Ketan Parekh Scam


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Over and over again, every time the Indian markets have seen an upward trend, it has been followed by a scam…Yet each time a bigger one than the previous! The tale of the stock market’s boom and bust during the scams consists of various elements. Stock Brokers, research analysts, fund managers, regulators (and even retail investors) stand suspect. Of greed. Of fear. Of Hope. Of incompetence. Nonetheless primarily this is the story of one man. His mastermind and his greed. This tale is concerning the rise and fall of a man named Ketan Parekh. There is a strange parallel amongst Parekh and his predecessor Big Bull Harshad Mehta. Both are from Gujarat and were nearly non-entities prior to catching up with ill repute.

To understand these scams, I would like to brief you upon 2 market forces that operate namely: Bulls and Bears. These are the two sets of operators that generally form a cartel, manipulate stock prices and thereby influencing movement of indices in the financial markets.

Bulls cause increase in prices of stocks by selectively buying stocks very aggressively so that they can sell them at a very high price on a later date. Bulls are enormous in scale in comparison to Bears which are few in numbers. They consist of lesser players and hence, they can better work together as a pair. They operate on the principle of “SHORT SELL” .i.e.  They sell shares which are borrowed, they do not yet own them in expectation that the price will fall in future and they can buy them at a lower price and return. So the profits for Bears lie in the fall of markets when the value of shares erodes. Hence to evoke a fall in markets, “n” no. of tactics are adapted (which also includes rumors) in order to create “PANIC” and to wipe off investor’s confidence.

The market turbulence was the action of an international bear cartel, (in agreement with a few giant domestic players) that succeeded in rigging off stock prices with liberty. Some of the members of this bear cartel are leading foreign institutional investors (FIIs) and domestic big players such as First Global, Credit Suisse First Boston, JM Morgan Stanley, C Makertich, Nirmal Bang and also R Damani. The price rigging by international bear cartel was carried out with the full connivance of senior officials of the BSE, including its President. Anand Rathi, the then President of the BSE, ill used his official position in order to attain sensitive information on the market exposure of bulls, especially that of  Ketan Parekh and his allies, and passed it on to the bear cartel. Taking undue advantage of absence of liquidity in the markets, the international bear cartel resorted to heavy short selling.

Now, let me throw some light on the rise of the big Bull– Ketan Parekh aka KP

Commonly recognized as “Pied Piper of Dalal Street”, “New Economy Superman” and “ICE Superman,” (ICE – Information, Communication and Entertainment sectors), Ketan Parekh had been one of the major players behind the boom in the “new economy” stocks. Even though Ketan Parekh came to public notice only in early 1999, his supreme hold on the financial markets could be instrumented from the fact that his favorite stocks were known as “KP Stocks” and market players had more faith in the “KP Index” rather than the Sensex.

He had a very strong and established network of about more than 50 brokers and his daily turnover averaged around Rs. 4000 mn which was almost equivalent to the turnover of Ahmedabad Stock Exchange put together!(it has been one of the leading stock exchange) Sounds Fascinating?

It was not wrong to state that the markets were dancing to the tunes of KP, who was in his thirties…Mobs of traders; investors simply monkeyed the Bull Run led by him. One rumor regarding KP’s stake in the stocks of a company and the share prices skyrocketed as fast as one could imagine!

The basic concepts of investing were all forgotten. Instead of investing after thorough analysis (company History, Promoters, profitability, cash flows, P/E ratio etc) and making rational decisions, investors were following all investment strategies of KP with their eyes shut! If KP bought 100 shares of company “A” all investors ran and purchased the same shares in anticipation of making a killing …this despite them knowing that the stock prices were unrealistic…..An ideal case in point showcasing herd mentality which has been a widespread nuisance in the financial markets. The markets had blind faith in KP, so much that his role in fraudulent deals had been totally overlooked. More often than not, he would collude with top management of companies to shoot up the stock prices to unrealistic levels.

The Factors that Helped the Man

As per market information, though he was a big broker, he didn’t have sufficient funds to buy large stocks. He borrowed funds from various companies and banks for this purpose. He used to raise loan from the banks by offering shares as collateral security. The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee telefilms, Crest Communications, and PentaMedia Graphics. Ketan selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the ‘K-10′ stocks.

