ACKNOWLEDGMENT

I Adarshitha Kilaru, hereby declare that this project on the topic ‘Ketan Parekh case
study’, submitted by me is an original work undertaken by me. I have duly acknowledged
all the sources from which the ideas and extracts have been taken in preparing this
project. The project is free from the plagiarism issue.

PLACE: Vishakhapatnam.

(Signature of the student)

Roll no: 19LLM03

Semester-1

Date:

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 TABLE OF CONTENTS

ACKNOWLEDGEMENT ...................................................................................................... 1

CHAPTER 1: SYNOPSIS ...................................................................................................... 3

1.1 Introduction ...................................................................................... 3

1.2 Objective of the study ...................................................................... 3
1.3 Scope of the study ............................................................................ 3
1.4 Research methodology ..................................................................... 4
1.5 Review of literature...........................................................................4

CHAPTER 2: THE KETAN PAREKH CASE .................................................................... 5

2.1 Who is Ketan Parekh ......................................................................... 5

2.2 What happened in the scam?..............................................................5
2.3 Joint Parliamentary Report 2001- Ketan Parekh................................ 8

CHAPTER 3: REGULATIONS APPLICABLE IN INDIA ............................................... 10

3.1 SEBI (Prohibition of fraudulent and unfair trade practices relating to securities market)
regulations, 2003 ............................................................................. 10
3.2 Relevant case laws .......................................................................... 13

CHAPTER 4: REGULATION OF SECURITIES MARKET IN US

4.1 Securities Exchange Act of 1934 ..................................................... 18

4.2 Frauds and manipulative device.......................................................18

CHAPTER 5: CONCLUSION...........................................................................................23

BIBLIOGRAPHY ............................................................................................................... 24

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 CHAPTER 1: SYNOPSIS

1.1 Introduction:

The Ketan Parekh scam was the second most important scam that shook the Bombay Stock
Exchange after the Harshad Mehta scam. Ketan Parekh who is also popularly known as
Bombay Bull is a former stock broker from Mumbai, India. He is a chartered accountant by
profession and used to manage a family business, NH Securities. At the height of his success,
he became friends with international celebrity Kerry Packer and both of them had together
started a venture capital with the intent of funding start-ups in India.

This case is related to acquisition of shares by Panther Fincap of Shonkh Technologies beyond
permissible limits without making disclosures under the SEBI regulations. Parekh was the
director of Panther Fincap and in charge of the business. He would take the market by storm
and raise or drop the prices of stocks in an instant by suddenly unleashing lots of money in the
market.

1.2 Objective of the Study:

The main objectives of this research are:

1. What are the developments that led to the Ketan Parekh scam and changes made by
SEBI and actions taken after the scam was unearthed?
2. What effect would SEBI’s decision on ban ‘badla’ have on the stock markets?

3. To analyse whether the Ketan Parekh scam an example of the inherently weak
financial and regulatory set up in India?

1.3 Scope of the Study:

The scope of this researcher is limited to the Ketan Parekh scam case and its impact on the
stock exchange market of India and the extent to which the nature and scope of critical central
banking supervision lapses in this fraud and how the economy of the country is effected by this
scam.

1.4 Research Methodology:

The researcher has adopted doctrinal method which deals with accumulating information from
various sources such as Books, Internet, Case laws, Articles. The research process deals with

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collecting and analyzing information about the scam that took place and legislations regulating
these kind of scams in India.

1.5 Review of Literature:

Books-

Sumit Agrawal, robin joseph baby ‘SEBI ACT: A legal commentary on securities &exchange
board of India ASct, 1992’ taxmann, New Delhi

This book serves as the comprehensive legal commentaries on the SEBI Act, 1992. The book
chronically explains the evolution of securities law in India and provides insights on the road
ahead. The researcher referred to Annexure 15 of the book which talks about Joint
Parliamentary report 2001-Ketan Parekh. The report talks about how the misappropriation of
public funds falling under the purview of statutory regulators and involving issues of
governance becomes a scam.

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 CHAPTER 2: THE KETAN PAREKH CASE

2.1 Who is Ketan Parekh?

Ketan Parekh, who is also popularly known as Bombay Bull is a former stock broker from
Mumbai, India. He is a chartered accountant by profession and used to manage a family
business, NH Securities. He, who is also famously known as KP, was the person who came
forward to fill the vacuum created by the late Harshad Mehta, the original big bull in the stock
market. KP's business practices were unconventional in nature and he was not an ordinary stock
broker who lives on brokerage commission receiving from buying and selling of shares on
behalf of clients.

