1 | P a g e

WHO IS KETAN PAREKH?

"All my lifetime's savings are gone. I don't know how to feed my family."
- A small investor hit by the Ketan Parekh scam, in April 2001.
Ketan Parekh [KP] was a chartered accountant by profession and used to manage a family
business, NH Securities started by his father. Known for maintaining a low profile, KP's only
dubious claim to fame was in 1992, when he was accused in the stock exchange scam. He
was known as the 'Bombay Bull' and had connections with movie stars, politicians and even
leading international entrepreneurs like Australian media tycoon Kerry Packer, who
partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in
new economy companies. Over the years, KP built a network of companies, mainly in
Mumbai, involved in stock market operations.
The rise of ICE (Information, Communications, and Entertainment) stocks all over the world
in early 1999 led to a rise of the Indian stock markets as well. The dotcom boom contributed
to the Bull Run led by an upward trend in the NASDAQ.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 KP 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.
2 | P a g e


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. The buoyant stock markets from
January to July 1999 helped the K-10 stocks increase in value substantially (Refer Exhibit I
for BSE Index movements). 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 (Refer Exhibit II for the price
movements of K-10 stocks). 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.
[1] When the interest rates were freed in mid-1989, it made the price of both bonds and
money more volatile, and increased the link between the securities and money markets.
With price volatility and increased volumes, securities broking became a profitable activity.
The rising volumes were funded by banks through bank receipts (BR is a document issued by
a bank acknowledging that it has sold certain government securities to a party and received
payment). The scam came to light when RBI asked the SBI to show the bank receipts, and it
was found that Rs 6.22 billion not been reconciled and was untraceable. The money involved
in the scam was eventually ascertained to be well over Rs 30 billion.
3 | P a g e

[2] The e-commerce revolution had led to a massive upsurge in the value of technology
stocks across the globe, especially Internet ventures. This came to be known as the dotcom
boom.
[3] A bull run is an uptrend in the stock markets caused by the rise in the price of shares,
sustained by buying pressure of actual investors or news of favorable economic growth,
decontrol and political developments.
[4] The National Association of Securities Dealers Automated Quotation System
(NASDAQ) is a US-based stock exchange, which comprises largely of technology stocks.
Started in 1971, NASDAQ is the first screen-based, floor less trading system and the second
largest stock market in the US.
[5] In September 2002, Rs 48 equaled 1 US $ Thus, he was the man who triggered the cash.

As per market information, though he was a big broker, he didnt have sufficient 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 PritishNandy 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.
4 | P a g e

This could not have been possible out without the involvement of banks. A small
Ahmadabad-based bank, NMCB (name changed) was KPs main ally in the scam. KP and his
associates started tapping the MMCB for funds in early 2000. In December 2000, when KP
had to face some liquidity issues in settlements he used NMCB in two different ways. 1st
was the pay order route, wherein KP issued cheques drawn on BoI to NMCB, against which
NMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that NMCB
issued funds to KP without proper collateral security and even crossed its capital market
exposure limits. As per a RBI inspection report, NMCBs loans to stock markets were around
Rs 10 billion of which over Rs 8 billion were lent to KP and his firms.
The second route was borrowing from a NMCB branch at Mandvi (Mumbai), where different
companies owned by KP and his associates had accounts. KP used around 16 such accounts,
either directly or through other broker firms, to obtain funds. Apart from direct borrowings
by KP-owned finance companies, a few brokers were also believed to have taken loans on his
behalf
The NMCB pay order issue hit several public sector banks very hard that included big names
all of whom lost huge amounts in the scam. It was also alleged that Global Trust Bank (GTB)
issued loans to KP and its exposure to the capital markets was above the prescribed limits.
According to media reports, KP and his associates held around 4-10% stake in the bank.
There were also allegations that KP, with the support of GTBs former CMD Ramesh Gelli,
rigged the prices of the GTB scrip for a favorable swap ratio before its proposed merger with
UTI Bank. KPs modus operandi of raising funds by offering shares as collateral security to
5 | P a g e

the banks worked well as long as the share prices were rising, but it reversed when the
markets started crashing in March 2000.








