Ketan Parekh Scam - The Crash that Shook the Nation

Year of scam: 2001, Amount of scam: Rs. 120 crores (approx)

Period of the scam: 1999 - 2001
Brief description of the scam:
Ketan Parekh had single handedly caused one of the biggest scams in the history of Indian financial
markets. He was charged with defrauding Bank of India (Bol) of about $30 million among other
charges.
For two years, market men followed his every action because all he touched turned to gold. KP was a
chartered accountant by profession and used to manage a family business, NH Securities started by
his father. He was known as the 'Bombay Bull' and had connections with movie stars, politicians and
even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered
KP in KPV Ventures, a $250 million venture capital fund that invested mainly in new economy
companies. Over the years, KP built a network of companies, mainly in Mumbai, involved in stock
market operations.
The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early
1999 led to a rise of the Indian stock market as well. The dotcom boom contributed to the Bull Run
led by an upward trend in the NASDAQ. 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
Penta Media Graphics. KP selected these companies for investment with help from his research
team, which listed high growth companies with a small capital base. These stocks eventually came to
be known as the 'K-10' stocks.
The shares were held through KP's company, Triumph International. The buoyant stock market from
January to July 1999 helped the K-10 stocks increase in value substantially. HFCL soared by 57%
while Global increased by 200%. As a result, brokers and fund managers started investing heavily in
K-10 stocks. Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10
stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in
the top five traded stocks in the exchanges. As such huge amounts of money were being pumped
into the markets, it became tough for KP to control the movements of the scrips. Also, it was
reported that the volumes got too big for him to handle. According to market sources, though KP
was a successful broker, he did not have the money to buy large stakes. Analysts claimed that KP
borrowed from various companies and banks for this purpose. He bought shares when they were
trading at low prices and saw the prices go up in the bull market while continuously trading. When
the price was high enough, he pledged the shares with banks as collateral for funds. He also
borrowed from companies like HFCL. This could not have been possible out without the involvement
of banks. A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB)
was KP's main ally in the scam. In December 2000, when KP faced liquidity problems in settlements
he used MMCB in two different ways. First was the pay order route, wherein KP issued cheques
drawn on Bol to MMCB, against which MMCB issued pay orders. The pay orders were discounted at
BOl.
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. 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. Be it investment firms, mostly
controlled by promoters of listed companies, overseas corporate bodies or cooperative banks, all
were ready to hand the money to Parekh, which he used to rig up stock prices by making his interest
apparent. But the vicious cycle of fraud did not end with price rigging. The inflated stocks had to be
dumped onto someone in the end, for which Parekh used financial institutions like the UTI.
A bear cartel started disrupting Parekh's party by hammering prices of the K-10 stocks, precipitating
a payment crisis in Kolkata. In December 2000, the NASDAQ crashed again and technology stocks
took the hardest beating ever in the US. Led by doubts regarding the future of technology stocks,
prices started falling across the globe and mutual funds and brokers began selling them. KP began to
have liquidity problems and lost a lot of money during that period.

Lapses which led to the scam:

> Laxed attitude of SEBI in monitoring the stock market activities :

The market regulator was blamed for being lax in handling the issue of unusual price movement and
tremendous volatility in certain shares over an 18 month period prior to February 2001. Analysts
also opined that SEBI's market intelligence was very poor. Media reports commented that KP's arrest
was also not due to the SEBI's timely action but the result of complaints by Bol. When prices moved
up, SEBI watched these as 'normal' market movements. It ignored the large positions built up by
some operators. It asked no questions at all. It had to investigate these things, more as a probing
agency than as a regulatory body coordinating with other agencies. An equally crucial question was
raised by media regarding SEBI's ignorance of the existence of an unofficial market at the CSE. Had
the regulatory authorities been alert, the huge erosion in values could have been avoided or at least
controlled.

> Existence of long trading cycles and Badla system:

Long trading cycles in the stock which was then 7 days gave more chances to manipulation than the
now trading cycle of 2 dyays. Also the investors got the money/ shares only on the 7th day of doing
such a transactions. Badla trading involved buying stocks with borrowed money with the stock
exchange acting as an intermediary at an interest rate determined by the demand for the underlying
stock and a maturity not greater than 70 days. Badla system though was a hedging technique was
largely used as a tool for speculation. Thus cash and forward transactions were performed in the
same market where there existed both investors as well as speculators.

