Is Ketan Parekh, or KP as he is otherwise known, back? Earlier this month, the Forward Markets Commission (FMC) issued a circular to commodity exchanges asking them to bar him and his associates from trading in any of the futures exchanges. The real problem, though, is that by the time the FMC order was issued, manipulators and speculators in these markets had already made their money and exited.

While the FMC did not specify the commodities in which KP was supposed to be active, there is a widespread belief in the market that he is (or was) active in the markets for mentha oil and guar seed. Despite repeated attempts to contact him, KP did not speak to BW.

It is also clear that in the three years since the national-level multi commodity exchanges came into being, one of the main aims behind their setting up — reducing the control that cartels, or a group of traders had over the futures market for any specific commodity — has, to a large extent, not been achieved.

In fact, allegations are flying thick and fast about the tactics used by groups of traders to rig the prices of commodities. For instance, in November 2004, there was a fire at a godown of a national multi-commodity excahnge, which stored guar gum and guar seed. There have been repeated allegations of price rigging in both these commodities. Traders have alleged that the fire was deliberately started by a cartel in an attempt to create an artificial shortage. The exchange, in a circular, described the fire as “minor” and said that there was “no significant loss of commodities stored at the warehouse”. And allegations about price rigging with official collusion are also widespread.

While a copy of the circular on KP has not been made public, FMC officials confirmed to BW that they had indeed issued such a circular. “We have cautioned exchanges to not allow Parekh or any associated groups to trade on the exchanges,” says Anupam Mishra, director, FMC. A circular sent out by the Multi-Commodities Exchange (MCX) contains a list of 29 associates of KP and has asked members not to deal with any of the entities. Interestingly, the circular with the list of names of KP-related entities was later removed from the MCX website.

The controversy over market manipulation in mentha oil comes just months after similar concerns of manipulation in urad dal prices. (See ‘Who Cares About Urad Dal?’, BW 6 March 2006.) The NCDEX was forced to transfer one of its senior officials after the FMC accused the exchange of changing the terms of the contract for uraddal near the date of expiry — something which the exchange said it did to thwart speculators.

Mentha oil is mainly used as an additive in foods, pharmaceuticals, perfumes and artificial flavouring. India is the world’s largest producer and exporter of mentha oil. It earns the country Rs 100 crore in foreign exchange every year. Mentha oil producers say they have been hit hard by the extreme volatility in the futures market. “The market goes up by Rs 100 one day and then falls by Rs 100 the next day,” says Vishnu Kapoor, a mentha oil exporter who claims annual exports of Rs 20 crore. “Producers like us have long term contracts with buyers and when the price of the main input becomes so volatile, it becomes extremely difficult to remain viable.”

He claims that many factories in Rampur (Uttar Pradesh), around which most of the country’s mentha oil industry is based, have shut down due to the extreme price volatility. Since last October, the futures price has fluctuated in a range of 109 per cent. Over the same period, the spot market price has fluctuated in an 88 per cent range, according to NCDEX data. (see ‘The Rise and Fall of Mentha Oil’.)

Dealers say the manipulation began last December, a time when stocks in the physical market are low as the crop comes to market between late May and June. “The quantity available in the market at the time was between 4,000 tonnes and 6,000 tonnes. Much of it was bought up by a group of traders who took advantage of the fact that there would be no new crop in the market till May,” says a dealer. Another market participant points out that this was when Ketan Parekh’s name, linked to a group of traders, first began to do the rounds. These traders took advantage of holding back most of the market supplies and began bidding up futures prices. Dealers say that KP deals in the commodities markets through a trader called ‘Montu’, who was based out of Pune but now operates from Delhi.

By the end of December, the futures price of mentha oil had risen by almost 80 per cent over the October price. Traded values in the futures market had also soared from nil in the second week of October to as much as Rs 7 crore-10 crore per day by late December. On 3 January, daily trade in the futures market hit Rs 28 crore. “Every day the market was hitting the upper circuit filters at both the NCDEX and the MCX,” points out the dealer. Also, given that the upper circuit filter on the two exchanges differs by 3 per cent, a price differential opened up on the two main exchanges. In response to the volatility, the exchanges increased margins on the commodity in January. The FMC asked exchanges to bar entities, banned by Sebi from the equity markets, from trading in commodity futures. Despite these measures, futures prices remained high till the end of January. Then they began to slide as steeply as they had risen. Between February and May, prices fell 28 per cent. Those exporters who had been severely burned during the bull run, jumped into the market once the price began to slide and took short positions, exacerbating the fall. By mid-May, they were at last year’s early October levels.

That was when the FMC order banning Parekh was issued. “The raising of margins by exchanges managed to bring the manipulation to a halt, but by then the damage had already been done,” says the dealer. Referring to KP, a market player said: “All along, his style has been to trade in such a way that dramatically increases the level of volatility in the market. This forces other traders to shy away leaving the way clear for him to ramp up prices.”

“All along there were wild and contradictory rumours about the actual physical market,” points out Pramit Mistry, a commodities analyst. “Last year, the total crop was in the order of 20,000 tonnes. The prices began rising after rumours that the crop would fall by 25 per cent in the coming year.” He says that the price slide from February was prompted by rumours that the mentha oil crop would be a bumper one this year. “Now there are again rumours that the actual size of the crop may be smaller than expected. So, the price is jumping again (in May).”

“In markets like these, fundamentals play a minor role,” says Mistry. “The role of cartels is much more important. Also information of market supplies is very hard to come by.” For instance, he points to the run up in the price of pulses like urad dal. India imports a large quantity of pulses from Myanmar. “The fact is that many of the traders in the market have little or no knowledge of the supply situation in that country, or the amount that is available for export. Only a few large traders who have offices in that country have that kind of information.”

article by Avinash Celestine in Businessworld