Chapter 2
What are his stocks?
He picks out-of-favour stocks that are expected to grow rapidly. These are also companies
that investors think lowly of or have doubts about the business, accounting standards and
management. He was the first to see the software boom spreading over to second-rung
software companies in 1998. His first killing came in Pent four which had been consciously
6 | P a g e

avoided by most institutional investors. Parekh came and sold them a solid growth story and
the rest is history.
Ranbaxy had moved in a narrow trading range for five years. There were pending warrant
conversions and institutional investors feared that the management came and sold at higher
levels. Parekh spotted the change in management and the company's new drug discovery
system becoming successful. He sold this story again and reaped a rich harvest.
Global, Himachal and DSQ Software will not fit in the universe of an institutional investor,
but for Parikhs presence. The country's largest mutual fund, UTI's Unit Scheme-64, had
Himachal Futuristic (1.48 per cent of the portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35
per cent) and Global Tele-Systems (1.05 per cent) on September 30, 1999.
Parekh is also one of the few brokers who understands the power of online trading. Most
operators work through a large team of trusted dealers and jobbers. (Word should not spread
that he is buying or he would not be able to acquire enough shares.) An operator would also
need to indulge in buy and sell orders so that his dealers remain quite confused on whether he
is in or getting out.
Every big broker has enough enemies. These are the people he has crossed or the people who
crossed him on his way to the top. Alleges one of his adversaries, "Most of these rumours are
spread by the KP gang so that they get to smash prices, enter at lower levels and then pull the
market up."
Does he always succeed? There are two ways of judging this. One is the level that a stock
reaches and then declines. BPL is a good example. The stock went to Rs 600 levels; it is
7 | P a g e

currently at Rs 270 levels. That has happened in many companies. The other is of a stock just
not moving up after he buys it -- that happened in MTNL some time ago when it would find
some new seller to stanch the stock's rise. This is an aberration when you compare stocks like
Aftek, Himachal, Global, Zee and Pent four which are on a continuous upswing and an
investor getting in at any point will be in the money.
KP travels a lot and meets company managements regularly. He likes buying a substantial
stake in relatively smaller companies by a private placement (like in Aftek) and then waits
for other players to catch his fancy. He has also bought a stake in many unlisted companies.
As is the way of the world today, he is building a nice portfolio of Internet start-ups too.
He is big for the market and getting bigger. But investors and speculators are not
complaining. Nor are institutional investors and the government unhappy. The current level
of the Sensex and the hope in every eye near an online terminal of ten-baggers are this man's
doing, at least to some extent.


CHAPTER-3
HOW KETAN PAREKH SCAM WAS REVEALED?
The Intelligence Bureau has unearthed a major stock market scam involving big players such
as rogue stockbroker Ketan Parekh (KP), ostensibly banned from trading on the bourses till
8 | P a g e

2017 by securities market regulator SEBI. The damaging IB report, submitted to the topmost
echelons of the government, suggests that KP and his associates are driving up share prices
through the creation of false volumes.
The 'top secret' IB document states that these manipulators are brazenly continuing "their
illegal activities using circular trading, insider trading and use of front entities to rig up
prices". Apart from KP and his cartel, some of the stock market players whose names figure
in the IB report are Piyush Sampath and Raju Shah.
According to it, the manipulating cartels have been using illegal means to buy shares so that
the prices rise in the run-up to an IPO or a qualified institutional placement (QIP). These
cartels have bought select shares in volumes that range from lakhs to millions on a single
day, causing the stock prices to shoot up despite the bearish trend in stock markets.
The shares are offloaded after the QIP or IPO is over and this leads to a sharp fall in the
prices of the stock. The IB document also reveals that the cartels claim to have been in touch
with a senior LIC official and some insurance companies to sell the shares to these cash-rich
entities. It is intriguing that if the IB has so much evidence against these manipulators, why
the SEBI is not actively cutting off their trading lifelines.
The extent of the involvement of manipulators as detailed by the damning IB report shows
that rogue brokers such as KP are hyperactive despite having been banned. In the past, too,
the IB has spotlighted broking cartels led by KP being active. The report lists seven
companies involved in the illegal manipulation, including Dewan Housing Finance
Corporation Limited (DHFCL), Goenka Diamond and Jewels Limited, Orchid Chemicals and
Pharmaceuticals Limited (OCPL), IVRCL Limited, Pantaloon Retail (India) Limited,
Tribhovandas Bhimji Zaveri IPO and GMR Infrastructure Limited.
9 | P a g e

