KETAN PAREKH SCAM

HISTORY OF THE 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 protégé 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.

Ketan Parekh, a trainee of Harshad Mehta from Mumbai was a former stock broker who was
declared to be guilty of a criminal offence by the verdict of the jury for he played a major
manipulative role in the Indian Stock market scam which took place between1999-2001.
However now he has been barred from trading in the Indian stock exchange till 2017. Ketan
Parekh is claimed to have complicated himself in the circular trading for a prolonged period
of time with a number of companies including Global Trust Bank and Madhavpura
Mercantile Cooperative Bank. Ketan Parekh was found guilty by the court and was sentenced
to imprisonment for a period of one year because of a transaction which was due by him
involving a unit of Canara Bank in 1992. The Securities and Exchange Board of India were
able to identify that though Ketan Parekh was barred from entering the stock market for
trading there were supposed to be a number of companies who were trading on behalf of
Parekh.

KETAN PAREKH’S 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 90’s and early
2000’s 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 Mehta’s 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 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 ILLEGALITIES

The problem with Ketan Parekh’s dealings was two-fold:

1. 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.
2. 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.
THE FALLOUT

Ketan Parekh also conducted majority of his trading’s 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 Rs 2000 crores ($4 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.

CENTRAL BUREAU OF INVESTIGATION COURT IN MUMBAI

With such findings after the investigation nearly 26 entities were banned from trading.
However, in March 2014 Ketan Parekh was proved guilty and was convicted by a special
Central Bureau of Investigation Court in Mumbai, India for his cheating and based on
criminal grounds was sentenced to two years of rigorous imprisonment with total fine of Rs.
50,000. During its investigation the CBI had also sent some Letters Rogatory to different
countries where the agency has prima facie found that the big bull Ketan Parekh has siphoned
off the money allegedly acquired through the multi-crores Madhavpura Mercantile Co-
operative Bank scam. Some of the top positioned CBI officials declared that Ketan parekh
has not only siphoned off money in Swiss Bank but also in different banks in various other
countries. The CBI has already sent a Letter Rogatory to Switzerland authorities who were
examine the request by India seeking details of the bank account of Parekh.
INTERPOL FOR AN INTERNATIONAL PROBE

The account, allegedly containing millions of Swiss Francs, had been frozen by the Swiss
authorities after the CBI made a request to the Interpol for an international probe into the
alleged siphoning off of money from India, the sources said. However the agencies which
were probing on the Ketan Parekh’s scam denied disclosing the names of the banks and the
different countries where Parekh was suspected to have siphoned off his money. The sources
were very clear on one fact that Ketan Parekh had routed a considerable amount to his
overseas accounts from the bank. The sources were very clear on one fact that Ketan Parekh
had routed a considerable amount to his overseas accounts from the bank. Some of the major
firms which have been precluded from the securities market include Maruti Securities Ltd
(MSL), Kundan Leasing & Finance Pvt Ltd, Chnadra Financial Services Pvt Ltd, Jay
Investrade Pvt Ltd and HSM Financial Services Ltd. These entities allegedly executed
synchronized trade in five scripts, which includes Cals Refineries Ltd, Confidence Petroleum
India Ltd, Bang Overseas Ltd, Shree Precoated Steels Ltd (SPSL) and Temptation Foods Ltd
(TFL).

INVESTIGATION

All the above mentioned entities were performing as a channel for Ketan parekh and
executing synchronized deals in five scripts over a period of 26 months from Jan 2007 to Feb
2009. During the investigation done by SEBI it was noted that in all the trade that was done
the buying and selling order quantities and order rates remained the same and also matched
exactly with the time difference which was less than 60 seconds and also in all trades the
concerned clients were appearing simultaneously on account of their dealing in the scripts of
Confidence Petroleum and Bang Overseas Ltd. However, they incurred huge losses of Rs
3.68 crores, Rs 7.64 crores and Rs 4.68 crores respectively while dealing in the scripts of Cals
Refineries, SPSL and TFL. But in spite of the loss there were non-profitable transactions
which were made clear which very clearly indicated that there was a substitute pay off which
was happening outside the securities market.

SECURITIES AND EXCHANGE BOARD OF INDIA

Ketan Parekh one of the major stock broker in the share market was identified to be the sole
person responsible for the 2001 scam which happened in the entire stock market. This
happened during the month of March in 2001 and was initially discovered by the Joint
Parliamentary Committee. Ketan Parekh was held responsible for the collapse in the
Madhavpura Mercantile Co-operative Bank and also for the payment problem which was a
big issue then in the Calcutta Stock Exchange market. The Joint parliamentary Committee
had drafted a report which stated that Ketan Parekh was operating from a various ultimate
use. Ketan Parekh has planned in such a way that he conveniently designed different layers in
the process of his transactions which further led to complication so as to think the source of
fund with the actual user of fund.

REPORT SUBMITTED BY SECURITIES AND EXCHANGE BOARD

OF INDIA

After a thorough investigation a report was submitted by the SEBI on Ketan Parekh scam
which let out the news that the amount outstanding from Ketan Parekh to a few corporate
houses in the year 2001 towards the end of April 2001 was about Rs 1,273 crore (Rs 12.73
billion) Ketan Parekh also had an outstanding of Rs 888 crores (Rs 8.88 billion) to MMCB
and to Global Trust Bank it was about to be got from Ketan Parekh according to the
investigating report submitted by the SEBI. It was also revealed that Ketan Parekh using his
rapport with political heads and religious leaders was able to hook up lot of funds from
corporates and banks which had gone to three major groups on the CSE and had been utilized
in different operations of the capital market.

FOREIGN INSTITUTIONAL INVESTORS

It also added to the report that the grounds of CSE was mainly opted by Ketan Parekh so as to
make use or exploit the known weakness of the exchange. Ketan Parekh’s success in this
scam involved a vast networking of a number of overseas corporate bodies, foreign
institutional investors’ sub-account and mutual funds for large money transactions. The most
shocking part of the scam was how both the stock exchange and the SEBI kept themselves
unaware of the happenings of Ketan Parekh manipulative work in the stock market using his
sound and well-built network. It stands quite ambiguous from the media platform. But
however Ketan Parekh at the time of giving his oral evidence to the Joint Parliamentary
Committee had clearly owned hat he was responsible and was highly involved in the crisis of
the CSE payment and also the crash of MMCB which took place in March. Also, Ketan
Parekh added and admitted to the evidence given to the investigation team that he used select
scripts and made it possible to build huge positions in the stock market and thereby he crosses
the limits and the principles of risk management.

FINDINGS OF SECURITIES AND EXCAHNGE BOARD OF INDIA

The findings of SEBI on the investigation of Ketan Parekh scam was further authenticated by
his oral evidence to the Joint Parliamentary Committee. The JPC noted that SEBI has since
taken action to cancel the registration of Triumph International, which was assosciated with
Ketan Parekh. Once the findings were clear, the JPC persistently persuaded SEBI to wind up
its investigation in an efficient manner and file charge sheets and take immediate actions
against on the violations based on various grounds by Ketan Parekh and his various
establishments which were involved in the scam. Ketan Parekh was also filed a charge sheet
for criminal action which is stated to be under scrutiny. The Government was advocated by
JPC to take all required suitable punishment is awarded to him without delay.