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ketan parekh scam 2001

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ketan parekh scam 2001

ketan parekh scam 2001

Deepak Sharma 13 Mar 2021

All you should know about Ketan Parekh - The Infamous Stock Market Fraud!

 

Banned from trading for 15 years till 2017, Ketan Parekh continued working from the shadows. Let’s know the man who's heard more than he's seen.

On one hand, we have big names of successful traders in the stock market like Warren Buffet, Carl Icahn, George Soros, etc. who became millionaires by investing in the stock markets. And on the other hand, we have scamsters like Harshad Mehta and Ketan Parekh, who not only ruled the stock market but also were found guilty of economic crimes.

 

The gigantic Ketan Parekh scam, unearthed in March 2001, swallowed the top institutions including the Unit Trust of India (UTI), the Bank of India (BoI), the Madhavpura Mercantile Cooperative Bank (MMCB). This was the second most important scam after the Harshad Mehta scam, which shocked the Bombay Stock Exchange.

The SFIO (Serious Fraud Investigation Office) has estimated that the extent of the fraud could touch Rs. 30,000-40,000 crores. The investigations indicate that he managed the scam by synchronized trading & circular trading, effecting cross deals, generating high volumes and prices by acting in concert with other brokerage firms across the stock exchanges.

Charges against Parekh to be framed include manipulation of shares with the intent of benefiting himself and others, falsifying accounts, cheating banks, giving loans without following norms, paying huge commissions to some company directors, and mishandling public money.

 

Who is Ketan Parekh?

 

Ketan Parekh, a former stockbroker from Mumbai, acknowledged as 'Bombay Bull’ and the ‘Pied Piper of Dalal Street’.

 

                                                                         

Ketan Parekh was a CA (chartered accountant) by profession. For him, the stock market was a family business, which was passed to him by his father. All this conditioned him to get familiarized with a trade circle of his own and this way gradually, he became the big bull of the stock market. Harshad Mehta himself mentored him and walked him through the nooks and corners of the stock exchange.

 

He was a soft-spoken, unpretentious guy that you would mistake for being an ordinary person on the street. However, in reality, his associates describe him as being shrewd and ruthless.

 

Ketan Parekh was like the God for many investors as he created a deception that whatever he wished the market seemed to grant him and whatever he touched turned into Gold. His portfolio comprised of 10 preferred stocks, which can be best described as the K-10 stocks and the market always forecasted these stocks as bullish. 

On top of all this, he also had good connections with international celebrities like Kerry Packer and others. They together started a venture capital firm, KPV venture with $250 million and funded some more start-ups in India. 

 

                                                                           Ketan Parekh – Biography of the Man Behind the Ketan Parekh Scam – WikiBio

 

How Ketan Parekh Scam was executed?

 

Ketan Parekh always believed and invested in the ICE sector Information, Communication, and Entertainment and that was the time during 1999 and 2000 when the dotcom boom had just started. During this time, he ruled the stock market.

 

He traded in the Kolkata stock exchange which proved to be beneficial for him due to the lack of regulations. Many investment firms, banks, overseas corporations, businessmen from listed companies invested their money to be managed by him.

 

The Ketan Parekh scam case mainly involved two key strategies, namely circular trading and pump and dump scheme.

 

Pump and dump Scheme

 

Here, he would purchase 20-30% of the share of a company to cause a price rise. The price increase will subsequently tempt other investors to invest. Once the prices shoot up, he would simply dump the shares and exit by liquidating his holdings. 

 

 

Circular trading 

 

In this strategy, KP made a few amateur traders buy and sell frequently certain shares throughout the day on his call. As a result, the "traded volumes" went up drastically. The investors who based their decisions on the volume traded, considered such stocks to be good for investment. 

Once the price rises, KP made a profit out of it and also paid the traders a small remuneration amount. This type of trading is popularly known as the Badla system. 

However, trading at such magnitude, demands a huge amount of money.

 

Circular Trading in Stock Market - Sana Securities Blog

 

Playing with a pack of 10 stocks

Ketan Parekh – Biography of the Man Behind the Ketan Parekh Scam – WikiBio

Factors That Helped Ketan Parekh

 

A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was Ketan’s main partner in the scam. KP and his associate started knocking the MMCB for funds in early 2000. 