From 1999 to 2001, KP was trained by the master manipulators of the stock market, the late
Harshad Mehta and his brother Ashwini Mehta and made millions of dollars for himself and
billions for his clients who are the owners of the listed companies. Like his mentors the Mehta
brothers, KP also involved in circular trading to jack up share prices for the benefit of promoters
and himself before finally dumping devalued shares with financial institutions like UTI and
LIC etc.in 1992 scam, he was jailed with two others for one year for siphoning off Rs.48 crore
from a branch of Canara Bank.

KP turned into an operator to drive share prices with deceitful motives where promoters,
through their investment companies provided him with capital to jack up share prices. Unlike
Mehta, he didn’t use public money to drive the market. But he made use of his contacts at
Global Trust Bank and Madhavpura Mercantile Co-operative Bank to access funds for market
manipulation. He was also called the 'Pentafour Bull' and 'One Man Army' for his aggression
and his ability to instantly take Sensex either way.

During his peak period he used to drive a pack of 10 stocks known as K-10 stocks. These K-
10 stocks include names like Global Telesystems, Zee Telefilms, HFCL, Silverline, Satyam
Computers, Aftek Infosys, DSQ Software, Ranbaxy, Pentamedia Graphics and Visual Soft.
Sometimes Digital Global and SSI also dubbed as K- 10 stocks.

In 2001, a payment crisis hit the Kolkata based beers which brought KP down. The market
regulator SEBI has banned him, for rigging the market by wrongful means.

According to an investigation by SEBI, Parekh used to make use of bank and promoter funds
to rig the markets.

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In June 2009, the SEBI had banned 26 entities for acting as fronts for KP to undertake share
trading, but KP goes on record to say that he has kept his distance from stocks since the ban
imposed on him.

SEBI Act empowers SEBI to conduct inquiries and also initiate disciplinary proceedings or
prosecution against any person who has violated the provisions of the SEBI Act, rules and
regulations.

2.2 What happened in the case?

The present case is related to the alleged price manipulation in the scrip of Lupin Laboratories
Limited (for short ‘Lupin’). Persons allegedly involved in this price manipulation are Ketan
Parekh (appellant herein), Classic Credit Limited, Panther Fincap and Management Services
Limited and Saimangal Investrade Limited (hereinafter referred to as Classic, Panther and
Saimangal respectively).

During the period from September to December, 1999 the SEBI has witnessed significant rise
in the price and volumes in the scrip of Lupin on the Bombay Stock Exchange (BSE) and
National Stock Exchange (NSE). Therefore, SEBI had ordered investigations into the buying,
selling and dealings in the scrip. Investigations revealed that Ketan Parekh, Classic credit Ltd,
Panther Fincap and Management services Ltd and Saimangal Investrade Ltd had together
indulged in the price manipulation in the scrip of Lupin Laboratories.

A first show cause notice dated March 27, 2002 was issued to them asking to show them why
necessary step under Regulation 11 of the Securities and Exchange Board of India (Prohibition
of Fraudulent and Unfair Trade Practices) Regulations, 1995 read with Section 11 and 11B of
the Securities and Exchange Board of India Act, 1992 should not be taken against them.

SEBI during its investigation for the period April 01, 2000 to March 31, 2001 found out that
certain entities didn’t reveal the true prices and gave false prices to mislead and manipulate the
securities market. So, the shares sold by entities Classic, Luminant and Panther through Credit
Suisse First Boston Securities (CSFB) and Dresdner Kleinworth Benson Securities (DKB)
were by bought by same entities i.e., Classic, Luminant and Panther or by other entities that
are controlled or connected with Ketan Parekh which are collectively referred to as ‘KP
Entities’.

Further the investigations revealed that these KP entities were indulged in certain manipulative
activities such as:

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 1. Synchronized Trades
2. Financing transactions given the semblance of purchase and sale of shares at the
Exchanges.
3. Circular Trading and creation of artificial volume
4. Benchmarking of the prices of certain scrips by executing non-genuine transactions
which were detrimental to the integrity of the securities market and also violative of
SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 1995.

A second show cause was issued to Ketan parekh and these KP Entities on July 30, 2002. There
was no reply from any of these entities. Ketan Parekh made a reply to the first show cause
notice stating that the SEBI analysis of price movement was wrong.

Later, KP along with his reply to the show cause notice, also filed a separate but identical
replies on behalf of the other entities under his signatures. In his reply, he questioned the very
basis on which the Board had compared the price movement in certain scrips in the
pharmaceutical sector during a certain period and stated that any particular scrip moves
according to its own tradeability and the fact that it does not move in line with the market index
does not make persons who trade in that particular scrip guilty of price rigging in the scrip.

He also challenged about the period chosen by the SEBI for comparing the price movement in
the scrip of Lupin with the scrip of other pharmaceutical companies. He stated that the Board
had selected a certain period in time and construed the findings of the investigations in such a
manner that it would appear as if the movement in the scrip of Lupin was abnormal. It was
pointed out that price movement in any scrip is effected by various factors such as growth
potential, future earning capability etc.