According to the report, one of the
manipulators claimed that he had been
asked to place the shares of a
company with insurance firms for
which the promoter was willing to
give 7.5 per cent of the amount as
placement fee. The highly confidential
report further states that during
February-March 2012, DHFCL had raised over Rs.300 crore through a QIP. The KP cartel
played a crucial role in making the QIP a success as its members bought large stakes during
the issue. After the QIP, during March 2012, KP and his associates had accumulated around
1 million shares in order to keep the share price above Rs.240.
In the case of another firm - KS Oils Limited - the report states that in the last week of
March, the company's board of directors approved the allotment of 33.77 million equity
shares to qualified institutional buyers at an issue price Rs.7.25 per share. KP roped in
Singapore-based associate Akshay Natra to participate in the QIP issue for which the latter is
reported to have asked for 15 per cent commission of his total investment along with the
funds to sink in the QIP, the report discloses. On April 13, Natra bought 1.5 million shares at
the issue price of Rs.7.5 per share. Several other KP cartel members also participated in the
QIP. On April 15, KP intended to buy 30 million shares of KS Oils and asked Ashok (a
broker) to make place for the parking shares, the report adds.
10 | P a g e

According to the IB findings, the
shares of Goenka Diamond rose by 47
per cent in April from Rs.79 toRs.116.
During this period, the KP cartel
continued to be active in the counter
to accumulate a large volume of
shares. The IB report states that KP
was also active in propping up the
share price of Chennai based OCPL. On April 25, he bought 200,000 shares of the company
in the F&O segment at an average price of Rs.184 a share. By the end, KP claimed to have
gathered about 2.5 million shares of the pharma firm. KP and Natra entered into several
synchronized trades and mutual trades during April in which they bought and sold Nifty
stocks between themselves, leading to a profit of over Rs.1 crore, the document points out.
The duo had also shorted 18,000 Bank Nifty during the early part of the month out of which
they eventually covered 8,000 Bank Nifty. The IB has also found that market player Sampath
had received insider information that the results of LIC Housing were expected to be poor
and the non-performing assets (NPAs) of the company were on the rise. On the basis of this
information, Sampath and his associates shorted the scrip at an average price of Rs.158.
Consequently, the share price fell to Rs.150. The IB has noted that Sampath claimed to have
received insider information on April 19 that a Mumbai based Jewellery Company would be
entering the market with an IPO to be issued in the price band of Rs.120-Rs.130.
Reacting to the information, Sampath advised several of his associates to go short on the
counter as the issue was highly overpriced. Sampath opined that the issue was worth a
11 | P a g e

premium of Rs.40-Rs.50 only on a face value of Rs.10. Then there is the case of Kiri
Industries. Its share price witnessed a fall of about 40 per cent as it fell from Rs.102 to Rs.63.
Shah claimed that the share price of Kiri Dyes fell sharply owing to offloading by a big bear
who had accumulated a large chunk of shares during its QIP. Shah also claimed that he
intended to raise the share price to new highs by creating large volumes in the counter.
Similarly, there is evidence of Shah's active involvement in other counters such as Gokul
Refoil & Solvent, Sanghvi Forging & Engineering and a top-of-the line jewellery company
IPO.
According to it, the manipulating cartels have been using illegal means to buy shares so that
the prices rise in the run-up to an IPO or a qualified institutional placement (QIP). These
cartels have bought select shares in volumes that range from lakhs to millions on a single
day, causing the stock prices to shoot up despite the bearish trend in stock markets.





Chapter 4
SEBI Discovers Ketan Parekh:-
DIFFERENT STROKES
12 | P a g e


On 5th June, the Securities and Exchange Board of India (SEBI) banned 26 entities
connected with Ketan Parekh who had traded in five scrips (Cals Refineries, Confidence
Petroleum India, Bang Overseas, Shree Precoated Steels and Temptation Foods). In doing so,
the regulator officially declared what was well known to the market which Ketan Parekh
has been active in the market and in manipulating the prices of small and medium scrips,
despite the 14-year ban imposed on him and his associates in 2003. In fact, he was rumored
to be active even in 2003 when SEBI first barred him from the market following the Joint
Parliamentary Committee (JPC) report that named him as the central figure in the scam of
2000.

Evidence of Ketan Parekhs massive market activities was his ability to pay back well over
Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which
had collapsed and caused thousands of depositors to lose money when he siphoned off Rs880
crore to fund his market shenanigans in 1999-2000. Ketan Parekh negotiated bail terms
where he was set free on the condition that he would repay his dues to the bank in
instalments. Ever since, revenue agencies and SEBI have studiously looked the other way
and allowed him to earn and pay by manipulating the market for over six years.

