Industry body Assocham has opposed re-listing of guar seed and gum in the futures market till the Forward Contract Regulation Amendment (FCRA) Bill to accord adequate powers to Forward Markets Commission (FMC) with a view to regulate the market and penalize any insider trading, cartelization and price manipulations.
“Cartelization and price manipulations had suddenly increased the price of guar seed from a level of Rs 2,422 per quintal in 2010-11 to Rs 29,000 per quintal in 2011-12. Before these manipulations, prices used to be in the range of Rs 1500 – 2200 a quintal for 2004-05 to 2010-11, Assocham secretary general D S Rawat, said.
Even during the year 2009-10 which was a bad crop year with guar seed production falling to an all time low of 3,00,000 tonnes, the prices ranged within Rs 1800 - 2200 per quintal.
In 2010-11, there was bumper crop of 15,45,000 tonnes and the price during the year ranged within Rs 2000 to Rs 3800 a quintal. But, the very next year, guar crop size is 12,00,000 tonnes and the guar prices have gone up from Rs 4,000 in October 2011 to Rs 2,9000 per quintal in March 2012, an increase of 625%. There is said to be export led increase in demand. However, such an abnormal price rise is not easily attributed to increase in export demand only. There is a possibility of price manipulation and insider trading as price, due to lack of corresponding trading volumes and negligible open interest in the market, Rawat said.
The future market price rise (returns) in 2011-12 is all most 10 times higher than last year and is the steepest rise in any agri commodity in the history of Indian future exchanges. The future price change volatility (return volatility) in 2011-12 has gone up by almost 80% compared to 2010-11 figures. Guar future prices have ranged between Rs. 2,743 and Rs, 29,900 per quintal. During 2011-12, the maximum price was 889% higher than the maximum price 2010-11.
In 2011-12, the distribution of price changes is strongly negatively skewed and leptokurtic implying informational inefficiency, possibly exploited by insider traders.
The trading volume and open interest has declined sharply in 2011-12 compared to 2010-11 which needs attention, and a thorough probe. The NCDEX data analysed suggests possibilities of cartelization and price manipulation.
The price changes (returns) exhibit one distinct structural break, which matches with volatility peak. Unusual price changes (returns) and trading behavior is observed in and around 22-03-2012 as the prices have enormously gone up without any corresponding volume of trading or open interest in the Exchanges. Hence, trade positions around these dates must be thoroughly examined to check for possible insider trading, leading to un-noticed price rigging.
The future and spot prices exhibit long-run equilibrium relationship confirming the price discovery process. However, during 2011-12 there has been absolute mismatch in the prices, trading volumes and trading patterns, which needs to be further investigated.
There are bivariate volatility spillovers implying that high futures price volatility drives high spot price volatility and vice-versa.
The futures trading activity does affect spot price volatility. This may be due to the fact that spot market is not well-organised and lacks transparency.
The Chamber further stated that Well organized spot markets must be developed, ensuring transparency and trading efficiency. Electronically traded spot exchanges must be developed and warehousing, testing labs as well as other eco-system linkages must be established and strengthened to provide adequate quality of goods laying on exchange warehouses for efficient trading in future market.
Institutional investors’ participation must be allowed so that these markets achieve higher trading liquidity. Innovative derivative instruments such as commodity options must be introduced to attract higher trading volumes and provide a better risk management alternative.
Assocham advised that the FMC must come out with a long term investor education strategy. Investor education is the best way to empower investors and hence the issue needs special attention. A well informed investor’s base shall create greater trading liquidity and help in avoiding price manipulations.