KP has argued that the comparison that was made by the Board here was not fair and it
compared two inequals as the pharmaceutical companies with which the scrip of Lupin had
been compared are big and well established companies which had already reached a certain
unit of critical mass and had only a limited ability to grow whereas Lupin was a middle size
company which had greater potential to grow.

Thus, an order was passed by the then chairman of SEBI dated 12 December, 2003 for
prohibiting KP and KP Entities from buying, selling or dealing in securities in any manner
directly or indirectly and also debarring them from associating with the securities market for a
period of 14 years.

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2.3 Joint Parliamentary Report 2001- Ketan Parekh

The committee found out that KP was the key person involved in all dimensions of the stock
market scam which came into light because of the payments problem occurred in the Calcutta
Stock Exchange (CSE) and crash of Madhavapura Mercantile Cooperative Bank (MMCB) in
March 2001. KP operated through a large number of entities and various layers were created
in his transactions so it became difficult to find nexus between the source of fund and with the
actual use of the fund.

SEBI in its investigation of this scam revealed that there were huge amounts outstanding from
KP to banks. At the end of April 2001, outstanding amount of KP entities to some corporate
bodies was over Rs. 1,273 crore, to MMCB was around Rs. 888 crore and to Global Trust Bank
over Rs. 266 crore and etc.

The funds received by KP entities from different corporate houses were kept in three major
broker groups in Calcutta stock exchange to take advantage of the loopholes in this stock
market operations. They also used overseas corporate bodies, foreign institutional investor sub
accounts and mutual funds for large transactions.

KP agreed that certain trades such as the sale to Credit Suisse First Boston and Dresdner
Kleinwort Benson which SEBI described as ‘circular trades’ were pre-arranged trades though
at first he denied saying that they were meant for short term funds.

According to the committee various acts of omission and commission have already been clearly
established against KP and his entities. So the committee urges the Government to take
necessary steps without any delay and finalise proceedings against KP entities expeditiously
and recover the amounts due from him and his entities.

The committee also urges to initiate civil and criminal proceedings against the three major
broker groups of CSE belonging to Shri D.K. Singhania, Shri A.K. Poddar and Shri H.C. Biyani
who were mainly responsible for the payment problem in March 2001. D.K. Singhania Group
and A.K. Poddar along with Sanjay Khemani Group received a sum of Rs. 3191 crore from
Ketan Parekh entities for taking deliveries on behalf of the latter and had close linkages with
KP.

The broker’s plea of ignorance about the defects in the CSE margin system is not convincing.

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The committee in its examination into the issue found out that Shri H.C. Biyani had deposited
10 lakh shares of DSQ Software Ltd. as security towards his pay-in dues to CSE on 21-3-2001.
But the ownership of these shares wasn’t vested with Shri Biyani when he deposited them so
his transfer of the shares to CSE was a fraud. CSE has filed an FIR against Shri Biyani and
Biyani securities and committee expect that this should be investigated thoroughly and criminal
proceedings should be initiated based on the findings.

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 CHAPTER 3: REGULATIONS APPLICABLE IN INDIA

3.1 SEBI (Prohibition of fraudulent and unfair trade practices relating to securities
market) regulations, 2003

These regulations are by made SEBI in exercise of its power conferred by sec 30 of SEBI Act,
1992. They came into force from 17 July 2003, the date of notification in the Official Gazette.
The aim of these regulations is to prohibit fraudulent and unfair trade practices in securities
market. These regulations have replaced SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to securities market) Regulations, 1995 which were repealed after bringing
these into picture.

Sec 11(2)(c) of the SEBI Act prohibits fraudulent and unfair trade practices relating to
securities market. But this section doesn’t define or prescribe as to what practices constitute as
fraudulent and unfair trade practices. These regulation are provided to define such practices
like wash sales, front running, price rigging, artificial increasing and decreasing of prices of
securities that are used to manipulate the stock exchange market fall within the ambit of these
regulations. These regulations are the guiding principles for the market to work efficiently and
prohibits any person from disturbing its equilibrium and punishes wrongdoers.

The SEBI Act also empowers SEBI to conduct inquiries and initiate proceedings or prosecution
against the person who has violated the provisions of SEBI Act, rules and regulations.

Regulation 3: This regulation talks about ‘prohibition of certain dealings in securities’-

According to this, no person shall directly or indirectly:-

a. Buy or sell any securities in a fraudulent manner.

b. Use or employ any method with respect to purchase or sale of any security listed or
proposed to be listed in a recognised stock exchange which is manipulative, deceptive or
in contravention of any provisions of the Act, rules or regulations made thereunder.
c. Employ any device, scheme to defraud any dealing in issue of securities which are listed
or proposed to be listed on a recognised stock exchange.
d. Engage in any act, practice, course of business which are fraudulent and deceitful to any
person who is dealing in or issue of securities which are listed or proposed to be listed in
contravention of the provisions of the Act, rules and the regulations made thereunder.

