COMMODITY MARKETS MODULE 1:

INTRODUCTION

WHAT IS A ‘COMMODITY’?

A commodity is a basic good used in commerce that is interchangeable with

other commodities of the same type; commodities are most often used as
inputs in the production of other goods or services. The quality of a given
commodity may differ slightly, but it is essentially uniform across producers.
When they are traded on an exchange, commodities must also meet specified
minimum standards, also known as a basis grade.
Commodities generally meet the following criteria:

Tradability: The commodity has to be tradable, meaning there needs to be a

viable investment vehicle to help you trade it.

Deliverability: All the commodities have to be physically deliverable. Crude

oil is included because it can be delivered in barrels, and wheat is included
because it can be delivered by the bushel.

Liquidity: Every commodity in this learning centre has an active market with
buyers and sellers constantly transacting with each other. Liquidity is critical
because it gives you the option of getting in and out of an investment without
having to face the difficulty of trying to find a buyer or seller for securities.

1.4 WHAT IS COMMODITY MARKET?

A commodity market is a physical or virtual marketplace for buying, selling

and trading raw or primary products, and there are currently about 50 major
commodity markets worldwide that facilitate investment trade in
approximately 100 primary commodities.

Commodities are split into two types: hard and soft commodities.
Hard commodities are typically natural resources that must be mined or
extracted (such as gold, rubber and oil), whereas soft commodities are
agricultural products or livestock (such as corn, wheat, coffee, sugar,
soybeans and pork)
Commodities can be invested in numerous ways. An investor can purchase
stock in corporations whose business relies on commodities prices, or
purchase mutual funds, index funds or exchange-traded funds (ETFs) that
have a focus on commodities-related companies. The most direct way of
investing in commodities is by buying into a futures contract. A futures
contract obligates the holder to buy or sell a commodity at a predetermined
price on a delivery date in the future
Commodity ETF’s are exchange-traded funds (ETFs) that invest in
physical commodities, such as agricultural goods, natural resources
and precious metals. A commodity ETF is usually focused on either a
single commodity, holding it in physical storage, or it is focused on
investments in futures contracts.
Commodity Futures contract is an agreement to buy or sell a
predetermined amount of a commodity at a specific price on a specific
date in the future. Buyers use such contracts to avoid the risks
associated
with the price fluctuations of a futures' underlying product or raw material.
Commodities Mutual Funds Commodities get a lot of attention from
the media. The price of oil, gold, corn, soy and hogs are in the national
news nearly every day. While investing in the commodities markets is
a fairly sophisticated endeavor, commodity mutual funds provide an
opportunity for almost any investor to get a piece of the action.

HISTORY OF COMMODITY MARKET

Commodities markets, over its years of evolution, have had far reaching
economic impact on different countries and its citizens, in varying magnitude.
Though its origin is not readily documented, it is believed that it could have
found its roots in Amsterdam in 1695. Shortages of critical commodities
have always been the cause of wars over centuries such as in World War II,
when Japan invaded neighboring countries to secure oil
and rubber. The 16thand 17thcenturies witnessed trading in a wide array of
commodities, livestock, spices, precious stones and gold. Even before equity
markets emerged in the world, Commodities Market, though in different
form, has been in existence for centuries; the early stages can be traced to
17th century in connection with rice, meat and other products. Currently
commodities market has been given an official status and has grown leaps
and bounds whose breadth and utility are far bigger than any other markets.
Organized Futures Market evolved in India by setting up of Bombay Cotton
Trade Association Ltd in 1875. Bullion futures market began in Mumbai in
1920. In the 1970s most of the registered associations became inactive as
futures as well as forward trading in commodities were suspended or
prohibited completely.

After the introduction of economic reforms since 1991 the government

appointed Kabra committee which favoured to reintroduce futures trading
and upgrade the existing regional exchanges. As a follow-up the government
issued notifications on 01.04.2003 permitting futures trading in
commodities.

Commodities futures contracts and the exchanges they trade in were till
recently governed by Forward Markets Commission which now comes under
the regulations of SEBI.

Commodities are instruments to buy & sell -

- a fixed quantity of a commodity

- on a pre-specified future date
- at a specified price
- through an online facility facilitated by a registered commodities broker
- avail physical delivery if indicated

In India commodities market is regulated by SEBI & Forward Market

Commission (FMC). Two important commodities exchanges – MCX (Multi
Commodities Exchange), NCDEX E-Markets are operational offering trading,
hedging, arbitrage & physical delivery opportunities across various
commodities

INTERNATIONAL SCENARIO

The commodities markets are one of the oldest existing markets in the
human history.
Derivativestradingstartedoffincommoditieswiththeearliestrecordsbeingtracedback
tothe17thcenturywhenricefuturesweretradedinJapan,thoughthereissomeevidence
that rice may have been traded as far back as 6,000 years ago inChina.

In the US during the early 1800s, agricultural commodities – notably grains –

were brought from Midwest farmlands to Chicago for storage until being
shipped out to the east coast. As more farmers and merchants began
delivering their wares to Chicago, the first American exchange was set up in
1848. It was called the Chicago Board of Trade (CBOT).

COMMODITY EXCHANGE

Meaning

A commodity exchange is a systematized physical or virtual marketplace

where various tradable securities, commodities and derivatives are sold and
bought. Commodity derivatives exchanges are places where trading of
commodity futures and options contracts are conducted.

Major International Commodity Exchanges

The major exchanges in the United States, which trade commodities, are
domiciled in Chicago and New York with several exchanges in other locations
within the country.
The Chicago Board of Trade (CBOT) was established in Chicago in 1848.
Commodities traded on the CBOT include corn, gold, silver, soybeans, wheat,
oats, rice and ethanol. The Chicago Mercantile Exchange (CME) trades
commodities such as milk, butter, feeder cattle, cattle, pork bellies, lumber
and lean hogs.

The New York Board of Trade (NYBOT) commodities include coffee, cocoa,
orange juice, sugar and ethanol trading on its exchange. The New York
Mercantile Exchange (NYMEX) trades commodities on its exchange such as
oil, gold, silver, copper, aluminum, palladium, platinum, heating oil, propane
and electricity.

COMMODITY EXCHANGES IN INDIA

The advent of economic liberalization helped the cause of laying emphasis on

the importance of commodity trading
Commodities futures contracts and the exchanges they trade in are governed
by the Forward Contracts (Regulation) Act, 1952. The regulator is the
Forward Markets Commission (FMC), a division of the Ministry of Consumer
Affairs, Food and Public Distribution.

In 2002, the Government of India allowed the re-introduction of commodity

futures in India. Together with this, three screens based, nation-wide multi-
commodity exchanges were also permitted to be set up with the approval of
the Forward MarketsCommission.

1.9.1 National Commodity & Derivative Exchange:

ThisexchangewasoriginallypromotedbyICICIBank,NationalStockExchange(NS
E), National Bank for Agriculture and Rural Development (NABARD) and Life
Insurance Corporation of India (LIC). Subsequently other institutional
shareholders have been added on. NCDEX is popular for trading in
agriculturalcommodities.
National Multi Commodity Exchange of India:

This exchange was originally promoted by Kailash Gupta, an Ahmedabad

based trader, and Central Warehousing Corporation (CWC). Subsequently
other institutional shareholders have been added on. NMCE is popular for
trading in spices and plantation crops, especially from Kerala, a southern
state of India.
MCX:

1.9.2 Multi Commodity Exchange of India Ltd (MCX)

The Multi Commodity Exchange of India Limited (MCX), India’s first listed
and independent commodity exchange, that facilitates online trading, and
clearing and settlement of commodity futures transactions, thereby
providing a platform for risk management. It was established in 2003 and is
based in Mumbai and operates under the regulatory framework of Securities
and Exchange Board of India (SEBI).
MCX offers trading in varied commodity futures contracts across segments
including bullion, ferrous and non-ferrous metals, energy and agricultural
commodities. The Exchange focuses on providing commodity value chain
participants with neutral,secure and transparent trade mechanisms, and
formulating quality parameters and trade regulations, in conformity with the
regulatoryframework.
The Exchange has an extensive national reach, with 708 SEBI registered
members, operations through 607,331 trading terminals (including CTCL),
spanning over 1822 cities and towns across India. MCX is India’s leading
commodity futures exchangewith a market share of 83.33 per cent in terms
of the value of commodity futures contracts traded in Q3FY2015-16.
MCX is popular for trading in metals and energy contracts. The turnover
of the exchange for the fiscal year 2014-15 was Rs. 51.84 lakh crore and in
terms of contracts traded, it was in 2009 the world's sixth largest commodity
exchange. In terms of market share, MCX is today’s largest commodity futures
exchange in India, with a market share of close to 80% of Indian commodity
market.
PRODUCTS DEALT AT MCX

Commodities Traded

1. Agricultural 2. Bullion 3. Base Metal 4. Energy

Commodities

1.Cardamom 1.Gold 1.Aluminum 1.Crude Oil

2.Cotton 2.Silver 2.Copper 2.BrentCrude
Oil
3. Kapan 3. Lead 3.Crude Oil
Mini
4. Mentha Oil 4.Nickel

TABLE 1.3: SHOWING LIST OF PRECIOUS METALS

COMMODITY MAIN EXCHANGE

GOLD COMMODITY EXCHANGE INC.

PLATINUM COMMODITY EXCHANGE INC.

PALLADIUM COMMODITY EXCHANGE INC.

SILVER COMMODITY EXCHANGE INC.

TABLE 1.4: SHOWING LIST OF AGRICULTURAL PRODUCTS

COMMODITY MAIN EXACHANGE

CORN CHICAGO BOARD OF TRADE

 CORN EURONEXT

OATS CHICAGO BOARD OF TRADE

ROUGH RICE CHICAGO BOARD OF TRADE

SOYBEANS CHICAGO BOARD OF TRADE

RAPESEED EURONEXT

SOYBEAN MEAL CHICAGO BOARD OF TRADE

SOYBEAN OIL CHICAGO BOARD OF TRADE

WHEAT CHICAGO BOARD OF TRADE

MILK CHICAGO MERCANTILE

EXCHANGE
COCOA CHICAGO BOARD OF TRADE

COFFEE INTERCONTINENTAL EXCHANGE

COTTON NO.2 INTERCONTINENTAL EXCHANGE

SUGAR NO.11 INTERCONTINENTAL EXCHANGE

SUGAR NO.14 INTERCONTINENTAL EXCHANGE

TABLE 1.5: SHOWING LIST OF BASE METALS

COMMODITY MAIN EXCHANGE

COPPER LONDON METAL EXCHANGE

LEAD LONDON METAL EXCHANGE

ZINC LONDON METAL EXCHANGE

 TIN LONDON METAL EXCHANGE

ALUMINIUM LONDON METAL EXCHANGE

ALUMINIUM ALLOY LONDON METAL EXCHANGE

NICKEL LONDON METAL EXCHANGE

COBALT LONDON METAL EXCHANGE

MOLYBDENUM LONDON METAL EXCHANGE

RECYCLED STEEL LONDON METAL EXCHANGE

TABLE 1.6: SHOWING LIST OF ENERGY

Commodity Main Exchange

Wti Crude Oil New York Mercantile

Exchange,
Intercontinental Exchange
Brent Crude Intercontinental Exchange

Ethanol Chicago Board Of Trade

Natural Gas New York Mercantile Exchange

Heating Oil New York Mercantile Exchange

Gulf Coast Gasoline New York Mercantile Exchange

Rbob Gasoline New York Mercantile Exchange

Propane New York Mercantile Exchange

Purified Terephthalic Zhengzhou Commodity Exchange

Acid

COMMODITIES SPOT v/s FUTURES

PARTICULARS SPOT FUTURES

Delivery Immediate Upon Expiry
Investment Full Value Margin
Risk Less High
Return Potential Less High
Transportation / Only in case of
Needed
Warehousing Delivery
Mandis,
Physical
market place
Trading thru Electronic
system
Quality Varying Standardized

ADVANTAGES OF COMMODITIES MARKET

- Screen-based Online Trading
- No geographical barrier
- Complete anonymity
- Settlement guaranteed
- No counter-party risk
- High volumes & high liquidity across commodities
- Price efficiency
- Supported by various regulators
- Efficient risk management system
- Good hedging mechanism

Commodity Specific Regional Exchanges

1) Bikaner Commodity Exchange Ltd., Bikaner

2) Bombay Commodity Exchange Ltd., Vashi, Bombay

3) Chamber of commerce, Hapur

4) East India Jute & Hussian Exchange Ltd. Kolkata

5) First Commodities Exchange of India Ltd., Kochi

6) Haryana Commodities Ltd., Sirsa

7) India Pepper & Spices Trade Association Kochin (IPSTA)

8) Meerut Agro Commodity Exchange Co. ltd. Meerut

9) National Board of Trade (NBOT), Indore 18 Rajkot Commodity

Exchange Ltd., Rajkot

10) Rajdhani Oils & Oilseed Exchange ltd., Delhi

11) Surendranagar Cotton oil & Oilseeds Association Ltd., Surendranagar

12) Spices & Oilseeds Exchange Ltd. Sangli

13) Vijay Beopar Chamber Ltd., Muzaffarnagar

Other Regional Commodity Exchanges Not Recognized by Forward Markets
Commission

1) Bhatinda Om & Oil Exchange ltd., Bhantinda

2) East India cotton Association Ltd., Calcutta

3) Kanpur Commodity Exchange Ltd., Kanpur

4) E-Sugar India Ltd., Mumbai

5) Coffee Futures Exchange India Ltd., Bangalore

6) E-Commodities Ltd., New Delhi

7) Bullion Merchants Association Limited, Bikaner

Structure of Indian Commodity Market.

