Agri-Business & Management

August 2009
Volume 1, Issue 1

Agri-Business &
Management

Spot Exchange
Spot Markets which have
Inside this issue: been operational in India
since time immemorial..
Introduction to concept of 2 These markets whether
Spot Exchanges regulated or unregulated
Salient Features of Spot 2 provides a mechanism
Exchanges for price discovery and
Regulations governing 3
physical transaction of
Spot Exchanges goods. The Mandis
which are regulated by
States in which Spot Ex 3
are operational the APMC acts of the
respective states are
Business Model of Spot 3 largely controlled by the
Exchanges
middleman. The com-
Forward Auction 4 mission agents act as the
bridge between the pro-
Reverse Auction 4 ducer and the consumers
and the mechanism of
price discovery remains
highly opaque. Moreover
the farmers face the
problem of insufficient
price-information as the
prices of the produce is
known only after he
reaches the APMC mar-
ket yard. Concepts like
ITC e chaupal are Bullions
praiseworthy but the
coverage is not very
high.
due to legal issues like
The future markets
which are supposed to ban on future trading of
certain commodities.
act as the price informa-
tion providers have Hence the concept of
failed to act as a price Spot Exchanges is seen
discovery mechanism as a revolution in the
field of Agri-Business.

Special points of
interest:
• Unlike Future Ex-
changes Spot Ex-
changes is not regu- The Essence of Spot Exchanges
lated by the FMC.

• Physical delivery of The Spot Exchanges are largely eliminated. is web based.
commodities shall
seen as a revolutionary 3. Prices arrived at shall 4. Counterparty risk
take place
idea because: be realistic as the shall be totally elimi-
• Counterparty risk
shall be eliminated 1. They shall act as plat- participation of buy- nated as the Ex-
• Price discovery and
forms of price dis- ers from across the change shall act as
price information covery. country shall take the guarantor.
shall be free and
2. Middleman shall be place as the platform
fare.
Page 2 Agri-Business & Management
Introduction
What is a Spot Exchange? Commodities have been
traded in the spot market
from time immemorial.
The presence of too many
intermediaries in the sys-
tem and an opaque price
discovery mechanism has
been the major disadvan-
tage of the present Spot
Market system. More over
arriving at the reference
spot prices for the Futures
Exchanges has also been a
problem due to non stan-
Salient Features of Spot Exchanges
• Single day trading
contracts
• Intra day trading with
Features of
settlement of obliga-
Spot tion on net basis
exchanges • All positions out-
standing at end of the
day resulting into
compulsory delivery
• Demat delivery facil-
How does it affect the farmers
Farmers have not been able
to take the advantage of
trading in the Futures Ex-
changes and not much is
expected to change with
the coming up of Spot Ex-
changes. These Exchanges
The farmers perspective shall remain largely domi-
nated by the commodity
dardized nature of the
Spot Markets. To do away
with the shortcomings of
the Spot Markets the con-
cept of Spot Exchanges
has been developed.
The Spot Exchanges are
perceived to be the best
thing that can happen to
the field of Agri-Business
in the coming future. At
present National Spot Ex-
change and NCDEX Spot
ity available
• Loan facility against
pledge of demate /
warehouse receipt
• All deliverable futures
contracts, including
agri commodities,
gold silver, non-
ferrous metals and
wide number of other
traders. But a lot can be
expected in terms of au-
thentic price information
dissemination and price
discovery. This shall help in
getting a fare price in the
Spot Market.
The Spot Exchanges can
also facilitate the active
Volume 1, Issue 1
Exchange are the two spot
exchanges that are operat-
ing in India. Reliance Spot
Exchange is expected to
join the league in a few
months time as they have
already carried out trad-
ing of almonds on an ex-
perimental basis.
industrial products to
be launched
• Cash futures arbitrage
opportunity
participation of farmers in
the spot exchange by mak-
ing the procedure of mem-
bership as seller easier and
by reducing the lot sizes to
be traded on the Exchange
Platform.
Agri-Business & Management
Regulations
Unlike the Futures Ex-
changes which are regu-
lated by the Forward Mar-
ket Commission the Spot
Exchanges comes under
the jurisdiction of the re-
spective state govern-
ments where the ex-
changes are set up. The
APMC act prevalent in the
various states acts as a
hurdle to the establish-
ment of Spot Exchanges.
The Exchange operations
Business Model of Spot Exchanges
The Spot Exchanges are
distinctively different
from the Future Ex-
changes as physical deliv-
ery of the commodity is
compulsory in Spot Ex-
changes. Unlike the Fu-
tures Exchanges the posi-
tions outstanding at the
end of the day, will result
Spot Exchanges for Spot Trading (NEST) system has
two types of markets
Normal Market:
All orders which are of
regular lot size or multi-
ples thereof are traded in
the Normal Market. For
commodities that are
traded on the NEST sys-
tem are deliverable in
are regulated in each state
by the respective state
governments and are be
subjected to various laws
of the land like the Com-
panies Act, Stamp Act,
Contracts Act, APMC Act
and others which impinge
on its working.
into compulsory delivery.
But during the day, the
transactions of offsetting
nature will be netted off
and delivery will be exe-
cuted only with respect to
the net quantity out-
standing at the end of the
day. All the terms relating
to quality specifications,
physical or in dematerial-
ized mode.
Auction Market:
In the Auction Market,
auctions are initiated by
the Exchange on behalf of
trading members for set-
tlement related reasons.
Volume 1, Issue 1 Page 3
States in which Spot Ex-
changes ore operational:
Gujarat, Maharashtra,
Karnataka, Rajasthan and
Madhya Pradesh. In addi-
tion to these states since
Bihar and Kerala does not
have APMC act, setting
up Spot Exchanges in
these states shall be rela-
tively easier.
Control !!!!
place of delivery, date of
delivery and other condi-
tions will be specified by
the Exchange in advance Business
and all contracts executed Model is the
on the system would be
on the basis of such terms Key
only.
Auctions are again of two
types:
• Forward Auction
• Reverse Auction
The Market
Page 4 Agri-Business & Management Volume 1, Issue 1