This could not have been possible out without the involvement of banks. A small Ahmedabad-based bank, NMCB(name changed)was KP’s main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000. In December 2000, when KP had to face some liquidity issues in settlements he used NMCB in two different ways. 1st was the pay order route, wherein KP issued cheques drawn on BoI to NMCB, against which NMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that NMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits. As per a RBI inspection report, NMCB’s loans to stock markets were around Rs 10 billion of which over Rs 8 billion were lent to KP and his firms.

The second route was borrowing from a NMCB branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts. KP used around 16 such accounts, either directly or through other broker firms, to obtain funds. Apart from direct borrowings by KP-owned finance companies, a few brokers were also believed to have taken loans on his behalf

The NMCB pay order issue hit several public sector banks very hard that included big names all of whom lost huge amounts in the scam. It was also alleged that Global Trust Bank (GTB) issued loans to KP and its exposure to the capital markets was above the prescribed limits. According to media reports, KP and his associates held around 4-10% stake in the bank. There were also allegations that KP, with the support of GTB’s former CMD Ramesh Gelli, rigged the prices of the GTB scrip for a favorable swap ratio before its proposed merger with UTI Bank. KP’s modus operandi of raising funds by offering shares as collateral security to the banks worked well as long as the share prices were rising, but it reversed when the markets started crashing in March 2000.

The games bulls and bears play

Due to various factors including the bursting of “New Economy” bubble and the subsequent downward trend in NASDAQ, Ketan Parekh and his cronies started borrowing heavily. The only option before Ketan Parekh and other members of the bull cartel was to recklessly rig the prices of shares upwards and then sell them. Initially, he and his cronies borrowed heavily from the banks but later switched to unofficial markets in Calcutta. Over 90 per cent of transactions in Calcutta are estimated to be unofficial, outside the exchange with no records and margin money. The financiers at Calcutta were too happy to lend huge amount of money to Parekh and his cartel at rates as high as 100 per cent.

Because of liquidity crunch, Parekh and his cronies were finding it extremely difficult to further push the prices of stocks upwards. Taking advantage of this situation, the international bear cartel got together and started massive selling of “KP Stocks” in the hope of buying them dirt cheap at a later stage. The short selling was carried out with the active connivance of Anand Rathi and other broker-directors of the BSE who provided sensitive information to the bear cartel about market exposure of Parekh and his cronies. The sudden selling of shares created a panic-like situation in the markets. Sensing a major meltdown, the big market players not associated with the bear cartel also started heavy selling of “KP Stocks.” Even the Madhavpura Cooperative Bank started offloading the shares it held as collateral from Parekh, fearing his inability to pay back the borrowed funds. All these factors further contributed towards the steep decline of the prices of “KP Stocks.”

Some of “KP Stocks” lost nearly 90 per cent of their value since their peaks early last year. For instance, the share of Zee dropped from its peak of Rs.2330 to Rs.127 while the share of Himachal Futuristic Communications Limited was traded at Rs.194 on March 14, 2001, many times lower than its peak of Rs.2553. The share price of DSQ, which Parekh jacked up to Rs.2820 only a few months ago, came down to Rs.127 on March 14. Because of tough hammering of “KP Stocks” by the international bear cartel, several associates of Parekh, particularly those located in Calcutta, defaulted on payment obligations estimated to be more than Rs.10000 million. Taking advantage of the low prices of shares, several TNCs turned this crisis into an opportunity. TNCs such as Sandvik Asia, Cabot India, Hoganas India and Centak Chemicals enhanced their stakes by buying their own shares at dirt-cheap prices.

The official response: bolting the stable doors after the horses have fled

Smelling deliberate price rigging, the Ministry of Finance asked the SEBI to launch investigations into the matter. This scam created a historical impact on financial status of Bombay Stock Exchange and also on faith of investors in its working. Securities and Exchange Board of India (SEBI) was highly criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in shares over an 18-month period prior to February 2001.

Analysts also opined that SEBI’s market intelligence was very poor. Analysts commented that if the regulatory  authorities had been alert, the huge erosion in values could have been avoided or at least controlled. Ketan Parekh was sent behind bars immediately though was later released on bail. Currently he has been prohibited from trading in the Indian stock exchanges till 2017. One would have thought that after this scam the regulatory authorities would have became more strict and effective and than we come across the Satyam scam!!!!!!!!


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