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 51commodity 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 andtransparency82% of the
turnover came from food and fibre crops in NCDEX. MCX is trading
mainly in Zinc and Gold.

ACKNOWLEDGMENT
I w o u l d l i ke t o t h a n k m y p ro j e c t g u i d e Pro f. S a n j a y
D i d d e e fo r g u i d i n g m e 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
bea t t a i n e d w i t h o u t a p ro p e r re s e a rc h d e s i g n . I t s p e c i fi
e s t h e m e t h o d s a n d p ro c e d u re s f o r a c q u i r i n g t h e
i n f o rm a t i o n n e e d e d t o c o n d u c t t h e re s e a rc h 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, competitors 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 multicommodity 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 mostly 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 exchanges 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 recognized 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 L
i m i t e d ( N C D E X ) i s 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
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N C D E X i s t h e o n l y c o m m o d i t y exc h a n g e i n t h e
c o u n t r y p ro m o t e d b y n a t i o n a l l e v e l i n s t i tu t i o n s. T h i s u n
i q u e p a re n t a g e e n a b l e s i t t o o ff e r a bouquet of benefits,
which are currently in short supply in the
commoditym a r ke t s . T h e i n s t i t u t i o n a l p ro m o t e r s a n d s h a r
e h o l d er s o f N C D E X a re p r o m i n e n t p l a y e r s i n t h e i r
r e s p e c t i v e fi e l d s a n d b r i n g w i t h t h e m

institutional building experience, trust, nationwide reach,

technology and
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.
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
committedt o p r o v i d e a w o r l d - c l a s s c o m m o d i t y
e x c h a n g e p l a t f o r m f o r m a r k e t participants to trade in
a wide spectrum of commodity derivatives driven
by b e s t g l o b a l p r a c t i c e s , p r o f e s s i o n a l i s m
a n d t r a n s p a r e n c y . NCD EX is re gu la te d by Forw
a rd M a r ke t s C o m m i s s i o n . N C D E X i s
subjected to various laws of the land like the F
o r w a r d C o n t r a c t s (Regulation) Act, Companies Act,
Stamp Act, Contract Act and various
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.
NCDEX is located in Mumbai and off ers facilities to
its members about550 centres throughout India. The reach will
gradually be expanded to
morecentres. N C D E X c u r r e n t l y f a c i l i t a t e s t r a d
ing of 57 commodities Agriculture
Barley, Cashew, Castor Seed, Chana, Chilli, Coff ee Arabica, Coff ee
-Ro b u s t a , C r u d e Pa l m O i l , C o t t o n S e e d O i l c a ke , E x p e l l e
r M u s t a rd O i l , 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, MenthaOil, Mulberry
Green Cocoons, Mulberry Raw Silk, Mustard Seed,
Pepper,Po t a t o , Ra w J u t e , Ra p e s e e d - M u s t a rd S e e d
O i l c a ke , R B D Pa l m o l e i n , Refined Soy Oil, Rubber, Sesame Seeds,
Soyabean, Sugar, Yellow SoybeanMeal, Tur, Turmeric, Urad, V-797 Kapas,
Wheat, Yellow Peas, Yellow RedMaize.
Metals
Aluminium Ingot, Electrolytic Copper Cathode, Gold, Mild St
eel Ingots, N i c k e l
C a t h o d e ,
S i l v e r ,
S p o n g e
I r o n ,
Z i n c
I n g o t .
Energy
Brent Crude Oil, Furnace Oil.

Indian economy is riding high enjoying 8% growth rate; and

theindustrial and agricultural sectors are doing well. We are also
enjoying favourableforeign exchange balances. Even so, the
producer or the farmer does not get hisdue for a host of
reasons. One among them is the middlemen and mediators
tryingto hoodwink the producer about the reasonable price and
the producers inability towait for the right price for lack of
infrastructural facilities.Though there is a spot market for many

commodities to secure immediate price, italways results in the

producer settling for a loss. Similarly even if a farmer waitsfor a
futures contract to get a reasonable price, his ignorance of
the market putshim in a disadvantageous position. MCX and
NCDEX were formed in answer tothese problems faced by the
producers and farmers.
Introduction to MCX:MCX:
refers to
Multi Commodity Exchange
which facilitates trading in a
varietyo f c o m m o d i t i e s i n t h e co u n tr y. T h i s i s a n i n d e p e n
d e n t c o m m o d i t y exc h a n g e 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
CorporationLtd, Fid Fund (Mauritius) Ltd etc. as key share holders.
MCX reaches out to 500Indian 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
agriculturalcommodities, 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 marketshare and thus it occupies No1 position in India
in the commodity market. MCXoccupies 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.
T h e d e t a i l s o f c o m m o d i t i e s d e a l t i n th e M C X i s
g i v e n h e r e u n d e r c a t e g o r y wise:

