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October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do share-brokerage based family. He was involved in the shares scam of the year 2000/01.

All over world investment in ICE (Information Technology, Communication and Entertainment) shares was the trend. Ketan Parekh colluded with promoters of the new economy (ICE) shares and changed the complexion of the market by buying stock known as K-10 scrips. He succeeded in lifting scrips such as HFCL, Satyam and Global to international P/E levels. Parekhs modus operandi was to route orders through his three broking outfits and 40 satellite brokers. He had contacts with brokers in Kolkata and Ahmedabad, who were rewarded with badla payments. His sources of funds were non-resident Indians and the new private sector banks who accepted shares as collateral. He would pledge the shares with banks as collaterals when the share prices were high. Mutual funds and foreign institutional investors by investing heavily in technology stocks helped KP scrips to rise high. He placed shares of Satyam at a premium of Rs 1,000 with UTI and the shares of HFCL for Rs 1,400 with mutual funds and foreign institutional investors. Parekh would increase the liquidity of stock when there was a strong demand or buy aggressively if one of the portfolio stocks fell.

Ketan Manohar Vichare (MFM_III Roll No: 201059)

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

The Bull Run started in May- November 1999 when Parekh started his first major round of trading aggressively in HFCL, Global, Satyam, and Zee scrips. The Sensex rose from 3,378.4 to 4,491 points. The Sensex peaked to 6,100 before it started falling due to a global meltdown in ICE shares. There was a sharp decline in prices due to factors such as global economic slowdown, significant market capitalization erosion at NASDAQ and other leading stock exchanges, and bear hammering on the Indian stock exchanges in sectors such as telecommunication, media, and information technology. The sudden sharp fall in prices of these scrips resulted in a huge depletion in the margins on shares that were placed as securities with the banks. Consequently the banks were, on the one hand, obliged to ask Parekh and his associates to either pledge more shares as collateral or return some of the borrowed money, and on the other they were driven to prop the prices by pumping more money into the capital market. This resulted in a financial crunch for some major bull operators, which led to disputes in the Kolkata Stock Exchange (CSE). The crisis snowballed as the Kolkata brokers took more long positions then Parekh. Trading at Kolkata is 90 per cent unofficial. It is a cash badla market where Rs 1,500-2,000 crore is rolled every month at 21-30percent. As the circumstances developed, badla rates shot up to 80 per cent at the Kolkata stock exchange. So, Parekh defaulted on payment to Kolkata brokers which resulted in a payment crisis between March 12 to17 2001. Seventy CSE brokers defaulted as the exchange plunged into crisis. The bear cartel on BSE, which was hear hammering the market with inside information was caught red handed by SEBI who suspended all the seven members form the BSE governing board.

Ketan Manohar Vichare (MFM_III Roll No: 201059)

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

Ketan Parekh desperately borrowed huge sums from the Ahmedabad based Madhavpura Mercantile Cooperative Bank (MMCB). The bank issued pay orders running into crores of rupees without receiving cash payment or collateral from Parekh. Pay orders are instruments issued between branches of bank in one place. They are issued to banks, collect the cash or have significant collateral. Hence, the discounting bank is sure of collection. As Parekh colluded with Ramesh Parekh the chairman of MMCB, the latter issued pay orders without having the balance in the banks accounts. The Bank of India (BOI) discounted Rs 137 crore worth of pay orders which bounced. Ketan Parekh paid only Rs 7 crore and BOI went to a criminal court against him. The Reserve bank specifically prohibits cooperative banks to invest in the stock market or to lend to stockholders. However, the latter are free to lend to individuals against a pledge of shares upto Rs 10 lakh per borrower if the shares are in a physical form and up to Rs 20 lakh if they are in dematerialized form. MMCB flouted the norms of the Reserve Bank to earn higher rates of return.

The Crime Branch of India arrested Ketan Parekh on the charge of defrauding BOI. The BSE Sensex plummeted from a peak of 6,100 points to 3, 788.2 on March 30, 2001. SEBI banned all deferral products including badla from all stock exchanges.

Ketan Manohar Vichare (MFM_III Roll No: 201059)

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

Impact on Financial Institutions.

Ketan Parekh was threatening to sue the Bank of India for defamation, because it complained about the bouncing of Rs 1.3-billion pay orders issued to the broker by the Madhavpura Mercantile Cooperative Bank. He seemed to suggest there is nothing more that the authorities would be able to pin against him.