In December 2000, when KP faced liquidity problem in the settlement he used MMCB in two different ways-

  • First was the pay order route, where KP issued cheques drawn on BoI to MMCB, again which MMCB issued pay orders, the pay order discounted at BoI. 

 

  • The second route was borrowing from the MMCB branch at Mandvi (Mumbai) where several companies owned by Ketan and his associates had accounts. Ketan used 16 accounts, either directly or through other broker firms, to collect funds. 

Funding Mechanism  

  • Simple borrowing mechanism 

  • Badla System-Primitive carry forward system fabricated on the Bombay Stock Exchange

  • Badla trading involved buying stocks with borrowed money. The stock exchange acts as a mediator, and the interest rate is determined on the demand for the underlying stock maturity (less than 70 days).

 

How Whatever Ketan Parekh Touched Turned into Gold?

 

The ICE sector was booming and KP invested largely in these sectors which backed him to gain the trust of the investors. The funding method of buying shares and getting pay orders and later getting them guaranteed when the prices rise, also helped him create a Bull Run in the stock market.

Many investors believed that the negligent reactions and regulations of SEBI who could have noticed the abnormal price movements in the market helped the scam to accumulate more losses to them. His connections with big celebrities, political and religious leaders also aided him to get the majority of the fund from large corporate and businessmen.

 

 

How was it detected? 

 

Sucheta Dalal played a crucial role in exposing the Ketan Parekh scam as well, just like the Harshad Mehta scam.

Due to MMCB’s actions, their depositors underwent huge losses. After being declared defaulter, they had not refunded the money of a majority of depositors. Ketan Parekh made a network of 20-25 companies for this manipulation of stocks.

When Dot-com-Bubble started bursting, that time the entire world was noticing a slowdown in Technology stocks. In March 2001, some brokers and traders started selling K-10 stocks that were overvalued because of the shooting prices.

Parekh failed to challenge the market for long. When the prices of the stocks started coming down, he faced difficulties in raising funds from the banks. Then Parekh's Pay order matter came to light, and the scam was exposed.

Highlights:

  • The Stock market crash of 2000 

  • KP started borrowing heavily 

  • Attempted to set up the price rise and later sell

  • But failed to do so

IT department detected errors in sources of funds of KP 

  • Routine market surveillance of 5 stocks

 

Actions and Regulations - by SEBI

 

RBI and SEBI were quick in detecting that there was something abnormal about the profits KP made and the loan he had received. Soon, he was arrested in March 2000 and was held in custody for more than 53 days. 

He was prohibited from trading in the stock market till 2017 and was also sentenced to 1 year in jail. It became one of the biggest stock market fraud in stock market history.

SEBI banned the Badla system and circular trading. SEBI also started inspecting all the accounts related to the stock exchange annually. They permitted collateralized loans only via BSE and NSE. 

Though he was banned by SEBI, it was rumored that Ketan Parekh operated through puppets who executed his orders in the stock exchange. In 2008 many companies were questioned by SEBI and were barred from helping him.

 

Another Scam by Ketan Parekh

Do you know, Ketan Parekh’s name was also involved in the 1992 Cantina Mutual Fund, and was sentenced to a year of jail. During this scam, Parekh had sent around 2000-3000 crore rupees overseas with the help of the Overseas Corporate body. 

Not only in Swiss Banks, but he also used to send money to different banks all around the world. CBI had seized his Swiss Banks accounts also. He still has got a lot of cases against him in court.

 

Closing Thoughts

This is how the Biggest Stock Market frauds in India came to light and rocked the entire nation. People choose short-cuts in life to gain fame and money easily. If you dream to become a successful Investor or Stock Market broker then we suggest you pick the right path. Remember, there is no ladder to success; you'll have to follow each step with Hard-work and dedication.

 

John Andreas Widtsoe Quote: “Fraud and deceit are anxious for your money.  Be informed and prudent.” (7 wallpapers) - Quotefancy

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