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Regulation 4:

This regulation deals with the certain acts which will be considered as fraudulent activities
and it should not be performed by anyone for example:1

(a) Indulging in an act which creates false or misleading appearance of trading in the
securities market
(b) Fluctuation in the price of any security for wrongful gain or avoidance of loss
(c) To buy any security in any issue only with the intention of securing the minimum
subscription to such issues
(d) Any act or omission amounting to manipulation of the price of a security
(e) Entering in to transaction in securities without intention of performing it.
(f) Selling , dealing or pledging of stolen of counterfeit securities
(g) Any advertisement that is misleading
(h) Planting false or misleading news which may induce sale or purchase of securities.
(i) An intermediary predating or otherwise falsifying records such as contract notes

Regulation 5 - What are the powers of the Board for investigation?

If any suspicious activities were noticed by board then SEBI has the power to order
investigation and procedure is as follows:2

(a) When the appointing authority that includes (Board, the member or the Executive Director)
has reasonable ground to believe that, transactions in securities are being dealt with in a
manner detrimental to the investors or the securities market in violation of these
regulations.
(b) If any person doing any fraud by indulging in securities market activities and violating the
provision or the rules and regulations, then at any time any officer who is not below the
rank of division chief may order in writing for investigation process
(c) against that intermediary or person associated with securities and to report in a manner as
provided under the section 11c of the act.3

1
SEBI ( Prohibition of fraudulent and unfair Trade Practices) Regulations, 2003
2
SEBI ( Prohibition of fraudulent and unfair Trade Practices) Regulations, 2003
3
SEBI ( Prohibition of fraudulent and unfair Trade Practices) Regulations, 2003

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Regulation 6 – Power of investigating authority
Without preconceived opinion, the Investigating officer has certain to be exercised under the
act and powers that can be exercised by officer for investigating process are as follows—

(a) Investigation authority can call for records or for any information
(b) If investigating authority has sufficient grounds to believe than they can also undertake
any book, bank accounts, register, or other document of any companies listed (which
include private as well as public company).
(c) Authority can keep any document for a period of one month which may extend to period
of six month
(d) Investigating authority can record the statement of the person concerned or any director,
member or employee, which will be in a oral form and such oral examination to be used
as an evidence against such person

Regulation 7 – Power of investing authority to be exercised only after prior permission

The Inspecting Authority has certain powers which can only be exercised with the permission
of chairman and these powers are namely:4

(a) Investigating authority can call for information of any document of bank or any
corporation established under any central or provincial act
(b) Investigation authority can make application to First class judicial magistrate for
granting jurisdiction or order to search and seize any book, bank account and other
documents.

Regulation 8 – Duty to co-operate with board

It is the duty of every intermediary to co-operate with proceedings of Board, when any
investigation was going on against that person and to present every document or to appear
before any authority when it required.5

Regulation 10 & 11 - Enforcement by the board

The Board after finding and based on valid reason, if it was found that there is violation of
regulation given under SEBI. The Board has power to order under regulation 11 and 12 of

4
SEBI ( Prohibition of fraudulent and unfair Trade Practices) Regulations, 2003

5
SEBI ( Prohibition of fraudulent and unfair Trade Practices) Regulations, 2003

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SEBI (PFUTP) Regulations 2003 for cancellation of registration. This action will be taken in
the interest of investors and securities market and opportunity to hear and present his case will
be given to intermediary. If pre decision hearing was not given due to certain reasons then post
decisional hearing will be provided.

Providing further that, in the interest of investors and securities market, board may dispense
with the pre decisional hearing to be recorded and reason will be given in writing. Post
decisional hearing will be given to intermediary as fast as possible.6

Regulation 12 – Suspension or cancellation of registration

The Board after finding that there is fraudulent activities going on in any corporate body and
which can result in to big scam and loss to investors. So to protect the interest of investors
and to fulfil the objectives of SEBI, without prejudice to any provision and section 11 of this
act can issue:
(a) Warning to intermediary
(b) Suspension of registration
(c) Cancellation of registration

This is the whole procedure to prohibit the fraudulent practices and to punish the fraud and
person. This is the framework to regulate the stock market and to avoid unnecessary loss or
again of a person buying or selling in securities market.7

3.2 Relevant case laws

RAKHI TRADERS CASE8

The Supreme Court has recently upheld an order passed by the Securities and Exchange Board
of India in 2009 against Rakhi Trading Private Limited and others. The case is of significant
importance primarily because it has explained the role of SEBI in the market in relation to
punishing culprits indulging in “synchronized trading,” which is a kind of transaction wherein
both the buying and the selling order quantities are identical and happen on the same time on
the trading platform. The judgement under analysis reiterated the apex court’s outlook

7
Pravesh Aggarwal, Examining the Scope and Regulatory Framework concerning Employees' Benefit Schemes
in India, 10 NUJS L. Rev. 109 (2017)
8
SEBI v. Rakhi Trading Private Ltd, civil appeal no. 1969 of 2011.

