Ketan

Parekh scam
UNVEILING STOCK MARKET SCAM
2001
 INTRODUCTION
Ketan Parekh: Former stockbroker from Mumbai.

Convicted in 2008 for involvement in Indian stock market manipulation scam (late 1998 to 2001).

Rigged prices of specific securities, known as "K-10 stocks."

Borrowed substantial amounts of money from banks, including Madhavpura Mercantile Co-operative Bank.

He served as a director of Madhavpura Mercantile Co-operative Bank.

Investigation by SEBI (Securities and Exchange Board of India) led to his conviction.

Guilty of manipulating share prices of ten companies referred to as K-10.

SEBI imposed a 14-year ban on Parekh and his associated firms from trading in the market.
 BACKGROUND & EARLY CAREER
• Ketan Parekh is an Indian stockbroker and former fund manager.
• After becoming a CA, started his career in the late 1980s at NH Securities.
• He came in contact with Harshad Mehta in the ’90s, a well-known stockbroker.
• He joined Mehta's GrowMore Investments (involved in the 1992 Stock Market scam).
• He invested heavily in stocks related to IT, media, and communication and propagated them.
• Known as Pentafour Bull in the Indian stock market during the late 1990s and early 2000s.
• He was involved in a series of manipulative and fraudulent activities in the Indian stock market.
 MODUS OPERANDI
1. Legal Consequences: Ketan Parekh was banned from the Stock market till 2017 as he was
found guilty of rigging share prices, insider trading, etc.

2. Borrowing Heavily: Ketan Parekh borrowed substantial funds from banks.

3. Choice of Target Stocks: He targeted specific securities, often referred to as "K-10” stocks.

4. Circular Trading: Ketan Parekh engaged in circular trading.

5. Price Manipulation: Parekh generated significant profits by manipulating K-10 stocks.

6. Pay Order issues: Parekh violated the rules regarding the Pay Order amount disbursement.
 Parekh’s favorite K-10 was on fire in ’99 and ‘00. The
Pentafour bull and supporters would take advantage of the
low liquidity in these stocks, and in collusion with the
promoters, ramp up the stock prices.

K-10 Stocks i. SSI

& other manipulated stocks
ii. Ranbaxy
iii. Aftek Infosys
iv. DSQ Software
v. Global TeleSystems
vi. Pentamedia Graphics
vii. Zee Telefilms
viii. Global Trust Bank
ix. Silverline Technology
x. Himanchal Futuristic Communication
xi. Sonata Software
 THE SCAM
• He Studied the "Pump and Dump" system used by Harshad Mehta.
• Illegally received funds from banks and financial institutions.
• Used these funds to buy specific stocks in bulk, artificially inflating their prices.
• Calcutta Stock Exchange was the best platform for Ketan Parekh.
• The buying behavior of Big Bulls influenced market participants to invest, which led to increasing prices.
• Focused on IT, Communication, and Entertainment (ICE) sector companies during the dot-com
boom.
• Successfully pumped up the share prices of several firms.
• Encouraged institutional investors rather than retail investors to invest in manipulated stocks.
CONVINCE INSTITUTIONAL INVESTORS
Circular Trading
 CONVINCE INSTITUTIONAL INVESTORS
• By research, Parekh found that Institutional Investors invest only in stocks having high
trading volumes and high media attention.
• To fulfill this, he initiated Circular Trading.
• Parekh and his associates conducted circular trading primarily on IT, media, and telecom
stocks that were already growing rapidly and getting media attention.
• Thus, Ketan Parekh's “K10 Stocks” became widely popular.
• He conducted most of the investments/trades in the Calcutta Stock Exchange (CSE) as
it did not have any strict regulations at the time.
• He artificially created a 200% annual return on some stocks in Calcutta stock exchange.
 SOURCE OF FUND
He wanted to obtain more funds through various sources to pump up stock prices on a larger scale.
1. Parekh got funds from the Promoter of the company whose shares were manipulated.
• A surge in share price an increase in net worth and easy loans by pledging shares (Insider Trading)
2. Parekh illegally raised large sums of money from Global Trust Bank (GTB) and Madhavpura
Mercantile Cooperative Bank (MMCB).
• A sum of Rs 15 crore loan was the regulation to be given to a stock broker.
• Parekh got Rs 800 crore from MMCB and Rs 100 crore from GTB.
3. Parekh made MMCB issue a pay order of Rs 137 crore from the Bank of India.
• But Parekh never deposited that amount in MMCB.
 DOWNFALL
• Bank of India (Mumbai Branch) alleged that Parekh had defrauded them to the tune of Rs.137
crore.
• Sucheta Dalal of the Times of India uncovered the entire scam and published a report on it.
• Parekh was found guilty of insider trading and arrested by the CBI.
• He was also convicted of rigging share prices and was banned from trading until 2017.
• In 2009, SEBI found that Parekh was using 26 front companies to carry out illegal activities and
they were also banned along with Parekh.
• in March 2014, Parekh was convicted by a special CBI court for cheating and sentenced to two
years of rigorous imprisonment as he defrauded Rs 40,000 crore scam
 IMPACT ON CALCUTTA STOCK EXCHANGE
• Lack of regulations and surveillance on the bourse allowed a
highly illegal and volatile Badla business
• CSE had 3rd highest volumes in the country after NSE and BSE.
• CSE helped KP to cover his operations from his rivals in
Mumbai.
• Brokers at CSE used to buy shares on KP's behalf.
• The brokers were paid 2.5% weekly interest for keeping those in
their own name.
Continue…
• By Feb 2001, CSE were reduced to an estimated Rs 6-7 billion from their initial
worth of Rs 12 billion.
• KP’s Badla payments of Rs 5-6 billion were not honored on time for the
settlement and about 70 CSE brokers, defaulted on their payments.
• By mid-March, the value of stocks held by CSE brokers went down further to
around Rs 2.5-3 billion
 Badla Transaction
• The stock exchange acts as an intermediary between borrower and the actual lender.
• Borrower will be charged an interest rate for borrowing, which will be determined
by the demand for that stock under Badla trading.
• Thus, higher the demand for Scrips under Badla trading higher will be the interest
rate.
• You can keep your borrowing unpaid for a maximum of 70 days, after which you
will have to repay the Badla financier through the exchange
 Role of SEBI after Scam
• SEBI launched immediate investigation on the scam.
• It suspended all the broker member directors BSE'S governing board.
• SEBI also banned trading by all stock exchange presidents, vice presidents and treasurers.
• SEBI banned naked short sales. RBI started inspecting accounts and sub-accounts twice a year in
spite of once in two year.
• SEBI allowed banks for collateralized lending only through BSE and NSE.
An additional 10% deposit margin was imposed on outstanding net sales in the stock
markets. 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 and ordered. It
suspended all the broker member directors of BSE’S governing board SEBI also banned
trading by all stock exchange presidents, vice presidents and treasurers SEBI allowed banks
for collateralized lending only through BSE and NSE
CONCLUSION