2001-Ketan Parekh scam: Stock

and bull story

December 18, 2009 | UPDATED 09:14 IST

The market crashed but ended up pushing much-needed modernisation.

Ketan Parekh can best be described as the Pied Piper of Dalal Street. For two
years, marketmen followed his every action because all he touched turned to
gold. Better known as the Pentafour Bull, he kept a low profile, except when
he threw a millennium bash that was attended by politicians, business
magnates and film stars. A chartered accountant by training, Parekh came
from a family of brokers, which helped him create a trading ring of his own.
Between 1999 and 2000, as the technology bubble was engulfing the rest of
the world, the stock market in India sprang to life too.
Be it investment firms, mostly controlled by promoters of listed companies,
overseas corporate bodies or cooperative banks, all were ready to hand the
money to Parekh, which he used to rig up stock prices by making his interest
apparent. In no time, scrips like Visualsoft rose from Rs.625 to Rs.8,448 per
share and Sonata Software from Rs.90 to Rs.2,150. But the vicious cycle of
fraud did not end with price rigging. The inflated stocks had to be dumped
onto someone in the end, for which Parekh used financial institutions like the
UTI. But the party ended rather abruptly a day after the Union Budget was
presented in February 2001. A bear cartel started disrupting Parekh's party
by hammering prices of the K-10 stocks, precipitating a payment crisis in
Kolkata.
As SEBI investigated, it was evident that bank and promoter funds were used
to rig the markets. Parekh was arrested in March that year and was in
custody for 53 days. In the aftermath of the scam, many gaping loopholes in
the market were plugged. The trading cycle was now reduced from one week
to one day. Badla was banned and operators could not carry forward trade in
its primitive form. Forward trading was formally introduced in the form of
exchange-traded derivatives to ensure a well-regulated futures market.
Broker control over stock exchanges was demolished. It's perhaps thanks to
the Pentafour Bull that India's stock markets are today considered safe. And
to his credit, Parekh forced lethargic policy-makers to institute reforms in the
financial system. He is, however, now suspected to be operating in the
markets through conduits. Parekh will remain a work-in-progress for
regulators.
-by Malini Bhupta

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Ketan Parekh
From Wikipedia, the free encyclopedia

Ketan Parekh is a former stock broker from Mumbai, India, who 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.[1][2]

Parekh is alleged to have been involved in circular trading throughout the time period and with a variety of
companies, including Global Trust Bank and Madhavpura Mercantile Co-operative Bank.[3]
Parekh's sole conviction, which carried a one year sentence, came as a result of a transaction he conducted
involving a unit of Canara Bank in 1992.[1]
Though Parekh is currently barred from stock trading, in 2009, the Securities and Exchange Board of
India alleged a variety of companies and other actors were trading on behalf of Parekh; 26 entities were
banned from trading as a result of that investigation. [2]

http://en.wikipedia.org/wiki/Ketan_Parekh

Harshad Mehta & Ketan Parekh Scam

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Harshad Mehta: the high-profile stockbroker

Harshad Shantilal Mehta (1954-2002) was an Indian stockbroker who grabbed headlines for the notorious BSE
security scam of 1992. Born in a lower middle-class Gujarati Jain family, Mehta spent his early childhood in Mumbai
where his father was a small-time businessman. The family relocated to Raipur in Chhattisgarh after doctors advised
Mehtas father to shift to a drier place on account of his health.
Transition from an ordinary broker to Big Bull
Mehta studied in Holy Cross Higher Secondary School, Byron Bazar, Raipur. He quit his job at The New India
Assurance Company in 1980 and sought a new one with BSE-affiliated stockbroker P. Ambalal before going on to
become a jobber on the BSE for stockbroker P.D. Shukla. In 1981, Mehta became a sub-broker for stockbrokers J.L.
Shah and Nandalal Sheth. Having gained considerable experience as a sub-broker, he teamed up with his brother
Sudhir to float a new venture called Grow More Research and Asset Management Company Limited. When the BSE
auctioned a brokers card, the Mehta duos company bid for it with the financial support of J.L. Shah and Nandalal
Sheth. Another name that is rumored to have a crucial hand in the scam was Nimesh Shah. However, Shah could
keep a safe distance from the accusations and is currently known to be a heavy player in the Indian stock market.