Instruments traded in commodity markets.
Derivatives such as futures contracts, Swaps (1970s-), Exchange-traded Commodities
(ETC) (2003-), forward contracts have become the primary trading instruments in
commodity markets. Futures are traded on regulated commodities exchanges. Over-the-
counter (OTC) contracts are "privately negotiated bilateral contracts entered into
between the contracting parties directly

Forward contracts

A forward contract is an agreement between two parties to exchange at some fixed future
date a given quantity of a commodity for a price defined when the contract is finalized. The
fixed price is known as the forward price. Such forward contracts began as a way of reducing
pricing risk in food and agricultural product markets, because farmers knew what price they
would receive for their output.

Forward contracts for example, were used for rice in seventeenth century Japan.

Futures contract

Futures contracts are standardized forward contracts that are transacted through an
exchange. In futures contracts the buyer and the seller stipulate product, grade, quantity and
location and leaving price as the only variable.

Agricultural futures contracts are the oldest, in use in the United States for more than
170 years. Modern futures agreements, began in Chicago in the 1840s, with the
appearance of the
railroads. Chicago, centrally located, emerged as the hub between Midwestern farmers and east
coast consumer population centers.

Swaps

A swap is a derivative in which counterparties exchange the cash flows of one party's financial
instrument for those of the other party's financial instrument. They were introduced in the 1970s

ELECTRONIC SPOT EXCHANGE

The securities and Exchange Board of India (SEBI) approved the report on Internet Trading
brought out by the SEBI Committee on Internet Based Trading and services In January 2000.
Internet trading can take place through order routing systems, which will route client orders to
exchange trading systems for execution Thus a client siting in any part of the country would be
able to trade using the Internet as a medium through brokers Internet trading systems.

SEBI registered brokers can introduce Internet based trading after obtaining
permission from respective Stock Exchanges.

Spot Exchanges refers to electronic trading platforms which facilitate purchase and sale of
specified commodities including agricultural commodities metals and bullion by providing
spot delivery contracts in these commodities.

Spot exchanges in INDIA

NSEL – National Spot Exchange Ltd.

NSPOT – NCDEX Spot Exchange.
National Spot Exchange Ltd (NSEL) which has been allowed and permitted by Government of
India. NSEL is promoted by NAFED and FT It is a national level institutionalized electronic
transparent spot exchange which is composed to transform the rural economy.

NCDEX Spot Exchange (NSPOT) the electronic spot exchange complements the existing
marketing system in the country with its improvised technology and reach through the online
system.
 CHAPTER – 2

QUALITY ASSURANCE

QUALITY ASSURANCE MEANING:

It refers to the systematic measurement comparison with a standard, monitoring of

processes and an associated feedback loop that confers error prevention. It includes
management of the quality of raw materials, assemblies, products and components,
services related to production, and management, production and inspection processes.

CONCEPTS OF QUALITY ASSURANCE IN COMMODITY MARKET

1. A history of quality

2. Continuous improvement

3. Cost of quality

4. Customer satisfaction

5. Glossary: a handy guide to unique terminology and quality

6. Problem solving

7. Process view of work

8. Quality assurance and quality control

9. Root cause analysis

10. Supplier quality.

 CHAPTER – 2

METHODS OF QUALITY ASSURANCE:

Manual Methods:

1. Visual

2. Color

3. Gloss

4. Shape and size

5. Absence of defects

6. Firmness

Technical methods:

1. Statistical independence

2. Sampling

3. Grading

4. Conformance to requirements

5. Failure testing

6. TQM

7. Kaizen

8. Certification

9. Just in Time

10. Six sigma

 CHAPTER – 2

Manual methods

1. Visual

The visual appearance of fresh fruits and vegetables is one of the first quality determinants
made by the buyer whether the wholesaler, retailer or consumer. Often the appearance of
the commodity is the most critical factor in the initial purchase while subsequent
purchases may be more related to texture and flavour.

2. Color

We perceive color when light reflected off the fruit or vegetable’s surface falls upon the
eye’s retina; there is no color without light. Color perception depends on the type and
intensity of light, chemical and physical characteristics of the commodity, and the person’s
ability to characterize color. Evaluating color can be subjective or objective.

3. Gloss

Gloss is a visual aspect of quality that depends on the ability of a surface to reflect light.
Products that are freshly harvested often have a bright, glossy surface and this appearance
factor can be greatly reduced with weight loss and other post- harvest conditions. There
are small portable instruments from Minolta and BKY Gardner for measurement of gloss.
 CHAPTER – 2

4. Shape and size

Uniform and characteristic shape are important quality characteristics. Misshapen

products may be more susceptible to mechanical injury and are generally avoided by
consumers. Another example where shape is important is for broccoli. For the fresh
market, compact broccoli florets are desirable while for fresh-cut, space between the
florets is important to allow for cutting without injury. Size of product can also be
important depending on its intended use. Consumers tend to associate large size with
higher quality and view larger fruit as more mature.

5. Absence of defects

The product should be evaluated for the presence of defects. The level of tolerance for each
type of defect such as cuts, bruises, disease, low-temperature injury, and physiological
disorders should be determined. During quality evaluation, the percentage of fruit with
each class of defect can be determined as a guide to overall product quality. A scoring
system (such as 1= none, 2= slight, 3= moderate, 4= sever and 5= extreme) can be used to
describe the incidence and severity of defects.

6. Firmness

Firmness or the degree of softness or crispness, is often measured using objective

instruments, subjective measure of firmness with the fingers can be useful for quick
measure of gross differences in firmness, particularly of soft products.
 CHAPTER – 2

GRADING AND STANDARDIZATION IN COMMODITIES:

It is well understood and practiced at all India level for engineering and consumer goods. It
is yet to become popular for rural producer. Efforts are made by standard organization to
popularize the standards. Agmark is one of the important steps in popularizing quality
moment by gradation. There are many advantages of grading. The important one is to
obtain fair price to producer and justice to the customer.

STANDARDIZATION

It is a process of fixing certain norms for the product. These norms are established by
customs or tradition or by certain authority. It involves determination ogf basic
characteristic of a product on the basis of which the product can be divided into various
groups. It also means determining the standard of product to be produced with regard to
size, color shape and quality. Standards are model products which form basis of
comparison

BASIS OF STANDARDIZATION

Agricultural goods are standardized on the basis of different factors, based on which they
are classified into different grade. The following are some factors on basis of which
standards are set:

1. On the basis of quantity, weight and measures

 CHAPTER – 2

2. on basis of size and shape

3. on basis of color such as apples

4. on basis of quality such as food grains and cotton

Process of standardization

1. Prepare the list of all items use to make final product

2. Classify the items according to their performance and dimensional

characteristics

3. Group the items with similar functional characteristics and then sub group according to
major dimensional values

4. For a group of items with similar functional characteristics, study the dimensional
features

5. If performance is acceptable, the items have been standardized according to national or

international standard. If the performance is not satisfactory., the organization will adopts
a local standard, dimensions being of the representative value

ADVANTAGES OF STANDARDIZATION

1. Uniformity in quality

2. Differential pricing

3. Increased demand

4. Elimination of risk

5. Expanding market
 CHAPTER – 2

6. Availability of finance

7. No need of inspection

GRADING

It is categorizing the produce into different lots, each containing similar

characteristics. The characteristics could be one or more of following type

 Size – big, medium, small, long etc.

 Flavor – speaks about taste or class
 Ripeness – raw, semi ripe in case of fruits, oil seeds pulses and cereals.
 Length of staple – in case of cotton and jute
 Location oriented – bydagi chillies, Nagpur orange

PURPOSE OF GRADING

1. It is a means to describe the quality of produce for sale / purchase activity

2. It protects consumers from unfair trade practices by traders or farmers

3. Enable farmers to get price as per quality and grade

4. It works as basis of fixing price and price as per quality

ADVANTAGES AND IMPORTANCE OF GRADING

1. Production of large scale

2. Increase in sales, quality certainty

3. Helpful in financial management, helpful in future contracts

 CHAPTER – 2

4. It makes price more reasonable to grade and there will be difference in price as per
quality.

5. Simplification of storage and marketing of different grades.

6. Loans can be given based on stored goods as per the grade.

7. Easier to understand quality available for each grade in case of bulk sale.

8. based on grades, quality and quantity, it is easy to estimate value for loans against stock.
TYPES OF GRADING

1. Fix or mandatory Grading:

Under this the goods are sorted out according to the size, quality and other characteristics
which are of fixed standards. These do not vary over time and space. It is mandatory for a
person to follow these grade standards if he intends to sell graded products. The
Agriculture Marketing Advisor Government of India has fixed grade standards for a number
of agricultural commodities and it is compulsory to grade the produce according to these
grade specifications.

2. Permissive or Variable Grading:

Under this the goods are graded according to the standards which vary over a period of
time. The grading specifications are fixed in over time and space in this case but changed
every year according to the quality of the produce in that particular year. In India grading
by this method is not permissible.
 CHAPTER – 2

3. Centralized / Decentralized Grading:

Under the centralized grading system an authorized packer either sets up for his own
laboratory manned by qualified chemists or seeks access to an approved grading
laboratory set up for the purpose by state authorities or co-operative association or private
agencies. Grading in respect of commodities such as ghee, butter and vegetable oil where
elaborate testing facilities are required for checking the purity as assessing the quality has
been placed under the centralized system.

4. Grading at Producers Level:

Under this programme, free grading services are provided to the farmers for sorting the
produce before offering for sale. This enables them to realize prices commensurate with
the quality of produce. Several regulated markets and warehouses are manned with
grading personnel with the central assistance. Farmers on their own also do grading, which
is actually categorizing as per their own thinking.

PROBLEMS IN STANDARDIZATION & GRADING:

The techniques of standardization and grading have not been developed fully in India.
There are various problems in their way. Some are as follows:

1. Lack of Standards & Grades: One difficulty in the development of standardization and
grading is that for many products standards have not been developed.

2. Misuse of Standards & Grades: It is seen that many producers use standards and grades
in an authorized manner. There is lack of feeling of responsibility and
 CHAPTER – 2

national character among our producers and it is a big hindrance in the development of
standardization and grading.

3. Lack of Public Consciousness: Lack of public consciousness is the problem in the way of
development of standardization and grading in our country. The reasons for lack of public
consciousness are (i) low standard of living, (ii) Illiteracy, (iii) Dominance of rural
population.

4. Lack of Testing Facilities: This is also a great problem in development of

standardization and grading. Manufacturers feel the difficulty in getting these standards
and grades to be tested.

5. Lack of Facilities: There is lack of proper facilities for standardization and grading.
Many industrial enterprises and manufacturers do not like to indulge themselves because
of this reason.

AGMARK:

AGMARK is the acronym for agricultural marketing. It is a quality certification mark under
central agricultural produced (Grading & Marketing) ACT, 1937. AGMARK is done for
commodities of internal consumption like ghee, vegetable oil butter, etc. The AGMARK label
indicates the products meet certain standards of purity and quality. Labels of different
colors are used to indicate the grade of the products. Strict procedures are followed and
rules are laid down to ensure conformity to the standards set as per the grade given.
 CHAPTER – 2

INDIAN STANDARD INSTITUTE (ISI):

ISI came into existence in 1940 as the consequence of industrial conference held at that
time. In January 1947 government of India established Indian Standards Institute under
industrial development plan. Institutional head office is in Delhi.