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regarding the need of transparent norms of trading in securities and of fairness, integrity and
transparency in the securities market in India.

The facts and arguments of the case-

The case involved six respondents - three traders and three brokers. A show cause notice (SCN)
was issued to the respondents on the ground of execution of non-genuine transactions in the
Futures and Options (F&O) segment on October 05, 2007. The primary allegation against the
respondents was that of buying and selling securities in the derivatives segment at a price that
was nowhere near the market price in synchronized and reverse transactions. The Adjudicating
Officer passed an order after receiving replies to the SCNs and holding personal hearings with
the parties, making a finding that the respondents made a profit of Rs.107.79 lakhs within a
matter of minutes/hours despite an absence of a significant difference in the value of the
underlying security. The fact that such transactions took place repeatedly also made the AO
believe that the transactions were fraudulent and violative of regulations 3(a), (b) and (c) and
4(1), 2(a) and (b) of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating
to Securities Market) Regulations, 2003 (PFUTP Regulations). Consequently, a penalty of
Rs.1,08,00,000 was imposed under Section 15HA of the SEBI Act, 1992 (Act).

Aggrieved by the SEBI order, the respondents filed an appeal before the Securities Appellate
Tribunal (SAT) under sections 15T of the Act. Allowing the appeal, the SAT set aside the order
passed by the AO, holding that the Nifty index could not be influenced or manipulated by
movement of prices in F&O segment. It held that since there was no impact on the market, the
impugned transactions did not violate the provisions of the PFUTP Regulations. The SAT also
took the view that the circular dated March 10, 2018 issued by the NSE was not legally binding
primarily because such directions could only be issued by the SEBI. Further, the brokers
succeeded in the instant case because of two additional reasons:

1. The fact that two clients had executed matched trades did not necessarily mean that the
brokers were involved.
2. A majority of the impugned transactions were undertaken by the parties themselves
over the internet.

Aggrieved by the decision of the SAT, the SEBI approached the Supreme Court of India under
section 15Z of the Act. It was contended on behalf of the SEBI that the SAT had misunderstood
the case, and that the transactions between the parties were fraudulent and non-genuine. It was

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the argument of the appellant that a profit of Rs.107.79 lakh was made by the respondents
within a matter of several minutes without any change in the value of the underlying security.
The repeated number of such transactions over a period of time showed that the transactions
were fraudulent in nature.

The counsel on the behalf of the respondents argued that the decision rendered by the SAT was
per se valid and proper. The respondents also sought to distinguish the case of Ketan Parekh[1]
on the ground that the said judgement pertained to dealings in cash whereas the instant matter
concerned with the F&O segment only. It was also argued by the respondents that they did not
violate any of the above-mentioned provisions of the Regulation or the Act.

The Judgment

The Supreme Court held that the transactions were unfair and of a fraudulent nature. The Court
found the actions of the traders to be in violation of regulations 3 (a), 4 (1), and 4 (2) (a) of the
PFUTP Regulations and the appeals were allowed. However, there was no evidence to show
that the brokers acted in violation of the PFUTP Regulations aside from the mere fact that they
facilitated the impugned transactions. It was noted that the SEBI was not able to prove
negligence or connivance on the part of the brokers. The Court did not adjudicate upon the
issue of the transactions being an act of tax planning as such a ground was not raised in the
SCN and by the AO.

Understanding the Ruling

The case highlights the powers and duties of the SEBI particularly in regard to regulating the
market conditions. In the case of SEBI v. Kishore R Ajmera, the apex court held that in the
absence of a direct evidence in synchronized transactions, preponderance of probabilities shall
be the standard of proof with regard to civil liability. The genuineness of the transactions was
doubtful because one party was making continuous profits while the other was making
continuous losses. The court opined that a trade practice is unfair if the conduct defeats the
ethical standards and good faith dealings between the parties involved in business transactions.
It was also observed that “an intentional trading for loss per se is not a genuine dealing in
securities. The platform of the stock exchange has been used for a non-genuine trade.” The
primary objective of any trade is to make profits and not that of making planned losses.

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The order of the SAT with respect to change of beneficial ownership not arising in the
derivatives segment was found to be erroneous. Beneficial ownership is a kind of ownership
wherein a person who actually holds the beneficial interest in the shares does not have his name
in the register of members. It is clear that there would be a change of rights in the contract even
in the derivatives segment. However, owing to reverse trades, there was an absence of genuine
change of rights in the contract. In this regard, reliance was placed on Ketan Parekh. In this
case, the SAT had held that: “a synchronised transaction will, however, be illegal or violative
of the Regulations if it is executed with a view to manipulate the market or if it results in
circular trading or is dubious in nature and is executed with a view to avoid regulatory detection
or does not involve change of beneficial ownership.”

