Ketan Parekh was a stock broker from Mumbai who manipulated the Indian stock market in late 1999-2001, in what became known as the Ketan Parekh scam. He formed a network of brokers to target and artificially inflate the prices of 10 stocks by as much as 10 times their original values. Parekh used a simple borrowing mechanism known as the badla system to fund his stock purchases, pledging the inflated stock prices as collateral to obtain more funds. However, when the stock market crashed in 2000, Parekh was unable to maintain the prices and his scheme collapsed, leading to his arrest in 2001 and conviction in 2008 for market manipulation. The scam had major implications, including a 700 point fall in the
2. Pied Pieper of Dalal
Street
Ketan Parekh is a former stock broker from
Mumbai, India Popularly known as ‘Bombay
Bull’.
KP arrested on 30 march 2001 for the security
market scam known as Ketan Parekh scam.
He was convicted in 2008, for involvement in
the Indian stock market manipulation scam in
late 1999-2001.
Currently he has been debarred from trading in
the Indian stock exchanges till 2017
He was trainee of Harshad Mehta.
Ketan Parekh can be best described as the Pied
Piper of Dalal Street.
Parekh came from a family of brokers which
helped him to create a trading ring of his own.
3. How it happened?
Formed a network of brokers
Identified and targeted 10
stocks.
Zee telefilms went up from
Rs. 127 to Rs. 2330, Himachal
Futuristic – Rs. 194 to 2553.
5. Badla System
Indigenous carry-forward system invented on the
Bombay Stock Exchange
Badla trading involved buying stocks with borrowed
money.
The stock exchange acts as an intermediary.
Interest rate determined by the demand for the
underlying stock
Maturity not greater than 70 days
6. How it happened?
When stock prices were high, they were pledged with
banks as collateral.
No problems as long as prices were rising.
7. How was it detected
Stock market crash of 2000
KP started borrowing heavily
Attempted to rig the price upwards and later sell.
But failed to do so.
IT department found discrepancies in sources of funds
of KP
Routine market surveillance of 5 stocks
8. FACTORS THAT HELPED KETAN PAREKH
Though KP was a successful broker, he did not have money to buy large
stakes as he held the stakes of more than Rs 750 million in July
1999, according to a report.
Analyst claimed that he had borrowed from various companies and banks for
this purpose.
His financing method was fairly simple.
He bought shares when they were trading at low price and saw the prices go
up in the bull market while continuously trading.
When the prices was high enough, he pledged the shares with banks as
collateral for funds, and also borrowed from the companies like HFCL.
9. CONT…….
It could not have been possible without the involvement of banks.
A small Ahmadabad-based bank, Madhavapura Mercantile
Cooperative Bank (MMCB) was KP’s main ally in the scam. KP
and his associate started tapping the MMCB for funds in early
2000.
10. Implications
Ketan Parekh was arrested by CBI on 30th March
2001. He was charged defrauding Bank of India by
almost $20 Million
Global Trust Bank and Bank of India 's merger failure
RBI ordered some banks to furnish data of Capital
market exposure
SEBI inspected the books of several brokers suspected
of triggering the crash
11. Implications
One of the biggest Fall in BSE -700 points
KP and other traders were banned from trading for 17
years
Short selling was banned for 6 months.
Badla system was banned
All shares that were put as collaterals should be done
so through NSE and BSE.
10% additional deposit Margins.
12. IMPACT OF THE SCAM ON
FINANCIAL INSTITUTIONS
Ketan Parekh was threatening to sue the Bank of India for defamation
because it complained of bouncing of 1.3 billion pay orders issued to the
broker by Madhavpura Mercantile Cooperative Bank
Investigations by SEBI and CBI reveal that sheer magnitude of money
moved by Parekh was a staggering 64 billion
13. Steps taken by SEBI after scam
SEBI launched immediate investigation on the scam.
• 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
SEBI banned naked short sales.
RBI started inspecting accounts and sub-accounts
twice a year in spite of once in two year.
SEBI allowed banks for collateralised lending only
through BSE and NSE
Notes de l'éditeur
Borrowed initially and then financed by giving bonds as collateralPay order route – while he faced liquidity problemsDot com boom all over the world where all ICE stocks were bullishVolumes and prices went upUnion budget of 2001 – increase by 177 pointsNext day – bear cartel – decrease by 176 point – targeted K-10 stocksThe sudden crash made SEBI undertake investigations Defrauding BOI of $30 million
etan's rise to fame occurred at the same time as the worldwide dot-com boom (1999-2000) and he relied primarily on the shares of ten companies for his dealings (now known infamously as the K-10 scrips).Ketan had large borrowings from Global Trust Bank, whose shares he was ramping up (so that he could get a good deal at the time of its merger with UTI Bank) – he got Rs 250 crore loan from Global Trust Bank, though Global Trust’s chairman RameshGelli (who was later asked to quit) repeatedly said that lending to Ketan was less than Rs 100 crore in keeping with Reserve Bank of India norms. Ketan and his associates got another Rs 1,000 crore from the Madhavpura Mercantile Co-operative Bank despite the fact that RBI regulations ruled that the maximum a broker could have got as a loan was Rs 15 crore.
RameshgelliGTB 250 crores
Due to various factors including the bursting of “New Economy” bubble and the subsequent downward trend in NASDAQ, Ketan Parekh and his cronies started borrowing heavily. The only option before Ketan Parekh and other members of the bull cartel was to recklessly rig the prices of shares upwards and then sell them. Initially, he and his cronies borrowed heavily from the banks but later switched to unofficial markets in Calcutta. Over 90 per cent of transactions in Calcutta are estimated to be unofficial, outside the exchange with no records and margin money. The financiers at Calcutta were too happy to lend huge amount of money to Parekh and his cartel at rates as high as 100 per cent.Because of liquidity crunch, Parekh and his cronies were finding it extremely difficult to further push the prices of stocks upwards. Taking advantage of this situation, the international bear cartel got together and started massive selling of “KP Stocks” in the hope of buying them dirt cheap at a later stage. The short selling was carried out with the active connivance of AnandRathi and other broker-directors of the BSE who provided sensitive information to the bear cartel about market exposure of Parekh and his cronies. The sudden selling of shares created a panic-like situation in the markets. Sensing a major meltdown, the big market players not associated with the bear cartel also started heavy selling of “KP Stocks.” Even the Madhavpura Cooperative Bank started offloading the shares it held as collateral from Parekh, fearing his inability to pay back the borrowed funds. All these factors further contributed towards the steep decline of the prices of “KP Stocks.”