Scam Exposed! How Ketan Parekh Managed to Commit the Rs.40000 Crore Scam?

Ketan Parekh was a chartered accountant by profession. He started his career in the late 1980s and initially ran a business called NH Securities, a stockbroking firm established by his father. Parekh later joined Harshad Mehta’s firm where he closely observed market trends and the mindset of investors. He learnt the techniques used by the Big Bull and his associates to manipulate the stock market.

Although he was said to be soft-spoken and discreet, Ketan Parekh made connections with politicians, actors, and businessmen. At the height of its success Ketan Parekh was friends with international celebrities like Kerry Packer and both of them had together started venture capital with the intent of founding start-ups in India.

Ketan Parekh Scam Study

Involvement in the Indian stock market manipulation scam that occurred from late 1998 to 2001. Ketan Parekh was looking out for stocks that had a low market capitalization and low liquidity. He would then pump money into these shares and start trading within his network 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 looked into the “Pump and Dump” system used by Harshad Mehta in depth. The Big Bull illegally received money from banks and other financial institutions. He used these funds to directly or indirectly buy certain stocks in bulk, whose prices would then skyrocket. Parekh wanted to use the same system to his advantage but with a few tweaks. Parekh strongly believed in the potential growth of Companies within the Information, Communication, and Entertainment (ICE) sector.

The dot-com boom had just started between 1999 and 2000, and many of his stock predictions were pretty accurate. He was able to pump up the share prices of several firms. However, Parekh wanted to take it a step further and encouraged institutional investors to invest in stocks he had manipulated. He felt that it would be easier to control institutional investors rather than retail investors who had varying interests and views.

Inside the Scam

Parekh purchased a large stake in less-known small market capitalization companies and jacked up their prices through circular trading with other trades, and collusion with these companies and large institutional investors. It later transpired that promoters and industrialists often gave Parekh funds to artificially rig up their share prices. In just a few months, scrips of virtually unknown companies like Visualsoft rose from Rs.625 to Rs.8,448 per share and Sonata Software rose from Rs.90 to Rs.2,150. On 1 March 2001, just after the Indian Union Budget had been presented, the BSE Sensex crashed 176 points, prompting the then NDA Government to set up an enquiry into the market reaction.

Subequently the RBI refused to clear pay orders that had been given by Parekh as collateral for loans to Bank of India, as they found them to be suspicious. Around the same time, a bear cartel of brokers in Mumbai opposed to Parekh tried to dump their shares of K-10 stocks that he had successfully jacked up over the past two years, especially those of two entities – GTB Bank and MMCB Bank. He carried out this large-scale dump in the evening, after regular trading hours, from 5 pm to midnight at the Calcutta Sock Exchange. This resulted in a stock market crash the next day, resulting in large-scale losses for large institutional investors, including insurance companies and mutual funds.

Also Read This – Satyam Computers Scam: The Story of India’s Biggest Corporate Fraud.

Parekh Convinced the Institutional Investors

Ketan Parekh found out that institutional investors would only invest in those stocks that had high trading volumes and media attention. To fulfil the first criterion, he resorted to an illegal circular trading scheme.

How it works:

For example, Broker A would buy an order for a stock at a certain quantity. At the same time, Broker B places an order to sell the same quantity, at the same price, and matches the trade. Likewise, more brokers would join and conduct similar transactions, thereby showing high trading volumes.

Parekh Strategy

Parekh and his associates conducted circular trading primarily on IT, media, and Telecom stocks that were already growing rapidly and getting media attention. Thus, Ketan Parekh’s “K10 Stocks” became widely popular. It included Zee Telefilms, Tips, Mukta Arts, Himachal Futuristic Communication Ltd (HFCL), etc.

K10 stocks like PentaMedia Graphics’ price surged from Rs.175 to Rs.2700 and that of Global Telesystems rose from Rs.185 to Rs.3.100. Moreover, he conducted most of the investments/trades in the Calcutta Stock Exchange as it did not have any strict regulations at the time. He artificially created a 200% annual return on some stocks.

The Downfall of Parekh

Just like the predecessor and mentor, Ketan Parekh becomes too greedy. Parekh illegally raised large sums of money from Global Trust Bank and Madhavpura Mercantile Cooperative Bank. He reportedly bribed bank officials and persuaded them to provide loans against shares. He wanted to obtain more funds to pump up stock prices on a larger scale. Thus, he approached the promoters of those companies whose stocks he had been manipulating and raised funds from them.

Promoters believed they would surely benefit from the surge in share prices. Their net worth would increase, and they could also pledge shares to get loans from banks. However, these were clear cases of insider trading.

According to Reserve Bank of India guidelines, banks were not allowed to give out more than Rs.15 crore as loans to a stockbroker. But MMCB and GTB sanctioned loans of around Rs.800 crore and Rs.100 crore, respectively, to Ketan Parekh. However, Parekh had never deposited this amount at MMCB. He used the pay order to obtain funds from the Bank of India and manipulate share prices.

Scam Exposed!

The news of Ketan Parekh’s scam first came into the limelight when the Bank of India alleged that he had defrauded them to the tune of Rs.137 crore. Sucheta Dalal of the Times of India uncovered the entire scam and published a report on it and this resulted in a stock market crash in 2001. The RBI initiated an investigation against Parekh.

Highlight of Investigtion

• Ketan Parekh was found guilty of insider trading and arrested by the CBI. He was also convicted of rigging share prices and was banned from trading until 2017.
• Parekh’s name also surfaced in the Canfina Scam in which various entities had entered into a criminal conspiracy to siphon off Rs.47 crore.
• In 2009, market regulators SEBI discovered that he was using front companies to carry out illegal activities. Thus, nearly 26 entities were banned from trading as a result of that investigation.
• In March 2009, Parekh was convicted by a special CBI court for cheating and sentenced to two years of rigorous imprisonment.
• Broker-turned-operator Ketan Parekh was single-handedly driving the Indian Stock Market and eventually fell victim to his greed.
• In 2021, the Supreme Court allowed Ketan Parekh to travel to the United Kingdom to attend to his daughter’s medical needs.

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