The Court also made it clear that the case of SEBI v. Kishore R Ajmera9 should be relied upon
with regard to interpretation of the Act. It was held that market integrity could be affected by
both direct and indirect factors. Any kind of fraudulent or sham transaction on the stock market
should be discouraged. The pronouncement is indeed a welcome move as this would help the
SEBI curb non-genuine transactions and develop a free and fair market. It can be observed that
as the market grows, ingenious ways of manipulation are used. In such a scenario it is desirable
that the SEBI takes cognizance of and reviews the practices prevailing in the market. It is
believed that the reasoning adopted in the judgement will have an impact on all types of trade
and not merely on synchronised trading. There have been multiple orders passed by various
tribunals where relief was granted to the concerned traders on the ground that the quantity of
self-trades constituted less than one percent of the market volume. However, the instant ruling
may have a serious impact on such cases where the traders usually escape because of the
meagre value of the transactions.

Synchronised trades:

In synchronisation of shares, identified buyer and sellers with prior understanding make the
orders in such a way that the buy and sell orders in all likelihood will definitely match each
other. SEBI and SAT both have said that synchronisation per se is not illegal.

SAT has held, “merely because a trade was crossed on the floor of the stock exchange with the
buyer and seller entering the price at which they intended to buy and sell respectively, the
transaction does not become illegal. A synchronised transaction even on the trading screen

9 Civil Appeal no. 2818 of 2008

16 | P a g e
between genuine parties who intend to transfer beneficial interest in the trading stock and who
undertake the transaction only for that person and not for rigging the market is not illegal and
cannot violate the regulations.”10

In Prashant J. Patel v. SEBI11, SAT observed that “negotiated/synchronized trades are not by
themselves illegal but if a synchronized trade is executed with a view to manipulate the market
or of it results in circular trading or is dubious in nature and is executed with a view to avoid
regulatory detection or does not involve change of beneficial ownership or is executed to create
false volumes resulting in upsetting the market equilibrium, it would be illegal. In other words,
the intention with which a synchronised trade is fraudulent.”

SUBHAKAM CASE

Securities and Exchange Board of India, the SAT was concerned with the typical
case where a financial investor took up a 19.91% stake in the target. The SAT
closely analysed the contractual arrangements between the parties. It concluded
that the investor’s right to nominate one among several directors on the board
of the target did not confer upon it any control. Similarly, that the investor
has affirmative or veto rights whereby the approval of the investor is required
for the target to undertake several actions was insufficient to constitute
control. These rights were in the form of protective provisions to safeguard
the investment and therefore do not confer any control on the investor. This
decision provided considerable relief to the investing community in India, who
were able to successfully advocate their position seeking a narrow definition
of control. But, the euphoria was short-lived, as SEBI preferred an appeal to
the Supreme Court of India. Although a ruling from the highest court was
expected with great anticipation, that was not to be as the parties settled
during the pendency of the appeal. An added disappointment arose when the
Supreme Court clarified that the order of SAT will not be treated as precedent
and that the question of law was being kept open.

10
Ketan Parekh v. SEBI, Appeal No. 02/2004, SAT Order dated 14.07.2006.
11
Appeal No. 150/2006, SAT Order dated 17.08.2010.

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 CHAPTER 4: REGULATION OF SECURITIES MARKET IN US

4.1 Securities Exchange Act of 1934

The Securities Exchange Act, 1934, is the act which deals with securities market in US that
was introduced by Congress in lieu of regulating securities market there. The Act provides for
the establishment of Securities Exchange Commission (SEC) and empowers the SEC with
broad authority over all the aspects of the securities industry where under Section 10b of
the Act gave the SEC the power to enact rules against "manipulative and deceptive practices"
in securities trading. This includes the power to register, regulate, and oversee brokerage firms,
transfer agents, and clearing agencies as well as the nation's securities self-regulatory
organizations (SROs). The various securities exchanges, such as the New York Stock
Exchange, the NASDAQ Stock Market, and the Chicago Board of Options and The Financial
Industry Regulatory Authority (FINRA) are the SROs. The Act also identifies and prohibits
certain types of conduct in the markets and provides the Commission with disciplinary powers
over regulated entities and persons associated with them and provides safety to investors,
dealers, agents and agency in security market and prohibits them from any wrongdoing.

4.2 Frauds and manipulative device

Under section 10 of Securities Exchange Act, 1934 the use of any manipulative or deceptive
device is in contravention of the rules and regulations for the protection of investors. This act
deals with all the fraudulent activities which was not even known by the SEBI.

