Chapter 4

COMMODITY DERIVATIVES MARKET AND

EXCHANGES IN INDIA

4.1 Introduction

Commodity markets have existed for centuries around the world. Cash transactions
were most common but sometimes forward agreements were also made. To cite an
example forward agreements related to the rice markets were there from the
seventeenth century in Japan. However, most scholars agree that forward
agreements dates back much further in time. Forward agreements gradually gave
way to futures contracts when the first organized grain futures trading in US began
in places such as New York and Buffalo. Development of modern futures began in
Chicago in 1840s. The city was a natural hub for trade, but the trading that took
place was inefficient and unorganised until a group of Chicago based businessmen
formed the Board of Trade in Chicago in 1848. As trading of forward contracts
increased, the Board decided that standardising these contracts would streamline the
trading and delivery process. These standardised forward contracts are essentially
the first modern futures contracts. The usefulness of futures trading began apparent
and a number of futures exchanges came up in the country, the first one being
Chicago Mercantile Exchange (CME) in 1919. Led by the innovative thinking of
CME, the futures industry has expanded phenomenally to meet the risk management
needs of our complex society1.

Commodity derivatives made their appearance before financial derivatives in the

world and also in India. Informal trading in commodity derivatives was there even in
ancient India, but the formal market took shape in the late nineteenth century2.

1
Malhotra (2012) pp 1-22.
2
Barua and Mahanta (2012) pp. 45-59.

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4.2 Evolution of the Commodity Derivative Market in India

Commodity derivatives have had a long and chequered presence in India. Forward
trading in commodities existed in India from ancient times as it was mentioned in
Kautilya’s Arthashastra. The commodity derivative market has been functioning in
India since nineteenth century with organised trading in cotton through the
establishment of cotton trade association in 1875. India was one of the first countries
in the world to adopt commodity exchanges, with its earliest exchange dating back
to the “Bombay Cotton Trading Association”.

A separate association by the name “Bombay Cotton Exchange Ltd” was established,
following widespread discontent amongst leading cotton mill owners and merchants
over the functioning of the Bombay Cotton Trade Association. With the setting up of
the “Gujarathi Vyapari Mandal” in 1900, the futures trading in Oilseed began.
Commodities like ground-nut, castor seed, cotton etc. began to be exchanged.

Forward trading in raw jute and jute goods started at Calcutta in 1912. Forward
markets in wheat had been functioning at Hapur in 1913, and in Bullion at Bombay
since 1920. There are a number of exchanges which were established in the
beginning of the twentieth century. Majority of these exchanges conducted futures
trading in several commodities. The Defence of India Act 1943, prohibited the
futures trading in all types of commodities.

Commodity futures markets were in existence for a long time before the legal and
regulatory framework evolved gradually. In the early stage, the markets were
functioned under the rules and procedures laid down by individual trade
associations. There was wide difference in regulations followed by various
associations. This regulated in a variety of malpractices leading to frequent disputes
among traders. After independence, the Indian Constitution (1950) placed the
subject of futures market in the Union List, hence the responsibility of regulating the
market devolved on the Central Government. The Government drafted a Bill,
modelled on the Bombay Act and set up a committee under the Chairmanship of Sri.
Shroff to frame model Rules for Associations.

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The Committee submitted its report in August 1950. The Forward Contracts
(Regulation) Bill, 1950 was revised in the light of the A.D Shroff Committee and
referred to a select committee of Parliament. The Committee submitted its report in
August 1951, but the Bill lapsed with the dissolution of the Parliament in 1952. A new
Bill was drafted and after scrutiny by another Select Committee, the Forward
Contracts (Regulation) Act was passed by Parliament in December 1952. The
Forward Markets Commission (FMC) was established in 1953 to regulate and develop
commodity futures market in India3. The forward Contracts (Regulation) ACT 1952
envisage three-tier regulation.

1. The exchange which organises forward trading in commodities can regulate

trading on a day-to-day basis.

2. The Forward Markets Commission provides regulatory oversight under the

power delegated to it by the Central Government, and

3. The Commission functions under the administrative control of the Ministry of

Consumer Affairs, Food & Public Distribution, Department of Consumer
Affairs, and Government of India4

The Act applied to all contracts whereby the delivery of goods occurs after a period
longer than 11 days. The Act applied to goods, which are defined as any movable
property other than security, currency and actionable claims. The Act prohibited
options trading in goods along with cash settlements of forward trades, rendering a
crushing blow to the commodity derivatives market. Under the Act, only those
associations or exchanges which are granted recognition by the Govt are allowed to
organised forward trading in regulated commodities5.

Futures markets prospered in India during the early 1960s. In the mid 1960s due to
the war and natural calamities, in order to have control on price movement of many
agricultural and essential commodities, futures trading was banned in 1966 in most
commodities except pepper and turmeric. Futures trading in castor seed was
suspended in 1977.

3
Karande (2006)p 2.
4
Narender (2006)
5
Gupta (2011) pp. 4-9.

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On the recommendation of the A M Khusro Committee (1980) futures trading in
some commodities like gur (Muzaffarnagar and Hapur, 1982), potatoes (Hapur,
1985) and Castorseed (Mumbai and Ahmedabad, 1985) was permitted. With
liberalisation of the Indian economy in early 1990s, there was renewed emphasis on
development of commodity futures market in India in 1993. The Government set up
a committee under the Chairmanship of Prof. Kamal Narayan Kabra to examine the
feasibility and role of commodity futures market in India. The committee submitted
its report in September 1994.

The main recommendations of Kabra Committee that have been implemented are
introduction of futures trading for seventeen commodities namely coffee (Bangalore,
1998), cotton (Mumbai 1999), soya oil (Indore 1999), sugar (2001), tea (2002) and
bullion (2003) and introduction of international futures contract for pepper (Cochin
1997) and Castor Oil (Mumbai 1999). Acting on another recommendation of Kabra
Committee to strengthen the FMC, the Government upgraded the post of FMC
Chairman to Additional Secretary. The Government in 1995 set up a separate
Department of Consumer Affairs to focus on Commodities6.