Naturally, all those who aided Ketan Parekh (SEBI has now discovered that Shirish Maniar,
his cohort in the MCCB scam continues to operate for Parekh through his sons) have been
led to believe that he has bargained for immunity from regulatory action and investigation.
13 | P a g e

On 19 November 2006, I mentioned in an Indian Express column how a senior income tax
(IT) official had told me that the money was paid through a maze of entities with a cash
deposit in a bank account as the end point. I also said that the serious frauds investigation
office operating under the ministry of corporate affairs claimed to have investigated 16
corporate entities associated with Parekh, but no action was taken. In May 2007, I again
wrote that the Custodian (appointed after the 1992 scam) moved the Bombay High Court for
the first time to ask for the source of Ketan Parekhs self-admitted Rs72.2 crore repayment to
MCCB between 2002 and 2005. Even that drew a blank. Finally, in June 2009, we have a
SEBI report that acknowledges what was common knowledge in the market, namely:
That a set of brokers colluded to build up massive fictitious volumes aimed at creating
layers of transactions and obfuscating trails. In fact, Money life has repeatedly observed that
a big jump in volumes (not necessarily accompanied by an immediate price rise) is the first
signal that a particular stock will be ramped up and manipulated. The irony is that some
scamsters have got away by arguing (supported by academics) that such large volumes
cannot be fictitiously generated and that market manipulation is impossible when there are
huge trading volumes. Hopefully, SEBIs findings will silence such motivated academics
who have had a huge influence on framing market regulation.

That synchronized trades are part of the pump, dump and obfuscation game played by
speculators and used to route money into the market, from related entities and possibly for
money laundering.
14 | P a g e

That off-market transactions need to be monitored, since they are part of the slew of tricks
used to obfuscate the trail from persons and entities barred by the regulator or market
manipulators. Only the regulator has a market-wide snapshot of operations across bourses,
including off-market transactions and synchronized trades through the integrated market
surveillance system (IMSS).
How has SEBI come to the conclusion that Ketan Parekh conveniently used connected
clients at will as his front entities for executing trades desired by him in the securities
market? According to SEBI, the starting point was routine market surveillance (which was
apparently not happening for the past eight years!) that revealed synchronized trades in five
scrips. It also had information from the IT department on Ketan Parekhs source of funds
which trailed back to certain entities.
SEBIs investigation showed that these entities built up large volumes in the five scrips
chosen for investigation; strangely enough, they often made losses on their transactions, but
continued to trade. SEBI has surmised that these deliberately incurred losses have an ulterior
motive that needs to be separately investigated by the appropriate agency. It seems to have
referred concerns relating to money laundering to the enforcement and IT sleuths.


SEBI also found that the connected entities or fronts used by Ketan Parekh for his
transactions (many of them linked to the sons of Shirish Maniar) often sold shares without
having them in their possession. They subsequently obtained the shares in time for delivery
15 | P a g e

through off-market transactions through other connected entities within the circle of
operators.
Clearly, the modus operandi of Ketan Parekh and his cohorts is not unique. It is used by
manipulators of various hues as is evident from the large number of synchronised trades and
off-market transactions that take place with regularity. In fact, the market grapevine says that
some operators have developed an automated system to keep track of the hundreds of entities
and bank accounts that are created to generate millions of transactions to obfuscate price
manipulation. The system, they say, draws up a matrix for the movement of funds and shares
into bank and demats accounts spread across the country in order to avoid detection of
ultimate beneficiaries or masterminds. If true, the manipulators are several jumps ahead of
the regulator by figuring out how to beat market intelligence, surveillance alerts and
know your customer norms and the alleged transparency of a fully automated trading
system, to manipulate prices at will and enjoy the profits without detection.