STRUCTURE OF THE ORGANIZATION:

ISI is managed by the Board. The ex- officio chairmen is the Industrial Development
Minister of Union of India, central government, state government, education and research
institution testing laboratories different industries and developmental boards are its
representatives. There are five departments of ISI: Engineering, Construction, Economics,
Weaving and Agriculture.

FUNCTIONS OF ISI:

1. Giving suggestions in respect of the product

2. Conducting necessary researches and experiments in field of standardization.

3. Determining standards of different products at National and International Level.

4. Suggesting in request of products.

5. Making the standards popular.

6. Checking new products and determining the standard mark for them.

7. Developing a feeling of competition for the purpose of promoting the production of high
quality goods.

8. Collecting necessary data.

Indian Standards Institution Act, 1952:

 CHAPTER – 2

ISI ACT was passed in1952. This ACT gave power to the institute to the test the quality and
characteristics of agriculture product and marks them with “AGMARK”. It also gave power
to the producers of quality product to use mark ‘959’.

Grading of Commodities:

Agricultural Commodities: The agriculture produces grading and making act 1937. This act
provides for grading and marking of agriculture commodities. The act authorizes the
central government to frame rules relating to fixing of grades standards and the procedure
to be adopted for grading the agriculture commodities included in the schedule. This act
was amended in 1986.

For Manufactured Commodities:

The Indian Standards Institutions (Certification Marks) Act, 1952: Manufacture products
are graded in accordance with the standards laid down by the Indian Standards Institutions
established under the act and graded products bear the ISI label. The name of the Indian
Standards Institution has been changed to Bureau of Indian Standards (BIS) under the
Bureau of Indian Standards Act 1986.

Recommendations of National Commission on Agriculture:

The NCA had the made the following suggestion to make grading and standardization
popular in the country:

1) Grading and Standardization should be made compulsory for transactions in

agriculture commodities at all levels for local Interstate and export trade.
 CHAPTER – 2

2) Grading and standardization must cover all type of agricultural commodities viz,
livestock and livestock products, crops including horticulture and plantation, fish and fish
products, and minor forest products.

3) The grading system should be made efficient and full proof. For this trained and well
qualified grades should be appointed.

4) Samples of graded commodities should be displayed in all the markets for verification
by the graders and participating consumers.

5) Duplication and overlapping of functions linked with the formulation of grades

standards of agricultural commodities should be abolished.

6) In order to avoid duplication the work should be distributed among the central and
state government.

Other Provisions of Grade Standards and Quality Specification:

Apart from the agriculture product (Grading and Marketing) act, 1973, there are few other
legal provisions which lay down standards for food products. Some of the important acts
are:

The Bureau of Indian Standards (BIS). Under Indian Standards Institutions (Certification
Mark) Act, 1952

The Prevention of Food Adulteration Act, 1954 The

Fruit Products Order, 1956
Solvent extracted oil, de-oiled meal and edible oil (control) order 1967 The
Meat food products order 1973
 CHAPTER – 2

Vegetable oil products (standard of quality) order 1975.

Quality Control & Inspection – Indian Standards:

The Quality Control, Grades and Inspection Methodology is different from Commodity to
Commodity and for further information please login to (MCX, NCDEX, NMCE, NBOT, ACE,
ICE) websites and tap commodity profile to look into the above details (Contract
Specifications):- Example: Gold Contract Specification of 2016 for details such as Grade,
Standardization, Quality and Inspection as per Multi Commodity Exchange – Indian
Standards
 CHAPTER - 3
COMMODITY DERIVATIVE

DERIVATIVE
A derivative is a contract between two parties (buyer and seller) whose pay-off
depends on the underlying asset(existing securities).
A derivative security is a financial contract whose value is derived from the value
of something else such as stock price, commodity price, an exchange rate, an
interest rate etc.
Characteristics of Derivatives
 It has one or more underlying assets.
 The value of derivatives depends on their underlying assets price movements.
 It is a hedging device which reduces the risk involved in the transaction.
 It requires negligible initial investment compared to other types of financial
contracts.

Advantages of Derivatives
 They help in transferring risks from risk adverse people to risk oriented
people.
 They help in the discovery of future as well as current prices.
 They catalyze entrepreneurial activity.
 They increase savings and investments in the long run.

Traders in Derivative Market

Hedgers: Hedgers are those traders who wish to eliminate the price risk
associated with the underlying security being traded. The objective of this kind of
traders is to safeguard their existing position by reducing the risk.
Arbitrageurs: Arbitrage is the process of simultaneous purchase of securities or
derivatives in one market at lower price and sale thereof in another market at a
relatively higher price.

Speculators: Speculators are those classes of investors who willingly take price
risks to profit from price changes in the underlying assets. Speculators are people
who analyze and forecast futures price movement, trading contracts with the
hope of making a profit.

A derivative is used as an hedging instrument to prevent or reduce loss. Also

used as a speculative instrument. Derivatives are widely used in both domestic
and international business. The following are the types of derivative contract
used in mercantile activities:-
1. Options
2. Forwards
3. Futures
4. Swaps

OPTIONS
An option is a contract between two parties (buyer and seller) where one of the
parties called holder has the right to buy/sell without any obligation. If the
contract is not through, one of the parties suffers loss. Hence the party who
suffers loss is compensated by other party by means of small cost called
premium.
Options are of two types:-
Call option
Call option is a buy option. It originates from the buyer who is called holder of the
option. The holder has the right to exercise the option without any obligation.
The holder pays the seller who is called writer a small amount called premium.

Put option
Put option is a sell option. It originates from the seller who is called holder of the
option. The seller has the right to buy/sell an existing asset without any
obligation. In a put option the seller will pay a premium to the holder.
Advantages of options
 An investor can gain leverage in a stock without committing to a trade.
 Option premiums are significantly cheaper on a per-share basis than the full
price of the underlying stock.

Disadvantages of options
 Some option positions, such as writing uncovered options, are accompanied
by unlimited risk.
 Option are very complex and require a great deal of observation and
maintenance.

FORWARDS
A forward contract is an agreement between two parties to buy/sell an asset at a
predetermined rate for delivery at future date.

 Forward contracts are derivatives over the counter contract I.e., one to one. It
is used to hedge exchange rate risk generally by exporters and importers to
hedge their position.
 It is a contract to hedge exchange rate risk only.

Advantages of Forward Contract

 Hedge risk: Forward contracts can be used to hedge or lock in the price of
purchase or sale commodity or financial asset on the future commitment
date.
 No margin required: Forward contracts does not require any
margin(collateral)
 No initial cost: In forward contracts generally margins are not paid.
 Negotiability: The terms and conditions of the forward contract are negotiable.
 Forwards are tailor made and can be written for any amount and term.

Disadvantages of Forward contract

 Counter party risk: Counter party risk is very much present in a forward
contract since there is no performance guarantee.
 Not traded in stock exchange: Since forward contract are not traded in stock
exchange they have ready liquidity.
FUTURES
Future contract are standardized contracts between two parties where both
parties agree to buy and sell a particular asset of specific quantity and at a
predetermined price, at a specified date in future.
 It is exchange traded (not OTC contract).
 Both buyer and seller has to deposit certain percentage of the value by way
of margin. Hence there is no counter party risk.

Advantages of Future Contract

 Helps in risk management.
 Facilitates lengthy and complex production and manufacturing activities.
 Limits on price fluctuation speculation.
 Limits on price fluctuation prevents speculation.

Disadvantages of Futures Contract

 It offers only a partial hedge.
 Leverage can make trading in futures contracts highly risky for a particular
strategy.
 It is subject to basis risk which is associated with imperfect hedging using
futures.

SWAPS
A Swap is a derivative contract through which two parties exchange financial
instruments. These instruments can be almost anything, but most Swaps involve
cash flows based on a notional principal amount that both parties agree to.
Usually, the principal does not change hands. Each cash flow comprises of one leg
of the Swap. One cash flow is generally fixed, while the others variable, I.e., based
on a bench mark interest rate, floating currency exchange rate.
Types of Swaps
Interest rate swaps: These involve swapping only the interest related cash flows
between the parties in the same currency.
Currency swaps: Currency swaps include current swaps in which one currency is
exchanged for another at specified terms on one or more pre specified dates.
Advantages of Swaps
 The investor/corporate will have an access to the markets in which it is
impossible to raise debt directly.
 Swaps can be used as a long hedge instruments.
 Use of swaps provides an opportunity to restructure a firm’s capital profile
without physically redeeming debt or raising new debt.

Disadvantage of swaps
 Difficulty in finding a counterpart with opposite cash flow obligation who
could enter for a swap deal.
 Termination of swap contract requires mutual consent of both the parties.

IMPORTANT EVENTS IN INDIAN COMMODITY

DERIVATIVES MARKET
1875 - Start of Bombay Cotton Trade Association
1900 - Gujarat Vyapari Mandali was operationalised to trade in
oilseeds derivatives
1919 - Calcutta Hessian Exchange was initiated
1920 - Futures trading in Gold was started on Bombay Bullion
Association 1921 - East India Cotton Association was started
1927 - East India Jute trade Association was initiated
1957 - India Pepper and Spices Trade Association (IPSTA) was established
1980 - Committee on Forward Markets (Khusro Committee) recommended
steps to revive futures trading in more agriculture commodities
1994 - Committee on Forward Markets (Kabra Committee) recommended
opening up of futures trading in 17 selected commodities
1996 - UNCTAD and World Bank joint Mission Report “India: Managing Price
Risk in India’s Liberalized Agriculture: Can Futures Market Help?”
indicated the role of futures markets as important instruments for risk
management.
2000 - National Agricultural Policy favoured the revival of commodity futures.
2001 - Expert Committee on Strengthening and Developing Agricultural
Marketing (Guru Committee) emphasized the need for futures trading
in price risk management and in marketing of agricultural produce
2002 TO 2003 - Revival of futures trading in commodities and
operationalization of three national level commodity
exchanges.
2008 - Expert Committee on Commodity Futures Trading (Abhijit Sen
Committee) suggested for introduction of simple options in agricultural
commodities and allowing participation of banks and financial
institutions
2013 - Levy of commodities transaction tax
(CTT) 2015 - Merger of FMC and SEBI
2017 - SEBI allowed participation of category III alternative investment
funds in commodity derivatives.
2017 - Expert Committee on Integration of spot and derivatives markets was set
up to review and suggest suitable measures.
2017 - RBI permitted banks to become Professional Clearing Members of
the commodity derivatives segment of SEBI recognized
exchanges.
2017 - SEBI permitted trading in commodity options.
RBI permits bank subsidiary to offer broking services for
Commodity Derivatives Segment.

Importance of commodity derivatives

markets Commodity Derivatives Market
The Indian economy is observing a mini revolution in commodity derivatives
and as well as risk management. Commodity options trading and cash
settlement of commodity futures had been forbidden since 1952 and until 2002
commodity derivatives market was practically non-existent, except some
negligible activity on an OTC basis. In September 2005, the country had 3
national level electronic exchanges and for about 21 regional exchanges for
trading commodity derivatives. For about eighty (80) commodities had been
allowed for derivatives trading.

TWO IMPORTANT TYPES OF COMMODITY DERIVATIVES.

Commodity futures contracts: A contract of buying and selling a commodity

for a predefined delivery price at a specific future time is termed as futures
contract.
Futures contracts are standardized agreements that are traded on futures
exchanges. The futures exchanges ensure the performance of contracts and also
eliminates the default risk. Chicago Board of Trade (CBOT) was established in
1848, and along with it the commodity futures have been existed. It was done in
the view to bring farmers and merchants together. There are various functions of
futures markets but the main function is to transfer price risk from hedgers to
speculators.

Some of the important features of future commodity derivative are:-

 At present 22 Exchanges are recognized/registered for forward/ futures
trading in commodities.
 Under the Forward Contracts [Regulation]Act, 1952, forward trading in
commodities notified under section 15 of the Act can be conducted only
on the Exchanges, which are granted recognition by the Central
Government [Department of Consumer Affairs, Ministry of Consumer
Affairs, Food and Public Distribution].
 All the commodities are not suitable for futures trading and for conducting
futures trading. For being suitable for futures trading the market for
commodity should be competitive, i.e., there should be large demand for
and supply of the commodity. The commodity should have long self-life
and be capable of standardization and gradation.
 Price discovery is done through two popular methods. The fundamental
analysis
is concerned with basic supply and demand information, such as, weather
patterns, carryover supplies, relevant policies of the Government and
agricultural reports.
Technical analysis includes analysis of movement of prices in the past.

