The Ketan Parekh Scam
The Ketan Parekh scam was the second most important scam that rocked the Bombay Stock Exchange after the Harshad Mehta scam. To make matters worse, Ketan Parekh was himself a protege of Harshad Mehta and had learned stock trading from the pied piper of Bombay Stock Exchange himself. As a result, he was able to achieve a similar feat as compared to what Mehta himself had accomplished.
When he was believed to be single handedly driving the stock market, Ketan Parekh had created a 200% annual return on some stocks.
The low profile Indian stock market was suddenly once again making headlines all over the world. Later it turned out that it was broker turned operator Ketan Parekh that was driving the market and not changes in the fundamentals.
About Ketan Parekh
As already mentioned above, Ketan Parekh was a protege of Harshad Mehta. However, in his demeanor he was nothing like Mr Mehta.
He was a soft spoken, unassuming guy that you would mistake for being an average person on the street.
However, in reality his associates and competitors describe him as being particularly shrewd and ruthless. Unlike, other brokers, there would be no build up or warning of Ketan Parekhs moves.
He would take the market by storm and raise or drop the prices of stocks in an instant by suddenly unleashing lots of money in the market.
He was a chartered accountant by professional training and had started managing his familys brokerage business.
At the height of his success Ketan Parekh was friends with international celebrities like Kerry Packer and both of them had together started a venture capital with the intent of funding start-ups in India.
Ketan Parekhs Modus Operandi
Ketan Parekh had a cover story to back his unscrupulous dealings and throw skeptics off track.
He was said to be a believer of the Information, Communication and Entertainment sector i.e. the ICE sector. This was nothing special given the fact that late 90s and early 2000s were the time when the IT boom took place and these were the stocks which were actually growing by leaps and bounds worldwide.
Hence, it seemed to appear that the stocks Ketan Parekh was picking were growing because of their fundamentals. The massive 200% growth in his shares was therefore not as astounding and did not attract as much attention as Harshad Mehtas escapades did.
However, in reality, Ketan Parekh was looking out for stocks which had a low market capitalization and low liquidity. He would then pump money into these shares and start fictitious trading within his own network of companies.
The average person on the bourses may begin to believe that his/her stocks were rising and they too would start investing driving the prices even higher. Then, as the market took over Ketan Parekh would liquidate his holdings slowly, once again making less noise than his mentor Harshad Mehta would have done.
Ketan Parekh used this modus operandi repeatedly for 10 stocks which he had picked. These stocks came to be known as the K-10 stocks and the market always seemed to be bullish about the future of these stocks.
The problem with Ketan Parekhs dealings was two-fold:
- Firstly, he had been accepting money from the promoters of many companies to take their share prices up. This can be seen as insider trading and by itself was enough to get Ketan Parekh into severe trouble.
- However, to top it up, Ketan Parekh had also embezzled large amounts of cash from the Madhavapura Mercantile Commercial Bank (MMCB).
He was believed to have bribed the officials of the said bank to persuade them to lend against shares to a greater extent than was permitted by law.
At first, the bank crossed its prescribed limits to lend against market securities as it extended credit to Ketan Parekh.
Then, the bank basically started making unsecured loans to him. The loans would be sanctioned first and the collateral would be collected a few days later making the loans unsecured for the interim duration.
Ketan Parekh also conducted majority of his tradings in the Calcutta stock exchange (CSE). The lack of regulation in this exchange provided more flexibility to Mr Parekh.
He did not trade on his account but instead instructed other brokers to hold securities and paid them a commission to do so while making good any losses that they might have accrued on the position.
However, as a bear cartel started hammering the K-10 stocks, Ketan Parekh found himself locked out of cash. The MMCB bank was also not able to lend out credit and bail out Mr Parekh. As a result, the brokers that were holding positions on his behalf in the Calcutta Stock Exchange were forced to liquidate too causing a massive sell off in the market.
Investors lost money to the tune of INR 2000 crores (US$ 2.5 billion).
Ketan Parekh was immediately arrested and tried in court. He has been prohibited from trading in the Bombay Stock Exchange for 15 years i.e. till 2017. Also, he had been sentenced to one year rigorous imprisonment for his economic crimes.
There have been rumors in the Bombay Stock Exchange that Ketan Parekh still continues trading from a network of unnamed corporations.
In 2008, the regulators initiated a probe into this and many companies were barred from trading in the exchange. However, the extent to which such actions can stop the activities of Ketan Parekh is yet to be ascertained.
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