A

Major Research Project Report

On

Submitted to: - Submitted by:-

Prof. Sanjay Diddee 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 3

Acknowledgment 4

Title of Project and Objectives 5

Research Design 7

Company Profile of 9

Competitive Analysis 18

Analysis and Interpretation 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 de-
mutualized, 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
2007
Rs.28,228,674.00
( in lakhs) 2008
Rs.12,066,908.00
(in lakhs)