A commission broker is a registered member of a stock exchange who buys or sells shares/securities on behalf of his client and charges a commission on the gross value of the transaction. Full-service brokers provide services such as investment advice, portfolio planning, and credit when a client buys on margin in addition to their traditional commission job. Such brokers are only now emerging in India.
A jobber, also known as a ‘Taravaniwallah’ in India, is a broker’s broker or one who specializes in specific securities and caters to the needs of other brokers (in the BSE). A jobber works at a specific trading post on the stock exchange’s floor, buying and selling for small price differences known as the spread. He has no dealings with the general public.
He is known as a market-maker on the London Stock Exchange and a specialist on the New York Stock Exchange. If a company with a share capital of more than 3 crore wants to be listed on the Bombay Stock Exchange, it must hire jobbers or market-makers. As a result of this arrangement, investors can buy and sell shares on the stock exchange, increasing liquidity.
Serves as a market intermediary, ready to buy and sell securities. He quotes two-way rates simultaneously, much like a jobber, with the exception that he quotes two-way rates for buying and selling at the same time.
Only market-makers are permitted to play on the OTCEI’s floor. The Discount and Finance House of India (DFHI) is the primary market maker in India’s money market. Because he quotes the selling price while purchasing a particular share, he is known as a market maker. The NASDAQ in the United States is a market-stock maker’s exchange with web-enabled trading terminals connecting them.
The Securities and Exchange Board of India Act, 1992 (as a non-statutory body established on 12 April 1988 through a government resolution in an effort to give the Indian stock market an organized structure) regulates the Indian stock market, with its headquarters in Mumbai. The promoters—the IDBI, the IFCI, and the ICICI—put up Rs.50 crore as initial paid-up capital.
Except for the chairman, the SEBI Board consists of nine members: one member each from the Ministries of Finance and Law, one member from the Reserve Bank of India, and two other members appointed by the central government. It is staffed by four full-time members (including the chairman).
The main functions/powers of the Board as per the SEBI Act, 1992 are:
- Registering and stock exchanges, merchant banks, mutual funds, underwriters, registrars to the issues, brokers, sub-brokers, transfer agents, and others.
- levying a variety of fees and charges (as 1 percent of the issue amount of every company issuing shares are kept by it as caution money in the concerned stock exchange where the company is enlisted).
- Promoting investor education.
- Inspection and audit of stock exchanges and various intermediaries.
- Performing other concerned functions as may be prescribed from time to time.
Commodity trading is similar to stock market trading (shares, securities, debentures, and bonds). Commodities, on the other hand, are actual physical goods such as corn, silver, gold, crude oil, and so on. Futures are commodity contracts traded on a futures exchange such as the Chicago Board of Trade (CBOT). Futures contracts have expanded beyond commodities to include financial markets such as foreign currencies, interest rates, and so on.
In any economy, commodity futures play an important role. As we can see, agricultural commodity prices are crucial in determining the fortunes of India’s agriculture and food processing industries. These prices are subject to a lot of volatility. Crop failure, bad weather, demand-supply imbalances, and other factors can cause price fluctuations. Price risk is the result of this fluctuation. The farmer and industries that use agricultural commodities as raw materials bear the brunt of this price risk.
Commodity exchanges are organizations
Commodity exchanges are organizations that establish and enforce trading rules and procedures for commodities. The primary goal of the exchange is to protect participants from price volatility by facilitating commodity futures trading.
Participants would be able to protect themselves from the inherent price fluctuations associated with agricultural commodities if they hedged against this price risk. Using commodity exchanges as a trading platform is one way to do this. A commodity exchange can help with production and procurement planning, in addition to hedging against price risk. Furthermore, because the exchange is made up of a diverse group of knowledgeable industry participants, price discovery is more efficient and takes into account both local and global factors.
Let’s look at a simple example of how commodity exchange trading benefits industry participants. Wheat futures can be sold on a commodity exchange by a farmer who grows wheat. This will allow him to lock in a future sale price for a specific quantity of wheat. As a result, the farmer will be able to get a guaranteed price for his produce in the future, regardless of whether wheat prices fall or rise. A user industry, on the other hand, such as a flour mill, could buy wheat futures from the exchange. As a result, the flour mill can now set its future purchase price for a specific quantity of wheat. As a result, future increases in wheat prices will have no effect on the cost of production.
According to SEBI (April 2019), 91 commodities have been notified for future trading in the country; however, due to increased volatility and high speculation, trading in some of them has been suspended. The country has 21 national and regional commodity exchanges, with six national exchanges:
- National Commodity and Derivatives Exchange (NCDEX)
- National Multi-Commodity Exchange (NMCE)
- Multi Commodity Exchange (MCX)
- Indian Commodity Exchange (ICEX)
- ACE Derivatives & Commodity Exchange (ACE).
- Universal Commodity Exchange (UCE).
Improvements in warehousing
The government has used various subsidies and tax breaks to encourage private warehousing investments. A new breed of storage facilities has emerged under the auspices of the Warehousing Development and Regulatory Authority (WDRA), which are scientifically developed and supported by value-added services such as weighing, testing, certification, and even 24×7 physical security, with a number of them sporting CCTV-led remote monitoring facilities from a central location.
