Investment Products in Commodities: A New Paradigm

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Commodity Market: In perspective

Growth has been phenomenal, but instruments are limited
Current structure provides instruments for : Trading Hedging/ Price Risk Management

Jobbing
Speculation Cash Future Arbitrage No investment product available for retail and long term investors like equity( Free from

daily MTM and roll over at the time of maturity)

Mass participation of retail investors in commodities is still absent, because of : Futures contracts: High Risk, Leveraged Product Investment in Physical Commodities: Complexity, absence of smooth exit, VAT

compliance, Good for commodity traders only

ETF: High cost of trade and holding due to AMC charges Therefore, we have launched an investment product in commodities, which can address all these issues
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NSEL: A brief outline

A MCX Group company

Promoted by : Financial Technologies India Limited NAFED

Compulsory delivery based contracts Our group has revolutionized Indian Bullion market by providing a world class hedging tool to the Bullion Industry.

The next step is to revolutionize spot market of gold and silver by making it structured, institutionalized, transparent and risk free
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National Spot Exchange: Taking the lead

Realizing its need, NSEL has designed the product for trade and investment in commodity in the form of Demat. For the first time in India, Demat commodities is available for trading with all features and convenience of equity market scrip and operation. Only non perishable commodities will be made available for trading in demat form. NSDL and CDSL act as the Depository for holding such commodity in the electronic form. While the commodity in physical form is kept in the designated vault/storage/warehouse. Initially we have launched, Gold, Silver and Copper demat contract and are available where investors can buy in multiples of 1gm, 100 gm and 1 Kg respectively.
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Advantages of Commodity Demat Contract Trading

Holding commodities in Demat form
Retail Investors can diversify their portfolio

Demat contract on NSEL

No worry for daily MTM pay in/Payout as in Derivative market

No risk of commodity custody/theft
Liquidity/Any time buying and selling of commodity

Hassle free low cost transaction in physical commodity

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E Series Products

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Product Ecosystem
Designated vault for Bullion: Brinks Arya Registrar and Transfer Agent (RTA): Karvy

More than 40 empanelled Depository participants (DP).

Demat Contracts function just like cash segment in equities, Retail investors can trade and invest in the instrument. Intra day trading is allowed, but net position at end of day must result into delivery on T + 2 in demat form For holding beneficiary / pool account or buying / selling demat units, investors/ brokers do not need VAT number;

Authorized Dealers appointed by NSEL take care of all such compliance without any charge
At the time of dematerialization and rematerialization of units, Authorized dealer comply with all legal requirements and give delivery of gold bars/ coins with his sale invoice in the case of rematerialization.

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Product Details
Duration of contract : Single day. Settlement cycle: T + 2 Trading session : Mondays through Fridays Trading timing: 10:00 AM to 11:30 PM. Commodity pay in, commodity pay out, Funds pay in, Funds Pay out : T + 2 Settlement of demat Gold/Silver/Copper ICIN through the CM-Pool account of members as done in stock exchanges.

Settlement in demat only, no physical delivery in the contract

Clients must open beneficiary account (separate BO a/c) before trading in these instruments

Clients can accumulate gold demat by buying in multiple of 1 gram

periodically and exchange it with remat gold whenever they want
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Product offering and positioning

Current offering: Gold , Silver and Copper

Going forward: Zinc, Nickel, Guar and a number of other products

Example. If an investor is having Rs. 15000, who is bullish about copper buys 1 lot of copper( 1 MT) on MCX, but if the price crashes, his capital is wiped out.

Now, he will be able to buy 50 Kg of copper and hold in demat account. If the
price goes down, he holds. If the price goes up, he books his profit.

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Business Opportunities for NSEL Members?

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Investment Products in Commodities: Potential Market Size

A specific Equity scrip does not have inherent demand in common mass, it has to be created at IPO, but precious metals and other commodities have inherent demand among masses since ages. Penetration and Reach: No. of Demat beneficiary accounts : 1.75 crores( both Depositories combined)( As on 20th Nov 2010) (Source:
NSDL and CDSL websites )

Unique beneficiary accounts would be around 1 crore No. of persons holding Gold / Silver in India : At least 30 crores Potential of commodity demat accounts within 3 years: At least 5 crores

Cont

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Investment Products in Commodities: Potential Market Size

Total market cap of equity market : 65.24 lac crores as on 3rd November 2010 ( Source: www.bseindia.com) Consider 10-20 % portfolio diversification in commodities : 10 lac crores It implies 1000 MT of Gold, 50000 MT of Silver and so on.

Geographical reach: Equity market penetration confined to 500 towns and cities. Bullion products penetration: 6 lac villages across the country. Even in villages, where DPs and banks are not available, Gold and silver is a part of house hold savings portfolio. Bullion Products do not need marketing efforts, you make it available and investors will buy.

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Scope of business for you

A huge market is in making, be a part of it and participate in this growth story. Scope of business as DP: You can open 1 lac beneficiary accounts over a period of next 1 year

generating a recurring income of at least Rs. 5-10 crores a year.

