Sep 5, 2010

Ketan Parekh Scam: The Stock and Bull Story

Ketan Parekh is a name which rings a bell in our minds as the man behind one of the biggest scams of Indian stock exchange in 2000-2001. Through this article, I have explained the modus operandi of the “Ketan Parekh Scam” in a simple language without any technical jargon so that even a layman can understand. But before that, let’s get aware about an interesting fact, both Ketan Parkesh & Harshad Mehta, another big swindler of Indian stock exchange are the “infamous” alumni of the same school in Gujarat. God knows what is taught in that school!!!!!

Ketan Parekh-also known as the “Bombay Bull” was a known broker of Indian stock exchange. Over the years, Ketan built a network of companies mainly concentrated in Mumbai. According to market sources, although he was a big broker, he didn’t have enough funds to buy large stocks. He borrowed funds from various companies and banks for this purpose. He used to raise loan from the banks by offering shares as collateral security. 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 . Ketan 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 shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL.

He started trading of these shares within the network of his own companies at no profit no loss with the malafide intention of creating buying pressure for shares of K-10 .Continuous trading by Ketan Parekh within the network of his own companies make other brokers in the market believe that something is happening inside K-10. Thus brokers started buying shares of K-10 for themselves and also urge their clients to buy these shares. The buoyant stock markets 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. HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion.

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. Analysts and regulators wondered how KP had managed to buy such large stakes.

At that time Ketan thought of selling his shares but it is said that some senior officials of Zee telefilms told him to continue trading till the share value reach Rs 1000 mark and thus Ketan continued. He finally sold all his shares of zee at market price of Rs 1100. Though he earned enormous profits but due to sudden selling of huge number of shares and consequent fall in trading led to a fall in the markets and thus share price fall drastically to around 200 again. Investors lost heavily and many committed suicide. That was what Ketan did.

This scam created a historical impact on financial status of Bombay Stock Exchange and also on faith of investors in its working. Securities and Exchange Board of India (SEBI) was highly 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 shares over an 18-month period prior to February 2001.

Analysts also opined that SEBI's market intelligence was very poor. Analysts commented that if the regulatory
authorities had been alert, the huge erosion in values could have been avoided or at least controlled. Ketan Parekh was sent behind bars immediately though was later released on bail. Currently he has been prohibited from trading in the Indian stock exchanges till 2017. One would have thought that after this scam the regulatory authorities would have became more strict and effective and than we come across the Satyam scam!!!!!!!!

By: Aman Maggu

For reading about the harshad mehta scam: click on the following link:

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