For example- Insider trading was introduced way back in 1934 and at that time even SEBI was
not came in to force.

Section 9 of the Securities Exchange Act addresses manipulation of securities prices, it requires
the specific intent "for the purpose of inducing the purchase or sale of such security by
others"12 or "for the purpose of creating a false or misleading appearance of market activity"13.

The reason behind becoming world safest security market is because of SARBENS – OXLEY
ACT, 2002. This act makes much difference between India and US securities market. In India,
there is no such particular act which deals with prohibition of fraudulent activities and with so
much strict action by imposing penalties and making a criminal charge against members of

12
1 Securities Exchange Act § 9, 15 U.S.C.A. § 87 (2000).
13
1 Securities Exchange Act § 9, 15 U.S.C.A. § 87 (2000).

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Company. SEBI act did not provide any safeguards to whistle blower and this is the reason
why people are revealing against anyone even after knowing fraudulent activities.

The SEC was created to protect investors, prevent securities fraud, and assist in the creation of
new capital for businesses and investments. It also ensures that all securities transactions are
placed in a fair and orderly manner.

A myriad of new financial products and services have become available to the public over the
past few decades, including variable annuities and variable life insurance, exchange-traded
funds, hedge funds, and other alternative investments, as well as investment advisory services
that provide fee-based financial planning and asset management.

The SEC regulates all of these plus “traditional’ market investments like stocks and bonds and
works to prevent investment fraud in several ways, including:

 Full and Fair Disclosure Requirements. Investment companies are required to

disclose the specific and general risks of their financial products plus other investment
specific information as well as a clear statement of the company’s financial condition.
The SEC believes that fair and equitable markets can only exist when there is full and
fair disclosure to investors.
 Recordkeeping Requirements. The SEC monitors and regulates all securities
exchanges, broker-dealers, mutual funds, and other industry players by requiring
adequate recordkeeping and proper licensing for all securities personnel.
 Inspections and Audits. The SEC has the authority to conduct inspections and audits
of all securities-related organizations, such as broker-dealers and personnel and ratings
agencies in order to verify wrongdoing or insolvency.
 Legislation. The SEC has the power to interpret existing securities laws and create
additional legislation as needed in order to protect investors and regulate capital
markets.
 Coordination and Oversight. The SEC oversees all other regulatory agencies in the
industry, such as FINRA, state securities regulators, and the auditing and accounting
fields. It also coordinates overall securities regulation at all levels of government and
with foreign governments through its membership with the International Organization
of Securities Commissions (IOSCO). The SEC is able to help police securities fraud

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 through the Multilateral Memorandum of Understanding that it has with other members
as well as through direct bilateral regulatory treaties with other governments.
 Enforcement. The SEC can levy fines and censures to those who are convicted of
securities violations and can suspend or expel securities personnel if they determine
that such action is warranted. Severe violations can also result in substantial prison
terms

Illustration on enforcement:

Example 1

The Securities and Exchange Commission has filed an emergency action and obtained an asset
freeze against 18 traders in a scheme to manipulate more than 3,000 U.S.-listed securities for
over $31 million in illicit profits.14

The SEC alleges that the traders, who are primarily based in China, manipulated the prices of
thousands of thinly traded securities by creating the false appearance of trading interest and
activity in those stocks, thereby enabling them to reap illicit profits by artificially boosting or
depressing stock prices. For example, according to the SEC's complaint, the traders used
multiple accounts to place several small sell orders to drive down a stock’s price before using
a different set of accounts to buy larger amounts of the stock at the artificially low prices. After
accumulating their position, the traders then flipped the script and placed several small buy
orders to push up prices so they could then sell their stock at artificially high prices.

"We allege that defendants engaged in an extensive manipulation scheme and went to great
lengths to evade detection, placing trades in over one hundred separate accounts at several
different brokerage firms and submitting falsified documents to open new accounts in the
names of others," said Joseph G. Sansone, Chief of the SEC's Market Abuse Unit. "Despite
their efforts, the SEC staff was able to uncover the connections between these seemingly
unrelated accounts and expose the defendants' coordinated pattern of illicit trading."

In a parallel action, the U.S. Attorney's Office for the District of Massachusetts announced
criminal charges against two of the traders, Jiali Wang and Xiaosong Wang.

14
https://www.sec.gov/news/press-release/2019-216.

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The SEC's complaint filed in federal court in Boston and unsealed today, charges the traders
with violating and aiding and abetting violations of the antifraud provisions of the securities
laws. In addition to the asset freeze and other emergency relief obtained, the SEC seeks
disgorgement of ill-gotten gains plus interest, penalties, and injunctive relief.