Chapter 5
THE CRASH THAT SHOOK THE NATION
16 | P a g e

The 176-point Sensex crash on March 1, 2001 came as a major shock for the Government of
India, the stock markets and the investors alike. More so, as the Union budget tabled a day
earlier had been acclaimed for its growth initiatives and had prompted a 177-point increase in
the Sensex. This sudden crash in the stock markets prompted the Securities Exchange Board
of India (SEBI) to launch immediate investigations into the volatility of stock markets. SEBI
also decided to inspect the books of several brokers who were suspected of triggering the
crash.
Meanwhile, the Reserve Bank of India (RBI) ordered some banks to furnish data related to
their capital market exposure. This was after media reports appeared regarding a private
sector bank having exceeded its prudential norms of capital exposure, thereby contributing to
the stock market volatility. The panic runs on the bourses continued and the Bombay Stock
Exchange (BSE) President Anand Rathi's (Rathi) resignation added to the downfall. Rathi
had to resign following allegations that he had used some privileged information, which
contributed to the crash. The scam shook the investor's confidence in the overall functioning
of the stock markets. By the end of March 2001, at least eight people were reported to have
committed suicide and hundreds of investors were driven to the brink of bankruptcy.
The scam opened up the debate over banks funding capital market operations and lending
funds against collateral security. It also raised questions about the validity of dual control of
co-operative banks. (Analysts pointed out that RBI was inspecting the accounts once in two
years, which created ample scope for violation of rules.)
The first arrest in the scam was of the noted bull Ketan Parekh (KP), on March 30, 2001, by
the Central Bureau of Investigation (CBI). Soon, reports abounded as to how KP had singled
17 | P a g e

handedly caused one of the biggest scams in the history of Indian financial markets. He was
charged with defrauding Bank of India (BoI) of about $30 million among other charges.
KP's arrest was followed by yet another panic run on the bourses and the Sensex fell by 147
points. By this time, the scam had become the 'talk of the nation,' with intensive media
coverage and unprecedented public outcry.
[1] A change of Re. 1 in the price of a share when one speaks of a share rising or falling by
so many points. In stock market indices, however, a point is one unit of the composite
weighted average on market capitalization of rupee values.
[2] A stock market index indicating weighted average of 30 scrips, also known as the BSE
Sensitive Index. The daily closing figure of this index broadly reflects the performance of the
capital markets.
[3] It was alleged that Global Trust Bank exceeded its Capital market exposure.
[4] Co-operative banks are under the dual control of RBI and the Registrar of Cooperative
Societies. The RBI regulates banking functions while the registrar looks after the managerial
and administrative functions.
[5] An investor who expects share prices to go up and hence buys them.
According to market sources, though Ketan Parekh [KP] was a successful broker, he did not
have the money to buy large stakes. According to a report [1] 12 lakh shares of Global in
July 1999 would have cost KP around Rs 200 million. The stake in Aftek Infosys would have
cost him Rs 50 million, while the Zee and HFCL stakes would have cost Rs 250 million
each. Analysts claimed that KP borrowed from various companies and banks for this
18 | P a g e

purpose. His financing methods were fairly simple. He bought shares when they were trading
at low prices and saw the prices go up in the bull market while continuously trading. When
the price was high enough, he pledged the shares with banks as collateral for funds. He also
borrowed from companies like HFCL.
This could not have been possible out without the involvement of banks. A small
Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP's
main ally in the scam. KP and his associates started tapping the MMCB for funds in early
2000. In December 2000, when KP faced liquidity problems in settlements he used MMCB
in two different ways. First was the pay order route, wherein KP issued cheques drawn on
BoI to MMCB, against which MMCB issued pay orders. The pay orders were discounted at
BoI. It was alleged that MMCB issued funds to KP without proper collateral security and
even crossed its capital market exposure limits. As per a RBI inspection report, MMCB's
loans to stock markets were around Rs 10 billion of which over Rs 8 billion were lent to KP
and his firms
The second route was borrowing from a MMCB branch at Mandvi (Mumbai), where
different companies owned by KP and his associates had accounts. KP used around 16 such
accounts, either directly or through other broker firms, to obtain funds. Apart from direct
borrowings by KP-owned finance companies, a few brokers were also believed to have taken
loans on his behalf. It was alleged that Madhur Capital, a company run by Vinit Parikh, the
son of MMCB Chairman Ramesh Parikh, had acted on behalf of KP to borrow funds. KP
reportedly used his BoI accounts to discount 248 pay orders worth about Rs 24 billion
between January and March 2001. BoI's losses eventually amounted to well above Rs 1.2
billion.
19 | P a g e

