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: http://kaleidoscopeonline.blogspot.com/2010/02/harshad-mehta-from-pied-piper-of_25.html

Decoding The Jargon: Hedging..

Hedge your investments to weather tough times

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What: Hedging allows a risk-free investor to transfer his risks by paying some cost to a risk taker

Why: Hedging is important because it allows its investments as per his risk apetite

How: Some famous instruments of hedging are futures and options that are traded through stock exchanges

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When everything is going your way, it looks natural to get carried away by the upside and completely forget the downside

When you are crossing a road, looking to your left is just as important as looking to your right. This rule could be applied even to your investments. But many investors forget this simple rule when they are standing in the middle of markets going up and down. When everything is going your way, it looks natural to get carried away by the upside and completely forget the downside. Then one fine day, you get knocked down by something coming from the other side. For this simple reason, it is always better to keep your investments hedged if you are not sure if you could survive unexpected knocks.

Think of hedging as a kind of insurance that you buy to protect yourself from unforeseen losses.

Hedging could be used in a wide range of circumstances. The techniques of hedging would be as much relevant to your leaking umbrella as to your investments. You keep the second option ready, just in case. Like insurance, hedging involves participation of a risk-taker and someone who is risk-averse. For transferring the risk or what we call hedging, a risk-averse person has to pay a price to a risk-taker.

Hedging keeps a risk-averse person protected from a negative event while someone else assumes the risk in the hope that the negative may not materialize.

The key to hedging is that it allows limiting of loss on the downside. However, at the same time, the cost involved in hedging leads to reduction of upside potential of profit. The risk-taker makes some profit in terms of the price received from the hedger in case the negative event does not actually materialize.

If Hedging is a reduction of risk at the cost of reduction of potential profit, then why anybody would go for hedging?

Hedging is closely connected with the equation of risk-return trade-off. As per the risk-return equation, to generate a higher return you may have to take a higher risk.

A lower risk investment generates a lower return. That’s the normal equation the market follows—it is risk that’s ultimately getting translated into money. Interestingly, all of us have the same appetite for money but all of us may not be having the same appetite for taking risk.

The solution is to go for a compromise. Be satisfied with that much return which is commensurate with your risk-taking appetite. If you never put yourself in a situation offering higher risk than your risk-taking appetite, then you would probably never need to hedge.

But it’s at this point that many slip. The problem is that the equation of risk and return doesn’t come clearly written on the face of your investments. You have to judge for yourself. You may realize only after making an investment that you have entered a wrong lane. Hedging, in a way, provides you a chance to set your investments on the right track, as a result of which you are back to the level of your risk-taking appetite. However, as I said, you have to sacrifice some of the returns on your investments. So, before going for hedging, it is important to make some evaluation based upon its cost and benefit. A long-term investor may decide to ignore any short-term fluctuations rather than sacrifice a part of the profit. It all depends upon individual circumstances.

How can we hedge?

The simplest approach would be to create a natural hedge around your investments. Remember this age-old advice from simpletons: never put all your eggs in the same basket. Diversification works as a natural hedge for your investments. Some of your investments would perform well, some would perform badly but diversification on the whole ensures that you get a balanced return during normal times. But diversification alone can’t always fully protect your investments. A more aggressive approach would be to use derivative instruments for hedging. Many derivative instruments such as options, futures and other derivatives of more exotic kinds are available. Derivatives could be used to hedge a wide range of risks covering stocks and commodities or even currencies and interest rates. For retail investors, derivatives such as futures and options, which are easily tradable on stock exchanges, are most suited. You can hedge your investments by making investments in any of the available derivative instruments. But before that, you should try to understand how different derivative instruments work.

I have always found derivatives a bit puzzling. But for avoiding a sea of risks, you need to make friends with a devil.

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Harshad Mehta: From Pied Piper of the Markets to India's Best-Known Scamster

Just as the year 2001 was coming to an end, Harshad Shantilal Mehta, boss of Growmore Research and Asset Management, died of a massive heart attack in a jail in Thane. And thus came to an end the life of a man who is probably the most famous character ever to have emerged from the Indian stock market.

The Early Days

Harshad Shantilal Mehta was born in a Gujarati Jain family of modest means. His early childhood was spent in Mumbai where his father was a small-time businessman. Later, the family moved to Raipur in Madhya Pradesh after doctors advised his father to move to a drier place on account of his indifferent health. But Raipur could not hold back Mehta for long and he was back in the city after completing his schooling, much against his father’s wishes.

How It All Began?

Mehta first started working as a dispatch clerk in the New India Assurance Company. Over the years, he got interested in the stock markets and along with brother Ashwin, who by then had left his job with the Industrial Credit and Investment Corporation of India, started investing heavily in the stock market. They together started their venture GrowMore Research and Asset Management Company Limited

The Rise of the 'Big Bull'

He rose and survived the bear runs, this earned him the nickname of the Big Bull of the trading floor, and his actions, actual or perceived, decided the course of the movement of the Sensex as well as scrip-specific activities. By the end of eighties the media started projecting him as "Stock Market Success", "Story of Rags to Riches" and he too started to fuel his own publicity. He felt proud of this accomplishments and showed off his success to journalists through his mansion "Madhuli", which included a billiards room, mini theatre and nine hole golf course. His brand new Toyota Lexus and a fleet of cars gave credibility to his show off. This in no time made him the nondescript broker to super star of financial world.

During his heyday, in the early 1990s, Harshad Mehta commanded a large resource of funds and finances as well as personal wealth.

The Big Downfall

In April 1992, the Indian stock market crashed, and Harshad Mehta, the person who was all along considered as the architect of the bull run was blamed for the crash. It transpired that he had manipulated the Indian banking systems to siphon off the funds from the banking system, and used the liquidity to build large positions in a select group of stocks.

