL Limited (formerly the Credit Rating Information Services of India Limited), Goldman Sachs, Intercontinental Exchange (ICE), Indian Farmers Fertiliser Cooperative Limited (IFFCO) and Punjab National Bank (PNB). NCDEX is the only commodity exchange in the country promoted by national level institutions. This unique parentage enables it to offer a bouquet of benefits, which are currently in short supply in the commodity markets. The institutional promoters and shareholders of NCDEX are prominent players in their respective fields and bring with them

institutional building experience, trust, nationwide reach, technology and risk management skills. NCDEX is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956. It obtained its Certificate for Commencement of Business on May 9, 2003. It commenced its operations on December 15, 2003. NCDEX is a nation-level, technology driven online commodity exchange with an independent Board of Directors and professional management both not having any vested interest in commodity markets. It is committed to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. NCDEX is regulated by Forward Markets Commission. NCDEX is subjected to various laws of the land like the Forward Contracts (Regulation) Act, Companies Act, Stamp Act, Contract Act and various other legislations. NCDEX is located in Mumbai and offers facilities to its members about 550 centres throughout India. The reach will gradually be expanded to more centres. NCDEX

currently

facilitates

trading

of

57

commodities

-

Agriculture Barley, Cashew, Castor Seed, Chana, Chilli, Coffee - Arabica, Coffee Robusta, Crude Palm Oil, Cotton Seed Oilcake, Expeller Mustard Oil, Groundnut (in shell), Groundnut Expeller Oil, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Indian Parboiled Rice, Indian Pusa Basmati Rice, Indian Traditional Basmati Rice, Indian Raw Rice, Indian 28.5 mm Cotton, Indian 31 mm Cotton, Masoor Grain Bold, Medium Staple Cotton, Mentha Oil, Mulberry Green Cocoons, Mulberry Raw Silk, Mustard Seed, Pepper, Potato, Raw Jute, Rapeseed-Mustard Seed Oilcake, RBD Palmolein, Refined Soy Oil, Rubber, Sesame Seeds, Soyabean, Sugar, Yellow Soybean Meal, Tur, Turmeric, Urad, V-797 Kapas, Wheat, Yellow Peas, Yellow Red Maize. Metals Aluminium Ingot, Electrolytic Copper Cathode, Gold, Mild Steel Ingots, Nickel Cathode, Silver, Sponge Iron, Zinc Ingot. Energy Brent Crude Oil, Furnace Oil.

Indian economy is riding high enjoying 8% growth rate; and the industrial and agricultural sectors are doing well. We are also enjoying favourable foreign exchange balances. Even so, the producer or the farmer does not get his due for a host of reasons. One among them is the middlemen and mediators trying to hoodwink the producer about the reasonable price and the producer’s inability to wait for the right price for lack of infrastructural facilities. Though there is a spot market for many commodities to secure immediate price, it always results in the producer settling for a loss. Similarly even if a farmer waits for a future’s contract to get a reasonable price, his ignorance of the market puts him in a disadvantageous position. MCX and NCDEX were formed in answer to these problems faced by the producers and farmers.

Introduction to MCX: MCX: refers to Multi Commodity Exchange which facilitates trading in a variety of commodities in the country. This is an independent commodity exchange operating in India with its base in Mumbai. The MCX was established in the year 2003 with NABARD, NSE, Financial Technologies India Ltd, Corporation Bank, Bank of India, Bank of Baroda, HDFC Bank Ltd, SBI Life Insurance Corporation Ltd, Fid Fund (Mauritius) Ltd etc. as key share holders. MCX reaches out to 500 Indian cities with about 10000 trading terminals. MCX is the only market in India

where multiple commodities are traded. MCX is engaged in future trading in a number of commodities like agricultural commodities, Bullion, Ferrous and Non Ferrous metals, Pulses, Oil and Oil Seeds, Energy, Plantations, Spices and soft commodities. The average daily turnover of MCX is about 1.55 billion US Dollars. MCX captures almost 72% of the market share and thus it occupies No1 position in India in the commodity market. MCX occupies no 1 position in the world in respect of silver, No 2 position in Natural gas and No 3 position in crude oil and gold. The details of commodities dealt in the MCX is given hereunder category wise: Metals like Aluminum, Copper, Lead, Nickel, Sponge iron, Steel Long and Steel flat, Tin, Zinc; Bullion- Gold, silver Fibre -Long, medium and short staple cotton, Cotton yarn etc Energy-Crude oil, Furnace oil, Natural gas etc; Spices- Cardamom, Jeera, Pepper, Red Chilly; Pulses- Chana , Masoor and yellow peas; Plantation- Arecanut, Cashew kernel, Coffee, Rubber; Petro chemicals- HDPE, Polypropylene, PVC; Oil and Oil Seeds- Castor, Coconut, Cotton Seed, Palmoline, ground nut, Mustard, Soya, Sunflower, Sesame and Rice Bran; Cereals-Maize; Others- Mentha oil, Potato, Sugar etc. MCX works in joint venture with National Spot Exchange, a purely agricultural Commodity Exchange for the standardization in agricultural markets. It also works in conjunction with National Bulk Handling Corporation which helps farmers in bulk handling of agricultural commodities. MCX has also set up a management course i.e. ‘Diploma in Commodities Market’ in cooperation with Welingkar Institute of Management to train young managers deal efficiently in the commodities market. Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutulised exchang with a permanent recognition from Government of India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCX facilitates online trading, clearing and settlement operations for commodity futures markets across the country.

MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors’ Association of India, Pulses Importers Association and Shetkari Sanghatana. National Multi-Commodity Exchange of India Limited (NMCEIL) National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualized, Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it was granted approval by the Government to organise trading in the edible oil complex. It has operationalised from November 26, 2002. It is being supported by Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited. It got its recognition in October 2002. Commodity exchange in india plays an important role where the prices of any commodity are not fixed, in an organised way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market.

MCX overtakes NCDEX in turnover MCX has overtaken NCDEX to become India`s largest commodity exchange, reports Economic Times. The turnover on MCX has crossed a record Rs 100 lakh crore. NCDEX, still the country’s premier exchange for food and fibre crops, dropped to second place after the farm futures were gagged by the government with position limits and high margins. Energy, metals and bullion traders put Rs 9.99 lakh crore in the MCX trading ring in six months while punters in cereals, spices, fibre and guar managed to trade in contracts worth just Rs 5.45 lakh crore on the NCDEX. The daily volume at NCDEX has slipped to sub Rs 3,000 crore levels in the last few days from the peak volume of Rs 8,000 crore in March this year. From a monthly turnover of Rs 1.5 lakh crore in May, the volume on NCDEX has

shrunk to Rs 94,125 crore by October. In contrast, the turnover on MCX is now touching Rs 9,000 crore daily on the back of a boom in bullion, energy and metals. Between May-Oct. 2006, a huge 92.6% of MCX`s turnover came from high-value energy, metals and bullion. Farm produce provided the remaining turnover. On NCDEX, 82% of the turnover came from food and fibre crops. Bullion trading accounted for the rest. Interestingly, though both the exchanges are clearly the leaders in different product segments in the Indian commodity market, the mix are constantly changing. For instance, in May, bullion provided 81% of MCX turnover. By October, this had dropped to 69%. Even so, the share of food and fibre crops in NCDEX`s total turnover has increased as the base has shrunk. The share of trading in farm commodities in the total turnover has increased from 79% in May to 85% in October.

MCX India MCX is an independent and de-mutulised multi commodity exchange. It was inaugurated on November 10, 2003 by Mr. Mukesh Ambani, Chairman and Managing Director, Reliance Industries Ltd.; and has permanent recognition from the Government of India for facilitating online trading, clearing and settlement operations for commodities futures market across the country. Today, MCX features amongst the world's top three bullion exchanges and top four energy exchanges. MCX offers a wide spectrum of opportunities to a large cross section of participants including producers/ processors, traders, corporate, regional trading centre, importers, exporters, co-operatives and industry associations amongst others. Headquartered in the financial capital of India, Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodities futures market. Presently, the average daily turnover of MCX is around USD1.55 bn (Rs.7,000 crore - April 2006), with a record peak turnover of USD3.98 bn (Rs.17,987 crore) on April 20, 2006. In the first calendar quarter of 2006, MCX holds more than 55% market share of the total trading volume of all the domestic commodity exchanges. The exchange has also affected large deliveries in domestic commodities, signifying the efficiency of price discovery. Being a nation-wide commodity exchange having state-of-the-art infrastructure, offering multiple

commodities for trading with wide reach and penetration, MCX is well placed to tap the vast potential poised by the commodities market. Online commodity trading Online commodity trading offers a way for an open, many-to-many system, where every user has equal access to price quotes and trading functionality. It provides a level playing field for all, without favoritism or control by a chosen few, where any user can view all quotes posted by other users in real time, act or trade on quotes posted by others, post their own prices and quantities for others to trade The Online commodity trading site usually lists a large number of unique products covering a variety of commodities, structures, and settlement terms ranging from Oil, Natural Gas, Electric Power, Precious Metals, Emissions and Weather. It provides for various media ranging from Physical Delivery and Financial Cash Settlement. There are further derivative options available ranging from Forwards, Swaps, Options, Spreads, Differentials, Complex Derivatives. Liquidity, or trade activity, is perhaps the best measure of success of an online trading commodity trading system. With most online commodity trading systems, traders can be sure of finding an interesting market development or trading opportunity almost every time they log on. All quotes posted by users on any online commodity trading systems are live and firm. They can be acted on with full assurance of a completed transaction. The greatest advantage of an online system for trading is that just a click can be used to hit a bid or lift an offer.The Online trading system operates almost continuously around the clock, 24 hours a day, seven days a week. This allows any user to extend the trading day, and easily pass the trading objectives to others in companies in different times zones. The online commodity trading system in India is only an emerging segment yet. This is because the Internet boom in Indian is on the rise only now. The Internet charges are becoming minimal and the Internet is soon becoming a way of life in India. It is in this scenario that online trading is becoming more the way of trading in India.

The growth in the commodity derivative trading witnessed in 2005-06 continued during 2006-07. Total volume of trade rose sharply from Rs. 1.29 lakh crore in 2003-04 to Rs. 27.39 lakh crore in 2006-07 (till December2006) (Table 4.15). In the first nine months of 2006-07, the volume of trade was already more than Rs. 21.55 lakh crore achieved in the twelve months of 2005-06. Turnover as aproportion of GDP increased from only 4.7 percent in 2003-04 to 18.3 per cent in 2004-05and further to 76.8 per cent in 2005-06. The growth in the volume of trading has been primarily propelled by Multi Commodity Exchange, Mumbai (MCX) and Nationa lCommodity Derivatives Exchange, Mumbai (NCDEX) with these two exchanges also accounting for a large share of the number of contracts traded on the exchanges

Growth of Guarseed in NCDEX

Growth of Guarseed in NCDEX

Rs.11,167,117.00 (in lakhs) 2006

Rs.12,066,908.00 (in lakhs)

Rs.28,228,674.00 ( in lakhs)

2007 2008