Forward Auction
1. The seller brings the goods at the Spot Exchange designated Warehouse location before list-
ing for auction.
2. The selers details are captured.
3. A provisional deposit code is generated.
4. Post weighing the empanelled assayer grades and certifies the quality of the goods and ac-
cepts the goods for warehousing. The warehouse issues a warehouse receipt (WR) towards
the goods stored.
5. A unique deposit code (UDC) is generated by the collateral Manager which captures of WR
No, Quantity, Quality, Grade, Validity, Warehouse Location, Depositors (owners) details etc.
6. The Trading member lists the UDC for auction post approval of Collateral Manager on the
Guess who Wins!!!!!! Online Auction Platform.
7. As the auction opens, the buyers bids for the listings. The bids are allowed only if the buyers
maintain a prescribed margin amount with the Exchange.
8. Upon settlement the buyer pays the balance fund including charges and taxes.

Reverse Auction
1. Buyer specifies the quantity, quality, location and ceiling price of the commodity he wishes to
buy in the Spot Exchange.
2. The Category Manager defines the quality, grade, quantity and the terms and agreement for
How Auction each RFQs. Buyers vet the deal thus structured and Collateral Manager approves the listings.
really work 3. Buyers provide the stipulated amount of money towards margin obligation.
4. The sellers bid to match the buyers specification. The lowest price bidder wind and is obli-
gated to deliver the goods in the specified time frame.
5. Post closure the winner brings the goods to the Exchange designated warehouse where the
goods are inspected, weighed, assayed etc.
6. The warehouse issues a warehouse receipt towards the goods stored.
7. The Buyers pay the balance fund towards settlement and takes the delivery of the goods
against Delivery order issued by the Exchange

Advantage of Spot Exchange over Spot market

• The seller has prior knowledge of the spot and futures prices at his own or at
a nearby centre. This provides him with the option of selling his produce at
the centre of his choice.
• Since the goods are assayed prior to sale, he knows the grade of his produce
and can guage the true price of his product based on the benchmark grade
price and the applicable premium or discount accorded based on the grade.
• The Spot platform would offer excellent opportunities for arbitrage against
future prices if the goods in the spot market conform to futures quality.
Agri-Business & Management Volume 1, Issue 1 Page 5
 Agri-Business & Management

Rajdeep Saikia
PGPABM 2008-10
Hoatel 2
National Institute of Agricultural Extension Management Agri-Business & Management is a
(MANAGE), Rajendranagar, Hyderabad-500030
Phone: 09951351151 Newsletter published on a monthly ba-
E-mail: rajdeepmanage08@gmail.com
sis by Rajdeep Saikai and Ankan
Langthasa, two Agri-Business Man-
We are on the Web ! agement students from National Insti-
agribusinessfocus.blogspot.com tute of Agricultural Extension Man-
endeavoring agri values….. agement (MANAGE).

Watch out for the Next Issue on Microfinance and a few tips on
Preparation for GDs and Interviews.