.
Commodity options contracts: Like hedges options are also financial
instruments, which are used for speculation and hedging. The commodity option
holder has the right and he don't have the obligation to buy or sell a specific
quantity of a commodity at a particular price on or before a specified date. This
involves two parties one is the seller of the options who writes the option in the
favor of the holder i.e, buyer, who pays certain amount to the seller as the price
of the option. Buyer is the second party who is involved in this. Commodity
options are of two kinds, first one is a “call” option which gives the holder a right
to buy a commodity at an agreed price and the
other one is “put” option which gives the holder a right to sell a commodity
at an agreed price on or before a predeclared date which is also called
expiry

ECONOMIC IMPORTANCE OF COMMODITY DERIVATIVE MARKETS

While commodity markets in general and commodity derivatives market in
particular have existed in India for over 100 years, the official traded mechanism
for commodities began as late as 2003. There have been issues of liquidity and
issues of multiple regulatory jurisdiction but at least there is a platform for
forming a view and trading on commodities. There are some very important role
that the commodity market can perform in Indian context.

 Greater investment in agricultural ecosystem

Today one of the big challenges for the agricultural sector is that there is
virtual absence of post harvest infrastructure. As a result substantial amount
of food grain is lost in the transmission process which worsens the price
situation for the end customer without benefiting the farmer. Viable
commodity market mechanism will be profitable for the farmer, broker,
middleman and the consumer and this will spur greater investment in the
agricultural ecosystem in the form of better warehousing systems and
improvement transport facilities.
 Here again a viable commodity market can play a key role in catalyzing the
development of this ecosystem.

 A mechanism for aggregation and financing

The big challenge in Indian agriculture is the farmers are too small and hence
too dispersed. The need of the hour is of an aggregator. Currently, the
middlemen play the role of aggregators but then it is not exactly a
transparent mechanism. An organized commodity market can play the role of
an aggregator of agricultural products more efficiently and more effectively.
The market provides an organized and guaranteed mechanism for
aggregating and selling agricultural products and small and dispersed
farmers can make the best of it. Financing is the second aspect of commodity
markets. The commodity markets have an organized ans institutional
mechanism to raise financing against warehouse receipts. Hence the
agriculture sector does not have to depend on unorganized financing.

 Retail investors can participate in a new asset class

For the long investment classes for Indian investors had been limited to the
traditional gold, real estate, bonds, FDs and equities. While the investors have
indirectly participated in commodities through the equity market
mechanism, they still do not directly participate in commodities as an asset
class. In the process, they are also able to diversify their concentration risk of
the existing asset classes. There is also a wide choice for investors and
traders. They can participate in agricultural products or even in precious
metals like gold and silver.

 Absorb some of the speculative excesses of the spot market

This is a very important role that the commodity markets play. A lot of
demand for gold is generated for speculative purposes. Since there is only so
much gold that India produces, we rely heavily on gold importers to meet the
additional demand. Now gold imports have a major downside. They result in
utilization of precious foreign exchange resources without any concomitant
productivity benefits. This is more because traders and speculators today
prefer to hold on to spot gold. That problem can be resolved with a robust
gold futures market as it will absorb most of the speculative demand for gold.
In the process, it saves precious forex resources for the Indian economy.
 Hedging price and distribution of risk.
This is one of the most important functions of the commodity market in
that it helps distribute the risk and protects the originator of the risk. Take
the case of a jewellery manufacturer who wants to hedge against gold price
volatility. The same can be done by selling gold futures and locking in the
price. Similarly, an FMCG food products company that wants to hedge against
volatility in agricultural products can also use the futures market to hedge
their position. What the market does is that overall risk tents to become
granular and more numbers of traders tend to share the risk.

 Achieve food security through commodity markets

Bad warehousing is the risk that the farmers are forced to take. These
farmers can use the futures market more effectively by selling futures on
their grains and locking in a price. These will ensure that the farmers are not
susceptible to the fluctuations in the prices. Currently farmers are being hit
by week pulses prices due to over supply in the Indian market. This can be
overcome by selling futures on theses pulses at a price that is remunerative
for the farmer.

Commodity markets in India are still at a nascent stage and have a long way to go.
Having said that; they have an important role to play in discovering the price and
hedging the risk of commodities in India.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

INTRODUCTION:

Among the investment avenues, commodity futures trading is a fast growing sector with
huge untapped potential, along with the financial markets. The major difference between
commodity and financial markets is that, in commodities futures physical delivery takes place
where as in the capital market it does not. In these markets, there are farmers, industrialists,
warehouses, consumers, dealers and traders, who buy and sell commodities. There are warehouses,
which stores commodities and there are consumers, who consume them eventually. In the Indian
context, warehouses are necessary for the commodity sector and commodity future trading
especially for farmers because agricultural commodities constitute a major segment of the Indian
economy.

Warehousing forms the basic platform of delivery based trading in commodity futures.
Warehouses play an important role in commodities futures, as most of trades are settled with
delivery. That is, if the seller chooses to handover the commodity instead of the difference in cash,
the buyer must take physical delivery of the underlying asset.

WAREHOUSE RECEIPTS:

A warehouse receipt, which may be either in writing or in electronic form, shall be a

document of title to goods in writing if it contains all the following particulars, namely:

(a) Receipt number;

(b) Warehouse registration number and date up to which it is valid;

(c) Name of the warehouse and its complete postal address;

(d) Name and address of the person by whom or on whose behalf the goods are deposited;

(e) Date of issue of the warehouse receipt;

(f) Statement that the goods received shall be delivered to the holder thereof, or that the goods
shall be delivered to the order of a named person;
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

(g) Rates of storage charges and handling charges;

(h) Description of the goods or of the packages containing them with particulars of quantity and
quality or grade;

(I) Market value of the goods at the time of deposit.

(j) private marks of depositor on the goods or packages, if any, except in the case of fungible
goods;

(k) Name of the insurance company indemnifying for fire, flood, theft, burglary, misappropriation,
riots, strikes or terrorism;

(l) Whether the warehouse receipt is negotiable or non-negotiable;

(m) Statement of the amount of any advance made and of any liability incurred for which the
warehouseman claims his lien;

(n) Date and signature of the warehouseman or his authorized agent;

(o) Declared shelf-life of goods;

(p) The fact that the warehouseman holds the lien on the goods deposited for his storage and
handling charges;

(q) That the receipt would be valid only till the date of expiry of declared shelf- life of the goods
for which it is issued.

NEGOTIABILITY OF WAREHOUSE RECEIPTS:

Negotiable warehouse receipts allow transfer of ownership of that commodity stored in

a warehouse without having to deliver the physical commodity. These receipts are issued
in negotiable form, making them eligible as collateral for loans.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

ESSENTIALS OF GOOD STORAGE:

1. It should be easy to clean.

2. It should provide protection from rodents, birds and other animals. 3. It should be waterproof
and moisture proof.

4. It should protect the food grains against variations of temperature and humidity. 5. It should
have provision for periodical inspection.

6. It should have provision for application of pesticides through spraying or fumigation.

7. It should be located far away from possible sources of infection such as kilns, flour mills, and
bone crushing mills, garbage rumps, tanneries, slaughter houses and chemical industries.

8. It should be located at a convenient place from where it is easy to receive issue and transport
the food gains. This explains why most of the storage structures are located near railway stations
or on highways.

WAREHOUSE AND STORAGE FACILITIES IN INDIA:

Three public sector agencies are involved in building large-scale storage and warehousing
capacities in the country. These are the Food Corporation of India (FCI) - External website that
opens in a new window, Central Warehousing Corporation (CWC) - External website that opens
in a new window and 17 State Warehousing Corporations (SWCs). While the FCI uses its
warehouses mainly for storing food grains, the storage capacities with CWC and SWCs are used
for the storage of food grains as well as other items.

USES OF WAREHOUSES:

• Scientific storage of produce from the vagaries of weather, rodents, insects and pests. They
prevent quality and quantity losses.

• Meeting the financial needs of people who store the produce by providing value for the goods
stored.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

• Regulating price levels by regulating the supply of goods in the markets. More goods from the
buffer are released when supplies are less and less is released when supplies are more in the
markets.

• Offering market intelligence in the form of price, supply and demand information so that market
users may develop selling and buying strategies.

KEY RISK AREAS – STORAGE AT WAREHOUSE

A. Protecting Ownership Rights in goods: Prudent owners must enquire correctly.

B. Co-Mingling: In case of insolvency by one trader to another to save cost and space.

C. Insurance: Failure to disclose a material fact may entitle the insurer to terminate the policy and
avoid payment in the event of a claim.

D. Financing: Loan on Goods stored or goods will be kept as a security. E. Pledge Security:
Retaining ownership and pledging with certain conditions.

F. Warehouse Documents: If documents are wrong and misrepresentations.

G. Legal risk management: Laws, Terms and Conditions, Rules & Regulations.

SIGNIFICANT GROWTH DRIVERS:

• Growth in GDP and changing demographics

• Demand for high-end services and infrastructure
• Growing external trade
• Rising share of organized retail
• GST implementation

Key players: DHL, Safexpress, Continental Warehousing, Indo Arya, MJ Logistics, Allcargo,
Nippon Express, etc. are the major players in industrial warehousing.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

WAREHOUSE STRUCTURE:

India’s Warehousing Industry: Liquid Storage, Cold Storage, Agri Storage, Container
Handling and Storage, etc.

The warehouse structure in warehouse management is divided hierarchically and

consists of the following elements:

● Warehouse number: In EWM (extended warehouse Management), you can manage an entire
physical warehouse complex using a single warehouse number.

● Storage type: You can define the individual warehouse facilities or warehouses that make up the
warehouse complex, using their technical, spatial, and organizational characteristics as storage
types.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

● Storage section: Each storage type is divided into storage sections. All storage bins with specific
common attributes belong to one storage section, for example, storage bins for fast-moving items
that are close to the goods issue zone. Storage bin: Each storage type and storage section consists
of a selection of storage compartments that are called storage bins in EWM. The coordinates of
the storage bin tell you the exact position in the warehouse, where you can store products.

● Quant: The quant is used for inventory management of a product in a storage bin.

WAREHOUSE COSTS AND OTHER EXPENSES:

Supervisory Salaries, Clerical Salaries, Purchased Labor, Office Equipment (major &
minor), Office Maintenance, Telephone/Facsimile, Postage, Printing, Office supplies, Legal and
Professional, Taxes and Licenses, Losses Due to Damage, Shortages, and Errors, Other expenses,
etc.

STORAGE:

Scientific storage and handling services for more than 400 commodities include
Agricultural produce, Industrial raw-materials, finished goods and variety of hygroscopic and
perishable items.

• Scientific Storage Facilities for more than 200 commodities including hygroscopic and
perishable items through network of 464 warehouses in India with its 4,156 trained personnel.

• Import and Export Warehousing facilities at its 30 Container Freight Stations in ports and inland
stations.

• Bonded Warehousing facilities, Disinfestation services & Handling, Transportation & Storage of
ISO Containers.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

TYPE OF WAREHOUSES:
There are six types of warehouses as described below:

1. Private Warehouses:
The private warehouses are owned and operated by big manufacturers and merchants to
fulfil their own storage needs. The goods manufactured or purchased by the owner of the
warehouses have a limited value or utility as businessmen in general cannot make use of them
because of the heavy investment required in the construction of a warehouse, some big business
firms which need large storage capacity on a regular basis and who can afford money, construct
and maintain their private warehouses. A big manufacturer or wholesaler may have a network of
his own warehouses in different parts of the country.

2.Public Warehouses:
A public warehouse is a specialised business establishment that provides storage facilities
to the general public for a certain charge. It may be owned and operated by an individual or a
cooperative society. It has to work under a license from the government in accordance with the
prescribed rules and regulations.

Public warehouses are very important in the marketing of agricultural products and
therefore the government is encouraging the establishment of public warehouses in the cooperative
sector. A public warehouse is also known as duty-paid warehouse.

Public warehouses are very useful to the business community. Most of the business
enterprises cannot afford to maintain their own warehouses due to huge capital Investment. In
many cases the storage facilities required by a business enterprise do not warrant the maintenance
of a private warehouse. Such enterprises can meet their storage needs easily and economically by
making use of the public warehouses, without heavy investment.

Public warehouses provide storage facilities to small manufacturers and traders at low cost.
These warehouses are well constructed and guarded round the clock to ensure safe custody of
goods. Public warehouses are generally located near the junctions of railways, highways and
waterways.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

They provide, therefore, excellent facilities for the easy receipt, despatch, loading and
unloading of goods. They also use mechanical devices for the handling of heavy and bulky goods.
A public warehouse enables a businessman to serve his customers quickly and economically by
carrying regional stocks near the important trading centres or markets of two countries.