The MMCB pay order issue hit several public sector banks very hard. These included big
names such as the State Bank of India, Bank of India and the Punjab National Bank, all of
whom lost huge amounts in the scam. It was also alleged that Global Trust Bank
(GTB) issued loans to KP and its exposure to the capital markets was above the prescribed
limits. According to media reports, KP and his associates held around 4-10% stake in the
bank. There were also allegations that KP, with the support of GTB's former
CMD Ramesh Gelli, rigged the prices of the GTB scrip for a favorable swap ratio before its
proposed merger with UTI Bank.
KP's modus operandi of raising funds by offering shares as collateral security to the banks
worked well as long as the share prices were rising, but it reversed when the markets started
crashing in March 2000. The crash, which was led by a fall in the NASDAQ, saw the K-10
stocks also declining. KP was asked to either pledge more shares as collateral or return some
of the borrowed money. In either case, it put pressure on his financials. By April 2000,
mutual funds substantially reduced their exposure in the K-10 stocks. In the next two months,
while the Sensex declined by 23% and the NASDAQ by 35.9%, the K-10 stocks declined by
an alarming 67%.
However, with improvements in the global technology stock markets, the K-10 stocks began
picking up again in May 2000. HFCL nearly doubled from Rs 790 to Rs 1,353 by July 2000,
while Global shot up to Rs 1,153. Aftek Infosys was also trading at above Rs 1000.
In December 2000, the NASDAQ crashed again and technology stocks took the hardest
beating ever in the US. Led by doubts regarding the future of technology stocks, prices
started falling across the globe and mutual funds and brokers began selling them. KP began
20 | P a g e

to have liquidity problems and lost a lot of money during that period It was alleged that 'bear
hammering' of KP's stocks eventually led to payment problems in the markets. The Calcutta
Stock Exchange's (CSE) payment crisis was one of the biggest setbacks for KP. The CSE
was critical for KP's operation due to three reasons. One, the lack of regulations and
surveillance on the bourse allowed a highly illegal and volatile badla business (Refer Exhibit
III). Two, the exchange had the third-highest volumes in the country after NSE and BSE.
Three, CSE helped KP to cover his operations from his rivals in Mumbai. Brokers at CSE
used to buy shares at KP's behest. Though officially the scrips were in the brokers' names,
unofficially KP held them. KP used to cover any losses that occurred due to price shortfall of
the scrips and paid a 2.5% weekly interest to the brokers.
By February 2001, the scrips held by KP's brokers at CSE were reduced to an estimated Rs
6-7 billion from their initial worth of Rs 12 billion. The situation worsened as KP's badla
payments of Rs 5-6 billion were not honored on time for the settlement and about 70 CSE
brokers, including the top three brokers of the CSE (Dinesh Singhania, Sanjay Khemani and
AshokPodar) defaulted on their payments. By mid-March, the value of stocks held by CSE
brokers went down further to around Rs 2.5-3 billion. The CSE brokers started pressurizing
KP for payments. KP again turned to MMCB to get loans.
The outflow of funds from MMCB had increased considerably form January 2001. Also,
while the earlier loans to KP were against proper collateral and with adequate documentation,
it was alleged that this time KP was allowed to borrow without any security.
By now, SEBI was implementing several measures to control the damage. An additional 10%
deposit margin was imposed on outstanding net sales in the stock markets. Also, the limit for
21 | P a g e

application of the additional volatility margins was lowered from 80% to 60%. To revive the
markets, SEBI imposed restriction on short sales and ordered that the sale of shares had to be
followed by deliveries. It suspended all the broker member directors of BSE's governing
board. SEBI also banned trading by all stock exchange presidents, vice-presidents and
treasurers. A historical decision to ban the badla system in the country was taken, effective
from July 2001, and a rolling settlement system for 200 Group Ashares was introduced on
the BSE.











Chapter 6
THE SYSTEM THAT BRED THESE FACTORS:-
22 | P a g e

The small investors who lost their life's savings felt that all parties in the functioning of the
market were responsible for the scams. They opined that the broker-banker-promoter nexus,
which was deemed to have the acceptance of the SEBI itself, was the main reason for the
scams in the Indian stock markets.
TSEBI's measures were widely 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 certain shares over an 18-month period prior to
February 2001. Analysts also opined that SEBI's market intelligence was very poor.
Media reports commented that KP's arrest was also not due to the SEBI's timely action but
the result of complaints by BoI. A market watcher said[1] ,"When prices moved up,
SEBI watched these as 'normal' market movements. It ignored the large positions built upby
some operators. Worse, it asked no questions at all. It had to investigate these things, not as a
regulatory body, but as deep-probing agency that could coordinate with other agencies. Who
will bear the loss its inefficiency has caused?"An equally crucial question was raised by
media regarding SEBI's ignorance of the existence of an unofficial market at the CSE.
Interestingly enough, there were reports that the arrest was motivated by the government's
efforts to diffuse the Tehelka controversy.


