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KP Scam PDF
KP Scam PDF
Ketan parekh was chartered accountant and belongs to Gujrati Family. He Lived at Bombay
(Mumbai). His Father has Stock Broking Firm named NH Securities.
After completing CA, he was an intern of Harshad Mehta. His only dream was to rule the
stock market of India, so he decided to join Harshad Mehta's firm to learn some tricks to
deceive the investors.
He was an intern of Harshad Mehta. His only dream was to rule the stock market of India, so
he decided to join Harshad Mehta's firm to learn some tricks to deceive the investors.
At the height of his success Ketan Parekh was friends with international celebrities like Kerry
Packer and both of them had together started a venture capital with the intent of funding start-
ups in India.
Duration- 1997-2001
Ketan parekh did the scam with the help of circular trading or Pump and Dump Trading. In
other words we can say he did window dressing of shares. In which he bought share in large
numbers and then sell and purchase in between his different firms (which is a unlawful
activity) to rise the volume of the shares and attract institutional investors. And Promotes
shares as high earning shares on media so, the price of the share rises. When the share prices
is higher then he sold out or dump the share.
He did this practice with some selective companies stock which was rising in that time like
Telecom Industry, Technology and Media companies. He invested in selective companies
called as KP-10 Companies which are:
AFTEK INFOSYS
DSQ SOFTWARE
GLOBAL TELESYSTEMS
PENTAMEDIA GRAPHICS
SATYAM COMPUTERS
SILVERLINE TECHNOLOGI
SSI
ZEE TELEFILMS
In the whole scam two banks has play the important roles which are:
GT BANK
Global Trust Bank (India) (GTB) was founded on 21 October 1994 and commenced operations
at Secunderabad. Its founders included Ramesh Gelli (its first Chairman), Sridar Subasri, and
Jayant Madhob, among others. The bank introduced a number of technology-based innovations
and responsive service.
From GT Bank takes approx. 100 crores loan. Whereas, from MMCB he takes approx. 140
crores loan.
Whereas, above 15 crores loan is not allowed without security deposits but the allow him to
take without any deposits.
LOOPHOLES OR WEAKNESSES OF THE LAW
The All India Bank Officers' Confederation (AIBOC) today alleged that most financial
scams take place due to loopholes in the system.
At a public meeting here on "Crisis in the Banking Sector", the confederation, along
with other associations and trade unions like the Centre for Financial Accountability,
the National Alliance of People's Movement and the New Trade Union Initiative,
looked into recent financial scams and held talks on the "legal loot of the public
money".
"Why the RBI, the finance ministry, the CVC and others in the government wake up
only when a major scam surfaces? Why are we not analysing the failure of the
system? What is the role of the government and its policies which cause system
failures and scams? There have been Harshad Mehta scam, Ketan Parekh scam
and the NPA scam due to misuse and loopholes in the system," D T Franco, general
secretary of AIBOC said.
While discussing the topic, the panellists also dwelt on the issue of privatisation of
banks, which they alleged had been advised by the chief economic adviser to the
Centre.
During the meeting, some suggested that the government publish the names of bank
loan defaulters and direct the banks to write to the home minister to make entry in
the passports of the directors of these companies so that they cannot flee the
country.
THE SYSTEM THAT BRED THESE FACTORS:-
The small investors who lost their life's savings felt that all parties in the functioning of the
market were responsible for the scams. They opined that the broker-banker-promoter nexus,
which was deemed to have the acceptance of the SEBI itself, was the main reason for the
scams in the Indian stock markets.
TSEBI's measures were widely 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 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 BoI. A market watcher said[1] ,"When prices moved up,
SEBI watched these as 'normal' market movements. It ignored the large positions built upby
some operators. Worse, it asked no questions at all. It had to investigate these things, not as a
regulatory body, but as deep-probing agency that could coordinate with other agencies. Who
will bear the loss its inefficiency has caused?"An equally crucial question was raised by
media regarding SEBI's ignorance of the existence of an unofficial market at the CSE.
Interestingly enough, there were reports that the arrest was motivated by the government's
efforts to diffuse the Tehelka controversy.
Many exchanges were not happy with the decision of banning the badla system as they felt it
would rig the liquidity in the market. Analysts who opposed the ban argued that the ban on
badla without a suitable alternative for all the scrips, which were being moved to rolling
settlement, would rig the volatility in the markets. They argued that the lack of finances for
all players in the market would enable the few persons who were able to get funds from the
banking system - including co-operative banks or promoters - to have an undue influence on
the markets.
