Ketan Parekh Scam Do You Know the Real Story Behind the Ketan Parekh Scam?

Introduction

Former stockbroker Ketan Parekh was found guilty by the Securities Exchange Board of India, the market regulator known as SEBI, of market manipulation and influence peddling, or insider trading. He was identified as one of the main offenders in the Sensex’s 176-point decline, which led to the 2001 Budget’s failure. He fraudulently rigs the values of hand-selected equities known as K-10 stocks by securing loans from financial institutions. Additionally, he was found guilty of the Cantina mutual fund scandal involving more than Rs 47 crore of fraud. The Serious Frauds Investigation Office (SFIO) put the value of Ketan Parekh’s fraud at around 40,000 crores.

We know this from the various media reports, but is this the only truth? Let’s find out the real story behind the man and the scam.

Who is Ketan Parekh?

In 1963, Ketan was born into a prosperous middle-class family of stockbrokers and CPAs. He was first introduced to the volatile stock market by his father, Vinaychandra N. After becoming a chartered accountant, he began his work with Narbheram Karakchand Securities, a reputable institutional brokerage firm. He has two daughters together with his wife, Mamta Parekh.

Ketan Parekh is a protégé of Harshad Mehta, who was famous for his life trajectory. However, if reports are to be believed, Mr. Parekh was nothing like Mr. Mehtain in terms of behavior. He was a quiet, unassuming man who appeared to be an everyday person on the street. In actuality, though, his colleagues and rivals perceive him as being extraordinarily cunning and brutal.

Why did people believe in him?

The Pied Piper of Dalal Street is the finest way to characterize Ketan Parekh. Marketmen followed his every move because everything he touched turned to gold. He was more popularly known as the Pentafour Bull. He kept a quiet profile, save for when he hosted a party to celebrate that was frequented by politicians, business leaders, and celebrities. By starting his trading network, Parekh, a chartered accountant by profession, benefited from his family’s background as a broker. The Indian stock market sprung between 1999 and 2000 as the technological bubble engulfed the world. The Puppet Master of Dalal Street is the finest way to define Ketan Parekh. This instilled in the people hope for better monetary growth, and they started to believe in his market decisions immensely.

What are the infamous K-10 stocks?

Ketan Parekh was the dominant bull in the Indian markets when the twenty-first century emerged. The K-10 stocks were named after Parekh’s favorite companies. They included Global Trust Bank, Aftek Infosys, SSI Pentamedia Graphics, HFCL, DSQ Software, Silverline Technologies, Ranbaxy, Zee Telefilms, and GTL soaring. Thus, K denotes Ketan, and his ten favorite stocks, aforementioned, represent the number 10.

What is the Ketan Parekh Scam about?

Ketan Parekh first purchased massive holdings from promoters at significant discounts before shifting his attention to institutional investors. He had a positive outlook on the stock market. To increase the market, he needed three things: stocks, the stock exchange, and money.

The Bombay Stock Exchange (BSE) upgraded security and fraud detection after the 1992 Securities Scam. Ketan Parekh traded on the Kolkata Stock Exchange, which had lax regulations. Ketan Parekh chose his stocks based on four critical criteria: the company must be young, have promising prospects, have a small market capitalization, and conduct a low volume of business.

After the dot-com boom emerged, his stock portfolio was mainly concentrated on the technological, communication, and entertainment sectors, also known as the ICE sector. He used his own money to fundraise or used promoters like Global Telesystems, Zee Telefilms Communications Ltd., and Himachal Futuristic. Without providing adequate security, some money was obtained from institutional investors through banks, including Global Trust Bank and Madhavpura Mercantile Cooperative Bank (MMCB), hedge funds, insurance firms, P/E funds, and mutual funds. He bought certain bank shares to influence the Madhavpura Mercantile Cooperative Bank’s loan decision in his favor. At the time, the Reserve Bank of India allowed merchants to obtain a credit of about 15 crores.

For Ketan’s firms, MMCB issued pay orders totaling Rs. 137 crores in March 2001: 65 crores to Classical Share and Stockbrokers; 20 crores to Panther Investrade; and 52 crores to Panther Fincap. These companies had accounts with the Bank of India, which discounted the pay orders. But in 2001, the Reserve Bank of India stepped in and gave the Bank of India the bouncing pay orders back. Due to a lack of funds, Madhavpura Mercantile Cooperative Bank could not process the payments. MMCB was designated a defaulter by the RBI, costing the bank 137 crores. Only Rs. 7 crores of Ketan Parekh’s debt was repaid, prompting a 130 crore rupee fraud lawsuit against him. After Ketan was taken into custody by the Central Bureau of Investigation, the entire scheme was made public. He chose the pump and dumped technique and circular trading as his two operating strategies.