Many exchanges were not happy with the decision of banning the badla system as they felt it
would rig the liquidity in the market. Analysts who opposed the ban argued that the ban on
badla without a suitable alternative for all the scrips, which were being moved to rolling
23 | P a g e

settlement, would rig the volatility in the markets. They argued that the lack of finances for
all players in the market would enable the few persons who were able to get funds from the
banking system - including co-operative banks or promoters - to have an undue influence on
the markets.












Chapter 7
THE PEOPLE THAT THE SYSTEM DUPED:-
24 | P a g e

KP was released on bail in May 2001. The duped investors could do nothing knowing that
the legal proceedings would drag on, perhaps for years. Observers opined that in spite of the
corrective measures that were implemented, the KP scam had set back the Indian economy
by at least a year. Reacting to the scam, all KP had to say was, "I made mistakes."
It was widely believed that more than a fraud; KP was an example of the rot that was within
the Indian financial and regulatory systems. Analysts commented that if the regulatory
authorities had been alert, the huge erosion in values could have been avoided or at least
controlled.
After all, Rs 2000 billion is definitely not a small amount - even for a whole nation








Chapter 8
25 | P a g e

Article on Indian Stock Market Scam: The Ketan Parekh scam was an
example of the inherently weak financial, regulatory and legal set up in
India.
Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do share-
brokerage based family. He was involved in the shares scam of the year 2000/01.
The study by SEBI found that the flow of funds originating from Ketan Parekh, when paired
with securities market transactions of connected clients leads to the possibility that these
trades were executed to confuse the funds trail and to integrate the money originating from
the banned stock broker into the system of banking.
Ketans possible involvement was found by SEBI during its investigation into professed
manipulative trading in the scripts of Cals Refineries Limited, Confidence Petroleum India
Limited, Bang Overseas Limited, Shree Precoated Steels Limited and Temptation Foods
Limited.
Earlier, SEBI had Ketan and 17 other entities from participating in the market following a
study into purchase sale and dealing in the shares of companies like HFCL, Zee Telefilms,
Adani Exports, Ranbaxy and Aftek Infosys between October 1999 and March 2001.
In its time order, SEBI banned 26 entities and persons, including Maruti Securities Limited
and asked them to reply in 15 days time. The government had set up the Joint Parliamentary
Committee (JPC) to study the securities scam that hit the stock market during the year 1999-
2001.
26 | P a g e

According to SEBI, the starting point was routine market surveillance that revealed set
trades in five scripts. It also had information from the IT department on Ketan Parekhs
source of funds which trailed back to certain entities.
SEBIs investigation showed that these entities built up large volumes in the five scripts
chosen for investigation; strangely enough, they often made losses on their transactions, but
continued to trade. SEBI has opinion that these independently incurred losses have a
secondary motive that needs to be separately investigated by the appropriate agency. It seems
to have specific concerns relating to money laundering to the enforcement and IT
investigators.
SEBI also found that the connected entities or fronts used by Ketan for his transactions
often sold shares without having them in their possession. They subsequently obtained the
shares in time for delivery through off-market transactions through other connected entities
within the circle of operators.
Evidence of Ketan Parekhs massive market activities was his ability to pay back well over
Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which
had collapsed and caused thousands of depositors to lose money when he pump off Rs880
crore to fund his market misbehavior in the year 1999-2000.
SEBIs team led by Mr. S.Raman (chief general manager) must be congratulated for breaking
this seemingly impenetrable system; but let us recognize that this is only the tip of the market
manipulation. Ketan Parekh is not the only manipulator to use this system; there are plenty of
27 | P a g e

others doing it too. Also, the number of scrips in which Ketan has traded is substantially
higher than the five that were investigated by SEBI.
One of the best kept secrets is the action taken against those involved in the scam of 2000,
which led to large-scale losses, the drop of two banks, MadhavpuraMerc-antile Cooperative
Bank (MMCB) and Global Trust Bank (GTB) and split the giant Unit Trust of India (UTI)
into two, after pushing it to the brink of a collapse.
Whether the BSE directors had used their recourse to price sensitive information or not for
transactions in the market, having had direct access to the data was in direct violation of
SEBI rules, observes Oommen A. Ninan.
When the Sensex crossed the dizzy 5000 mark in October 1999, Bombay Stock Exchange
(BSE) brokers literally took to the terrace of Jeejebhoy Towers and released balloons. The
celebration also marked their bullish sentimentalism and showed lack of market prudence
that what goes up has to come down; that the market is driven by its own dynamics.
The built up position of Mr. Parekh in certain equities known as `K 10, in the normal
circumstances, would not have had any major impact on the market. With the elected
directors, including the BSE president, having had recourse to the price sensitive information
relating to outstanding positions, purchases and sales by leading operators it is to be seen
whether they have used this advantage to depress the prices. The Securities and Exchange
Board of India (SEBI) investigation will reveal it in the next few days.
28 | P a g e