In order to give more thrust on agricultural sector, the National Agricultural Policy
2000 has envisaged external and domestic market reforms and dismantling of all
controls and regulations in agricultural commodity markets. It has also proposed to
enlarge the coverage of futures markets to minimise the wide fluctuations in
commodity price and for hedging the risk arising from price fluctuations. In line
with the proposal many more agricultural commodities are being brought under
futures trading.

The announcements of the Finance Minister in the Budget Speech for 2002-2003
indicated the Government of India’s resolve to put in place a mechanism for futures
trade. The Government of India issued notifications on 1st April 2003 permitting
futures trading in all the commodities. With the issue of these notifications, futures
trading is not prohibited in any commodity. Options trading in commodity is
however, presently prohibited.

6
Karande (2006) p.2.

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The year 2003 marked a watershed year in the history of commodities with the
establishment and recognition of three national exchanges with online trading and
professional management. At present, there is a three tier regulatory system for
commodities futures market namely, the Central Government, Forward Market
Commission and recognized exchanges. Countrywide national exchanges are
multi-commodity electronic exchanges with a demutualised ownership pattern. In
the year 2003, three national commodity exchanges became operational viz, the
National Multi Commodity Exchange of India (NMCE), The National Commodity
and Derivatives Exchange (NCDEX) and the Multi Commodity Exchange (MCX).
The establishment of these exchanges and the introduction of futures contracts on
new commodities by the Forward Market Commission have triggered significant
levels of trade. Now all the commodities futures trading in India is all set to match
the volumes on capital markets. After the re- introduction of futures in India, there
has been a great revival of the commodity futures trading in India, both in terms of
the number of commodities allowed for futures trading as well as the value of
trading. While in year 2000, futures trading were allowed in only eight
commodities, the number jumped to 80 commodities in June 2004. The value of
trading in local currency saw a quantum jump from about INR 350 billion in 2001-
02 to INR 182 trillion in 2012 .In year 2011, futures contracts were available for
over 100 commodities across the country. At present the national and regional
commodity specific exchanges regulate futures trading in 113 commodities
approved by the Forward Markets Commission.

Commodity derivatives have witnessed remarkable growth since 2003,

nevertheless fingers were still being pointed accusing futures trading for rising
inflation in agricultural commodities. Four essential commodities wheat, urad, tur
and rice faced futures trading ban toward the end of 2006-07. An expert committee
was set up under the chairmanship of Prof. Abhijit Sen to examine the extent to
which futures trading had contributed to price rise in agricultural commodities.
The committee was unable to find any causual relationship between price rise and
futures trading in view of the short time period during which the futures market

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have functioned and the complexities that arise because of a large number of
variables that impact spot prices7.

4.3 Commodity Derivatives Market in India: A Time Line

1875- Organized futures market evolved in India by the setting up of “Bombay
Cotton Trade Association Ltd”.

1893- Widespread discontent amongst leading cotton mill owners and merchants
over the functioning of the Bombay Cotton Trade Association led to the
formation of “Bombay Cotton Exchange Ltd”.

1900- Gujarati Vyapari Mandali was set up for futures trading in groundnut,
castor seed.

1913- Chamber of Commerce at Hapur was established for futures trading in

wheat in various locations as Punjab and UP were involved in futures
trading.

1919- Futures trading in raw jute and jute goods began in Calcutta with the
establishment of the Calcutta Hessian Exchange Ltd.

1920- Futures market in bullion began at Mumbai and later similar markets came
up at Rajkot, Jaipur, Jamnagar, Kanpur, Delhi and Calcutta.

1952- Enactment of the Forward Contracts (Regulation) Act (FCRA).

1953- Setting up of the Forward Markets Commission.

1955- Free trade in many commodities were restricted.

1956- Enactment of the SCRA.

1969- Prohibition of all forms of forward trading under section 16 of SCRA.

1972- Informal carry forward trades between two settlement cycles began on
BSE.

1980- Khusro Committee recommends re-introduction of futures in most

commodities.

1983- Government. amends by laws of exchanges of Bombay, Calcutta and

Ahmedabad and introduced carry forward trading in specified shares.

7
Malhotra (2012).

110
1992- Enactment of the SEBI Act.

1993- SEBI prohibits carry forward transactions.

1994- Kabra Committee recommends the reintroduction of futures trading in

seventeen commodities.

1995- G S Pattel Committee recommends Revised Carry Forward System.

1996- Revised system restarted on BSE.

1996- SEBI appoints L.C Gupta Committee to develop regulatory frame work for
derivatives trade.

1997- Varma Committee recommends modified Carry Forward System.

1997- Cross-currency derivatives with Indian rupee as one leg were introduced
with some restrictions in April 1997 credit policy.

1998- Varma Committee recommends risk containment measures for derivatives

trading.

1999- Securities Laws (Amendment)Act, 1999 permits legal framework for

derivatives trading in India.

1999- Forward Rate Agreement and swaps permitted by the RBI.

2000- Implementation of National Agricultural Policy led to dismantling of all

controls and regulations in agricultural commodity markets.

2000- Trading in index futures began on BSE and NSE.

2001- Trading in options on index and stocks commenced trading on BSE and
NSE.

2002- Trading on single stock futures began on BSE and NSE.

2003-(i) Removal of the ban on futures trading. Futures trading is permitted on

almost all commodities but options on commodities still prohibited.

(ii) Three national level multi commodity exchanges NMCE, MCX, and
NCDEX were set up in 2004.

(iii) Introduction of interest rate futures on NSE.

(iv) Introduction of Currency options.

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2007- Govt. of India decided to suspend the futures trading in rued, tar and wheat.

2008- Govt. of India banned futures trading on another four commodities namely
rubber, chana, soy oil, and potato for nine months.

2008- FMC issued guidelines on setting up of new national multi commodity

exchanges.

2009- Recognition to ICEX as 4th national exchange.

2010- Recognition to ACE as 5th national exchange.

2010- Notified “Iron ore” under section 15 of the FCRA 1952.

2012- Recognition to UCX as 6th national exchange.

2013- FMC functions under the administrative control of the Department of

Economic Affairs, Ministry of Finance from September 2013.

2015- FMC merged with SEBI.

