Price Manipulation Behind Ending Saga of Ketan Parekh

Have you heard the story of King Midas? The king who turned everything he touched into gold. When his food turned into gold, he starved to death. It was then he realized his mistake. The story of King Midas teaches a lesson on greed. One who is greedy suffers forever. Conversely, the life of Ketan Parekh also teaches a lesson on greed and the suffering attached to it. No doubt Ketan Parekh had the power of turning the stock he touched into gold just like King Midas. But, greed played its role and led him into a bottomless pit.

So, let’s take you into the life of Ketan Parekh and understand why it changed for the worse.

Brief Opening

Ketan Parekh a Chartered Accountant belonged to the family of brokers. It was during the 90s; he came in close contact with Harshad Mehta and later joined GrowMore investments, a financial services firm operated by Harshad. During the years, Harshad trained Parekh well about the stock market from scratch.

Parekh became the raging bull of the stock market, turning every stock he touched into gold. Over the years, he won the investor's trust by artificially increasing the stock price to tempt investors, overruling fundamentals. In whatever stocks Parekh invested, investors followed suit.

The nuts and bolts of running the scam

Ketan Parekh used two fundamental strategies providing a pillar of support in his financial wrongdoing.

Pump and dump scheme – Ketan Parekh grabbed an established position by purchasing big company's shares in large quantities and injected false, misleading, and exaggerated statements to boost the stock price. The increased stock price lured the investors to invest into the market. After a puff got created, and the share price reached its peak, he sold the stocks, which earned him a lot of money.

On the other hand, when he sold the shares and no longer promoted them, it resulted in falling share prices. By and by, the manipulations and the act of dishonestly promoting the stocks ensured him a great deal of money.

Circular trading – Ketan Parekh an institutional trader artificially increased the stock volume. Volume is the total number of shares traded during a given day. When new trades pop up the volume for the day increases. Parekh bought and sold different shares between his own companies that shoot up stock volume.  Mainly Parekh manipulated ten popular stocks of his company that got recognized as k-10 stocks as in Global Telesystems, Zee Telefilms, HFCL, SilverLine, Satyam Computers, Aftek Infosys, DSQ Software, Ranbaxy, Pentamedia Graphics and Visual Soft. He invested a tidy sum and increased the price of such stocks in the market that ultimately hooked the investors. Following a dot-com boom from 1997 to 2001, technology and telecom equipment provider company’s stocks were on the rise and traded as hot stocks. During this time Parekh manipulated such blazing stocks.

How the scam was scripted?

With an eye towards hyping up the stock price, Parekh set out funds from Promoters, banks and institutional investors. Promoter’s job is to inflate the stock price and generate handsome returns. They sell shares, when they envisage that the stock price has reached its fundamental value. They even use shares as collateral to take loans and when the share price climbs up, promoters borrow more. Therefore, promoters allowed money to Parekh.

Ketan Parekh bought huge stakes of Madhavapura Mercantile Commercial Bank (MMCB) and Global Trust Bank (GTB) to gain the confidence of the bank’s management and get a loan instantly. When the share price moved up, Parekh kept his shares as collateral and took loans from the banks. Thereafter, he used the funds to manipulate the stock prices. Below is the table depicting the increase in the price of companies through price manipulations.

To arrange the pool of funds, Parekh used the Payment Orders which act as the financial tool issued by the banks, on payee’s behalf for carrying out payment transactions in the same city.

MMCB issued roughly 1.3 million pay orders on the name of Parekh’s group of companies. For quick payment, the pay-orders were discounted with Bank of India (BOI) that charged 18.5% interest rate on them. In March 2001 MMCB issued pay orders worth Rs 137 crores to Parekh’s companies, wherein they got forwarded to BOI stock exchange branch of Mumbai by Parekh’s company. Afterwards, BOI sends the pay orders for clearing. Usually, it takes 3 business days for a pay-order to be cleared, but shockingly after roughly 12 days, RBI had returned the pay orders to BOI because MMCB had failed in clearing the pay-orders. All this occurred when BOI had previously transferred the sum of Rs 137 crores to Parekh’s companies.

Consequently, BOI chairman KV Krishnamurthy declared in a Joint Parliamentary Committee that the bank had suffered a loss of Rs 137 crores. The bank asked to return the amount, but Parekh paid mere Rs 7 crores from the total of Rs 137 crores and refused to make further payment. BOI had filed a Fraud case against Ketan Parekh and following this Central Bureau of Investigation in 2001 arrested Parekh, and the scam was exposed. The depositors lost a large sum of money deposited in MMCB as it had failed to return the funds after RBI declared it as a defaulter. Finally, in 2012 RBI had cancelled the license of MMCB and forwarded the matter to the Central Registrar.

Effect on Stock Market

Sensex saw a sharp drop of 176 points on 1st March 2001. Overall, from February to April, the market fell by 28% due to disclosure of scam.

The Upshot

For the first time, Ketan Parekh came up with the 1992 Canfina mutual fund scam where he was accused of drawing-off Rs 47 crores. The court convicted Parekh for cheating, misappropriation of funds and criminal conspiracy. Consequently, the offences led him to one year of imprisonment.

Following the exposure concerning the scam of 2001, Parekh was banned from trading in the Indian stock market for 15 years till 2017. In 2009, market regulator the Securities and Exchange Board of India (SEBI) found that the stockbroker Ketan Parekh took trading in stocks through certain shell companies and thereby referred the matter to the Enforcement Directorate. Parekh conducted trading mainly in the Calcutta Stock Exchange because of lack of regulations, but in 2001 Calcutta stock exchange was in a payment crisis with a loss of around Rs 100 crores. The allegation says trading was done by other brokers on his behalf.

In March 2014, a special CBI court convicted Ketan Parekh for cheating and sentenced to two years of rigorous imprisonment. He through Overseas Corporate Body (OCB) had sent over Rs 2000 to Rs 3000 crores, to foreign countries following which CBI confiscated his Swiss bank account.

Conclusion

It is said, nobody has seen the future, but back in the 1990's it won’t be wrong to say, two people decided the fate of the stock market one is Harshad Mehta, and the other is, of course, Ketan Parekh. Talking about Ketan Parekh, he single-handedly influenced the wind of the stock market. Ketan Parekh manipulated the stock prices, was involved in insider trading, circular trading and pump and dump tactics, following which the bubble of illegal trading burst in 2001.