The excitement indicated on Budget day by a sharp rise in the Sensex was rather on the high
side. There is actually nothing much in the Budget to promote savings. On the contrary,
savings have been discouraged by a drop in interest rates.
It is now very doubtful whether demutualization or corporatization of broker-driven
exchanges is the answer. The experience of some of the stock exchanges like the London
Stock Exchange, the Australian Stock Exchange, the NASDAQ, etc. Is to be fully
ascertained. Assuming that the brokers are kept away from the management of stock
exchanges, restarting their role only to their trading rights, what is the guarantee that a new
management will act in an objective manner.
There has been a flow of money from banks to capital market in recent months. Private
sector banks are prominent among them, including the Global Trust Bank (GTB). However, a
reversal of banks exposure to capital market recommended by the RBI-SEBI committee in
September last year is not a solution. What is essential is that the banks should have expertise
in judging the risk of the business as well as the organizational ability to administer such
schemes.
Moreover, the prima facie evidence in price rigging of GTB shares raises doubts over the
regulators surveillance mechanism. The RBI was aware of some unusual price movements
in GTB share prices in November last year itself and the SEBI took another three months to
inform the RBI that it had found evidence of price rigging in GTB share prices. The true
measure of regulatory competence is the ability of the regulators to take quick corrective
action. Further, the GTBs loan to Mr. Parekh without collateral is another issue that raises
questions on the RBIs role as a regulator.
29 | P a g e

CHAPTER-9
CONCLUSION
Ketan Parekh resulted in the stock market getting smashed on January 11, 2000. The Sensex
fell 222 points. Eventually, it turned out to be an income tax survey that found Rs 92 crore
(Rs 920 million) of undisclosed money. Parekh paid an advance tax of Rs 13 crore (Rs 130
million) and all is well; at least for the time being.
This isn't the first time that the Sensex fell on "Parekh rumours". The rumours that have
come and gone have included Parekh in a payment crises (this has happened several times),
various bulls and bears tussles with Parekh and a rumour that rediff.com columnist Sucheta
Dalal was planning to expose a scam in the next day's newspaper. The result is always the
same: the market gets smashed, a panic follows, small operators and day traders are forced to
exit from their positions (they normally exit from long positions at the slightest hint of a
problem), some big operators (who know the truth) buy stocks at bargain prices and
subsequently pull the market up rapidly.
And these are not all of the Parekh rumours. The market loves discussing him. The Sensex
does get linked to Parekh's acquisitions of a jet (false) and a new car (true). Day traders also
monitor Parekh's travel plans and keep a track on his business meetings and holidays abroad.
And, of course, Mumbai's 'Party of the Millennium' was Parekh's bash at Mandwa across the
city's waterfont.

30 | P a g e

Not much is known about the man. But a recluse he isn't. He meets people, including the
press. But there is one cardinal rule: No pictures, please. We suppose he takes the Wall Street
wisdom too seriously -- get your picture on the cover of Business Week or Fortune and the
end is near. And Ketan Parekh obviously doesn't want to retire early.
This chartered accountant by training is a down-to-earth man with an extremely sharp mind.
Ask him how the market is and don't be surprised by a J P Morgan-type answer, "It will
fluctuate." If you know him well, he will give you a tip too. If you are strong-hearted, you
buy the share and forget it for a while. You will see some really wild swings, but in the end
you will make big money.










31 | P a g e

BIBILOGRAPHY
Books

Debasis, Basu; Dalal, Sucheta (1993), The Scam: Who Won, who Lost, who Got
Away, Mumbai: South Asia Books,
Dalal, Sucheta (2000), A. D. Shroff: Titan of Finance and Free Enterprise, New
Delhi: Viking,
Scams and Scandals (2011),The Edward pinnegar.


WEBSITES
www.google.com
www.wikipedia.com