The SEC's investigation was conducted by Andrew Palid and Michele T. Perillo of the SEC's
Market Abuse Unit in the Boston Regional Office with assistance from John Marino of the
Market Abuse Unit, and was supervised by Mr. Sansone. The litigation will be led by Eric
Forni of the Boston Regional Office and Mr. Palid. The SEC appreciates the assistance of the
U.S. Attorney's Office for the District of Massachusetts, the Federal Bureau of Investigation,
and the Financial Industry Regulatory Authority.

Example 2: J.P. Morgan Chase/HSBC Market Manipulation Lawsuit

Attorneys associated with Gibbs Law Group LLP represented investors in a class action lawsuit
against J.P. Morgan Chase & Co. and HSBC, alleging that the banks violated antitrust laws by
manipulating the prices of silver futures and option contracts. The class action alleges that J.P.
Morgan and HSBC manipulated the market by making large, coordinated trades to artificially
lower the price of silver. By depressing the price of silver, these banks made substantial illegal
profits while harming investors and restraining competition, according to the class action
lawsuit.

In United States v Corr15, the defendants were convicted of a manipulation scheme involving
woodem tickets which the Second Circuit identified as an order to purchase securities for
which the purchaser does not pay whether or not the intention not pay existed at the time of the
order. The defendants were also parking stock as part of their scheme which is an artificial
device to avoid depressing the market price and it occurs when a broker, unable to keep
securities in his trading account, ostensibly sells the same to another broker, with the
understanding that the same securities will be purchased back by the ostensible seller before
the settlement date. In this manner the shares are not sold into the market.

In SEC v Berliner, the defendant was enjoined by consent after being charged with
manipulating the price of a stock thorough a false rumour sent by next messages to brokers and
hedge funds, which were reported in the press. The Text messages stated that a blackstone

15
United States v. Corr, 543 F.2d 1042

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Group acquisition of the Alliance Data systems corp. was being negotiated at a much lower
price than previously reported. The news reports of this false claim caused the Alliance stock
to fall by 17% percent before the rumour could be corrected. The defendant had shorted the
Alliance stock and made a large profit.

In the matter of Setteducatti, the SEC dismissed a manipulation claim because bid quotations
in the wake of an IPO were not shown to have been based on anything other than market
fundamentals. The SEC noted that manipulations are often associated with a rapid price surge
in a stock that has little investor interest because of an absence of any known prospects. The
SEC also noted that typically manipulation of a stock price is followed by a price collapse.

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 CHAPTER VI: CONCLUSION

The Ketan Parekh was associated with several other stock brokers across exchange and he took
loans from several commercial banks and cooperative banks and invested in stocks called as
K-10 scrips. He took loans from global trust bank of around 250 crores and from Madhavpura
co-operative bank to the tune of 1000 crore. However, the nirmal bang group, Anand rathi
group and the Sharma group placed huge sell orders on the K-10 scrips as collateral and which
resulted in loss. SEBI initiated action against ketan parekh and debarred from entering into
securities market till, 2017. This case change the image of securities market and due to this
scam, SEBI put ban on badla trading and stock exchange were demutualised.

This scam is basically the manipulation of the capital market to benefit market operators,
brokers, corporate entities and their promoters and managements. The scam lies not in the rise
and fall of the prices in the stock market, but in large scale manipulations like the diversion of
funds, fraudulent use of bank of funds, use of public funds by institutions like the Unit Trust
of India (UTI), violation of risk norms on the stock exchanges and banks, and use of funds
coming through overseas corporate bodies to transfer stock holdings and stock market profits
out of the country.

The committee had found that Shri Ketan Parekh was a key person involved in all the
dimensions of stock market scam which took place in March 2001 that came into lime light
due to the crash of the Calcutta Stock Exchange. In this scam he received large sums of money
from the banks as well as from the corporate bodies during the period when SENSEX was
falling rapidly.

SEBI is not fulfiling its objective to protect investors and lacking in prohibiting the activities
related to fraud and unfair trade practice. Reason behind all this is lack of mechanism and
proper regulatory framework. As compared to US, we lack in proper mechanism and proper
regulation. There is a need to establish proper act regarding prohibition of fraudulent activities
and taking strict action against offender and to keep a check on daily activities of Companies
and if any fraudulent found then penalising every offender.

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 BIBLIOGRAPHY

STATUTES

1. SEBI ACT, 1992

2. SEBI ( PFUTP), 2003
3. SEC ACT 1934
4. SARBENS- OXLEY ACT

CASES

 Ketan parekh v. SEBI

 SEBI v. Rakhi trading private limited, civil appeal no. 1969 of 2011.
 Subhakam securities private limited v. SEBI, before the securities appellate tribunal, Appeal no.
73 of 2012.
 United States v. Corr, 543 F.2d 1042

ONLINE SOURCES

https://www.sec.gov/answers/about-lawsshtml.html

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