By year 1990, Mehta became a prominent name in the Indian stock market. He started buying shares heavily. The
shares of India's foremost cement manufacturer Associated Cement Company (ACC) attracted him the most and the
scamster is known to have taken the price of the cement company from 200 to 9000 (approx.) in the stock market
implying a 4400% rise in its price. It is believed that It was later revealed that Mehta used the replacement cost theory
to explain the reason for the high-level bidding. The replacement cost theory basically states that older companies
should be valued on the basis of the amount of money that would be needed to create another similar company. By
the latter half of 1991, Mehta had come to be called the Big Bull as people credited him with having initiated the Bull
Run.
The making of the 1992 security scam
Mehta, along with his associates, was accused of manipulating the rise in the Bombay Stock Exchange (BSE) in
1992. They took advantage of the many loopholes in the banking system and drained off funds from inter-bank
transactions. Subsequently, they bought huge amounts of shares at a premium across many industry verticals
causing the Sensex to rise dramatically. However, this was not to continue. The exposure of Mehta's modus operandi
led banks to start demanding their money back, causing the Sensex to plunge almost dramatically as it had risen.
Mehta was later charged with 72 criminal offences while over 600 civil action suits were filed against him.
Significantly, the Harshad Mehta security scandal also became the flavor of Bollywood with Sameer Hanchate's film
Gafla.
The 1992 security scam and its exposure
Mehta's illicit methods of manipulating the stock market were exposed on April 23, 1992, when veteran columnist
Sucheta Dalal wrote an article in India's national daily The Times of India. Dalals column read: The crucial
mechanism through which the scam was effected was the ready forward (RF) deal. The RF is in essence a secured
short-term (typically 15-day) loan from one bank to another. Crudely put, the bank lends against government
securities just as a pawnbroker lends against jewelers. The borrowing bank actually sells the securities to the lending
bank and buys them back at the end of the period of the loan, typically at a slightly higher price. In a ready-forward
deal, a broker usually brings together two banks for which he is paid a commission. Although the broker does not
handle the cash or the securities, this was not the case in the prelude to the Mehta scam. Mehta and his associates
used this RF deal with great success to channel money through banks.
The securities and payments were delivered through the broker in the settlement process. The broker functioned as
an intermediary who received the securities from the seller and handed them over to the buyer; and he received the
check from the buyer and subsequently made the payment to the seller. Such a settlement process meant that both
the buyer and the seller may not even know the identity of the other as only the broker knew both of them. The
brokers could manage this method expertly as they had already become market makers by then and had started
trading on their account. They pretended to be undertaking the transactions on behalf of a bank to maintain a faade
of legality.
Mehta and his associates used another instrument called the bank receipt (BR). Securities were not traded in reality
in a ready forward deal but the seller gave the buyer a BR which is a confirmation of the sale of securities. A BR is a
receipt for the money received by the selling bank and pledges to deliver the securities to the buyer. In the meantime,
the securities are held in the sellers trust by the buyer.
Complicit lenders
Armed with these schemes, all Mehta needed now were banks which would readily issue fake BRs, or ones without
the guarantee of any government securities. His search ended when he found that the Bank of Karad (BOK), Mumbai
and the Metropolitan Co-operative Bank (MCB) two small and little known lenders, were willing to comply. The two
banks agreed to issue BRs as and when required. Once they issued the fake BRs, Mehta passed them on to other
banks who in turn lent him money, under the false assumption that they were lending against government securities.
Mehta used the money thus secured to enhance share prices in the stock market. The shares were then sold for
significant profits and the BR retired when it was time to return the money to the bank.
Outcome
Mehta continued with his manipulative tactics, triggering a massive rise in the prices of stock and thereby creating a
feel-good market trajectory. However, upon the exposure of the scam, several banks found they were holding BRs of

