Ketan Parekh Scam

Presented By. Rajiv Singh NHLI09PGDM071 Corporate governance

What is Capital Market scam?

jIt is basically fraud done in the

Capital market with the investors by manipulating the facts in order to attain enormous profits.

INTRODUCTION
j C.A by profession-comes from broking

family background.
j Popularly known as the Pentafour Bull j Known for his K10 series of stocks.

THE K-10 STOCKS

j Amitabh Bachchan Corporation Limited (ABCL) j Mukta Arts j Tips j Pritish Nandy Communications. j HFCL j Global Telesystems (Global) j Zee Telefilms j Crest Communications j Penta Media Graphics j Satyam Computers

THE SCAM 2001

j Banker Broker partnership j Manipulation of the fund j Erosion of public wealth

KETAN PAREKH THE ONE MAN ARMY

j Ketan Parekh followed Harshad Mehta's

footsteps to swindle crores of rupees from banks. A chartered accountant he used to run a family business, NH Securities. Ketan however had bigger plans in mind. He targetted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names.

KPs Network
j Ketan formed a network of brokers from smaller

exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange j . Identified and acquired technology and communication stocks, now termed as K-10 stocks and ramp up their prices by simulating enhanced market activity. j Ketan had large borrowings from Global Trust Bank he got Rs 250 crore loan from Global Trust Bank, though Global Trusts chairman Ramesh Gelli (who was later asked to quit) repeatedly said that lending to Ketan was less than Rs 100 crore in keeping with Reserve Bank of India norms.

Fraud of Ketan ParekhWith MMCB

j About 250 pay-orders totaling Rs 2,400 crores were issues

by MMCB, UTI and GTB to Parekh .

j The total amount involved in the pay-order fraud was

estimated by the Central Bureau of Investigation (CBI) to total Rs 1030.34 crores.

j The CBI Report also has stated that Parekh opened 11

accounts in MMCB, Mandvi Branch, in Mumbai alone and his relatives held 16 accounts in the names of various bogus companies with the BOI, Mumbai Stock Exchange Branch.

COLLAPSE OF UTIS US-64

j The UTIs US-64 mutual fund, the largest mutual fund in

India, comprising of two-thirds of the total assets of the Indian mutual funds industry and Rs 57,500 crores in assets, collapsed in the wake of the Ketan Parekh fraud.
j The UTI invested Rs 3,400 crores in just 6 out of a total

portfolio of 44 stocks, which was eroded by 60 per cent of its value in one year.
j It also invested Rs 1,300 crores in another five stocks,

which was devalued by 77 per cent and stood at Rs 300 crores within a year.

WAYS HE FUNDED HIS SCAM

j THE PAY ORDER ROUTE
KP issued cheques drawn on BoI (Bank of India) to MMCB (Madhavapura Mercantile Cooperative Bank), against which MMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits.

THE PAY ORDER ROUTE

j KP reportedly used his BoI accounts to

discount 248 pay orders worth about Rs 24 billion between January and March 2001. BoI's losses eventually amounted to well above Rs 1.2 billion.

WAYS HE FUNDED HIS SCAM

j BORROWING FROM MMCB

The second route was borrowing from a MMCB 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.

Ketan borrowed Rs 250 crore from Global Trust Bank to fuel his ambitions. Ketan along with his associates also managed to get Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank. According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

HOW THE SCAM BROKE OUT?

j His mode of raising funds by offerings

shares as collateral securities worked well but.. There are some reason behind the broke out..

 Only till the prices of shares went up

but it reversed when shares started falling from mar 2000.  The crash was a result of fall at NASDAQ that saw a fall in K-10 stock as well  In next 2 months, sensex declined by 23% and K-10 stock declined by 67%

WHAT NEXT?
 In May 2000, the market picked up back

and the prices of K-10 rise again

 The prices of stock doubled like

HFCL doubled from Rs 790 to Rs 1353 by July

THE FINAL TURN AROUND

j BY Dec.2000

the NASDAQ fell back again and the KP stocks went down as the prices of stock falling globally

CONTu..
j KP faced liquidity problems j The CSE has payment crises and was a set

back for KP because of three reasons which are-

THE 3 REASONS
I. The lack of regulations and surveillance

on the bourse allowed a highly illegal and volatile badla business II. The exchange had the third-highest volumes in the country after NSE and BSE. III. CSE helped KP to cover his operations from his rivals in Mumbai.

THE DOWN FALL

j Stocks held by KP and his broker were

reduced to 6-7 bn from 12bn j Situation worsened when KPs badla payment was not honored and 70 CSE brokers along with top 3 brokers made default j By mid March the value of shares went to 2.5-3 bn.

THE END
j KPs brokers started pressuring him for

payment. j SEBI tricked the regulatory norms and several other rules were framed j Finally KP was arrested.

.THANK YOU.