4.4 Derivative Exchanges

Futures trading perform two important functions of price discovery and price risk
management with reference to the given commodity. It is useful to all segments of
the economy. It is useful to the producer because he can get an idea of the price
likely to prevail at the future point of time therefore can decide between various
competing commodities, the best that suits him. It enables the consumer in that he
gets an idea of the price at which the commodity would be available at a future point
of time. He can do proper costing and also cover his purchases by making forward
contracts. Futures trading are very useful to the exporters as it provides an advance
indication of the price likely to prevail and thereby help the exporter in quoting a
realistic price and thereby secure export contract in a competitive market. Having
entered into an export contract, it enables him to hedge his risk by operating in
futures market.

Forward or futures trading involves a passage of time between entering into a

contract and its performance making thereby the contracts susceptible to risks
uncertainties etc.

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Hence the need for the regulatory functions to be exercised by the Forward Markets
Commission (FMC), which is the regulator established under the provisions of
forward contract (Regulation Act), 1952.

Forward Markets commission (FMC) head quartered at Mumbai, is a regulatory

authority which is overseen by the Ministry of Finance, Govt. of India. It is a
statutory body set up in 1953 under the forward contracts (Regulation) Act, 1952.

Forward Markets Commission is a regulatory authority for commodity futures

market in India. The functions of the forward market commission are:

1. To advise the central govt. in respect of the recognition or the withdrawal of

recognition from any association or in respect of administration of the
forward contracts (Regulation) Act 1952.

2. To keep forward markets under observation and to take such action in

relation to them, as it may consider necessary, in exercise of the power
assigned to it by or under the Act.

3. To collect and whenever the commission thinks it necessary, to publish

information regarding the trading conditions in respect of goods to which any
of the provisions of the Act is made applicable, including information
regarding supply, demand and prices and to submit to the central
government, periodical reports on the working of forward markets relating to
such goods.

4. To make recommendation generally with a view to improving the

organization and working of forward markets.

5. To undertake the inspection of the account and other documents of any

recognised association or registered association or any member of such
association whenever it considers if necessary.8

8
Annual reports of SEBI.

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4.4.1 Performance of commodity exchanges

Year 2002-03 witnessed a surge in volumes in the commodity futures markets in

India. The 20 plus commodity exchanges clocked a volume of about 14025.74 lakh
tonnes in 2011-12 against the volume of 314.46 lakh tonnes in 2002-03,a
remarkable performance for an industry that is being revived. This performance is
more remarkable because the commodity exchanges as of now are more regional
and are for few commodities namely soyabean complex, castor seed, few other
edible oilseed complex, pepper, jute and gur.

Interestingly, commodities in which futures contracts are successful are commodities

those are not protected through government policies; and trade constituents of these
commodities are not complaining too. This should act as an eye opener to the policy
makers to leave pricing and price risk management to the market forces rather than to
administered mechanisms alone. Any economy grows when the constitutions
willingly accept the risk for better returns; if risks are not compensated with adequate
or more returns, economic activity will come into a standstill.

4.4.2 National level and regional commodity exchanges

Demutualisation has gathered pace around the world and Indian commodity
exchanges are also looking into it. Existing single and regional commodity
exchanges have realised the possible threat that the national level exchange may
pose on their future. Given the experience of the regional stock exchanges in India,
commodity exchanges are becoming proactive to counter such a threat. Commodity
exchanges may not face the threat of extinction because of the following reasons:

(1) Commodity exchanges are trading in futures contracts on those

commodities, which have some regional relevance. It is not going to be as
easy as a share of as company to get listed in a different exchange.
(2) Delivery of commodity is a physical activity, while delivery of shares is an
electronic activity.
(3) Commodity exchange members are stakeholders in those commodities
wherein stock exchange members were never the owners of the stock to
control where the stock should get traded.

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 (4) Importance of commodity exchanges are linked to the stakeholders of that
particular commodity wherein success of a stock exchange is more on
transparency and low transaction cost.

The following is the list of exchanges allowed trading in commodities in India.

Table 4.1 List of exchanges allowed trading in commodities

Sl. No Name of Exchanges

1. Bhatinda Om and Oil Exchange Ltd., Batinda
2 The Bombay Commodity Exchange Ltd. Mumbai
3 The Rajkot Seeds oil and Bullion Merchants’ Association Ltd.
4 The Kanupur Commodity Exchange Ltd., Kanpur
5 The Meerut Agro Commodities Exchange Co. Ltd., Meerut
6 The Spices and Oilseeds Exchange Ltd.
7 Ahmedabad Commodity Exchange Ltd
8 Vijay Beopar Chamber Ltd., Muzaffarnagar
9 India Pepper and Spices Trade Association, Kochi
10 Rajdhani Oils and Oilseeds Exchange Ltd., Delhi
11 National Board of Trade, Indore
12 The Chamber of Commerce, Hapur
13 The East India Cotton Association, Mumbai
14 The Central India Commercial Exchange Ltd, Gwalior
15 The East India Jute and Hessaian Exchange Ltd
16 First Commodity Exchange of India Ltd, Kochi
17 Bikaner Commodity Exchange Ltd, Bilkaner
18 The Coffee Futures Exchange India Ltd, Bangalore
19 Esugarndia Limited
20 Surendranagar Cotton Oil and Oilseeds Association Ltd.
21 Haryana Commodities Ltd, Hissar
22 e-Commodities Ltd.
Source: Wikipedia

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Apart from the 22 regional commodity exchanges there are six major national level
commodities exchanges namely Multi Commodity Exchange of India Ltd. (MCX),
National Commodity and Derivative Exchange Ltd. (NCDEX) National Multi
Commodity Exchange of India Limited (NMCE), Indian Commodity Exchange
(ICEX), Ace Derivatives and Commodity Exchange, and Universal Commodity
Exchange Limited (UCX).9

4.4.3 The Multi Commodity Exchange of India (MCX)

The Multi Commodity Exchange of India Ltd. (MCX) state of the art electronic
commodity futures exchange. Its Head quarter is in Mumbai. The demutualised
exchange is set up by Financial Technologies (India) Ltd (FTIL). It has permanent
recognition from the Government of India to facilitate online trading, and clearing
and settlement operations for commodity futures across the country.

The MCX incorporated in April 2002. The MCX started operations in November
2003. Today, MCX holds a market share of 84.13 percentage of the Indian
commodity futures market, 1731 registered members and 4,75,519 trading
terminals across India.

