Ketan Parekh Scam: All that you must know

The share market has been a wish-granting factory to many. For others, it is nothing more than just a terrible nightmare. Warren Buffett became the world’s third-richest person just by investing in share markets. But one cannot forget the stories where investors went bankrupt overnight. Share market is more than just a game of simple luck. But there are also times where people go beyond the rules and regulations to manipulate the market and pocket crores. SEBI, which is the watchdog of the share market, is keenly following the activities of the market in order to protect the investor’s interest. Despite that frauds and scams have become inevitable. 

Ketan Parekh Scam case is among the two stockbroker frauds that shook the share market. Ketan Parekh is said to be the pied piper of the Indian stock market. But only to direct it to its doom, just like in the story. Till date, Ketan Parekh fraud case remains to be a cautionary story to many.

 Are you baffled as to what it is all about? Let me summarize the details. 

Who is Ketan Parekh?

For Ketan Parekh, the stock market was a family business, which was passed to him by his father. Harshad Mehta mentored him and walked him through the nooks and corners of the stock exchange. 

The man who was responsible for one of India's largest stock market scam and 1992 market crash that rattled the stock market, banking system and the stockholders! Read to find more about the infamous scam of 1992 committed by Harshad Mehta.

Ketan Parekh was a chartered accountant by profession. All this enabled him to get acquainted with a trade circle of his own and he later went on to become the bull of the stock market.

Each and every move of Ketan Parekh was closely followed by other investors in the market. This is because they believed that everything he touched turned to be a gold mine. And that was more than just a rumour. His stock holdings were mostly based on information, communication, and entertainment sector. This is otherwise known as the ICE sector stocks.

His portfolio comprised of 10 handpicked stocks, which is also known as the K-10 stocks. The market always predicted the future of these stocks to be bullish. He traded in the Kolkata stock exchange which happened to be advantageous to him due to the lack of regulations. From 1999 to 2000 he ruled the stock market.

Ketan Parekh Scam: Annihilation of the Success Story

Ketan Parekh scam case involved two key strategies, namely “circular trading” and “pump and dump scheme”. 

• Pump and dump are where he would purchase 20 to 30% of the share of a company in order to cause a price rise. The increase in price will subsequently tempt other investors to invest. Once the prices have skyrocketed, he would simply dump them to make an exit by liquidating his holdings. 

• Circular trading is a strategy where he made a few amateur or junior traders to buy and sell frequently certain shares throughout the day on his call. This caused the “traded volumes” to go up significantly. The investors who base their decisions on the volume traded will consider such stocks to be active and make an investment. Once the prices shoot up he would make a profit out of it and also pay the traders a small commission. This trading via primitive traders is popularly known as the Badla system. 

However, trading at such magnitude will require a lot of money.

How did he get that?

To know that it is essential to understand what a pay order is. In simple words, a pay order is like a cheque but issued by the bank on payment of a small advance by the customer. He brought shares of Madhavapura Mercantile Commercial Bank (MMCB) in order to manipulate its loan decisions. Then he went forward to get a huge loan from MMCB in form of payment orders and when the prices shot up he pledged them with other financial institutions like HCFL and UTI. Nearly 1.3 million pay orders were issued. He did so until the early period of 2000. His loan amount accounted for 750 million. He also bagged huge amounts from promoters and owners of the company in order to make the share prices of their companies to go up. 

Some of the major stocks he invested in were Aftek Infosys, DSQ software, Satyam computers, Zee telefilms, Himachal Futuristic, Silverline technologies, etc. The price of Zee telefilms shot up from Rs. 127 to Rs. 2330, Visual soft touched Rs. 8448 from Rs.625 in no time. He recorded a 200% interest on the value of certain stocks. 

Soon like all other stories his master plan reached its deadly fall. RBI and SEBI were quick in sniffing that there was something unusual about the profits he made and the loan he had obtained. He was arrested in March 2000 and was held in custody for more than 53 days. On March 1, 2000, the share markets crashed by more than 176 points causing the investors to lose more than 2000 crores. He was prohibited from trading in the stock market for 15 years till 2017 and was also sentenced to a year’s jail. It became the largest stock market fraud in the history of Indian stock markets.

As a result, SEBI brought in various rules and regulations. It banned the Badla system and circular trading. It inspected all the accounts relating to the stock exchange yearly once. They also allowed collateralised loans only via BSE and NSE. 

Though he was banned, it was rumoured that Ketan Parekh operated through puppets who executed his orders in the stock exchange. In 2008 a number of companies were questioned by SEBI and were barred for helping him. However, does he still operates in the stock exchange or not still remains hearsay which is yet to be busted. Hope you like the information, if you want to know which stocks to buy as an investor. Please follow the link.