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The Ketan Parekh Scam

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The word 'scam’ is not new to the Stock Market Industry. The share Market has been a wish-granting factory to a lot of people trying their hand in the industry, it witnesses stories of success, failures and of course Bankruptcy.  Sometimes people go beyond the rules and regulations to manipulate the market in order to achieve fame. 

The recent SonyLiv web-series Scam 1992 has brought to light the scam that brought the Bombay Stock Exchange to its knees and prompted the restructuring of the entire Indian Share Market. 

We’ll discuss one such scam today which has rocked the entire nation. The ‘Ketan Parekh Scam’. Ketan Parekh was a Chartered Accountant, and he used to run his family business. The genius of Ketan Parekh is comparable to the Bachchan of Dalal Street, Harshad Mehta.  Just like we saw in the Harshad Mehta scam, Ketan Parekh had also been the trainee under Harshad Mehta once. Ketan Parekh was running his scam by using some techniques.

Sneak-Peak at Pump & Dump Scheme:

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This scheme is a fraud scheme. The operators who run this scam, first buy the shares of some companies in a huge amount, and after this by faking incorrect information, they try to attract investors. A lot of investors get trapped in their fraud and start buying their shares. And then the price of the share goes high. After seeing the rise in price, more and more operates and investors get attracted towards them, and start buying their shares. This eventually pumps the price of the share. And when the price of the shares pumps, the operators dump (sell)the shares and earn good profits. 

When the operators stop promoting the shares, then because the share is overvalued and of the fake and incorrect information about the share, the price of that share starts falling. All those investors who have invested in that stock face losses. Ketan Parekh used to buy stakes and manipulate them. There are 2 types of investors- Retail Investors and Institutional Investors. Retail Investors are the ones who buy shares for their personal use, like you and me. Institutional Investments are the organisations which make investments for the people, like Mutual Funds, Insurance companies, Hedge Funds etc. 

Ketan Parekh’s tricks to catch investors:

Just like Harshad Mehta used to attract people towards Retail Investments, on the other hand, Ketan Parekh used to attract Institutional Investors because they invest in big amounts. He was very well aware of the tricks as to how to attract the investors towards institutional investments because Ketan Parekh was an Institutional Stock Broker. He started manipulating the stocks by using different strategies. A lot of Institutional Investors prefer liquidity. This is the reason why Ketan Parekh started circular trading. In circular trading, you increase the value of the stock artificially. How many shares of a particular company have been traded so far, is called the volume of that stock. The way new trends come, the volume also starts rising.

What is Circular Trading?

In Circular Trading, operators do trading among themselves, like the 1st operator sells the share to the second operator, 2nd to the 3rd one and the 4th to the 5th one. And this goes on, and the shares keep operating between the operators, which increases the volume of the stock. In circular trading, operators first decide about how much shares they will trade, at which price, and when. After this, the operator who will buy and sell the share, places the order at the same time, meaning they place the exact matching orders. Similarly, the shares are then trading among these operators only, and the volume of the share goes up.

To do Circular Trading, Ketan Parekh used to buy and sell the shares of his own company, and increase the volume of the stocks. Ketan Parekh was mainly manipulating 10 stocks, which were called K-10 stocks. Because of high volume, those stocks could be seen trading actively which was giving an impression that investors are taking interest in that stock. Ketan Parekh was raising the price of those stocks by investing a huge amount of money in them. That’s why investors started participating in those stocks.

Ketan Parekh’s Power Games:

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Ketan Parekh had good terms with some Institutional Investors. These investors started investing in K-10 stocks. When Institutional Investors used to come, the price and demand of that used to go high. Seeing this, Retail Investors also started investing with them. Between the period of 1997-2002, Dot-com-Boom was running, where stocks of technology, and telecom equipment provider companies were rising rapidly, and investors were taking a huge interest in these. And just then, Ketan Parekh started manipulating the stocks of technology, and telecom equipment provider companies, and nobody gotta know anything about this conspiracy. Ketan Parekh undoubtedly had good timing here. 

All this was giving the impression that the prices of K-10 stocks were rising because of good future growth, Fundamentals, and Dot-com-boom. Ketan Parekh tried hard to get Media attention to the stocks that he was manipulating so that those stocks should always be in the limelight, which will eventually attract investors and it will increase the price of the stock. Ketan Parekh manipulated Pentafour Software, and its price has gone up from 175 to 2700. Similarly, the price of Global Telesystems has gone up from 185 to 3100, HFCL has gone up from 42 to 2300, and Zee, 750 to 11000. He manipulated many other stocks like this. The moment stock prices had gone high, Ketan Parekh started dumping those stocks and he left his focus on selected stocks and made a good position and bought more stakes in those companies.

Company Price Rise in Price
Pentafour Software 175 2700
Global Telesystems 185 3100
HFCL 42 2300
ZEE 750 11000

To run this scam, Ketan Parekh mainly arranged money from 2 sources. Company’s promoters and banks. Promoters wanted that when the price of the share will go high, then they will sell the share so that they will earn a profit. Promoters of some companies, mortgage their shares and take loans.When the price of the shares increases, then promoters get a high loan amount. This is why the Promoters of the company used to bribe Ketan to manipulate the prices.