Its key shareholders are Financial Technologies (India) Ltd, State Bank of India
and its associates, National Bank for Agriculture and Rural Development
(NABARD), National Stock Exchange of India Ltd (NSE), Fid Fund (Mauritius)
Ltd , an affiliate of Fidelity International, Corporation Bank, Union Bank of India,
Canara Bank, Bank of India, Bank of Baroda, HDFC Bank and SBI Life
Insurance Co. Ltd.

MCX offers more than 50 commodities across various segments such as bullion,
metals, energy, agricultural commodities, oil and oil seeds, spices etc. on its
platform. To ease participation, the exchange offers facilities such as calendar -
spread facility, as also Exchange of Futures for Physical (EFP) transactions which
enables participants to swap their positions in the futures or physical markets.

MCX’s ability to use and apply technology efficiently is a key factor in the
development of its business. The exchange’s technology framework is designed to

9
Reports of SEBI

116
provide high availability for all critical components, which guarantees continuous
availability of trading facility. The robust technology infrastructure of the
exchange along with its rapid customisation and development capabilities enables
it to operate efficiently with fast over routing, immediate trade execution, trade
reporting, real-time risk management, market surveillance and market data
dissemination. MCX follows a comprehensive and stringent margining system for
all future contracts traded on the Exchange platform. Actual margining and
position monitoring is done on an on-line basis.

The MCX estimated in 2003, and already the largest futures multi commodity
exchange of India, provides the premier forum for managing the price risk
associated with plantation and spices market MCX’s liquidity price transparency
and financial integrity make it a benchmark market in this part of the world.
Orders are entered through MCX Trader work station terminals. The clearing
house of the MCX ensures and guarantees the settlement of all net settlement
liability between the MCX’s clearing member firms. MCX has daily settlement of
all transactions conducted on the exchange.

Traditionally, taking an offset position fulfills contracts, thereby avoiding giving

or taking delivery. But when open contract run into the delivery period, then
contracts are initiated for a delivery10.

10
Reports of Mcx India.

117
Table 4.2 List of Commodities Permitted at Multi Commodity
Exchange of India Ltd., Mumbai.
Sl. Sl. Commodity NameNon
Commodity Name
No. No. Agricultural commodities
1 Almond 27 Gold Guinea ( 8 g ms)
2. Barley 28 Gold Petal (Mumbai/New Delhi)
3 Cardamom 29 Silver (30 kg)
4 Chana 30 Silver Mini (5 kg)
5 Coriander 31 Silver micro (1 kg)
6 Cotton 32 Copper
7 Cotton seed wash oil 33 Copper Mini
8 Crudem palm oil 34 Nickel
9 Guar seed 35 Nickel Mini
10 Kapas 36 Aluminium
11 KapasiaKhalli 37 Aluminium Mini
12 Maize 38 Lead
13 Melted Menthol flakes 39 Lead Mini
14 Mentha oil 40 Platinum
15 Potato (Agra) 41 Zinc
16 Potato (Tarteshwar) 42 Zinc Mini
17 RBD Palmolein 43 Tin
18 Red Chilly 44 Mild steel ingot/Billets
19 Refined sor oil 45 Iron ore
20 Rubber 46 Imported thermal coal
21 SoyaBean 47 Brent crude oil
22 Sugar m -30 48 ATF
23 Turmeric 49 Healing oil
24 Turmeric wheat 50 Gasoline
25 Gold ( 1 kg) 51 Natural Gas
26 Gold Mini (100 Gms) 52 Crude oil
Source: mcx india

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4.4.4 The National Commodity and Derivatives Exchange Limited (NCDEX)

The National Commodity and Derivative Exchange Ltd. is a professionally managed

online multi commodity exchange promoted by ICICI Bank Ltd., Life Insurance
Corporation (LIC) of India, National Bank for Agriculture and Rural Development
(NABARD) and National Stock Exchange (NSE) of India Ltd. The Punjab National
Bank, (PNB), CRISIL India Limited, Indian Farmers Fertilizer Corperative (IFFCO)
Limited and Canara Bank have joined the initial promoters as share holders of the
exchange by subscribing to the equity shares. Presently the consortium of shareholders
are:

i. Jaypee Capital

ii. Renuka Sugars

iii. Life Insurance Corporation of India (LIC)

iv. National Bank for Agriculture and Rural Development (NABARD)

v. National Stock Exchange of India (NSE)

vi. Punjab National Bank (PNB)

vii. CRISIL Limited (formerly the Credit Rating Information Services of India
Limited)

viii. Indian Farmers Fertilizer Cooperative Limited (IFFCO)

ix. Canara Bank

x. Goldman Sachs

xi. Intercontinental Exchange

xii. IDFC

NCDEX is a public limited company incorporated on 23 April. Under the

Companies Act 1956. It obtained its certificate for commencement of business on 9
May 2003. It has commenced its operations on 15th December 2003. 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 share
holders of NCDEX are prominent players in their respective fields and bring with

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them institutional building experience, trust, national wide reach, technology and
risk management skills.

NCDEX is a national technology driven de-mutualised online commodity exchange

with an independent Board of Director and professionals 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 has offices in Mumbai, Delhi, Ahmadabad, Indore, Hyderabad, Jaipur and
Kolkata. NCDEX is the youngest of the three national level multi commodity
exchange approved by the Government.

NCDEX had 848 registered members and more than 49,000 terminals across 1000
centers in India. It facilitates deliveries of commodities through a network of over
594 accredited warehouses through eight warehouse service providers with holding
capacity of around 1.5 million tonnes.

NCDEX offers futures trading in 37 agricultural and non-agricultural commodities.

It is an exchange for physicals- recently announced EFP (Exchange for Physicals)
facility in 18 contracts trade on the Exchange platform, which will help trade
participants in addressing their counterparty and business risks inherent in the
bilateral transactions in the physical market.

NCDEX has also tied up with the Govt. of India’s national level call center initiative
titled “Kissan call centres” that provide on-line guidance and hand-holding to
farmers in the country11.