Metals like Aluminum, Copper, Lead, Nickel, Sponge iron,

Steel Long andSteel flat, Tin, Zinc;Bullion- Gold, silver Fibre -Long,
medium and short staple cotton, Cotton yarn etcEnergy-Crude oil,
Furnace oil, Natural gas etc;Spices- Cardamom, Jeera, Pepper,
Red Chilly;Pulses- Chana , Masoor and yellow peas;PlantationArecanut, Cashew kernel, Coffee, Rubber;Petro chemicals- HDPE,
Polypropylene, PVC;O i l a n d O i l S e e d s- C a s t o r , C o co n u t,
C o t t o n S e e d , Pa l m o l i n e , g ro u n d n u t , 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 agriculturalCommodity Exchange for
the standardization in agricultural markets. It also worksin
conjunction with National Bulk Handling Corporation which
helps farmers in bulk handling of agricultural commodities.
MCX has also set up a
managementc o u r s e i . e . D i p l o m a i n C o m m o d i t i e s M a r ke
t i n c o o p e r a t i o n w i t h We l i n g ka r I n s t i t u t e o f M a n a g e
m e n t t o t r a i n y o u n g m a n a g e r s d e a l e ffi c i e n t l y
i n t h e commodities market.Headquartered in Mumbai Multi
Commodity Exchange of India Limited (MCX),is an independent
and de-mutulised exchang with a permanent recognition
fromGovernment 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 settlementoperations for commodity
futures markets across the country

MCX started offering trade in November 2003 and has

built strategic allianceswith Bombay Bullion Association, Bombay
Metal Exchange, Solvent ExtractorsAssociation 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 oilcomplex. It has
operationalised from November 26, 2002. It is being supported
byCentral Warehousing Corporation Ltd., Gujarat State
Agricultural MarketingBoard and Neptune Overseas Limited. It got
its recognition in October 2002.Commodity exchange in india
plays an important role where the prices of anycommodity are not
fixed, in an organised way. Earlier only the buyer of produceand 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, endusers, and even the retail investors, at agrassroots level. It brings
a price transparency and risk management in the vitalmarket.
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 countrys premier
exchange for food and fibre crops, dropped tosecond place after
the farm futures were gagged by the government with
positionlimits and high margins.Energy, metals and bullion traders
put Rs 9.99 lakh crore in the MCX trading ringin six months while
punters in cereals, spices, fibre and guar managed to trade
incontracts 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
lastfew 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 wasinaugurated on November 10, 2003 by Mr.
Mukesh Ambani, Chairman andManaging Director, Reliance
Industries Ltd.; and has permanent recognition fromthe
Government of India for facilitating online trading, clearing
and settlementoperations for commodities futures market across the
country. Today, MCXfeatures amongst the world's top three bullion
exchanges and top four energyexchanges. MCX offers a wide
spectrum of opportunities to a large cross sectionof participants
including producers/ processors, traders, corporate, regional
tradingcentre, importers, exporters, co-operatives and industry
associations amongstothers. Headquartered in the financial
capital of India, Mumbai, MCX is led by anexpert management
team with deep domain knowledge of the commodities
futuresmarket. 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, MCXholds more than 55%
market share of the total trading volume of all the
domesticcommodity exchanges. The exchange has also affected
large deliveries in domesticcommodities, signifying the efficiency
of price discovery. Being a nation-widecommodity exchange
having state-of-the-art infrastructure, offering multiple
commodities for trading with wide reach and penetration, MCX is
well placed totap the vast potential poised by the commodities
market.Online commodity trading Online commodity trading
offers a way for an open, many-to-many system, whereevery user
has equal access to price quotes and trading functionality. It

provides alevel playing field for all, without favoritism or control

by a chosen few, whereany user can view all quotes posted by
other users in real time, act or trade onquotes posted by others,
post their own prices and quantities for others to tradeThe Online
commodity trading site usually lists a large number of unique
productscovering a variety of commodities, structures,
and settlement terms ranging fromOil, Natural Gas, Electric Power,
Precious Metals, Emissions and Weather. It provides for various media
ranging from Physical Delivery and Financial CashSettlement.
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 onlinetrading commodity
trading system. With most online commodity trading
systems,traders can be sure of finding an interesting market
development or tradingopportunity almost every time they
log on.All quotes posted by users on any online commodity
trading systems are live andfirm. They can be acted on with full
assurance of a completed transaction. Thegreatest advantage of
an online system for trading is that just a click can be used tohit a
bid or lift an offer.The Online trading system operates almost
continuouslyaround the clock, 24 hours a day, seven days a week. This
allows any user toextend the trading day, and easily pass the
trading objectives to others incompanies in different times zones.
The online commodity trading system in Indiais only an emerging
segment yet. This is because the Internet boom in Indian is onthe
rise only now. The Internet charges are becoming minimal and
the Internet issoon 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 continuedduring 2006-07. Total volume of trade rose
sharply from Rs. 1.29 lakh crore in2003-04 to Rs. 27.39 lakh crore
in 2006-07 (till December2006) (Table 4.15). Inthe 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 asaproportion of GDP increased from only 4.7 percent in
2003-04 to 18.3 per cent in2004-05and 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)
withthese two exchanges also accounting for a large share of the
number of contractstraded on the exchanges
Growth of Guarseed in NCDEX
Growth of Guarseed in NCDEXRs.11,167,117.00(in
lakhs)Rs.12,066,908.00(in lakhs)Rs.28,228,674.00( in
lakhs)200620072008