Public warehouses provide facilities for the inspection of goods by prospective buyers.
They also permit packaging, grading and grading of goods. The public warehouses receipts are
good collateral securities for borrowings.

3.Bonded Warehouses:
Bonded warehouses are licensed by the government to accept imported goods for storage
until the payment of custom duty. They are located near the ports. These warehouses are either
operated by the government or work under the control of custom authorities.

The warehouse is required to give an undertaking or ‘Bond’ that it will not allow the goods
to be removed without the consent of the custom authorities. The goods are held in bond and cannot
be withdrawn without paying the custom duty. The goods stored in bonded warehouses cannot be
interfered by the owner without the permission of customs authorities. Hence the name bonded
warehouse.

Bonded warehouses are very helpful to importers and exporters. If an importer is unable or
unwilling to pay customs duty immediately after the arrival of goods he can store the goods in a
bonded warehouse. He can withdraw the goods in installments by paying the customs duty
proportionately.

In case he wishes to export the goods, he need not pay customs duty. Moreover, a bonded
warehouse provides all services which are provided by public warehouses. Goods lying in a
bonded warehouse can be packaged, graded and branded for the purpose of sale.

4.Automated Warehouse

With advances in computer and robotics technology many warehouses now have automated
capabilities. The level of automation ranges from a small conveyor belt transporting products in a
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

small area all the way up to a fully automated facility where only a few people are needed to handle
storage activity for thousands of pounds/kilograms of product. In fact, many warehouses use
machines to handle nearly all physical distribution activities such as moving product-filled pallets
(i.e., platforms that hold large amounts of product) around buildings that may be several stories
tall and the length of two or more football fields.

5.Climate-Controlled Warehouse

Warehouses handle storage of many types of products including those that need special handling
conditions such as freezers for storing frozen products, humidity-controlled environments for
delicate products, such as produce or flowers, and dirt-free facilities for handling highly sensitive
computer products.

6.Distribution Center

There are some warehouses where product storage is considered a very temporary activity. These
warehouses serve as points in the distribution system at which products are received from many
suppliers and quickly shipped out to many customers. In some cases, such as with distribution
centers handling perishable food (e.g., produce), most of the product enters in the early morning
and is distributed by the end of the day.

FOOD CORPORATION OF INDIA (FCA)

The Food Corporation of India (FCI) was set up on 14 January 1965 having its first District Office
at Thanjavur – rice bowl of Tamil Nadu– and headquarters at Chennai (The Headquarters later
shifted to Delhi) under the Food Corporations Act 1964 to implement the following objectives of
the National Food Policy :

1. Effective price support operations for safeguarding the interests of the poor farmers
2. Distribution of food grains throughout the country for Public Distribution System
3. Maintaining satisfactory level of operational and buffer stocks of food grains to ensure National
Food Security
4. Regulate market price to provide food grains to consumers at a reliable price
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

Statistics

It is one of the largest corporations in India and probably the largest supply chain
management in Asia (Second in world) .It operates through 10 Zonal offices and 24 Regional
offices. Each year, the Food Corporation of India purchases roughly 15 to 20 per cent of India's
wheat output and 12 to 15 per cent of its rice output. The purchases are made from the farmers at
the rates declared by the Govt. of India. This rate is called as MSP (Minimum Support Price).
There is no limit for procurement in terms of volume; any quantity can be procured by FCI (Food
Corporation of India) provided the stock satisfies FAQ (Fair Average Quality) specifications with
respect to FCI.

Organization structure

Food Corporation of India operates through its Depot headed by Manager (Depot). Every
district has few depots to cater to the requirement of the district's rural population. The depot
reports to District Office, headed by an Assistant General Manager, designated as Area Manager.
Assistant General Manager (Quality Control) is also posted who is looking after the QC work.
Under Area Manager control, there are Managers to deal with each and every section viz., Depot,
Sales, Contracts, Procurement, SL-TL, Movement, Establishment, Quality Control (QC),
Operational accounts etc., who consolidate the field level operations and through the area
managers' authorization, they transmit the necessary information and periodical statements to
Regional Offices of their respective regions. Under Managers are Assistant Grades Level -1, Level
-2 and Level - 3 who help managers in day-to-day operations of the organization.

The district office reports to regional offices which are headed by a General Manager, who is in
most of the cases from Indian Revenue Service, Indian Administrative Service /All India Services
under deputation. Under his control Deputy General Managers (DGM) who are FCI's officers co-
ordinate with daily operations through the Assistant General Managers who were posted in various
sections to oversee the functions of district offices units of their particular section. All these
officers appraise the general manager periodically on various issues pertaining to district offices
of that particular region.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

FCI has been divided into 5 zones viz. North, South, East, and West & North-East with a
Zonal Office in each zone. Each zone is further divided into regions with a regional office in one
region. All the Regional Offices are under the control of Zonal Offices which are headed by an
Executive Director, who in most of the cases is from Indian Administrative Service or Indian
Revenue Service under deputation. Under his control three or more than three General Managers
co-ordinate with all Regional Offices of their particular zone through subordinate officers like
Deputy General Managers and Assistant General Managers dealing with their allotted operational
sections in their zone.

All the Zonal Offices are under the control of Headquarters, located at New Delhi, which
is headed by Chairman and Managing Director, who is an Indian Administrative
Service of Secretary rank on Central Deputation. Headquarters instruct, communicate, consolidate
and refine the voluminous information required for the streamlined execution of day-to-day
operations and coordinates with Ministry of Consumer Affairs, Food and Public Distribution and
Food Secretary and various sister corporations like Central Warehousing Corporation, Indian
Railways in formulating food policy or amending the existing policy to suit the emerging
challenges in managing Food Security scenario of the nation.

Operation

The Food Corporation of India procures rice and wheat from farmers through many routes
like paddy purchase centres/mill levy/custom milling and stores them in depots. FCI maintains
many types of depots like food storage depots and buffer storage complexes and private equity
godowns and also implemented latest storage methods of silo storage facilities which are located
at Hapur in Uttar Pradesh and Elavur in Tamil Nadu. The stocks are transported throughout India
and issued to the state government nominees at the rates declared by the Government of India for
further distribution under the Public Distribution System (PDS) for the consumption of the ration
card holders. (FCI itself does not directly distribute any stock under PDS, and its operations end
at the exit of the stock from its depots). The difference between the purchase price and sale price,
along with internal costs, are reimbursed by the Union Government in the form of food subsidy.
At present the annual subsidy is around $10 billion. FCI by itself is not a decision-making
authority; it does not decide anything about the MSP, imports or exports. It just implements the
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

decisions made by the Ministry of Consumer Affairs, Food and Public Distribution and Ministry
of Agriculture.

Food Corporation of India recently ventured into procurement of pulses in various regions
from the crop year 2015–16, and pulses are procured at market rate, which is a sharp deviation
from its traditional minimum support price-based procurement system.

In 2014, Government of India set up a high-level committee under the chairmanship of

Hon'ble Member of Parliament and former Minister of Food and Consumer Affairs and Public
Distribution Shri Shanthakumar to recommend viable solutions regarding restructuring and
reorienting the role of Food Corporation of India, and the committee submitted its report to the
government, and many of the committee recommendations are under various stages of
implementation.

Central warehousing corporation (CWC)

Central Warehousing Corporation (CWC) a premier warehousing Agency in India,
instituted during 1957 CWC operates 432 Warehouses across the country with a storage capacity
of 9.96 million tonnes providing warehousing services

Central Warehousing Corporation (CWC) providing logistics support to the agricultural

sphere is one of the largest public warehouse operators in the country extending logistics services
to various groups of clients. Warehousing services are providing a broad scope of products
wandering from agricultural development to sophisticated industrial production.

Warehousing activities of CWS include food grain warehouses, industrial storage, custom
bonded warehouses, container freight stations, inland clearance depots and air cargo complexes.

Apart from storage and handling, CWC also offers services in the area of clearing and
forwarding, handling and transportation, procurement and distribution, disinfestations services,
fumigation services and other ancillary activities.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

CWC also offers consultancy services and training for construction of warehousing infrastructure
to different agencies.

CWC is the office for storage and covering. CWC also offers services in the field of
authorizing, and forwarding, handling and transportation, procurement and distribution,
disinfestation services, fumigation services and other ancillary activities are:

1. To establish warehouses: The very first function of Central Warehousing Corporation is to

acquire and build godowns and warehouses at such suitable and useful places in India as it deems
it.
2. Run warehouses: After establishing warehouses at suitable places the next function is to run
warehouses for the storage of agricultural produce, seeds, manures, fertilizers, agricultural
implements and notified commodities offered by individuals, cooperative societies and other
institutions.
3. Provide assistance to agriculturists: Central Warehousing Corporation also needs to arrange
facilities for the transport of agriculture products, seeds, manures, fertilizers, agricultural
implements and notified commodities to and from warehouses.
4. Assisting state warehousing corporation: Being a supreme government body in this field Central
Warehousing Corporation is also supposed to assist and direct State Warehousing Corporations. It
also has o subscribe to the share capital of State Warehousing Corporation.
5. Act as an agent of government: Sometimes central warehousing corporation has also to serve as
an agent of the Government for the purpose of purchase, sale, storage and distribution of
agricultural produce, seeds, manures, fertilizers agricultural implements and notified commodities.
6. Disinfestations services: The corporation may, at the request of parties concerned, undertake
disinfestations service outside its warehouses in respect of agricultural produce or notified
commodities.
7. Act as an agent of its discretion: CWC may, act at its directions, act as agent for the purpose of
purchase, sale, storage and distribution of agricultural produce, seeds, manures, fertilizers,
agricultural implements and notified commodities on behalf of the company as defined in the
Companies Act, 1956, or a body corporate established by an Act of Parliament or a State
Legislature or a co-operative society.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

8. Follow the instruction of the Government: Being a government organization the corporation has
to follow instructions from the central government. So, it also ahs to carry out such other functions
as may be prescribed by the Government from time to time.

Operation

CWC operations include scientific storage and handling services for more than 400
commodities include Agricultural produce, Industrial raw-materials, finished goods and variety of
hygroscopic and perishable items.

• Scientific Storage Facilities for commodities including hygroscopic and perishable items through
network of 476 warehouses in India with its 5,658 trained personnel.
• Import and Export Warehousing facilities at its 36 Container Freight Stations in ports and inland
stations.
• Bonded Warehousing facilities.
• Disinfestation services.
• Handling, Transportation & Storage of ISO Containers.
CWC enables the movement of imported and exportable goods to and from the port towns and has
developed infrastructure of Container Freight Stations & Inland Clearance Depots throughout the
country. It operates 36 CFSs/ ICDs where composite services for containerised movement of
import/export cargo are provided. The Warehousing Corporation is empowered to acquire and
build Warehouses for storage of Agricultural produce, seeds, fertilizers and other notified
commodities and also to act as an agent of the Central Warehousing Corporation or of the
Government, for the purpose of purchases, sales storage, distribution etc., of Agricultural
Commodities in time of need. Though it has been criticised for lack of manpower and
technologically equipped warehousing facility.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

TRADING ON COMMODITY EXCHANGE:

The commodities market works just like any other market. It is a physical or a virtual space,
where one can buy, sell or trade various commodities at current or future date. One can also do
commodity trading using futures contracts. A futures contract is an agreement between the buyer
and the seller, wherein the buyer promises to pay the agreed-upon sum at the moment of the
transaction when the seller delivers the commodity at a pre-decided date in the future.

PROCEDURE TO INVEST IN A COMMODITY MARKET:

1. An investor can transact a business with the approved clearing member of Commodity
Exchanges. The investor can ask for the details from the Commodity Exchanges about the list of
approved members.

2. When investor approaches Clearing Member, the member will ask for identity proof. For which
Xerox copy of any one of the following can be given

a) PAN card number

b) Driving License

C) Vote ID

d) Passport

3. The front page of Bank Pass Book and a cancelled cheque of a concerned bank. Otherwise the
Bank Statement containing details can be given.

4. In order to ascertain the address of investor, the clearing member will insist on Xerox copy of
Ration Card or the Pass Book/ Bank Statement the address of investor is given.