no value at all. Mehta had by then swindled the banks of a staggering Rs 4,000 crore. The scam came under
scathing criticism in the Indian Parliament, leading to Mehta's eventual imprisonment. The scams exposure led to the
death of the Chairman of the Vijaya Bank who reportedly committed suicide over the exposure. He was guilty of
having issued checks to Mehta and knew the backlash of accusations he would have to face from the public.
A few years later, Mehta made a brief comeback as a stock market expert and started providing investment tips on
his website and in a weekly newspaper column. He worked with the owners of a few companies and recommended
the shares of those companies only. When he died in 2002, Mehta had been convicted in only one of the 27 cases
filed against him. What attracted the taxmans attention was Mehta's advance tax payment of Rs 28-crore for the
financial year 1991-92. Another eye-catcher was his extravagant lifestyle.
I-T, PSBs recover dues nine years after Mehta's death
Nine years after Harsad Mehta died, the I-T department and public sector banks (PSBs) have successfully recovered
a significant portion of their claims emerging out of the securities scam from his liquidated assets. The Supreme
Court directed the Custodian of the attached properties and assets of the Harshad Mehta Group (HMG) in March
2011 to make payments of Rs1,995.66-crore to the I-T department and Rs 199.25-crore to the State Bank of India
(SBI), making the two institutions two of the earliest claimants to recover their dues.
While the SBIs total principal amount claim of Rs 1,000-crore have been largely settled, financial institutions have
also received some money. However, Standard Chartered Bank, which had claimed Rs 500-crore, has yet to recover
its dues it was one of the late claimants. Although the total claim over the HMG is of more than Rs 20,000-crore, the
apex court has said that for the present, it would only consider claims towards the principal amount.
Who is Ketan Parekh
Ketan Parekh is a former stockbroker based in Mumbai who was convicted in 2008 for being involved in engineering
the technology stocks scam in Indias stock market in 1999-2001. A chartered accountant by training, Parekh comes
from a family of brokers and is currently serving a period of disqualification from trading in the Indian bourses till
2017.
Ketan Parekh has been accorded with sobriquets such as the Pentafour Bull and the One Man Army by the countrys
national business newspapers, while the market simply refers to him as KP or associates him with his firm NH
Securities. Parekh is known to have no reluctance in meeting the press. He is also known to have razor-sharp
forecasts on market developments.
What distinguishes Ketan Parekh from the 'Big Bull' late Harshad Mehta
The two have been compared by people to have operated their scams using similar means and that their
backgrounds were similar as well. But the differences are very conspicuous.
At the outset, Mehta came from a lower middle-class and modest background, while KPs family has been engaged
as stockbrokers for a significant time. He is also related to many prominent brokers. Secondly, when Mehta was
operating, the market was still a closed one and was just beginning to liberalize. It was revealed later that Mehta
operated using the money of other people as his last recourse. Further, Mehta is known to have resorted to
aggressive publicity campaigns whereas KP operates almost clandestinely. The latter has also been successful at
creating stories and selling them aggressively to institutional investors.
The Midas touch
Parekh attracted the attention of market players and they kept track of every move of Parekh as everything he was
laying his hands on was virtually turning into gold. But the Pentafour Bull still kept a low profile, except when he
hosted a millennium party that was attended by politicians, business magnates and film stars. And by 1999-2000, as
the technology industry began embracing the entire world, Indias stock markets started showing signs of hyperactivity as well and this was when KP struck.
Almost everyone, from investment firms which were mostly controlled by promoters of listed companies to foreign
corporate bodies and cooperative banks were eager to entrust their money with Parekh, which, he in turn used to

inflate stock prices by making his interest obvious. Almost immediately, stocks of firms such as Visual soft witnessed
meteoric rises, from Rs 625 to Rs 8,448 per unit, while those of Sonata Software were up from Rs 90 to Rs 2,150.
However, this fraudulent scheme did not end with price rigging. The rigged-up stocks needed dumping onto someone
in the end and KP used financial institutions such as the UTI for this.
When companies seek to raise money from the stock market, they take the help of brokers to back them in raising
share prices. KP formed a network of brokers from smaller bourses such as the Allahabad Stock Exchange and the
Calcutta Stock Exchange. He also used BENAMI or share purchase in the names of poor people living in Mumbais
shanties. KP also had large borrowings from Global Trust Bank and he rigged up its shares in order to profit
significantly at the time of its merger with UTI Bank. While the actual amount that came into Parekh's kitty as loan
from Global Trust Bank was reportedly Rs 250 crore, its chairman Ramesh Gelli is known to have repeatedly
asserted that Parekh had received less than Rs 100 crore in keeping with RBI norms.
Parekh and his associates also secured Rs 1,000-crore as loan from the Madhavpura Mercantile Co-operative Bank
despite RBI regulations that the maximum amount a broker could get as a loan was Rs15-crore. Hence, it was clear
that KPs mode of operation was to inflate shares of select companies in collusion with their promoters.
Lady luck disfavours Parekh!
Notably, a day after the presentation of the Union Budget in February 2001, Parekh appeared to have run out of luck.
A team of traders, Shankar Sharma, Anand Rathi and Nirmal Bang, known as the bear cartel, placed sell orders on
KPs favorite stocks, the so called K-10 stocks, and crushed their inflated prices. Even the borrowings of KP put
together could not rescue his scrips. The Global Trust Bank and the Madhavpura Cooperative were driven to
bankruptcy as the money they had lent Parekh went into an abyss with his reportedly favourite K-10 stocks.
The exposure of the dupe
As with the Harshad Mehta scam, Ketan Parekh's fraudulent practices were first exposed by veteran columnist
Sucheta Dalal. Sucheta's column read, It was yet another black Friday for the capital market. The BSE sensitive
index crashed another 147 points and the Central Bureau of Investigation (CBI) finally ended Ketan Parekhs twoyear dominance of the market by arresting him in connection with the Bank of India (BoI) complaint. Many people in
the market are not surprised with Parekhs downfall because his speculative operations were too large, he was
keeping dubious company, and he was dealing in too many shady scrips.
When the prices of select shares started constantly rising, innocent investors who had bought such shares believing
that the market was genuine were about to stare at huge losses. Soon after the scam was exposed, the prices of
these stocks came down to the fraction of the values at which they had been bought. When the scam did actually
burst, the rigged shares lost their values so heavily that quite a few people lost their savings. Some banks including
Bank of India also lost significant amounts of money.
Dalal goes on to state that Parekh's scheme was not visible to a layman given the positive deflection that media had
made him a hero while some of the biggest national dailies had even quoted him profusely on that years Union
Budget. Dalal added that KPs arrest and the uncanny similarity of his operations to the Harshad Mehta securities
scam of 1992 vindicated the miserable inadequacy of the countrys regulatory system. The Securities Exchange
Board of India (SEBI) and the Reserve Bank of India (RBI) had remained complacent when the stock bubble was
created during the latter half of 1999 and through 2000 while it had not bothered to take any action through 2001
when it was ready to burst.
SEBIs damage control measures
SEBI investigations into Parekh's money laundering affairs revealed that KP had used bank and promoter funds to
manipulate the markets. It then proceeded with plugging the many loopholes in the market. The trading cycle was cut
short from a week to a day. The carry-forward system in stock trading called BADLA was banned and operators
could trade using this method. SEBI formally introduced forward trading in the form of exchange-traded derivatives to
ensure a well-regulated futures market. It also did away with broker control over stock exchanges. In KPs case, the
SEBI found prima facie evidence that he had rigged prices in the scrips of Global Trust Bank, Zee Telefilms, HFCL,
Lupin Laboratories, Aftek Infosys and Padmini Polymer.