11
Reports of Ncdex.

120
Table 4.3 List of commodities permitted at National Commodities
Derivatives Exchange Ltd., Mumbai.

Sl. Commodity Sl. Commodity

No. No.
Agricultural commodities Agricultural commodities
1 Barley 26 Gold ( 1 kg)
2 Castor seed 27 Gold (100 gms)
3 Chana 28 Gold International
4 Chilly 29 Silver (30 kg)
5 Coriander 30 Silver (5 kg)
6 Cotton seed Oil cake 31 Silver International
7 Crude palm oil 32 Copper cathode
8 Guar Gum 33 Nickel Cathode
9 Guar Seed 34 Steel Long
10 Gur 35 Brent crude oil
11 Jeera 36 Light sweet crude oil
12 Maize (feed/industrial grade) 37 Poly vinyl chloride
13 Pepper
14 Potato
15 Rapeseed must and seed
16 RBD palmole in
17 Refined soy oil
18 Rubber
19 Shankar kapas
20 Soy bean
21 Sugar M
22 Sugar S
23 Turmeric
24 V-797 kapas
25 Wheat
Source:Annual reports of Ncdex

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4.4.5 National multi commodity Exchange India Ltd, Ahmadabad (NMCE)

National Multi Commodity Exchange of India Ltd. (NMCE) is the first

demutualised multi commodity exchange and was promoted by commodity relevant
public institutions, namely, Central warehousing Corporation (CWC), National
Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-
Industries Corporation Limited (GAICL) and Punjab National Bank (PNB).

NMCE is unique in many other respects also. It is a zero-debt company following

widely accepted prudent accounting and auditing practices. It has robust delivery
mechanism making it the most suitable for the participants in the physical
commodity markets. The exchange does not compromise on its delivery provision to
attract speculative volume. Public interest rather than commercial interest guide the
functioning of the exchange It has also established fair and transparent rule based
procedures and demonstrated total commitment towards eliminating any conflicts of
interest. It is the only commodity exchange in the world to have received ISO
9001:2000 certification from British Standard Institutions (BSI).

NMCE commenced futures trading in 29 commodities in cash crops, food grains,

plantations, spices, oil seeds, metals and bullion among other. Benefits of futures
market, namely, price discovery and price risk management flow more easily from
an order driven system rather than Quote driven system. NMCE follows the former
system. NMCE does not support any market maker. The Trader submits orders and
the incoming orders are matched against the existing orders in the order book.
Transactions are cleared and settled through NMCE’s in house Clearing and
Settlement House, which is connected to all its members and the clearing banks.
Delivery of the underlying commodities as permitted only through a Central
Warehousing Corporation (CWC) receipt, which meets highest contemporary
international standards12.

12
Reports of Nmce.

122
Table 4.4 List of commodities permitted at National Multi
Commodities Exchange of India Ltd. Ahmedabad

Sl. Commodity Sl. Commodity

No. No.
Agricultural commodities Agricultural commodities

1 Cardamom 18 Sugar (M)

2 Castor seed 19 Sugar (S)

3 Chana 20 Turmeric

4 Coffee REP bulk Non-Agri Commodity

5 Copper 21 Kilo Gold

6 Copra 22 Gold (100 gms)

7 Guar Gum 23 Gold (Guinea)

8 Guar seed 10 mt 24 Silver

9 Isabgul seed 25 Lead

10 Mentha oil 26 Nickel

11 Menthol crystal 27 Zinc

12 Pepper 28 Aluminum

13 Rapeseed/mustard seed 29 Copper

14 Raw Jute

15 Rubber

16 Sacking

17 Soya bean oil

Source: Reports of the Nmce.

4.4.6 Indian Commodity Exchange (ICEX)

Indian Commodity Exchange Limited is a nation-wide screen based on-line

derivatives exchange for commodities and has established a reliable, efficient and

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transparent trading platform. It has adequate warehousing facilities in order to
facilitate prompt deliveries. This exchange is ideally positioned to leverage the huge
potential of commodities’ market and encourage participation of farmers, traders and
actual users to benefit from the opportunities of hedging, risk management and
supply chain management in the commodities markets.

The Exchange is a public-private partnership with Reliance Exchange next Ltd. as

anchor investor and has MMTC Ltd., Indiabulls Financial Services Ltd., Indian
Potash Ltd., KRIBHCO and IDFC among others, as its stakeholders.

Its objectives are to provide fair, transparent and efficient trading platform to all
participants, meet the international benchmarks for the Indian commodity market,
provide equal opportunity and access to investors all over the country through the
modern communication modes, attract a wide array of end users, financial
intermediaries and hedgers, become a major trading hub for most of the
commodities, and to provide product portfolio to suit the trading community needs
in an efficient manner

Reliance Exchange next Ltd (R Next), a wholly owned subsidiary of Reliance

Capital, represents Reliance entry into Exchange vertical. R Next aims to be present
across asset classes in the exchange space. Reliance Spot Exchange (RSX) is the
first such initiative from R Next. RSX focus on creating a unique value added
proposition in the existing spot market. RSX aims to bring together the regional spot
markets on a national level, through a single electronic marketplace for physical
delivery through e-auction in agricultural and other commodities. RSX offers
additional services such as quality assaying, testing, grading, warehousing, collateral
management, financing, to bring about transparency, efficiency, modern technology
and integrated solution to the market participants

ICEX follows VaR (Value at Risk) methodology for initial margin calculation. The
Initial Margin requirement shall be based on a worst case loss of a portfolio of an
individual client across various scenarios of price changes. The various scenarios of
price changes would be so computed so as to cover a 99 percentage VaR over a one
day horizon. Daily volatility of the futures prices is considered for the computation
of VaR. Volatility is estimated using Exponentially Weighted Moving Average

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(EWMA) Method. The standard deviation shall be set as the volatility estimate at the
beginning13.

4.4.7 Ace Derivatives and Commodity Exchange

As India has entered a new phase wherein its markets are opening up more, allowing
participants to be exposed to global commodity risk, there is a growing need to bridge
the current gap through more entrants in the Indian commodity exchange space.

Ace Derivatives and Commodity Exchange Limited is a screen based online

derivatives exchange for commodities in India. Ace Commodity Exchange earlier
known as Ahmedabad Commodity Exchange has been in existence for more than
five decades in commodity business, bringing in the best and transparent business
practices in the Indian commodity space. The Kotak group brings in more than
twenty five years of financial expertise and has pioneered many business practices
existing in the financial services industry. With Ace, Kotak Group brings to the
commodity market a new, state-of-the-art trading platform which combines the
operational efficiency of global exchanges with deep domain expertise in each
commodity vertical.

