Indian Scams: What was the Ketan Parekh Scam?
Updated: Jan 10, 2021
Ketan Parekh, the name which holds somewhat top positions in long list of people who manipulated the Indian Stock Markets. Ketan Parekh was a stock broker who is widely recognised for manipulating stocks markets, Formerly he used to work with Harshad Mehta, who was the prime accused of 1992 stock market scam and most of the Parekh scams were based on Mehta's technique itself. Parekh was also involved in 1992 Scam but was never convicted by court.
Parekh was the prime accused of 2001 stock market crash. He used the technique of pump and dump the stock to manipulate the market. Its mainly inspired from what Harshad Mehta used to do, in layman terms Pump-Dump is a technique in which one person buys a certain number of shares of one particular stock and then try to increases the price of that stock by various means by spreading fake news and other things and when the stock reaches a certain high then the individual sells his share i.e dumps the stock booking a large sum of profit.
In this technique Harshad Mehta generally used to target the retail investors i.e the individuals who would invest into the company whereas in case of Parekh he targeted institutional investors who used to bring in large amounts of money at once. As mentioned by Sucheta Dalal in her blogs based upon his meeting with Parekh, she tells that Parekh when used to work with Mehta showed himself as a very down to earth man and lived a basic life and that might be the reason he didn't came into lime-light at the time of Harshad Mehta scam case and wasn't accused, but after Mehta's death when he himself started manipulating market he started coming into limelight, big bungalows, throwing big parties and Bollywood friends. The key aim behind this was building reputation and credibility in the market, for the stocks he targeted to pump up, he started targeted institutional investors and winning their trusts, after this when the stocks were in their initial phases of rise other big-investors were also attracted towards this and invested. However these institutional investors aren't so easy to convince as they equally rely on other factors such as liquidity of the stock in market, liquidity refers to how fast a stock is being bought or sold without severe change in price of stock or in simpler terms can be taken a idea from volume of stock traded in the market. Volume refers to total quantity of shares trade both side For Example- A person X sales 100 stock of a company in market and other person Y buys those 100 shares, then the total volume traded would be 200. Parekh used to use a technique called Circular Trading by which he used to increase the volume or the liquidity in the market. He used to sale particular amount of shares from one of his company and then used to buy those particular amount of shares in a different company at the same particular time overall increasing the liquidity.
In those days technology stocks were rising due to the dot-com boom hence Parekh mostly invested in tech-sector stocks, because of this the pumping up wasn't easily observed and was considered as an organic growth. He used to work in mainly 10 stocks and these were famously known as K-10 stocks in the market, some of these were Pentafour Softwares (Rs. 175-Rs. 2700), Global TeleSystems (Rs. 85- Rs. 3100), HFCL (Rs. 42- Rs. 2300), Zee Network (Rs. 750 - Rs. 11,000).
Also Read: Decoding the Harshad Mehta Scam 1992
For all these a large sum of money is required, this capital he used to arrange via banks. For this he mainly used two main sources, banks and promoters of the company, Promoters of the company used to lend him money as the increase in stock price would also help them increase their assets value. For banks he mainly used these banks ,Global Trust Banks (GTB) and Madhavpura Mercantile Co-operative Bank (MMCB), At those times as per RBI guidelines Banks were not allowed to give loans above Rs. 15 Cr to any stock-broker however MMCB gave Parekh a Lon of Rs.800 Cr and GTB gave him a loan of around Rs.100 Cr and that too without proper collaterals. Alternatively Parekh also used to use Pay Order method to take money from banks. MMCB issued a pay order to Parekh worth Rs. 137 Cr which he further given to Bank of India (Stock Exchange Branch) to get the amount from them. BOI forwarded the pay order to RBI to get clearance however the pay order was rejected by RBI after 12 days, by then BOI has already issued the amount to Parekh. Upon investigation RBI found out the whole matter, after this MMCB was declared bankrupt, BOI when asked Parekh to return the money he just returned 7 Cr, later BOI filed a fraud case against Parekh and gradually the whole Scam was uncovered.
The BOI filed case on Parekh at the time the dot-com bubble burst, due to the burst the technology stocks were falling across the world, due to this Indian Investors also started short-selling the technology stocks and the prices of K-10 stocks started falling rapidly. Initially Parekh tried fighting back by taking loan from market and again pumping up but wasn't successful and the bear market overtook. Fearing the loss and seeing Bear cartel taking over the market Parekh sold his entire stake in those K-10 stock due to which the prices fell rapidly and the sentiment in market change which lead to market crash the very next day. These all series of event lead to his fall and un-covering of the scam. Parekh was accused and sentenced a year of imprisonment and barred him from stock markets till 2017.
However, he was again caught trading and manipulating markets in 2007-2009 due to which he was again accused for cheating and sentenced to 2 year regroup imprisonment by a special court in 2014.