At last investigations by the Central Bureau of Investigation and the Securities and Exchange Board of India reveal that the sheer magnitude of money moved around by Parekh or available to him for his market manipulation was a staggering Rs 64 billion.

Money abroad

The CBI called a press conference to announce it had unearthed a Swiss bank account in which Parekh was listed as the beneficiary. The Bureau claimed there was $ 80 million (Rs 3.4 billion) in the account, which has since been frozen. In the past, CBI announcements were usually followed up with a quick arrest, this time it has gone silent.

Ketan Manohar Vichare (MFM_III Roll No: 201059)

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

New Overseas Corporate Bodies

The Securities and Exchange Board of Indias preliminary investigation in May revealed that Rs 29 billion was transferred out of the country through five Overseas Corporate Bodies between March 1999 to March 2001. These OCBs had together invested just Rs 7.77 billion in the Indian market but remitted a whopping Rs 36.77 billion out of the country. This direct flight of capital occurred through European Investments, Far East Investments, Wakefield Holding, Brentfield Holdings and Kensington Investment. Three of these companies have a paid up capital of just $ 10.

SEBI says the pattern of investments and transactions through these accounts shows a clear misuse of the OCB/Foreign Institutional Investor route. They seem to be used as a channel to repatriate profits earned through stock price manipulation. Many of these OCBs were subaccounts of Credit Suisse First Boston whose brokerage operations have been suspended. But there were other FIIs too. Strangely, SEBI has not yet placed any restrictions on them so far. All it has done is to request the Mauritius Offshore Business Activities Authority to give details in respect of actual beneficiaries, source and utilisation of funds of OCBs and sub-accounts mentioned in its preliminary report.

Ketan Manohar Vichare (MFM_III Roll No: 201059)

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

In answer to a Joint Parliamentary Committee query, Sebi now admits to have unearthed six more OCBs, where there is evidence that Parekhs companies may have used them for cornering and parking of stocks. Dossier Stock Inc, Greenfield Investments Ltd, AOM Investments Ltd, Symphony Holdings Ltd, Almel Investments (Mauritius) Ltd, and Delgrada Ltd. However, since there was no other specific query about further repatriation of funds, SEBI is silent about other flight of capital through the OCB window. However, it does admit there are clear inter-linkages between the OCBs and that some of them have issued participatory notes abroad to route funds to India. It also says Parekhs entities have conducted many of their trading transactions.

In its preliminary investigation report, SEBI unearthed a transfer of nearly Rs 11 billion to Calcutta brokers, most of whom have had their businesses suspended because of payment defaults. In an answer to a JPC query, SEBI now says Parekh had sent over Rs 27 billion to Calcutta brokers between January 2000 to March 2001. This suggests that as soon as the infotech, communication and entertainment stock-led boom began to lose momentum, Parekh shrewdly began to move his speculative activities to the unofficial market in Calcutta in order to avoid detection. SEBI says it is investigating the source of these funds and how they were utilised.

The study by SEBI found that the flow of funds originating from Ketan Parekh, when paired with securities market transactions of connected clients leads to the possibility that these trades were executed to confuse the funds trail and to integrate the money originating from the banned stock broker into the system of banking. Ketans possible involvement was found by SEBI during its investigation into professed manipulative trading in the scripts of Cals Refineries Limited, Confidence Petroleum India Limited, Bang Overseas Limited, Shree Precoated Steels Limited and Temptation Foods Limited.

Earlier, SEBI had Ketan and 17 other entities from participating in the market following a study into purchase sale and dealing in the shares of companies like HFCL, Zee Telefilms, Adani Exports, Ranbaxy and Aftek Infosys between October 1999 and March 2001.
Ketan Manohar Vichare (MFM_III Roll No: 201059) 6