Following the Kotak Group’s legacy of transparency in their dealings and providing
the best solution to the market participants, Ace provides the confidence of trading
on a world-class platform to manage risks and reduce complexities of commodity
prices.

With the lowest latency trading platform, Ace Commodity Exchange sets the
industry benchmark for quicker trade synchronization and price information
broadcast. Product innovation has always been central to Ace, bringing forward a
basket of products that align to leading exchanges worldwide.

In addition to its convenient trading platform, Ace Commodity Exchange provides a

robust clearing and settlement infrastructure that supports the complete process of
trade intermediation – including registration of trades, settlement of contracts and
mitigation of counter-party risk; giving traders the peace of mind in times of
increased market volatility.

13
Reports of Icex.

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Themajor share holders are Kotak Mahindra Group, Haryana State Cooperative
Supply and Marketing Federation Ltd. (HAFED), Bank of Baroda, Corporation
Bank and Union Bank.

Members can access real time market depth quotes, charts, positions and contract
related information through the Trading System. It also has variety of user friendly
features such as message logs, profit or loss calculations and watch lists for top
gainers and losers. For every commodity, the maximum price movement during a
day is limited by the price limits prescribed by the regulator. price limits (upper and
lower) are based on the previous day closing price of the contract and are prescribed
in percentage term. If the price band limit is hit intraday, Exchange will relax the
price band limits to a higher level, as per the set procedures in accordance with FMC
guidelines14.

4.4.8 Universal Commodity Exchange Limited

Universal Commodity Exchange Limited is the next generation national level

commodity exchange for derivatives market across all commodity segments. UCX is
headquartered in Mumbai with presence in all major trading destinations across the
country.

It aims to be one of the largest commodity derivatives exchanges ensuring price

transparency and a robust risk management and surveillance system for facilitating
online trading, clearing and settlement operations for the market across the country.

The Exchange's strategic philosophy is driven by an expert management team with

deep domain knowledge and expertise of the capital and commodities market. UCX
strives to be recognised as a change agent by facilitating a neutral and transparent
price discovery platform to set the benchmarks for the industry. Universal
Commodity Exchange Ltd., has received a permanent recognition from Govt. of India
under the provision of FC(R)A.

Corporate reputation is a valuable asset like brands and employees. They aim to earn a
reputation for conducting the business operations with integrity and with respect to all

14
Reports of Ace Exchange

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those whom our business activities affect directly or indirectly. To attain this
reputation, UCX requires highest standard of behavior consistency from employees.

Creating a successful and sustainable business is equally important, thus the exchange
has to strike a fine balance between short and long term interests. It also means caring
about the customers, market participants, shareholders, business partners and
employees.

The major shareholders are National Bank for Agriculture and Rural Development
(NABARD), Indian Farmers Fertiliser Cooperative Limited (IFFCO), IDBI Bank,
Rural Electrification Corporation Limited (REC) and Commex Technology.

UCX has a robust risk-management system to contain the risk arising out of
transactions entered into by the members in various contracts either on their own
account or on behalf of their clients15.

4.5 Growth of Commodity Derivatives Market in India.

The commodity derivatives market witnessed a remarkable growth after the

reintroduction of futures in 2003. Now there are twenty eight commodity exchanges
and they trade 113 commodities across India. The following is the list of
commodities permitted to trade in exchanges.

15
Reports of ucex.

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Table 4.5 List of commodities notified under section 15 of the FCR. Act 1952
Sl.
Commodity Sl. No Commodity
No
I Food Grains and Pulses II Oilseeds and Oils
1 ArharChuni 29 Cotton seed
2 Bajra 30 Cottonseed Oil
3 Barley 31 Cottonseed Oilcake
4 Gram 32 CPO Refined
5 Gram Dal 33 Crude Palm Oil
6 Guar 34 Crude Palm Oil
7 Jowar 35 Groundnut
8 Klthi 36 Groundnut Oil
9 Lakh (Khesari) 37 Groundnut Oilcake
10 Maize 38 Linseed
11 Masur 39 Linseed Oil
12 Moth 40 Linseed Oilcake
13 Mung 41 Repeseed Oil/Mustard Oil
Rapeseed Oilcake/Mustard seed
14 MungChuni 42
Oilcake
15 Mung Dal 43 Rapeseed/Mustard seed
16 Peas 44 RBD Palmolein
17 Ragi 45 Rice Bran
18 Rice or Paddy 46 Rice Bran Oil
Small Millets (KodanKulti, kodra,
19 korra, vargu, Sawan, Rala, Kakun, 47 Rice Bran Oilcake
Samai, VariandBanti)
20 Tur Dal (Arhar Dal) 48 Safflower
21 Tur (Arhar) 49 Safflower Oil
22 Urad (Mash) 50 Safflower Oilcake
23 Urad dal 51 Sesame (Til)
24 Wheat 52 Sesame Oil
II Oilseeds and Oils 53 Sesame Oilcake
25 Celeryu seed 54 Soy meal
26 Copra Oil/Coconut Oil 55 Soy Oil
27 Copra Oilcake/ Coconut oilcake 56 Soybean
28 Copra/Coconut 57 Sunflower Oil
58 Sunflower Oil cake (VI) Others
59 Sunflower Seed

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III Spices 89 Castor seed
60 Aniseed 90 Chara or Berseem (including
chara seed or berseem seed)
61 Betel nuts 91 Crude Oil
62 Cardamom 92 Gram Husk (Gram Chilka)
63 Chillies 93 Gur
64 Cinnamon 94 Khandsari Sugar
65 Cloves 95 Polymer
66 Coriander seed 96 Potato
67 Ginger 97 Rubber
68 Methi 98 Seedlac
69 Nutmegs 99 Shellac
70 Pepper 100 Sugar
IV Metals 101 Furnace Oil
72 Copper 102 Ethanol
73 Zinc 103 Cooking Coal
74 Lead 104 Electricity
75 Tin 105 Natural Gas
76 Gold 106 Onion
77 Silver 107 Carbon Credit
78 Silver Coins 108 Thermal coal
(V Fibers and Manufactures 110 Melted Menthol Flakes
79 Art Silk Yam 111 Mentha Oil
80 Cotton Cloth 112 Menthol Crystals
81 Cotton pods 113 Iron Ore
82 Cotton Yam
83 Indian Cotton (Full pressed, half
pressed or loose)
84 Jute goods (Hessian and Sackings and
cloth and/or bags, twines and/or yarns
mfd. by any of the mills and/or any
other manufacturers of whatever nature
made from jute)
85 Kapas
86 Raw Jute Including Mesta
87 Staple Fiber Yam
88 Champhor
Source: Annual Reports of FMC.