1. “Pump and Dump” strategy.

The first step in the pump and dump scheme was to inflate stock prices artificially. He invested in K-10 stocks by buying between 20 and 30 percent of the company’s stock when it was less well-known on the stock market. By inflating the price of the shares, he made them more valuable over time and attracted institutional traders and investors to buy the claims. After that, he sold the shares, which sharply decreased the stock prices.

2. Circular Trading

He exchanged shares between his entity and other friendly entities using circular trading, often known as the “badla system.” Through his operational team’s large trading volume of identical sell orders for the same number of stocks, at the same price, and at the same time, which exhibited a strong market and created high volumes of the stock in the market, the costs of the stock were lifted.

What were the legal implications of the scam?

Parekh was charged with insider trading and making false statements to defraud banks. Parekh was ultimately found guilty of market manipulation and was prohibited from trading. However, later, when the Securities Exchange Board of India learned that Parekh was trading using front firms and that his trades had caused a payment issue at the Calcutta Stock Exchange, Parekh received a harsh prison sentence in March 2014. The RBI eventually revoked MMCB’s license in 2012. GTB amalgamated with Oriental Bank of Commerce in 2004.

In the case of Sebi v. Ketan V. Parekh and Others (2003), as a result of violations of Sections 11 and 11B of the SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, and SEBI (Prohibition of Insider Trading) Regulations, 1992. In the case of Securities and Exchange Board of India v. Panther Fincap and Management Services Limited and Ors (2018), he was sentenced to three years in prison and a fine of Rs. 5,00,000 under Section 24(2) of the Securities and Exchange Board of India Act, 1992. Additionally, he was told to pay Rs. 3,25,000 in compensation to the Securities and Exchange Board of India.

How did the Ketan Parekh Scam help in the modernization of the market?

In one of its articles on Parekh, India Today reported that the market collapse ultimately pushed for urgent modernization. It is also interesting to note that a seasoned trader who had completed a few transactions for Ketan Parekh (abbreviated KP in stock market circles), as he was and is still known, stated that Ketan Parekh improved the system through more difficult times if Harshad Mehta saw himself as an expert who developed a strategy and entered the market.

This gave the much-needed fillip to close the loopholes and make laws more stringent, along with specific procedures to avoid such manipulation by stock brokers and traders.

Is Parekh a hero or a villain?

Without back support, competing with and eclipsing leading stock market participants isn’t easy. Even if people and the media refer to it as fraud, stock exchange trading is still conducted in today’s generation according to standard practices. How can someone be referred to as a scammer when loopholes exist in the system? He was surrounded by a large group of people discreetly funding Parekh and lending him assistance. Politicians, businesspeople, conglomerates, and institutional investors made money during that time and called him a hero. But only Parekh was the target when the story surfaced, and he became a villain overnight.

If he were a genuine con artist, he might have gone from India to London like the so-called “genuine con artists,” including Nirav Modi, Lalit Modi, and Vijay Mallya, who defrauded individuals and fled to London, where all con artists and criminals from throughout the world are welcome to live happily and permanently, as India and the UK still do not have an extradition treaty to deport criminals from the UK to India.

Anyone working in the stock market or with stock brokers will tell you that Parekh’s method of alleged manipulation is just one of the standard trading tactics brokers employ, even today. He did commit scams, but his pitiful rivals, who had been clamoring for their monopoly for many years, pushed him to leave the market. Short selling is also a scam if common sense and logic are to be followed. We acquire shares when we desire them. How can anyone short-sell their way to riches and make money without spending a dime? A few real con artists excessively targeted him and called him a villain.

Conclusion

Everyone, including citizens, the government, other important regulators (including the RBI), and investigating agencies, is responsible for identifying, preventing, and reducing the incidence of financial fraud. The emphasis is on improving processes, controls, and fraud risk management frameworks to minimize the potential for fraud and shorten the time it takes to uncover fraud. To assist institutions in identifying instances of fraud as soon as possible, the Reserve Bank of India also established a Central Fraud Registry Portal, a searchable database accessible by all Indian banks. Last but not least, it is essential to note that the Union Government has established a nationwide helpline with the number 155260, run by the relevant state police. Calling this number will enable cyber fraud individuals to report financial crimes.