When the scam broke out, he was called upon by the banks and the financial institutions to return the funds, which in turn set into motion a chain reaction, necessitating liquidating and exiting from the positions which he had built in various stocks. The panic reaction ensued, and the stock market reacted and crashed within days.He was arrested on June 5, 1992 for his role in the scam.

Modus Operandi of the Great Indian Financial Scam

Scam Exposed: On April 23, 1992, journalist Sucheta Dalal in a column in The Times of India, exposed the dubious ways of Harshad Metha. The broker was dipping illegally into the banking system to finance his buying.

“In 1992, when I broke the story about the Rs 400 crore that he had swiped from the State Bank of India, it was his visits to the bank’s headquarters in a flashy Toyota Lexus that was the tip-off. Those days, the Lexus had just been launched in the international market and importing it cost a neat package,” Dalal wrote in one of her columns later.

The authors explain: “The crucial mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government securities just as a pawnbroker lends against jewellery….The borrowing bank actually sells the securities to the lending bank and buys them back at the end of the period of the loan, typically at a slightly higher price.”

It was this ready forward deal that Harshad Mehta and his cronies used with great success to channel money from the banking system.

A typical ready forward deal involved two banks brought together by a broker in lieu of a commission. The broker handles neither the cash nor the securities, though that wasn’t the case in the lead-up to the scam.

“In this settlement process, deliveries of securities and payments were made through the broker. That is, the seller handed over the securities to the broker, who passed them to the buyer, while the buyer gave the cheque to the broker, who then made the payment to the seller.

In this settlement process, the buyer and the seller might not even know whom they had traded with, either being know only to the broker.”

This the brokers could manage primarily because by now they had become market makers and had started trading on their account. To keep up a semblance of legality, they pretended to be undertaking the transactions on behalf of a bank.

Another instrument used in a big way was the bank receipt (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR.

As the authors write, a BR “confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name - bank receipt. It promises to deliver the securities to the buyer. It also states that in the mean time, the seller holds the securities in trust of the buyer.”

Having figured this out, Metha needed banks, which could issue fake BRs, or BRs not backed by any government securities. “Two small and little known banks - the Bank of Karad (BOK) and the Metorpolitan Co-operative Bank (MCB) - came in handy for this purpose. These banks were willing to issue BRs as and when required, for a fee,” the authors point out.

Once these fake BRs were issued, they were passed on to other banks and the banks in turn gave money to Mehta, obviously assuming that they were lending against government securities when this was not really the case. This money was used to drive up the prices of stocks in the stock market. When time came to return the money, the shares were sold for a profit and the BR was retired. The money due to the bank was returned.

The game went on as long as the stock prices kept going up, and no one had a clue about Mehta’s modus operandi. Once the scam was exposed, though, a lot of banks were left holding BRs which did not have any value - the banking system had been swindled of a whopping Rs 4,000 crore.

Interestingly, however, by the time he died, Mehta had been convicted in only one of the many cases filed against him.

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Dow Theory Unplugged

The Dow Theory UNPLUGGED…!

The legacy of Charles Dow’s thoughts have continued to exist in the form of the Dow theory for more than 100 years now and with new believers joining, this theory is expected to remain popular for years to come.

What is THE DOW THEORY?

• The Dow Theory believes that stock market prices follow a trend.
  

• Dow, through his observations, arrived at the conclusion that prices move in a pattern.
  

• If the market is going through an uptrend, then the prices will continue to rise until the uptrend changes into a downtrend.
  

• The evidence of any change in the trend can be gathered by observing price charts.
  

• In a way, the Dow Theory is based on the presumption that stock prices convey everything that is worth knowing about the stock.
  

• Be it future earnings or fear of the future or just hope, almost everything is reflected in the current stock price.
  

• But the focus of the Dow Theory is always on the changes in average price as reflected by some market index.
  

• The Dow Theory relies upon the Dow Jones Industrial Average and the Dow Jones Transport Average for its analysis. But the theory should work as well with any other market index.
  

• The focus on a market index helps in minimizing discrepancies that might creep in when observing individual securities.

Q. How can one know about the current market trend or the overall mood of the market by analyzing stock prices?

The Dow Theory says that three kinds of trends are seen working in the market.

Ø The first is the primary trend, which lasts from a few months to many years, and could be either bullish or bearish.

Ø Then we have a secondary trend that lasts from a few weeks to some months and that moves in the direction opposite to the direction of the primary trend.

So if the primary trend is bullish, then the secondary trend would come in the form of temporary corrections or fall in prices, and if the primary trend is bearish then the secondary trend would bring a temporary rally or rise in prices.

But once the secondary trend is over, the market continues its march in the direction of the primary trend.

Apart from primary and secondary trends, the market also sees day-to-day fluctuations that can last from one day to a week, during which the prices could move either in the direction of the primary trend or in the opposite direction.

Interestingly, day-to-day fluctuations don’t have much of a role in the Dow Theory. The main focus lies on identifying the primary trend and making investments based on that. Changes in the secondary trend are observed for deciding the direction of the primary trend. You can know about the overall direction of the market by watching both the trends simultaneously.

When you watch both primary and secondary trends, you would observe something like this:

The overall direction of the market over a period of, say, one year or two is decided by the direction of the primary trend, with the secondary trend acting as a temporary pull-back.

So the movement of a stock index would look like someone taking two steps forward and one step backward. In a market trending up, the market rises then falls a bit, then rises once again and reaches a point higher than the previous high.

In a down-trending market, the whole movement is reversed. The market falls then rises a bit, then falls once again to reach