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The following table represents the growth of the Indian commodity derivatives
market for the last 10 years.

Table 4.6 Volume and Value of Commodity Exchanges (Volume in Lakh

Tonnes, Value in Crores of rupees)

National Exchanges Regional Exchanges Grand Total

Year
Volume Value Volume Value Volume Value
2002-03 18.89 4572.48 295.57 61958.26 314.46 66530.74
2003-04 76.29 27787.35 416.70 101576.33 492.99 129363.68
2004-05 1395.65 445473.40 546.45 126286.16 1942.10 571759.56
2005-06 6310.43 2046704.37 478.28 108417.65 6788.71 2155122.02
2006-07 5838.72 3580643.09 290.56 96283.58 6129.29 3676926.67
2007-08 5244.97 3937564.52 328.44 128424.95 5573.41 4065989.47
2008-09 6697.96 5194038.56 164.54 54917.63 6863.49 5248956.18
2009-10 9925.87 7681193.10 217.07 83560.95 10142.93 7764754.05
2010-11 12652.37 11878305.52 153.21 70636.83 12805.57 11948942.35
2011-12 13916.52 18072416.79 109.22 53689.99 14025.74 18126103.78
2012-13 14408.34 16997961.17 101.74 48878.92 14510.08 17046840.09
2013-14 8764.12 10116030.29 68.64 28764.69 8832.76 10144794.98
Source: Forward Markets Commission

In the year 2002-03 the specific regional exchanges have a remarkable share in the
volume and value of trade. But now a day the share of specific regional exchanges is
sharply declining. The growth paradigm of India’s commodity markets is best
reflected by the figures from the above table which indicated that the value of trade
on the commodity futures market in various financial year16.
The main drivers of this impressive growth in commodity futures were the national
commodity exchanges. MCX, NCDEX and NMCE contributed to 99.30 percentage
of the total value commodities traded during 2013-14. Of course, more than 100
commodities are today available for trading in the commodity futures market and
more than 50 of them are actively traded. These include bullion, metals, energy and

16
Barua and Mahanta (2012)

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agricultural commodities. Most importantly, an archaic markets has suddenly turned
into an organised, service oriented set-up with shooting volumes.
The unqualified success of the futures market has ensured the next step, ie, the
launch of electronic spot markets for agricultural products. Being in a time-zone that
falls in the gap left by the major commodity exchanges in the US, Europe and Japan
has also worked in India’s favor because commodity business by its very nature is a
24/7 business. Innovation coupled with modern and successful financial market
environment has ensured the beginning of a success story in commodities which will
eventually see that India is becoming a price setter in major commodities on the
strength of its large production and consumption.

4.6 GDP Growth rate in India

The gross domestic product is an indicator of the economic condition of a country.
Gross domestic product represents the market value of all goods and services
produced by the economy during one year. It includes the personal consumption,
government purchases, private inventories, construction costs, and the net balance in
the foreign trade. A gross domestic product represents the health of the economy,
and it is very useful for the economists, analysts, investors, and policy makers. The
GDP is considered as the broadest indicator of economic growth in India
There are three different ways to calculate gross domestic product. They are
Production method, Income method and Expenditure method.
4.6.1. Production Method
The production method of GDP is the market value of all final goods and services.
Also called the “net product” method, it includes three statistics:
• Gross Value Added: Estimation of the gross value of various domestic
economic activities.
• Intermediate Consumption: Determination of the cost of materials, supplies,
and labor used to create goods and services.
• Value of Output: Deduction of the intermediate consumption from the gross
value, which gives you the GDP. This is how you determine GDP via the
production method.

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4.6.2 Income Approach
Many economists dislike the production method as a means to measure GDP as it
does not include income. Rather, they believe that the money each family brings
home is a better way to evaluate the economic strength of the country. Therefore, the
income approach measures the annual incomes of all individuals in a country.
Incomes are culled from five different areas:
1. Wages, salaries, and supplementary labor income
2. Corporate profits
3. Interest and miscellaneous investment income
4. Farmers’ income
5. Income from non-farm unincorporated businesses
Once these numbers are added, two further adjustments must be made to arrive at
the GDP via this method. Indirect taxes, such as sales taxes at a convenience store,
minus tax subsidies (tax breaks or credits) are added to arrive at market prices. Then,
depreciation on various hard assets (buildings, equipment, etc.) is added to that to
arrive at the GDP number. The idea behind the income method is to try to get a
better handle on real economics activity.
4.6.3 Expenditure Approach
There are, in fact, other economic theorists who believe that neither the income
approach nor the production method is sufficient. In theory, income is not generated
to be hoarded. People might save and invest, but they will definitely purchase
needed and desired goods. From this basic viewpoint, the expenditure approach was
developed. This approach measures all expenditures by individuals within one year.
The components of this method are:
• Consumption as defined by purchases of durable goods, non-durable goods,
and services. Examples include food, rent, gas, clothes, dental expenses, and
hairstyling. The purchase of a new house, however, is not included as
consumption. Consumption is the largest component of this method of
determining GDP.