Parekh’s Network with Banks:

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Lets now talk about the fund that Parekh was getting from Banks: He mainly used to get funds from Global Trust Bank (GTB) and Madhavpura Mercantile Cooperative Bank. When the price of the share used to go up, then Ketan Parekh used to take a loan against that share, and he used to use that money again to manipulate the stock prices. He had bought good stakes in the GTBank. This was a part of Ketan Parekh’s plan. He started arranging funds for himself with the help of GTB employees. On the other hand, Madhavpura Mercantile Cooperative Bank played a very big role in this entire scam. Some officers of MMCB helped Ketan Parekh in every possible way. And with their help, he managed to avail big loans from that bank. According to the guidelines of RBI, the bank was not supposed to give loan to a stockbroker more than 15 crore rupees, despite the fact, MMCB sanctioned him a loan of around 800 crore rupees. Global Trust bank also sanctioned him a loan of more than 100 crore rupees.MMCB broke the rule of RBI and issued funds to Parekh without a proper Collateral.

The way Harshad Mehta used Ready Forward Deal to arrange funds, same way Ketan Parekh used the Payment Order to arrange funds and took help from MMCB. Pay order is like a Demand draft in which before you take the pay order, the bank which is supposed to issue you the order has to pay the amount. MMCB used to issue pay orders in the name of Ketan Parekh’s companies. Parekh also had a Current Account in the Bank of India. ( Stock Exchange Branch) Bank of India’s stock Exchange branch was quite big which used to deal in big transactions. And for Quick payments, Ketan Parekh used to take money from MMCB and deposit it in the Bank of India for receiving money. That time, the Bank of India used to charge interest of 18.5% while issuing pay orders.

In the year 2001, MMCB had issued pay orders to Parekh’s company of Rs 137 crore. Parekh’s company had given these pay orders to the Bank of India’s Stock Exchange Branch. Then the bank had sent these pay orders for clearing. In this way, the bank used to get the money from the Pay order bank. Normally within 3 days, if pay order return isn't used to come to a clearing, then it is assumed that pay order has been cleared. But RBI had sent back these pay orders to Bank of India after 11-12 days. But Bank of India had already transferred the amount to the companies of Ketan Parekh. No one thought RBI would do this. This came as a surprise to some Big Bankers also. These payment orders were bounced because MMCB didn't participate in clearing, also they didn’t have sufficient funds. Then RBI declared MMCB as a defaulter and Bank of India suffered a loss of 137 crores. Bank of India asked Ketan Parekh to return their money. Then Ketan Parekh returned only 7 crores and refused to return the remaining 137 crores.

How the Ketan Parekh scam was Unfolded?

Then Bank of India accused him of 137 crore rupees and filed a complaint. After this CBI arrested Ketan Parekh and this entire scam unfolded. 

Just like the Harshad Mehta scam, Sucheta Dalal played a vital role in exposing the Ketan Parekh scam as well. Due to MMCB’s actions, their depositors suffered huge losses. After being declared defaulter, they had not returned the money of a lot of depositors. Later in the year 2012, RBI cancelled the license of MMCB. For his stock manipulation, Ketan Parekh made a network of 20-25 companies. The money that he got from his banks & promoters, he used to send it to one of his companies. Then this money used to get transferred to some other company. The money that he got from Bank of India, he instantly transferred that money to one of his companies and used that money in stock markets. This moved helped him in hiding all his inappropriate ways of collecting money from various sources illegally. He also used his trading to take loans from banks and for Circular Trading.

When Dot-com-Bub started bursting, that time the entire world was witnessing a slowdown in the Technology stocks. Then in March 2001, some Traders and brokers started selling K-10 stocks which were overvalued because of the rising prices. Started short selling them, due to which Markets were facing losses. Than Retail Investors and Institutional investors also started selling their shares. The stocks on which Parekh holds a big position started falling continuously.

Once Institutional Investors, Retail Investors and short-sellers were selling shares, Ketan Parekh was still struggling to save the overvalued stocks. But Parekh couldn't manage to fight with the market for long. When the prices of the stocks started falling, then Parekh started facing difficulties in raising funds from the banks. Though he did try to fight with the markets by arranging some funds, he failed. Then Parekh’s Pay order matter came into light, and the scam was exposed. The stocks that Pareskh bought, and the prices of those stocks got high in a short span of time,  they started declining heavily when the scam was exposed. Global Telesystems dropped from 3100 to 120. HFCL dropped from 2300 to 120. Similarly, the remaining stocks also suffered losses.

People who invested in K-10 stocks suffered major losses. After the Stock Market Scam came into light, MMCB and GTB also faced losses.

After this scam, Ketan Parekh was barred from trading till 2017. Despite this, SEBI found out in the year 2009, that Ketan Parekh was trying to indulge in some trading with some companies and he is active in the market. Calcutta Stock Exchange suffered a Payment Crisis because of Ketan Parekh, because of which they suffered a loss of around 100 crores. Parekh was sentenced to rigorous imprisonment in the year March 2014.

Ketan Parekh’s name came into light after the 2001 scam. We must tell you that Ketan Parekh’s name was also involved in the 1992 Canfina Mutual Fund due to which he spent 1 year in jail. During this scam, Parekh had sent around 2000-3000 crore rupees overseas with the help of Overseas Corporate body. CBI had seized his Swiss Banks accounts also. Not only in Swiss Banks, but he also used to send money in different banks all around the world. He shared good terms with the politicians of the country which benefited him a lot. He still has got a lot of cases against him in the court.

This is how the Biggest Stock Market frauds in India came into light and rocked the entire nation. If you dream to become an Investor or Stock Market broker then we suggest you pick the right path, take guidance from people like Warren Buffett, Radhakishan Damani. Sometimes people choose the short-cuts in life to gain fame easily. But remember, there is no ladder to success, you’ll have to follow each and every step of Hard-work and dedication.

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author

Madhulika