Furthermore, the information provided by the RBI to the Joint Parliamentary Committee (JPC) during the investigation
revealed that financial institutions such as Industrial Development Bank of India (IDBI Bank) and Industrial Finance
Corporation of India (IFCI) had given loans of Rs 1,400 crore to companies known to be close to Parekh.
Criticism of SEBI
Some of the regulatory actions SEBI undertook came under scathing criticism from some quarters who accused it of
still being clueless about its supervisory duties. Observers said the regulator still continued believing that its only
priority was to prevent a fall in stock prices.
It was rumored that SEBI banned short sales and increased margins creating a virtual cash market in the process
and squeezed turnover to a sixth of the normal level. It also fired all broker directors from the Bombay Stock
Exchange and Calcutta Stock Exchange and declared the completion of three controversial settlements of the
Kolkata bourse by retaining a sizeable proportion of the payout of operators who had allegedly tied-up for collusive
deals. Furthermore, SEBI rounded up the bear operators and launched an inquiry into their alleged short sales.
Stringent regulatory measures follow Parekh episode
Parekh's fraudulent operations motivated the authorities to take necessary steps that have made made India's stock
markets relatively safer in present times. He can also be credited for having forced indolent policy-makers to bring
about reforms in the financial system.
An active trader
According to an Intelligence Bureau report, though disbarred from trading in the countrys bourses until 2017, is still
operating in the markets through conduits, vindicating Dalal Streets belief that he has never left the market. The
report says that as recently as December 2010, KP has been rallying behind different stocks and placing some of
them at rigged up prices to large institutions such as the LIC. He is operating through little-known investment firms,
market operators and a following of loyal brokers. KP, who was at the forefront during the technology shares-led bull
run in 1999-2000, is apparently using front entities such as Orchid Chemicals , GMR Infrastructure, Cairn India,
Deccan Chronicles Holdings, Reliance Industries, Punj Lloyd, Indiabulls Real Estate, Pipavav Shipyard, Amtek Auto,
Hindustan Oil Exploration, UCO Bank, State Bank of India, EIH and JSW Steel, among others, to trade in shares.
The report further states that KP has been instrumental in inflating the share price of SKS Microfinance from Rs850 to
Rs1,100 following its listing in August 2010. He has also rigged IPOs of little known companies by buying out 50% of
the issue in collusion with his Kolkata-based associates. KP and his associates have also acquired very large
positions in petroleum companies such as ONGC and HPCL, according to the report. An IB official has further said
that KP and his team have revealed to their close associates that they have insider information on the government's
proposal to decontrol the sale of gas which is expected to raise profit margins of these companies by about 20%.
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