The most intriguing aspect of these modern warehouses is that they have an IT backbone that allows for real-time stock updates. Because these warehouses are subjected to regular physical audits by both internal and external teams, the stock’s physical integrity – both in terms of quality and quantity – can be easily determined at any time. Using electronic Negotiable Warehouse Receipts, these cutting-edge, high-tech warehouses enable stakeholders to obtain financing (e-NWRs).
Regulation and reform
While the FMC (Forward Markets Commission) has regulated commodity markets since 1952, it has been criticized for its inability to control price volatility and other irregularities. As a result, FMC and SEBI merged in 2015. (with a reputation of being superior in terms of surveillance, risk-monitoring and enforcement mechanisms, and a more robust regulatory body for the sector). SEBI has since implemented a number of reforms, including:
- Allowing stockbrokers to deal in commodity derivatives (common broking businesses for equities and commodities),
- Permitting the NSE and BSE to commence commodity trading,
- Allowing the FPIs to participate in commodity derivatives contracts traded in stock exchanges subject to certain stipulations,
- Allowing the Category III Alternative Investment Funds (AIFs) to trade in commodity markets.
According to experts, India’s commodity trading market is on the verge of transformation, with numerous changes occurring in related areas such as infrastructure, logistics, electronic warehousing, and transportation.
Spot Exchanges in India are electronic trading platforms that facilitate the purchase and sale of specific commodities, such as agricultural commodities, metals, and bullion, by offering spot delivery contracts.
This market segment works similarly to the equity segment of major stock exchanges. Alternatively, this can be viewed as a guarantee of direct marketing by commodity sellers. For the trading of goods, Spot Exchanges use the most up-to-date technology available in the stock exchange framework. This is an innovative Indian experiment in goods trading, as opposed to what is commonly referred to as “commodity exchanges,” which trade in commodity futures contracts.
“A body corporate incorporated under the Companies Act, 1956 and engaged in assisting, regulating, or controlling the business of trading in electronic warehouse receipts,” according to the Warehousing Development and Regulatory Authority (Electronic Warehouse Receipts) Regulations, 2011.
However, today’s spot exchange is more than just warehouse receipts—it’s an electronic market where a farmer or trader can find national commodity prices and buy or sell goods immediately (i.e., on the spot) to anyone across the country. All contracts on the exchange are mandatory delivery contracts, which means that at the end of the day, all outstanding positions are marked for delivery, implying that the seller must deliver and the buyer must accept the delivery.
The spot exchange, like a traditional stock exchange, provides clearing and settlement services for trades. To ensure that trades are settled on a guaranteed basis (i.e., in the event of any person’s default, the exchange arranges for the payment of money/good), the exchange collects various margin payments. Quality certification, warehousing, warehouse receipt financing, and other services are available through the exchange.
Spot Exchanges in India
At present, there are four-spot exchanges operating in the country:
- The National Spot Exchange Ltd. (NSEL) is a national commodity spot exchange established in 2008 by Financial Technologies India Ltd. (FTIL) and the National Agricultural Cooperative Marketing Federation of India Limited (NAFED). After the FTIL was found to be involved in irregularities, the FMC (Forward Market Commission) asked it to leave the spot exchange by the end of March 2014.
- NCDEX Spot Exchange Ltd (established in October 2006 by NSE).
- Reliance Spot Exchange Ltd. (R-Next).
- Indian Bullion Spot Exchange Ltd. (an online over-the-counter spot exchange). Advantages of Spot Exchanges
Spot exchange provides various advantages over the traditional way of trading in commodities:
- Price determination is more efficient because it involves a wider range of people from across the country, as opposed to traditional mandir,’ where commodity price discovery was limited to local participation.
- Ensures price discovery transparency—anonymity ensures convergence of different price perceptions, as the buyer or seller merely expresses their desire to trade without actually meeting.
- Ensures widespread participation by farmers, traders, and processors across the country, as well as the elimination of cartelization and other unhealthy commodity market practices.
- It implements some best practices in commodity trading, such as a quality grading system, the creation of a network of warehouses with assaying facilities, the facilitation of trading in smaller quantities, lower transaction costs, and so on.
- Bank financing on more favorable terms against warehouse goods improves holding capacity and can actually incentivize farm production, reducing rural poverty.
- Since the trades are guaranteed (by the exchange), counterparty risk is avoided.
Raising Capital in the Primary Market
There are three ways in which a company raises capital in the primary market.
Public Issue: A public offer is open to all Indian citizens and is the most widely used and prestigious method of raising capital (Reliance Industries Ltd. is the biggest company in India in this category).
Rights Issue: Raising capital from the existing shareholders of a company, means it is a preferential kind of issue restricted to a certain category of the public only.
Private Placement: Selling shares to a select group of investors, usually financial institutions (FIs), but also individuals, to raise capital. This is accomplished through direct negotiations (completely opposite to the public issue). The benefit of taking this route is that a company can save a lot of money on marketing costs (but the risk of shifting loyalties of the investors in this route is also the highest).
Many companies have recently raised capital by privately selling their shares to foreign institutional investors (FIIs) as a means of obtaining foreign exchange in India, and this has happened far too quickly.