PUNISHMENT GIVEN TO OFFENDERS
Sebi conducted investigations into the dealings of scrips of Himachal
Futuristic Communications, Zee Telefilms, Adani Exports, Global
Tele-Systems, Ranbaxy Laboratories, Shri Adhikari Brothers
Television Network, Shonkh Technologies International, Padmini
Technologies and Aftek Infosys during the period October 1999 to
March 2001.
Ketan V. Parekh was found to be the master mind behind all the acts
of omission or commissions by these entities, the Sebi order said.
trading,pump & dumping of stocks, which investors lost wealth unsuspecting in which
the
operators used to manipulate the share prices in correlation with share sub brokers who were
persons of interests in the markets, since there were no online trading back then.Orders were
There were amendment made in the securities laws act of 1995,this gave a stronger teeth to
the
regulator SEBI to regulate FII’s, VC’s & other hedge funds. There was also mandate to
disclose
The market regulator was also empowered an investigation arm which could audit ,inspection
of
MF’s ,exchanges.
How did Ketan Parekh con the markets then if regulator was stronger than it was before
Mehta?
Well there were many loopholes still existing, like the trading cycle was one week.
‘Badla’ was the informal future trading in which there were mainly three types :
Quasi Hedging
Stock Lending
Financing
Badla system was a loophole which Parekh used to scam the markets.
The main disadvantages were margins were collected on the lower side,allowed excess
leveraged trading & it did not have any proper surveillance over it.
It was a cash market transaction,the shares were only transferred when full payment was
made.The counter party defaults were on higher side ,since there were no strong regulations.
When the stock prices were higher,the shares were pledged as a collateral to banks.But what
happened when stock prices came down? The collateral were insufficient, but he had already
borrowed quite a lot of funds,he used to manipulate the stock prices so that they never came
Badla system was banned, now you have proper derivatives F&O, which is heavily
regulated
right from surveillance of stocks to SPAN margin to collaterals to be kept with CSDL/NSDL.
List of Changes by SEBI after the Harshad Mehta Securities Scam ¾ Strict full disclosure
norms
were introduced. The full disclosure norms were with respect to material facts, specific risk
factors, prudential norms, etc. ¾ The Listing Agreement413 was introduced and adherence to
it
was made mandatory by all listed companies. ¾ A code of advertisement was introduced to
ensure that the companies disclosed all the information in an honest and trusted manner to the
investors at the time of making a public offer for purchase of securities. ¾ The National
Stock
Exchange (NSE) with online, screen based, nation-wide electronic trading was introduced to
increase transparency of operations. ¾ The Bombay Stock Exchange (BSE) switched over to
online, screen based trading. ¾ A revised “carry forward” system replaced the “badla”414
Requirements to be fulfilled before making public offers for purchase of securities to the
public
with Ketan Parekh's famous K-10 stocks being hammered down and coating many
investors their lives
savings, came the Sebi (Amendment) Act of 2002. This gave Sebi the power to call for
records from any
bank, authority or board. It also empowered the regulator to inspect books of any listed public
company.
Sebi could now, suspend trading of a security, bar persons and companies from accessing
markets and
suspend any office bearer in a stock exchange. It was also granted powers to attach, impound,
and retain
the proceeds of any transaction that was not by the book. Sebi could also specify
requirements for listing
Also, offences like insider trading and unfair trade practices were spelt out better, and
expressly
forbidden. More power also came in the own of higher punitive powers. So fines of upto Rs
25 cr or three
times the unlawful gains, whichever is higher, were allowed and were jail terms from 1 to 10
years were
introduced.
The Securities Laws (Amendment) Act of 2004 followed. As per the recommendations of the
Joint
Parliamentary Committee on the stock market scam, a law was enacted for the de-
mutualisation of
exchanges. This put an end to exchanges being incorporated as ‘mutual’ organisations where
the traders
and brokers owned, controlled an managed the exchange. So exchanges were corporatized,
putting public
interest first.
These wholesale changes contributed towards arming the regulator better. But Sebi’s
keenness to stay
ahead of the curve does not stop there. Acting in concert with other stakeholders, Sebi sought
to move
from a merit-based regime to a disclosure-based regime. In the next part of the series, explore
how Sebi
Websites:
www.sebi.gov.in
https://www.business-standard.com/article/pti-stories/scams-happen-due-to-
loopholes-in-the-system-bank-officers-body-118022400022_1.html
https://en.wikipedia.org/wiki/Ketan_Parekh
https://www.consumer.ftc.gov/articles/0060-10-things-you-can-do-avoid-fraud
https://www.business-standard.com/article/pti-stories/scams-happen-due-to-
loopholes-in-the-system-bank-officers-body-118022400022_1.html
ps://economictimes.indiatimes.com/markets/stocks/news/remember-ketan-
parekh-some-kp10-stocks-still-doubled-investors-
wealth/articleshow/53111351.cms