The shells are not used in making peanut butter. You would need to shell these peanuts (and remove the papery skins from the individual peanuts) before grinding them to make the peanut butter.
It doesn't matter whether they are roasted in the shell or not--what matters is that they are roasted, to give the deeper, richer flavor.
I have to assume your peanut vendor did not mislead you, and therefore the peanuts you bought are already roasted. You would just shell them and grind them. Note: if they are roasted, they will be somewhat crunchy, with a toasty complex aroma, and light medium beige to brown color, whereas raw (or "green") peanuts will be closer to very pale yellowish beige, like unfinished lumber.
Due to the large number of peanuts that may be used in making a reasonable quality of peanut butter, and the inconvenience of shelling those peanuts, one might choose to purchase already shelled, roasted, preferably unsalted peanuts for the purpose.
Edit: in response to the second question, I defer to the mighty Alton Brown whose recipe indicates to roast peanuts at 350 F for 30-35 minutes. Since he doesn't give us a test or indicator to know when they are done, and a careful and meticulous recipe writer such as Brown would not omit this if one exists, I infer no good test for doneness of the in-shell peanuts exists.
However, since the individual peanuts within the shells are very uniform in size, the time and temperature guideline is likely to be quite effective.
You should almost certainly be smelling roasty peanut aromas as the peanuts close in to being done, but there is no way to describe that. Its like knowing when a cake is done by the aroma--its certainly possible, but you have to have experience with the recipe to know.
You can most generally shell peanuts with your hands. There are different methods you can do depending on how sturdy the shells are.
1- If the shells are sturdy, hold each side of the neck (if you know what I mean) with each hand, and then break it apart. Now you have two shells with peanuts in them but there is a hole in each shell. Take one of them and apply pressure to the side opposite from the hole by putting the shell between your thumb and index finger and pressing your thumb. The hole will get bigger and you get your peanut.
2- If the shells are not so sturdy (which most often is the case), do the last step in the previous method. Just apply pressure by putting the shell between your thumb and index finger and pressing your thumb a little hole will form, get bigger, and then you get your peanut.
3- If the shells are really thin, and your fingernails are long, you can just crack into them by pressing with your nails.
Best Answer
Roasting peanuts in a pan on a stove cooks them primarily via conduction (i.e., the surface of the peanuts touching the hot surface of the pan). Since peanuts are round, each part of the peanut must touch the pan for an equal amount of time during the cooking process to be evenly roasted. That's nearly impossible without something like a barrel roaster (which very few people will have in a home kitchen).
Cooking with convection (i.e., hot air) will produce much more even results since the heat will transfer to all sides of the peanut relatively evenly. Roast the peanuts at 175°C/350°F for 30 to 35 minutes, rotating the pan half-way. You can also try putting the peanuts on a wire rack (as opposed to directly on the sheet tray), which will help the hot air to more evenly cook their bottoms.
If it does not interfere with your ultimate use of the peanuts, you can also try coating them in peanut oil before cooking (roughly 30ml of oil per kilo of peanuts). The oil will help the heat transfer more evenly to the peanuts.
Finally, you can also use the Chinese method of deep-frying the peanuts in your kadhai; roughly 15 to 20 minutes. Immersion in hot oil will cook the peanuts evenly.