5. The clearing member will ask the client to sign a) Know your client Form b) Risk Discloser
Document.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

THE EXCHANGE PLATFORM:

The Commission allows commodity trading in 22 exchanges in India, of which 6 are

national. On 28 September 2015 the FMC was merged with the Securities and Exchange Board of
India (SEBI). India has six commodity exchanges they are as fallows Multi Commodity Exchange
(MCX), National Commodities and Derivatives Exchange (NCDEX), National Multi Commodity
Exchange, Indian Commodity Exchange, ACE Derivatives Exchange and the Universal
Commodity Exchange.

MEMBERSHIP OF THE MULTI COMMODITY EXCHANGE:

There are four types of membership of the Multi Commodity Exchange, each having their
own specific rights and responsibilities:
1. Trading Member (TM): Trading members of the Multi Commodity Exchange may trade on
behalf of themselves and clients, but may not clear such trades: this has to be done by members
with clearing privileges. Individuals, partnerships, trading organisations and Hindu Undivided
Families (HUFs) are eligible for this grade of membership. Applicants must also have a minimum
net worth: Rs.10 Lakh in the case of private individuals, RS.25 Lakh in the case of organisations.

2. Professional Clearing Member (PCM): these members have the right to trade, and to clear
their trades and those of clients through MCX’s clearing house. Any company or similar
organisation is eligible for PCM membership, though financial institutions and banks are most
common. Minimum net worth is RS.500 Lakh.

3.Trading-cum-Clearing Member (TCM): these members have the right to trade on the
exchange and to clear those trades, but cannot clear the trades of others. Available to individuals,
partnerships, associations, co-operatives, companies, banks, financial institutions and Hindu
United Families (HUFs). Minimum net worth for applicants is Rs.75 Lakh.

4.Institutional Trading-cum-Clearing Member (ITCM): these members have the same rights
as standard TCMs, with the additional ability to be able to appoint subsidiary organisations and
individuals as traders (though the ITCM will have to clear these trades). Membership of this type
is generally only available to larger organisations and institutions such as commodity brokers or
brokerages, commodity exchanges, stock exchanges, co-operatives and the like.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

MEMBERSHIP ELIGIBILITY CRITERIA:

To become a member of Commodity Exchange the person should comply with the
following Eligibility Criteria.
1. He should be Citizen of India.
2. He should have completes 21 years of his age.
3. He should be Graduate or having equivalent qualification.
4. He should not be bankrupt.
5. He has not been debarred from trading in Commodities by statutory/regulatory authority.

MEMBERSHIP PROCESS:

Step 1: Receiving of Membership Application Form / Documents and Payment of Fees

Step 2: Processing of Application Form and Documents

Step 3: Interview of the Member

Step 4: Admission in Exchange and Allotment of Membership Code

Step 5: Processing Application for registration at Securities & Exchange Board of India (SEBI)

Step 6: Issue of Registration Certificate by SEBI

Step 7: Activation

COMMODITY BROKERAGE:

BROKER:

The broker is essentially a person of firm that liaisons between individuals traders and the
commodity exchanges. In other words the Commodity Broker is the member of Commodity
Exchange, having direct connection with the exchange to carry out all trades legally. He is also
known as the authorized dealer.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

COMMODITY TRADER/BROKER OF COMMODITY EXCHANGE:

To become a commodity trader one needs to complete certain legal and binding
obligations. There is routine process followed, which is stated by a unit of government that lays
down the laws and acts with regards to commodity trading. A broker to gain such a membership
in exchange.

To become a member of Commodity Exchange the broker of brokerage firm should have
net worth amounting to Rs. 50 Lakh. This sum has been determined by Multi Commodity
Exchange.

TRADING SYSTEM:

The best five buy and sell orders for every contract available for trading are visible to the
market and orders are matched based on price time priority logic. Orders can be placed with time
conditions and/ or price conditions.

Trading Sessions:

Monday to Friday Agri Commodities10:00 A.M. to 5:00 P.M.

Non-Agri Commodities 10:00 A.M. to 11:30 P.M./11:55 P.M.

Time Related Conditions

1. DAY Order
A Day order is valid for the day on which it is entered. If the order is not matched during the day,
the order gets cancelled automatically at the end of the trading day.

2. GTC
A Good Till Cancelled (GTC) order is an order that remains in the system until the expiry of the
respective contract in which it is entered or until when the same is cancelled by the member.

3. GTD
A Good Till Date (GTD) order is valid till the date specified by the member. After the specified
date the unexecuted orders get automatically cancelled by the system.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

4. IOC
An Immediate or Cancel (IOC) order allows a member to execute the orders as soon as the same
is placed in the market, failing which the order will get cancelled immediately.

Order Type:
1. Market Order: A market order is a buy or sells order to be executed immediately at current
market prices.

2. Limit Order: A limit order is a buy or sell order placed to execute a transaction only at a
specified price.

3. Stop Order: It is a market order to buy or sell a certain quantity when a specified price (the
stop price) is reached, either above (on a buy) or below (on a sell) the price that prevailed when
the order was given.

4. Stop Limit Order: An order to buy or sell a certain quantity at a specified price or better, but
only after a specified price has been reached. A stop-limit order is essentially a combination of a
stop order and a limit order.

ROLE OF SPECULATOR IN COMMODITY EXCHANGE

A speculator is a person who trades derivatives, commodities, bonds, equities or
currencies with a higher than average risk in return for a higher-than-average profit
potential. Speculators take large risks, especially with respect to anticipating future price
movements, in the hope of making quick, large gains.
In periods of excessive price swings, individuals, politicians and market regulators
start questioning the role of commodities speculators. These participants look to profit from
either rising or falling prices through the commodities future markets, where it is possible to
invest in a financial asset or index where the price level is determined by an underlying
commodity price level.
• Speculators serve an important role in commodities markets. There are many
legitimate purposes for trading in commodities futures or by actually holding
physical commodities.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

• Speculators take the offsetting swing in prices that is, Companies do it to hedge
against rapid rises and falls in price, and farmers may do it to try and offset swings
in the weather or price swings that result in rapid shifts in demand. These market
participants need someone to take the offsetting positions to their positions, which is
exactly what speculators do.
• Speculators should be watched closely for unethical and even illegal activities.
Allegations that certain insiders at MF Global stole client commodity funds to stave
off bankruptcy.
• Speculators look to profit from either rising or falling prices through the commodities
future markets, where it is possible to invest in a financial asset or index where the
price level is determined by an underlying commodity price level.
• It set limits on the amount of supply that speculators can trade for 28 commodities
and related restrictions in an attempt to make commodity price gyrations less volatile
and more stable overall.

COMMODITY MARGIN TRADING

Once the broker is selected and the paperwork is done, the next step is to deposit the
margin required for commodity trading. There are two types of margins in commodity
trading: initial margin and maintenance margin.

Initial margin in commodity trading

Initial margin is the amount that you have to deposit with your broker before you can
start trading in commodities. The amount of initial margin depends on the commodity you
want to trade in and the exchange that you will be trading on. In most cases, however, the
initial margin requirement is 5–10% of the contract value.

Maintenance margin in commodity trading

As the losses mount, the balance in trading account falls. If this balance falls to a
predefined threshold, the broker may ask to top it up. The predefined threshold is called the
maintenance margin. The money that has to bring to replenish your account is called margin
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

money. When there is a profit in trading, account balance rises above the margin
requirement. Customer can withdraw the excess amount in your account, if they like.

MARK TO MARKET
MTM for the day, which is also referred to as the settlement price, will rely on a
random sample selected any time in the last 5 minutes of trading at the discretion of the
exchange. Based on the random snapshot selected, the MTM price is a function of
referencing the last traded price unless there is a better bid or lower offer. If the closing bid
is above the last traded price this will then be used MTM, alternatively if the offer is lower
than the last traded price then the offer will be used as the MTM. To recognize the liquid
expiries within the MTM process, the most liquid expiry per product meeting the Volume
Weighted Average Price (VWAP) criteria is selected as the reference from which all other
expiries are adjusted by the spread difference, the following applies:
• An expiry will be considered liquid on the trading day for the purpose of
determining the MTM if 50 or more contracts trade during the last 15 minutes of
a trading session.
• Should multiple expiries per product meet this criteria, only the most liquid will
be selected as the reference expiry month.
• Only on screen traded activity will be taken into account when determining the
VWAP.

ARBITRAGE IN COMMODITY MARKETS

Financial markets offer a host of trading options for investors with different risk
profiles. While one can opt for various market strategies, such as trading, arbitrage and long-
term investing, an interesting, low-risk option is arbitrage. It's an opportunity which can help
an investor benefit from the difference in the prices of an asset on various platforms.
Arbitrage helps reduce the price disparity of an asset in different markets even as it helps
boost the liquidity.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

There are two pre-requisites for exploiting an arbitrage opportunity. One, that the
asset trades at different prices in different markets, exchanges or locations, and two, that two
assets with identical cash flows should not trade at the same price. In case of commodities,
too, a market participant can avail of various types of arbitrage opportunities.
Here's how you can use these different types of arbitrage strategies for trading in
commodities.
Cash and carry
Cash-n-carry arbitrage can be used between spot/physical and future prices of a
commodity. This strategy is often used by commodity traders who have linkages with
physical markets. In this case, arbitrageurs set up a trade in the physical market and,
simultaneously, take a position in the futures market in order to gain from the price disparity
between the spot and futures prices. Suppose an arbitrageur finds that in January 2014 the
price of wheat in the physical market is around Rs 1,500 per quintal. On the other hand, in
the futures market, the price of wheat in February expiry contract is around Rs 1,550 per
quintal. So, he can buy the commodity in the physical market and, simultaneously, sell in
the futures market. At the time of expiry, he can settle the future trade by giving the delivery
of physical wheat at Rs 1,550 a quintal. In this trade, he can make a profit of Rs 50 a quintal
after deducting the applicable charges.

Spread
In case of spread, arbitrageurs trade only in the futures contracts on exchanges to
benefit from the price differentiation between various contracts of the same commodity.
They buy a futures contract and sell another futures contract of the same underlying
commodity on the exchange to profit from the price difference.

Inter exchange
This is also a technique to set up an arbitrage trade in the commodity market. The
price difference for the same commodity on various exchanges with the same contract expiry
can be exploited as an interexchange arbitrage opportunity. The price difference for the same
commodity in the two exchanges can arise due to volatility, liquidity and contract
specifications, among other reasons.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

Inter commodity
When one considers a different commodity on the same exchange having the same
cash flow or in the same category, then an inter-commodity arbitrage can be created. For
instance, an arbitrage between cotton, cottonseed, cotton oilseed cake and kapas can be
created in order to benefit from the price difference.

ORDER TYPES:

Fill or kill (FOK): Use this order if you want your order to be filled right away at a specific price.
If a matching offer isn’t found within three attempts, your order is cancelled, or “killed.”

Limit (LMT) A limit order is placed when you want your order to be filled only at a specified
price or better. If you’re on the buy side of a transaction, you want your limit buy order placed at
or below the market price. Conversely, if you’re on the sell side, you want your limit sell order at
or above market price.

Market (MKT): A market order is perhaps the simplest type of order. When you choose a market
order, you’re saying you want your order filled at the current market price.

Market if touched (MIT): A market if touched order sounds intimidating, but it’s not. When you
place an MIT, you specify the price at which you want to buy or sell a commodity. When that price
is reached (or “touched”), your order is automatically filled at the current market price. A buy MIT
order is placed below the market; a sell MIT order is placed above the market. In other words, you
buy low and sell high.

Market on close (MOC):When you place a market on close order, you’re selecting not a specific
price, but a specific time to execute your order. Your order is executed at whatever price that
particular commodity happens to close at the end of the trading session.

Stop (STP): A stop order is a lot like a market if touched order because your order is placed
when trading occurs at or through a specified price. However, unlike an MIT order, a buy stop
order is placed above the market, and a sell stop order is placed below market levels.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

Stop close only (SCO): If you choose a stop close only order, your stop order is executed only at
the closing of trading and only if the closing trading range is at or through your designated stop
price.

Stop limit (STL): A stop limit order combines both a stop order and a limit order. When the stop
price is reached, the order becomes a limit order and the transaction is executed only if the specified
price at which you want the order to go through has been reached.

CLEARING AND SETTLEMENT ON COMMODITY MARKET:

Most futures contracts do not lead to the actual physical delivery of the underlying asset.
The settlement is done by closing out open positions, physical delivery or cash settlement. All
these settlement functions are taken care of by an entity called clearing house or clearing
corporation.