> Over exposure to the stock market by the Banks;

MMCB was the main bank through which Ketan Parekh conveniently operated for financing the
stock market. It was alleged that MMCB issued funds to KP without proper collateral security and
even crossed its capital market exposure limits. As per a RBI inspection report, MMCB’s loans to the
stock market were around Rs 10 billion of which over Rs 8 billion were lent to KP and his firms.

> Management of the Bank hands in gloves with the broker for figging of their own shares:

Apart from direct borrowings by KP-owned finance companies through 16 different accounts in
MMCB, a few brokers were also believed to have taken loans on his behalf. It was alleged that
Madhur Capital, a company run by Vinit Parikh, the son of MMCB Chairman Ramesh Parikh, had
acted on behalf of KP to borrow funds. It was also alleged that another bank which went bust during
the scam, 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.
After math of the scam:
The Stock bubble created by Ketan Parekh, which went bust in 2000-01 and took down two banks -
Global Trust Bank and Madhavpura Mercantile Co-operative Bank, was kept alive for more than 10
years, due to its political connections.

Ironically, Dr Mehta, the then SEBI chairman who allowed this to happen under his watch, was
allowed to remain in office for seven years. Interestingly, Satyam Computers of Ramalinga Raju who
confessed to a fraud in 2008 was a part of the K-10 scrips which were ramped up by Ketan Parekh. A
second JPC was appointed to probe the Ketan Parekh scam with Pramod Mahajan, as the strategist
for the BJP-led government, ensuring that it was packed with sympathisers of the accused. Most of
the culprits of these scam got away. Every corporate / promoter who colluded with Ketan Parekh
(such as Himachal Futuristic Communications, Zee, Padmini Technologies, Shonkh Technologies) has
got away scot-free. Some, like Manoj Tirodkar, the 45- year-old chairman & managing director of
GTL Group have even snagged massive loans from banks to go nearly bust. Himachal Futuristic
walked away by paying Rs 10 crore under a consent deal with SEBI in 2010. Ironically, the 15th action
taken report of the finance ministry mentions that charges against the company were dropped after
adjudication on 11 March 2009. The Zee group was similarly discharged by SEBI’s whole-time
members, immediately after C.B. Bhave took over as chairman. The biggest beneficiaries of the
scams have been lawyers and law firms. Unlike journalists, activists, investigators and regulators,
they are not required to take a moral stand on who they represent.

Consequently, the best brains in India are always and invariably working at getting scamsters and
crooks off the hook for enormous fees. These fees are linked to conferences and court appearances
and not the completion of cases or their success. The worst victims are innocent, or just weak, bank
officials who couldn’t say no. They are slowly destroyed in decades of court appearances and the
absence of decent legal representation. Ironically, the office of the custodian which claims that it
has filed 11,000 cases (disputed by all others involved in the trial) has continued to file fresh ones.

After a decade, the custodian finally woke up in February 2012 to ask Ketan Parekh (and 19 entities
connected with him) the source of over Rs72 crore that he repaid in instalments to Bank of India and
Madhavpura Bank under a court order. On 31st March 2012, a media report said that it was set to
contest the discharge by a magistrate’s court of two key cronies of Ketan Parekh—one Mr.
Dharmesh Doshi, who worked with him, and another a stockbroker Mukesh Babu. Ketan Parekh’s
skill was in his trading prowess and ability to sense the market pulse . He has been allegedly
operating through fronts and has been dealing with many brokers on a profit- sharing basis. He is
also said to have actively engaged many foreign funds to invest in the scrips, which he operates
through fronts. Rumours also suggest that many top managers of foreign funds have been
structuring their portfolios with the active ‘guidance’ of the banned operator, Parekh is also known
to structure complex deals through tax
havens to manipulate the stock price. People who know him closely say he has managed to pull on
thus far because of his strong connections with financiers in Kolkata.