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 • Investment means capital investments, such as equipment, machinery,
software, or digging a new coal mine. It does not mean investments in
financial products, like stocks and mutual funds.
• Government Spending is the total of government expenditures on goods and
services, including all costs of government employee salaries, weapons
purchased by the military, and infrastructure costs. For example, the money
spent on the war in Iraq is included, as is the money spent in the stimulus bill
in 2008. Social Security and unemployment benefits, however, are not
included.
• Net Exports are calculated by subtracting the value of imports from the value
of exports. Exports are goods that are created in this country for other nations
to consume, while imports are created in other nations and consumed
domestically.
The following table represents the Gross Domestic Product of India.
Table 4.7 Gross Domestic Product of India
Sl No. Year GDP (Billion US Dollars)
1 2002-03 522.8
2 2003-04 617.6
3 2004-05 721.6
4 2005-06 834.2
5 2006-07 949.1
6 2007-08 1238.7
7 2008-09 1224.1
8 2009-10 1365.4
9 2010-11 1708.5
10 2011-12 1835.81
11 2012-13 1831.78
12 2013-14 1861.8
Source:www.worldbank.org/data bank

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Computation of Growth Rate
The growth rate of the Indian futures market is determined by analyzing the
comparison between the percentage growth rate attained in the GDP of India. The
following table explains the percentage growth rate attained both in the GDP and
commodity derivative sector. The growth rate is calculated by using the following
formula.

Current Year’s figure

Growth Rate= -------------------------------------- x 100
Previous year’s figure

Table 4.8 Growth Rate in GDP and Commodity Derivatives

GDP Commodity Commodity
Sl GDP Growth
Year (Billion US Derivative Value Derivative
No. Rate
Dollars) (Crores) Growth Rate
1 2002-03 522.8 66530.74
2 2003-04 617.6 129363.68 118.133 194.442
3 2004-05 721.6 571759.56 116.839 441.978
4 2005-06 834.2 2155122.02 115.604 376.928
5 2006-07 949.1 3676926.67 113.774 170.613
6 2007-08 1238.7 4065989.47 130.513 110.581
7 2008-09 1224.1 5248956.18 98.8213 129.094
8 2009-10 1365.4 7764754.05 111.543 147.929
9 2010-11 1708.5 11948942.35 125.128 153.887
10 2011-12 1835.81 18126103.78 107.452 151.696
11 2012-13 1831.78 17046840.09 99.7805 94.0458
12 2013-14 1861.8 10144794.98 101.639 59.5113

Source: Computed

From the above table it is clear that the percentage change in the growth rate of
commodity derivatives is higher than the percentage change in the growth rate of
GDP. There may be some variations in the result because of the ban of commodity
derivatives trade in some commodities. Thus the conclusion of the analysis is that
the commodity derivatives had attained a substantial growth after the reintroduction
futures trading which is more than the growth of GDP in the Indian economy.

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4.7 Structure of Commodity Derivative Market in India

The Forward Markets Commission is the regulatory authority of the commodity

futures market. The commodity futures market in its new electronic origin is almost
10 years old and comprises six national level exchanges and 22 commodity-specific
regional exchanges. The national exchange operating in the Indian commodity
futures market are multi-Commodity Exchange of India, (MCX), National
Commodity and Derivative Exchange of India (NCDEX) ,National multi
Commodity Exchange of India (NMCE), Indian Commodity Exchange(ICEX), Ace
Derivatives and Commodity Exchange, and Universal Commodity Exchange
Limited (UCX) . In line with its modern financial infrastructure, India is one of the
few countries worldwide to have commodities delivery in electronic and
dematerialized form.

Figure 4.1 Structure of commodity derivatives market in India

DEA

FMC

Commodity Exchanges

National Exchanges Regional Exchanges

NCDEX MCX NMCE NBOT 22 Regional

Exchanges
Source :www.fmc.com

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4.8 Working of Derivatives Exchanges

The following table explains the composition of trade conducted by various national
and regional exchanges.

Table 4.8 Share of different commodity exchanges

Exchanges Year
2009-10 2010-11 2011-12 2012-13 2013-14
MCX Mumbai 82.34% 82.36% 86.05% 87% 84.89%
NCDEX Mumbai 11.82% 11.81% 9.99% 9.5% 11.3%
NMCE Ahammadabad 2.94% 1.83% 1.48% 1% 1.51%
ICEX Mumbai 1.76% 3.16% 1.42% 1% 0.84%
ACE Ahamadabad ---- 0.25% 0.76% 1% 0.84%
Others 1.14% 0.59% 0.29% 0.5% 0.62%
Total 100% 100% 100% 100% 100%

Source: Annual reports of Forward Markets Commission

Based on the above table it can be conclude that MCX holds majority of the market
share when compared to other exchanges. NCDEX has a market share which is
higher than NMCE. Other two national exchanges have a very limited volume of
share in the trading of commodity derivatives. Thus MCX becomes the market
leader in national level exchanges.

The following table gives information about the share of various commodities in
national and regional levels. The percentages in the composition of various
commodities have a direct influence in the profitability of the exchanges.

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Table 4.9 Percentage Share of various commodities

Year
Commodities
2009-10 2010-11 2011-12 2012-13 2013-14

Bullion 47.93% 45.00% 56% 46% 43%

Base Metals 22.51% 22.00% 16% 19% 24%

Energy Products 24.11% 23.00% 16% 22% 17%

Agricultural Commodities 5.45% 10.00% 12% 13% 16%

Total 100% 100% 100% 100% 100%

Source: Annual reports of Forward Markets Commission

The above table depicts the composition of trade in different commodities in India.
During the initial stages of commodity derivatives there is a remarkable share in
agricultural commodities but now it is decreasing. At present Bullion market attracts
a high level of investments followed by base metal and energy products. The
percentage in agricultural sector is showing an increasing trend.

4.9 Conclusion

The commodity derivatives market has attained a remarkable growth rate in India.
There are six national exchange and twenty two regional exchanges and they trade
113 commodities in India. The growth rate in the commodity derivatives market is
substantially higher than the growth rate in the GDP of India. The volume in the
financial derivatives of India is 109 trillion as against the volume of 182 trillion in
2012. Thus it can also concluded that the growth in the commodity derivatives as
much higher than the growth rate in the financial derivatives of India. The Multi
Commodity Exchange of India is the market leader of commodity exchanges. The
bullion market holds around 45 percent followed by base metals, energy products and
agricultural products. There are various problems in the working of derivatives
exchanges namely, high transaction costs, inadequate warehousing facilities, low
trading volume, illegal trade practices such as speculation, hoarding etc, mismatch
between the grade specified in the futures contract and actual commodity available for
delivery, policy interventions, possibility of arbitrage trade, low participation of
hedgers etc.

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