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

In its time order, SEBI banned 26 entities and persons, including Maruti Securities Limited and asked them to reply in 15 days time. The government had set up the Joint Parliamentary Committee (JPC) to study the securities scam that hit the stock market during the year 19992001. According to SEBI, the starting point was routine market surveillance that revealed set trades in five scripts. It also had information from the IT department on Ketan Parekhs source of funds which trailed back to certain entities. SEBIs investigation showed that these entities built up large volumes in the five scripts chosen for investigation; strangely enough, they often made losses on their transactions, but continued to trade. SEBI has opinion that these independently incurred losses have a secondary motive that needs to be separately investigated by the appropriate agency. It seems to have specific concerns relating to money laundering to the enforcement and IT investigators. SEBI also found that the connected entities or fronts used by Ketan for his transactions often sold shares without having them in their possession. They subsequently obtained the shares in time for delivery through off-market transactions through other connected entities within the circle of operators. Evidence of Ketan Parekhs massive market activities was his ability to pay back well over Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which had collapsed and caused thousands of depositors to lose money when he pump off Rs880 crore to fund his market misbehavior in the year 1999-2000. SEBIs team led by Mr. S.Raman (chief general manager) must be congratulated for breaking this seemingly impenetrable system; but let us recognise that this is only the tip of the market manipulation. Ketan Parekh is not the only manipulator to use this system; there are plenty of others doing it too. Also, the number of scrips in which Ketan has traded is substantially higher than the five that were investigated by SEBI.

Ketan Manohar Vichare (MFM_III Roll No: 201059)

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

One of the best kept secrets is the action taken against those involved in the scam of 2000, which led to large-scale losses, the drop of two banks, Madhavpura Mercantile Cooperative Bank (MMCB) and Global Trust Bank (GTB) and split the giant Unit Trust of India (UTI) into two, after pushing it to the brink of a collapse. Whether the BSE directors had used their recourse to price sensitive information or not for transactions in the market, having had direct access to the data was in direct violation of SEBI rules, observes Oommen A. Ninan.

When the Sensex crossed the dizzy 5000 mark in October 1999, Bombay Stock Exchange (BSE) brokers literally took to the terrace of Jeejebhoy Towers and released balloons. The celebration also marked their bullish sentimentalism and showed lack of market prudence that what goes up has to come down; that the market is driven by its own dynamics. The built up position of Mr. Parekh in certain equities known as `K 10, in the normal circumstances, would not have had any major impact on the market. With the elected directors, including the BSE president, having had recourse to the price sensitive information relating to outstanding positions, purchases and sales by leading operators it is to be seen whether they have used this advantage to depress the prices. The Securities and Exchange Board of India (SEBI) investigation will reveal it in the next few days.

The excitement indicated on Budget day by a sharp rise in the Sensex was rather on the high side. There is actually nothing much in the Budget to promote savings. On the contrary, savings have been discouraged by a drop in interest rates.

It is now very doubtful whether demutualization or corporatisation of broker-driven exchanges is the answer. The experience of some of the stock exchanges like the London Stock Exchange, the Australian Stock Exchange, the Nasdaq, etc. Is to be fully ascertained. Assuming that the brokers are kept away from the management of stock exchanges, restarting their role only to their trading rights, what is the guarantee that a new management will act in an objective manner.

Ketan Manohar Vichare (MFM_III Roll No: 201059)

October 20, 2012

[BANKING SCAM OF KETAN PAREKH]

There has been a flow of money from banks to capital market in recent months. Private sector banks are prominent among them, including the Global Trust Bank (GTB). However, a reversal of banks exposure to capital market recommended by the RBI-SEBI committee in September last year is not a solution. What is essential is that the banks should have expertise in judging the risk of the business as well as the organisational ability to administer such schemes.

Moreover, the prima facie evidence in price rigging of GTB shares raises doubts over the regulators surveillance mechanism. The RBI was aware of some unusual price movements in GTB share prices in November last year itself and the SEBI took another three months to inform the RBI that it had found evidence of price rigging in GTB share prices. The true measure of regulatory competence is the ability of the regulators to take quick corrective action. Further, the GTBs loan to Mr. Parekh without collateral is another issue that raises questions on the RBIs role as a regulator. Regulation and supervision and the quality of on and off-site supervision of the RBI and the SEBI should be strengthened and they should be delinked from the Finance Ministry with more autonomy and powers.

The regulator should continuously monitor the investment pattern so that any undue change in a particular stream, like the broker position, could be identified and immediate investigation conducted. The Government also should strengthen the investment institutions to facilitate longterm investments. Flow of money to the capital market from the lending institutions should be more transparent so that undue concentration of lending on particular scrip is avoided.

The financial crisis in Asia in 1997 has led to a fundamental re- think about the way in which financial markets should be governed. While other Asian countries are converging towards an international set of governance best practices, India is still lagging behind in terms of quality and speed of implementation. In a globalize economy, countries which fail to base the financial liberalization on strengthened economic policies and institutional structures are bound to suffer financial crisis.

Ketan Manohar Vichare (MFM_III Roll No: 201059)