Scope of business as Broking House: You can enroll at least 1 lakh clients over a period of next 1 year and generate brokerage income of at least Rs. 10-20 crores a year.

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Why to Invest in Commodities?

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Why To Invest In Commodities ?

1. Commodities is emerging as another asset class 2. Commodities price is related to economic growth and hence offer return 3. Hedge against inflation 4. Improving stability and predictability of returns 5. Diversification of portfolio 6. Bullion (Gold& Silver): Historically proven as hedge against inflation and provide stable return 7. Base Metals: Long term bull cycle backed by industrial and economic growth

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Alternative Assets Comparison

Asset Class

Return Potential

Liquidity

Diversification Benefit

Risk Involved

Holding Cost

Gold & Silver

Private Equity VC Hedge Funds Commodities Art & Collectibles

Medium
Very High Various Volatile Medium

High
Low Low High Very Low

Very High
Moderate Various High High

Low
Very High Various High High

Low
High High Low High

Source: www.benchmarkfunds.com
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Improving stability and predictability of returns

Gold improves the stability and predictability of portfolio returns. It is not correlated with other assets because the gold price is not necessarily driven by the same factors that drive the performance of other assets. Adding gold to a portfolio introduces an entirely different class of asset. Gold is unusual because it is both a commodity and a monetary asset.

Gold is one of the few financial assets that is not linked to a liability. It can
provide 'insurance' against extreme movements on the value of traditional asset classes.

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Why should the general mass prefer demat Gold instead of physical gold
Its like comparing keeping cash at home versus maintaining a savings bank account. Given the comfort of easy liquidity, reach, safety, low cost, transparent

pricing and seamless entry and exit, the mass will prefer holding demat gold
instead of gold coin or jewellary at home. DPs and broking houses can expand to thousands of centers, where stock market has still not penetrated

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Comparison of Investment in Gold through different modes

Parameter Purchase & Sale Pricing Bank (bars / Gold ETF coins) Physical Form Physical Form Dematerialized Form May differ from May differ from Linked to jeweler to bank to bank international gold jeweler prices Likely to be High Likely to be very Likely to be Low High Are involved May exist Are Involved May exist High Not involved Cannot exist 1 2.25 % Jeweler NSEL e - gold Dematerialized Form Linked to Indian Gold Prices Likely to be Low

Buying premium above gold price Making Charges Impurity Risk

Not involved Cannot exist Free

Annual Recurring High Expenses (Storage, Insurance and AMC)

Cont..
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Comparison of Investment in Gold through different modes

Parameter Jeweler Bank (bars / coins) Gold ETF NSEL e - gold

Market Timing Security of Asset

10 AM - 7 PM Investor Responsible At substantial Discount

10 AM - 5 PM 9 AM - 3.30 PM Investor Responsible Banks do not buy,

10 AM - 11.30 PM

Taken care of by Taken care of by Fund house Exchange At Transparent At Transparent secondary market secondary market prices prices

Resale

Convenience of buying, storage and selling

Delivery Center

Low-As physical Low-As movement & physical transfer involved movement & transfer involved Single Single

High - Totally Demat

High - Totally Demat

Single

Multiple

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Start Investing in E-Series

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How to participate
Membership/ client registration Opening of CM Pool Account by NSEL members. Clients are entitled to sell and deliver the demat commodity by

issuing delivery instruction slip (DIS) to transfer their holding into

respective members pool account in the respective settlement number.

Similarly the pay-out will be credited in respective members pool

account and the member in turn will transfer the same to the clients/ beneficiary account.

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Empanelled Depository Participants

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Membership criteria
Admission Fee: Rs 7.5 lakh Non refundable, but membership transferable after 3 years
Security deposit: Rs 7.5 lakh Refundable Annual Subscription: Rs. 25,000

Membership processing Fee: Rs. 5,000

Networth criteria: Rs. 20 lakh NSEL members will get FT- ODIN for nsel free.
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Performance of E-Series

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E-series investment return and ETF comparison

E-Series E-Gold* E-Silver* Nifty 50 Return since last Return Since Return since Return since week % Last Month % last Quarter % Launch* (%) -0.69 4.81 7.59 20.01 4.34 19.83 44.48 51.58 13.64

Launch Date:* E-gold: 17th March, 2010 ; E-Silver: 21st April, 2010

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E-Gold: Monthly turnover (Rs lakh) and Price

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E-Silver: Monthly turnover (Rs lakh) and Price

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E-Copper: daily turnover (Rs lakh) and Price

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ETF Performance A Comparison of Benchmark MCX Gold Price vs. Gold Bees ETFs price

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Contact Details

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Thank You

National Spot Exchange Limited 102 A, Landmark, Suren Road, Chakala, Andheri (East), Mumbai - 400093. Tel: +91-22-67619900 Fax: +91-22-67619931 E-mail: info@nationalspotexchange.com
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