Business Standard

FMC widens crackdown after guar ban

The commodity derivatives market regulator asks for deal details of other farm commodities in the wake of price swings

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After banning all further futures trading in from last week, the commodity derivatives market regulator, the (FMC), has initiated investigations in other farm commodities, too, to check for price manipulation by traders.

The commodities derivatives market regulator has asked all exchanges in the sector to provide details of mark–to–market (M2M) beneficiary accounts for the past six months in highly liquid farm commodities. These include potato, guar, chana, rapeseed, mustard seed, cardamom, mentha oil, pepper and soybean.

FMC chairman told Business Standard, “We have asked exchanges to provide these details in other highly volatile agri commodities. We would take stern action in case of any evidence of price manipulation in these sectors.” The regulator had halted futures trading in guar due to continuous price rise in the futures market. Guar gum and seed prices had jumped almost 70 per cent since January, despite severe measures in the form of high margins, reducing position limits and suspension of traders by the regulator.

Turmeric, which was trading at Rs 35 a kg in January 2009, was manipulated to increase beyond Rs 150 a kg within a year. But in a few months, this was brought down to around Rs 40 a kg.

Similarly, the price of black pepper was Rs 225 a kg in April 2011 and was manipulated to rise beyond Rs 432 a kg this month, a rise of 95 per cent. The normal price of guar bean in the season is Rs 10 per kg, while guar seed is traded at Rs 25 a kg and guar gum at Rs 50 a kg. However, due to the suspected hand of some rogue traders, these increased to Rs 291 a kg for guar seed and Rs 959 a kg for guar gum on March 21.

“It is unbelievable that the fodder for animals is priced at Rs 291 a kg, much more than the price of cereals and pulses for human consumption,” said S K Jindal, chairman of the investments committee at The Associated Chambers of Commerce and Industry of India (Assocham). “The prices for guar have gone up by 120 per cent in the past month, 700 per cent in the past four months, 875 per cent in the past 12 months and 1,300 per cent in the past 18 months.”

This price manipulation has resulted in thousands of genuine traders, hedgers, exporters and farmers are losing their money, he added. This artificial price increase is against the interest of farmers, who will not be able to buy expensive guar seed for their next crop.

Traders fear FMC would take stern action on other farm commodities, too, to discourage speculators. Such action, however, would defeat the objective of commodities futures’ resurrection in 2003, said Madan Sabnavis, chief economist with Care Ratings.

“The major objective of futures trading in farm commodities is to benefit farmers, which would not happen in a short period of time. Hence, instead of suspending trading on the futures platform, the regulator should have found alternative means so that farmers’ interest should remain intact. These actions have put the credibility of the entire system at stake,” he complained.

Agreed Ajay Kedia, managing director of Kedia Commodity, a city-based research firm: “Stopping trades don’t send a good message in the market. It will also create uncertainty in other counters. The authorities should take more effective steps and punish the culprits in order to gain the confidence of investors. Also, the authorities should pave the way for more participation in the market from corporates and others in agri items to bring more liquidity and prudent price discovery. It is due to lack of massive participation in today’s scenario that price manipulation is possible.”

Smelling a Harshad Mehta-like scam in futures trading in narrow commodities like guar and turmeric, has urged the government to investigate manipulations by some traders at the National Commodity and Derivatives Exchange of India (NCDEX), which show huge price distortions and weak regulatory provisions. Commodity exch-anges were set up for true price discovery but have unfortunately become centres of price distortions., said Jindal. “A few manipulators have hijacked the NCDEX,” he said.

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