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KETAN

PAREKH
SCAM

WHO IS KETAN PAREKH ?

Ketan Parekh [KP] was a chartered accountant


by profession and used to manage a family
business, NH Securities started by his father
Ketan Parekh-also known as the Bombay
Bull was a known broker of Indian stock
exchange
Parekh came from a family of brokers which
helped him to create a trading ring of his
own
He had connections with movie stars,
politicians and even leading international
entrepreneurs like Australian media tycoon
Kerry Packer

Currently he has been debarred from trading in


the Indian stock exchanges till 2017
He was convicted in 2008, for involvement in
the Indian stock market manipulation scam in
late 1999-2001
He was a trainee of Harshad Mehta

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 PentaMedia
Graphics

KP selected these companies for investment with help


from his research team, which listed high growth
companies with a small capital base. According to
media reports, KP took advantage of low liquidity in
these stocks, which eventually came to be known as
the 'K-10' stocks

THE K10 STOCKS

AND THE STORY


BEGINS
Although KP was a successful broker, he did not
have the money to buy large stakes.
According to a report,
12 lakh shares of Global in July 1999 would
have cost KP around Rs 200 million.
The stake in Infosys would have cost him Rs
50 million,
While the Zee and HFCL stakes would have
cost Rs 250 million each.

KP borrowed from various companies and banks for


this purpose. His financing methods were fairly
simple. 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.

It wasnt possible without the involvement of


banks. A small Ahmedabad-based bank,
Madhavapura Mercantile Cooperative Bank
(MMCB) was KPs main ally.

MODUS OPERANDI
KP buys shares
of selected
companies

Banks and retail


investors loose

Other investors also


invest in KP
stocks

Prices are jacked up by


Circular trading

Bears Cartel sells the


inflated stocks,
Price reduces

WAYS OF FUNDING THE


SCAM
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.
KP reportedly used his BoI accounts to discount 248

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.
Borrows 250 crores from GTB (Global Trust Bank)
and 1000 crores from MMCB.
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.

END OF SCAM
His mode of raising funds were going on well only
till prices of shares went up
It reversed when shares started falling from March
2000. The crash was a result of fall at National
Association of Securities Dealers Automated
Quotation System(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%.
In May 2000, the market picked up back and the
prices of K-10 rose again. The prices of stock
doubled like HFCL doubled from Rs 790 to Rs 1353
by July

By December 2000, the NASDAQ fell back again


and the K10 stocks went down as the prices of
stock fell globally.
KP
liquidity
problems.
Thefaced
CSE had
payment
crises and was a setback
for KP because of following reasons Stocks held by KP and his broker were reduced
to 6-7 bn from 12bn.
Situation worsened when KPs badla payment
was not honored.
70 CSE brokers along with top 3 brokers made
default.

KPs brokers started pressuring him for payment.


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

IMPACT
The Sensex lost over 700 points and more than
500 of the 1364 actively traded shares
KP and other traders were banned from trading
for 17 years
Short selling was banned for 6 months.
Badla system was banned
Broker control over Stock Exchange was
demolished

Bombay Stock Exchange (BSE) President Anand


Rathi resigned.
Eight people were reported to have committed
suicide .
Hundreds of investors and two banks were
driven to the brink of bankruptcy
KP released on bail on May 2001--All Ketan
Parekh had to say was I made mistakes.
The Retail investors were the worst hit-SBI,
BOI, PNB, MMCB had to suffer huge losses.

STEPS TAKEN BY SEBI


AFTER SCAM

SEBI launched immediate investigation on the


scam.
It suspended all the broker member directors of
BSEs governing board.
SEBI also banned trading by all stock exchange
presidents, vice presidents and treasurers.
SEBI banned naked short sales.
SEBI allowed banks for collateralized lending
only through BSE and NSE

The limit of application of the additional


volatility margins was lowered from 80% to 60%

To revive the markets SEBI imposed restriction


on short sales.

RBI started inspecting accounts and subaccounts twice a year in spite of once in
two year.