CLEARING

Clearing of trades that take place on an Exchange happens through the Exchange Clearing
House. A clearing house is a system by which Exchanges guarantee the faithful compliance of all
trade commitments undertaken on the trading floor or electronically over the electronic trading
systems. The main task of the clearing house is to keep track of all the transactions that take place
during a day so that the net position of each of its members can be calculated. It guarantees the
performance of the parties to each transaction. Typically, it is responsible for the following:

1. Effecting timely settlement.

2. Trade registration and follow up
3. Control of the open interest.
4. Financial clearing of the payment flow.
5. Physical settlement or financial settlement of contracts.
6. Administration of financial guarantees demanded by the participants.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

SETTLEMENT

Settlement involves payments and receipts for all the transaction done by the members.
Trades are settled through the Exchange’s settlement system.

Future contracts have two types of settlements, the Mark-to-Market settlement which happens on
a continuous basis at the end of each day, and the final settlement which happens on the last trading
day of the futures contract. For instance, on the NCDEX, daily MTM settlement and final
settlement in respect of admitted deals in futures contracts are cash settled by debiting/crediting
the clearing accounts of CMs with the respective clearing accounts of CMs with the respective
clearing bank.

I. Daily settlement price: Daily settlement price is the consensus closing price as arrived after
closing session of the relevant futures contract for the trading day. However, in the absence
of trading for a contract during closing session, daily settlement price is computed as per
the methods prescribed by the Exchange from time to time.

II. Final settlement price: Final settlement price is the polled spot price of the underlying
commodity in the spot market on the last trading day of the futures contract. All open
positions in a futures contract cease to exist after its expiration day.

COMMODITY CLEARING HOUSE

Clearing house can be defined as entity which is different form the exchange, The clearing
house is responsible for keeping records. Clearing house acts as a seller to all buyers and a buyer
to all sellers.

Each day of trading all exchange members must report their buys and sell to the clearing
house. The clearing house then ensures that financial settlement form all buyers and sellers is made
to the clearing house. The clearing house guarantees all contracts by requiring that the participants
maintain cash deposits called margin or margin money. As soon as a contract is processed by the
clearing house the buyer and seller of the contract will have a contract with the clearing house
instead of counter party with their original trade.
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

MARGINING METHODS

Margin money:

Margin money is like a security deposit or insurance against possible future loss of value.
The aim of margin money like good faith money is to minimise the risk. To safeguard the integrity
of the market and its won interest, the exchange imposes the margin money. New contract on the
first day are assigned on base rate. Settlement price based on average of the last trades of the
trading day. Due date rate calculated based on average of the last few days closing prices.

Initial margin:

Initial margin is the amount to be deposited by the market participants in their margin
account with the clearing house before they can place buy or sell order of a futures contract.

VARIATION OR MARK TO MARKET MARGIN:

Margin is worked out on the difference between the closing rate and rate of the contract. It
helps to protect the interest of the exchange.

Additional margin: Volatility margin is extra margin imposed by exchange on the buyer and the
seller in the event of sudden increase in volatility of process of the underlying in the market.

Tender period margin: Extra margin imposed on the contracts during concluding phase.

Maintenance margin: It is the minimum amount of margin that is required to be held in the
margin account relative to the futures position held.

SETTLEMENT PROCESS

Settlement Process

Daily settlement Final settlement

Physical Cash
delivery settlement
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CHAPTER 4 - WAREHOUSING TRADE AND SETTLEMENT

Daily mark to market settlement:

Daily mark to market settlement is done till the date of the contract expiry. This is done to
take care of daily price fluctuations for all trades. All the open positions of the members are marked
to market at the end of the day and the profit/loss is determined as below:

▪ On the day of entering into the contract, it is the difference between the entry value
and daily settlement price for the day.
▪ On any intervening days, when the member holds an open position, it is the
difference between the daily settlement price for that day and the previous day’s
settlement price.
▪ On the expiry date if the member has an open position, it is the difference between
the final settlement price and the previous day’s settlement price.

Final Settlement:

On the date of expiry, the final settlement price is the closing price is the closing price of
the underlying commodity in the spot market on the date of expiry of the futures contract. The spot
prices are collected from polling participants from base centre as well as other locations. The poll
prices are bootstrapped and the mid-point of the two boot strapped prices is the final settlement
price.
 CHAPTER 5: REGULATORY FRAMEWORK

FCR Act 1952

FORWARD CONTRACTS (REGULATION) ACT, 1952.

An act to provide for the regulation of certain matters relating to forward contracts, the prohibition
of options in goods and for matters connected therewith.

ESTABLISHMENT AND CONSTITUTION OF THE FORWARD MARKETS

COMMISSION.

 The Central Government may, by notification in the official Gazette, establish a

Commission to be called the Forward Markets Commission for the purpose of exercising
such functions and discharging such duties as may be assigned to the Commission by or
under this Act.
 Commission shall consist of not less than two, [but not exceeding four] members appointed
by the Central Government [one of them being nominated by the Central Government to
be the Chairman thereof; and the Chairman and the other member or members shall be
either whole-time or part- time as the Central Government may direct]:

FUNCTIONS OF THE COMMISSION.

The functions of the Commission shall be

 To keep forward markets under observation and to take such action in relation to them as
it may consider necessary, in exercise of the powers assigned to it by or under this Act;]
 To collect and whenever the Commission thinks it necessary publish information regarding
the trading conditions in respect of goods to which any of the provisions of this Act is made
applicable, including information regarding supply, demand and prices, and to submit to
the Central Government periodical reports on the operation of this Act and on the working
of forward markets relating to such goods;
 To make recommendations generally with a view to improving the organization and
working of forward markets;
  To undertake the inspection of the accounts and other documents of [any recognized
association or registered association or any member of such association] whenever it
considers it necessary; and
 To perform such other duties and exercise such other powers as may be assigned to the
Commission by or under this Act, or as may be prescribed.

POWERS OF THE COMMISSION.

 The Commission shall, in the performance of its functions, have all the powers of a
civil court under the Code of Civil Procedure

RESPONSIBILITIES

Forward Markets Commission is a regulatory body for commodity futures/forward trade in India.
This was set up under the Forward Contracts (Regulation) Act of1952. It is responsible for
regulating and promoting futures/forward trade in commodities.

REGULATORY FRAMEWORK: FORWARD MARKETS COMMISSION

(FMC)

Forward Markets Commission (FMC) acts as a regulatory authority, which is a Statutory body set
up under the Forward Contracts (Regulation) Act 1952 (FCR) Act FMC operates under the
administrative authority of the Ministry of Finance, Department of Economic Affairs, Government
of India.

The Commission monitors and maintains the commodity futures markets well regulated.
Immoderate measures like skipping trading in certain deliveries of the contract, closing the markets
for a determined period.

The Commission adopts pro-active steps to ensure that there is no misuse of the market and that
the prices pondered on the Exchange platform are governed by the demand and supply factors in
the physical markets for which the regulator calls for daily reports from the Exchanges.
Forward Contracts are the exchangeable contracts where the quantity, quality, date of maturity and
place of delivery are all standardized.

The parties to the contract only decide upon the price and the number of units to be traded. Through
the commodity Exchanges, the futures contracts are entered which are governed by the provisions
of the FCR Act.

ROLE OF FORWARD MARKET COMMISSION

The role of FMC in the forward market is substantiated in this section eighth a description of its
functions in detail.

 The FMC advises the Central Government in respect of the recognition or withdrawal of
acknowledgement from any association. It advises the government about the issue
originating out of the administration of this act.
 The FMC comprises the task of continuing forward markets under observation and take
required actions, which should be according to controls given to the commission by the
Forward Contract Regulation Act.
 The FMC accumulates information regarding the trading conditions in respect of goods
including information concerning supply, demand and prices and publishes essential
information.
 It also executes the task of submitting to the Central Government periodical reports on the
functioning of this Act and on the working of forward markets associating to such goods.
 The FMC makes recommendations broadly with a view of ameliorating the organization
and working of forward markets.
 The FMC undertakes the examination of the accounts and other documents of the registered
association or any member of such association.
 The FMC performs such determined duties and exercise assigned powers by the Forward
Contract Regulation Act.
OBJECTIVES

 To advise the central government on the subject of assigning or withdrawal of recognition

from any commodity exchange.
 To observe the forward market activities and to take necessary actions within the powers
assigned to it under the Forwards Contract (Regulation) Act, 1952.
 To gather and publish obligatory information related with forward trading.
 To give recommendations regarding the improvements in working of future trading and
commodity exchanges.
 To examine the accounts and other documents of any recognised exchange/association or
any member of such organisation.
 To execute other functions assigned to the commission by FC(R) Act, 1952.

FUNCTIONS AND SCOPE

 Defining forward contracts as to as to include other commodity derivatives definitions of

intermediaries, etc.
 Composition and functioning of FMC
 Levying of fees on intermediaries to finance the Commission activities
 Allowing trading of option and other derivatives in goods.
 Fortification the punitive provisions.
 Constitution of Forward Market Appellate Tribunal.
 Provision for grant by the central Government to meet transitional financial needs of FMC.

RESPONSIBILITIES AND POWER

The power of the Forward Markets Commission are as follows:
 To keep forward markets under observation and to take such action in relation to them, as
it may consider necessary, in exercise of the powers assigned to it by or under the Act.
 To make recommendations generally with a view to improving the organization and
working of forward markets;
  To undertake the inspection of the accounts and other documents of any recognized
association or registered association or any member of such association whenever it
considers it necessary.
It allows futures trading in 23 fibers and manufacturers, 15 spices, 44 edible oils, 6 pulses, 4
energy products, single vegetable, 20 metal futures and 33 other futures.

ESSENTIAL COMMODITIES ACT, 1955

MEANING AND SCOPE

Essential Commodity means any commodity essential for the sustenance of the life of community
and declared as such by the Central Government and included in the list to schedule under section
2(a) to the Essential Commodities Act, 1955.

DEFINITIONS (SECTION 2)

ESSENTIAL COMMODITIES (SECTION 2A)

"Essential commodity" as to mean a commodity specified in the Schedule. The Central

Government may amend, if it is satisfied that it is necessary so to do in the public interest and for
reasons to be specified in the notification published in the Official Gazette.

IMPORTANCE OF ESSENTIAL COMMODITIES ACT

 The ECA gives consumers protection against irrational spikes in prices of essential
commodities.

 The Government has invoked the Act umpteen times to ensure adequate supplies..

 It cracks down on hoarders and black-marketers of such commodities.

 Given that almost all crops are seasonal, ensuring round-the-clock supply requires adequate
build-up of stocks during the season. So, it may not always be possible to differentiate
between genuine stock build-up and speculative hoarding.
  There can be genuine shortages triggered by weather-related disruptions in which case
prices will move up. So, if prices are always monitored, farmers may have no incentive to
farm.

 With too-frequent stock limits, traders also may have no reason to invest in better storage
infrastructure.

 Food processing industries need to maintain large stocks to run their operations smoothly.

 Stock limits curtail their operations. In such a situation, large scale private investments are
unlikely to flow into food processing and cold storage facilities.

OBJECTIVE:-
To Control the production, supply, distribution, trade & commerce in certain essential
commodities in the interest of the general public. Also, to prevent the black marketing, hoarding
& arbitrary price inflation of various essential commodities.

SCHEDULE TO THE ACT LISTS OUT FOLLOWING COMMODITIES:

 drugs: The explanation clarifies that for the purposes of this Schedule, "drugs" has the
meaning assigned to it in clause (b) of Section 3 of the Drugs and Cosmetics Act, 1940;

 fertilizer, whether inorganic, organic or mixed;

 foodstuffs, including edible oilseeds and oils;

 hank yarn made wholly from cotton;

 petroleum and petroleum products;

 raw jute and jute textiles;

 seeds of food-crops and seeds of fruits and vegetables;

 seeds of cattle fodder;

 and jute seeds.

AUTHORITIES RESPONSIBLE TO ADMINISTER THE ACT

Necessary powers have been given to the Central Government under the Act to administer the
provisions of the Act by issuing orders/directions notified in the official gazette and by delegating
the authority to State Governments and administrators of Union Territories.

The Central Government at its apex level is responsible for achieving the objectives enshrined by
the Parliament under this Act for the welfare and general well-being of all the citizens.

POWERS OF CENTRAL GOVERNMENT TO CONTROL PRODUCTION,

SUPPLY AND DISTRIBUTION ETC., OF ESSENTIAL COMMODITIES
[SECTION 3]

POWER TO ISSUE ORDERS

 The Central Government having been vested with power can issue order in the following
circumstances providing for regulating or prohibiting the production, supply and
distribution of essential commodities and trade and commerce therein:

 when it is necessary or expedient for maintaining or increasing supplies of any essential

commodity;

 for securing the equitable distribution and availability of essential commodities at fair
price;

 or for securing any essential commodity for the defence of India or the efficient conduct of
military operations.

DELEGATION OF POWERS (SECTION 5)

The Central Government may, by notified order direct that the power to make orders or issue
notifications under Section 3 shall in relation to such matters and subject to such conditions, if any,
as may be specified in the direction be exercisable also by such officer or authority subordinate to
Central Government, such State Government or such officer or authority subordinate to a State
Government as may be specified in the direction.

POWERS OF THE DISTRICT MAGISTRATE/ COLLECTOR UNDER ECA,

1955

 Where any Essential Commodity is seized, the seizure report is submitted to the District
Magistrate/ Collector of the District,
 Power of inspection of the seized essential commodity, & to confiscate the same,
 Where the seized essential commodity is of perishable nature, order may be passed for sale
at a controlled price, or by public auction.
 Only the District magistrate/ Collector of the District is competent to pass orders with
regard to the possession, delivery, disposal, release, distribution etc., of any seized essential
commodity pending confiscation proceedings.

COMMODITY BOARDS IN INDIA

A marketing board is an organization created by many producers to try to market their product and
increase consumption and thus prices. ... It can also be defined as an organization set up by a
government to regulate the buying and selling of a certain commodity within a specified area.
The Government of India has set up Commodity Board as a separate organization to promote the
export of commodities. Commodity Boards regard themselves as a match to export promotion
council. However, the following differences may be observed between Commodity Boards and
Export Promotion Council.

 Commodity Boards look after the export promotion of primary and traditional items of
export. While the export promotion council is responsible for the promotion of non-
traditional items like engineering goods, computers, chemicals, etc.
 Commodity Boards are statutory bodies, while export promotion councils are registered
bodies under the Indian Companies Act.
  Apart from export promotion, Commodity Boards take up product development. Export
promotion councils are concerned mainly with the promotion of exports of respective
products.

FUNCTIONS OF COMMODITY BOARDS

The functions and objectives of Commodity Boards are given below:

 To take active interest in production, development and exports of respective Commodities.

 To introduce new methods of cultivation of commodities.

 To offer advice to the government on export matters such as fixing quota for exports and
significant trade agreements.

 To provide trade information, guidance and various other services to their members and
help them in their export promotion efforts.

 To participate in trade fairs and exhibitions abroad.

 To sponsor trade delegations and conduct market surveys.

 To arrange pre-shipment inspection for export items.

KINDS OF COMMODITY BOARDS IN INDIA

The Government of India has established eight commodity Boards to guide production and export
of commodities in their jurisdiction:

 Coffee Board
 Tea Board
 Cardamom Board
 Rubber Board
 Coir Board
 Central Silk Board
 The All India Handicrafts Board
  The All India Handloom Board.

COFFEE BOARD: The Coffee Board was established under the Coffee Act of 1942. It aims
at the development of the industry and the promotion of its exports. The Coffee Board has set up
by a Central Coffee Research Institutes and also six coffee demonstration farms. The results of its
research activities are made available to coffee growers. The Board advertises its product in foreign
trade journal and mass circulation newspaper media. It also participates in trade fairs and
exhibitions to promote the export of the product.

COFFEE BOARD & ITS FUNCTIONS

During 1940’s, the coffee industry in India was in a desperate state due to the II World war
resulting in very low prices and ravages of pests and diseases. At this time, the Government of
India established the ‘Coffee Board’ through a constitutional act “Coffee Act VII of 1942” under
the administrative control of Ministry of Commerce and Industry. The Board comprises 33
members including the Chairman, who is the Chief Executive and appointed by the Government
of India. The remaining 32 members represent the various interests such as coffee growing
industry, coffee trade interests, curing establishments, interests of labour and consumers,
representatives of governments of the principal coffee growing states, and Members of Parliament.

ROLE OF COFFEE BOARD

After pooling was discontinued in 1996, Coffee Board serves as the friend, philosopher and guide
to the Coffee sector covering the entire value chain.
The core activities are primarily directed towards research & development, transfer of technology,
quality improvement, extending development support to growing sector, promotion of coffee in
export and domestic markets. The activities of the Board are broadly aimed at
 Enhancement of production, productivity & quality;
 Export promotion for achieving higher value returns for Indian Coffee and
 Supporting development of Domestic market.
TEA BOARD

About Tea

Tea is one of the industries, which by an Act of Parliament comes under the control of the Union
Govt. The genesis of the Tea Board India dates back to 1903 when the Indian Tea Cess Bill was
passed. The Bill provided for levying a cess on tea exports - the proceeds of which were to be used
for the promotion of Indian tea both within and outside India.

The present Tea Board set up under section 4 of the Tea Act 1953 was constituted on 1st April
1954. It has succeeded the Central Tea Board and the Indian Tea Licencing Committee which
functioned respectively under the Central Tea Board Act,1949 and the Indian Tea Control Act,
1938 which were repealed. The activities of the two previous bodies had been confined largely to
regulation of tea cultivation and export of tea as required by the International Tea Agreement then
in force, and promotion of tea Consumption.

TEA BOARD ORGANISATION AND FUNCTIONS

Organization of the Board: The present Tea Board is functioning as a statutory body of the Central
Government under the Ministry of Commerce. The Board is constituted of 31 members (including
Chairman) drawn from Members of Parliament, tea producers, tea traders, tea brokers, consumers, and
representatives of Governments from the principal tea producing states, and trade unions .The Board is
reconstituted every three years.

VISION & MISSION

Vision

To make India, the leading producer and supplier of quality tea in the global market.

Mission

"Develop effective management strategies to facilitate: Competence and innovation in tea plantations,
Innovative processing technology for producing good quality teas, Augmentation of high value tea exports,
Capacity Building for human resources at all levels in tea Industry, Strengthening of R & D efforts on all
aspects of tea husbandry and technology."
THE FOLLOWING ARE THE STANDING COMMITTEES OF THE BOARD :

 The Executive Committee deals with the administrative matters of the Board.
 The Export Promotion Committee deals with the work in relation to the export promotion
of tea.
 Labor Welfare Committee guides the Board in implementation of various welfare schemes
for the benefit of the plantation workers and their wards.
 The Development Committee is responsible for overseeing the various developmental
schemes run by the Board.
 Licensing Committee for North and South India will act as per direction of the Board or
the Executive Committee pertaining to Chapter III & IV of the Tea Act relating to Tea
Estate of North India and South India respectively.

FUNCTIONS:

The Tea Board has wide functions and responsibilities under the direction of the Central Government.
Briefly the primary functions of the Tea Board are as under:

 Rendering financial and technical assistance for cultivation, manufacture and marketing of tea.
 Export Promotion
 Aiding Research and Development activities for augmentation of tea production and improvement
of tea quality.
 Extend financial assistance in a limited way to the plantation workers and their wards through labor
welfare schemes.
 To encourage and assist both financially and technically the unorganized small growers sector.
 Collection and maintenance of Statistical data and publication
 Such other activities as are assigned from time to time by the Central Government.

SPICE BOARD OF INDIA

Spices Board was established on 26th Feb 1987 under the Spices Board Act 1986 (no. 10 of 1986)
with the merger of the erstwhile Cardamom Board (1986) and Spices Export Promotion Council
(1960). Spices Board is one of the five Commodity Boards functioning under the Ministry of
commerce and industry. It is an autonomous body responsible for the export promotion of the 52
scheduled spices and development of Cardamom (Small and Large).

MAIN FUNCTIONS

 Research Development and Regulation of marketing of Small and Large cardamom.

 Post-harvest improvement of all spices.
 Promotion of organic production, processing and certificate of spices.
 Development of spices in the North East.
 Provision of quality evaluation services.
 Export promotion of all spices through support
 Technology up gradation
 Quality up gradation
 Brand promotion
 Research and product development
 Other responsibilities related to export promotion of spices
 Quality certification and control

REGISTRATION OF EXPORTER

 Collection and documentation of trade information

 Provision of inputs to the central Government on policy matters relating to import and
export of spices.
 Multi-faceted activities.
 Promotion of exports of spices and spice products
 Maintenance and monitoring of quality of export.
 Development and implementation of better production methods through scientific
agricultural practices.
 Provision of financial and material support to growers
 Facilitating infrastructure for processing and value addition
 Registration and licensing of all spice exports
PACKAGE OF SERVICES FOR EXPORTER/IMPORTER

 Helps exporters and importers in establishing mutual contact

 Identifies competent supply sources for specific requirements of importers
 Processes and forwards foreign trade enquiries to reliable exporters
 Manages a comprehensive and up to date bank for exporters and importers.

RUBBER BOARD OF INDIA

The Rubber Board is a statutory body constituted by the Government of India, under the Rubber
Act 1947, for the overall development of the rubber industry in the country. The Board has its
headquarters complex located at Kottayam in Kerala State.

Commercial cultivation of natural rubber was introduced in India by the British, although the
experimental efforts to grow rubber on a commercial scale in India were initiated as early as 1873
at the Botanical Gardens, Calcutta. The first commercial Hevea plantations in India were
established at Thattekadu in 1902.

The importance of rubber production in India from strategic and security reasons had been realized
by the government during the Second World War period. The rubber growers in India were
encouraged to produce the maximum rubber required for the use during war. After the war, there
were growing demands from the growers for setting up a permanent organisation to look after the
interests of the industry. Thereupon the government set up a committee in 1945 to particularly to
study the situation and to make appropriate recommendation. On the recommendation of this
committee, the government passed the Rubber (Production and Marketing) Act, 1947, on 18th
April 1947, and the “Indian Rubber Board” was constituted forthwith. The Rubber Production and
Marketing (Amendment) Act, 1954, amended the name of the Board as “The Rubber Board”.
FUNCTIONS OF RUBBER BOARD OF INDIA

The functions of the Board as defined under the Act are:

 To promote by such measures as it thinks fit the development of the rubber industry.
 Without prejudice to the generality of the foregoing provision the measures referred to
therein may provide for:
 Undertaking, assisting or encouraging scientific, technological or economic research.
 training students in improved methods of planting, cultivation, manuring and spraying.
 the supply of technical advice to rubber growers
 improving the marketing of rubber.
 the collection of statistics from owners of estates, dealers and manufacturers.
 securing better working conditions and the provision and improvement of amenities
and incentives to workers.
 carrying out any other duties which may be vested with the Board as per rules made
under this Act.
 It shall also be the duty of the Board:
 to advise the Central Government on all matters relating to the development of the
rubber industry, including the import and export of rubber.
 to advise the Central Government with regard to participation in any international
conference or scheme relating to rubber.
 to submit to the Central Government and such other authorities as may be prescribed,
half yearly reports on its activities and the working of this Act, and
 to prepare and furnish such other reports relating to the rubber industry as may be
required by the Central Government from time to time.
TOBACCO BOARD OF INDIA

Recognizing the need to regulate production, promote overseas marketing and control recurring
instances of imbalances in supply and demand, which lead to market problems, the Government
of India, established the Tobacco Board, in place of the Tobacco Export Promotion Council.

The Tobacco Board was constituted as a statutory body on 1st January, 1976 under Section (4) of
the Tobacco Board Act, 1975. The Board is headed by a Chairman with its headquarters at Guntur,
Andhra Pradesh and is responsible for the development of the tobacco industry. While the primary
function of the Board is export promotion of all varieties of tobacco and its allied products, its
functions extend to production, distribution (for domestic consumption and exports) and regulation
of Flue Cured Virginia (FCV) tobacco.

ACTIVITIES OF TOBACCO BOARD

The Tobacco Board Act aims at planned development of Tobacco Industry in the country. The
various activities of the Board outlined in the Act for the promotion of the industry are:

 Regulating the production and curing of Virginia Tobacco with regard to the demand in
India and abroad.
 Constant monitoring of the Virginia tobacco market, both in India and abroad and ensuring
fair and remunerative price to the growers and reducing wide fluctuations in the prices of
the commodity.
 Establishing auction platforms for sale of Virginia tobacco by registered growers and
functioning as an auctioneer at auction platforms either established by it or registered with
it.
 Recommending to the Central Government the minimum prices to be fixed for exportable
Virginia tobacco with a view to avoiding unhealthy competition amongst the exporters.
 Propagating information useful to the growers, dealers and exporters (including packers)
of Virginia tobacco and manufacturers of tobacco products and others concerned.
 Promoting tobacco grading at the level of growers.
 Sponsoring, assisting, co-coordinating or encouraging scientific, technological and
economic research for promotion of tobacco industry.