Ketan Parekh Scam and it’s Impact on Financial

Institutions
You are Here:
Home > Management Articles > Ketan Parekh Scam and it’s Impact on Financial Institutions
Share

Ketan Parekh was threatening to sue the Bank of India for defamation, because it complained
about the bouncing of Rs 1.3-billion pay orders issued to the broker by the Madhavpura
Mercantile Cooperative Bank. He seemed to suggest there is nothing more that the authorities
would be able to pin against him.

At last investigations by the Central Bureau of Investigation and the Securities and Exchange
Board of India reveal that the sheer magnitude of money moved around by Parekh or available to
him for his market manipulation was a staggering Rs 64 billion.

Money abroad

The CBI called a press conference to announce it had unearthed a Swiss bank account in which
Parekh was listed as the beneficiary. The Bureau claimed there was $ 80 million (Rs 3.4 billion)
in the account, which has since been frozen. In the past, CBI announcements were usually
followed up with a quick arrest, this time it has gone silent.

New Overseas Corporate Bodies

The Securities and Exchange Board of India’s preliminary investigation in May revealed that Rs
29 billion was transferred out of the country through five Overseas Corporate Bodies between
March 1999 to  March 2001. These OCBs had together invested just Rs 7.77 billion in the Indian
market but remitted a whopping Rs 36.77 billion out of the country. This direct flight of capital
occurred through European Investments, Far East Investments, Wakefield Holding, Brentfield
Holdings and Kensington Investment. Three of these companies have a paid up capital of just $
10.

SEBI says the pattern of investments and transactions through these accounts shows a clear
misuse of the OCB/Foreign Institutional Investor route. They seem to be used as a channel to
repatriate profits earned through stock price manipulation. Many of these OCBs were sub-
accounts of Credit Suisse First Boston whose brokerage operations have been suspended. But
there were other FIIs too. Strangely, SEBI has not yet placed any restrictions on them so far.

All it has done is to request the Mauritius Offshore Business Activities Authority to give details
in respect of actual beneficiaries, source and utilisation of funds of OCBs and sub-accounts
mentioned in its preliminary report.

In answer to a Joint Parliamentary Committee query, Sebi now admits to have unearthed six
more OCBs, where there is evidence that Parekh’s companies may have used them for ‘cornering
and parking of stocks.’ Dossier Stock Inc, Greenfield Investments Ltd, AOM Investments Ltd,
Symphony Holdings Ltd, Almel Investments (Mauritius) Ltd, and Delgrada Ltd.

However, since there was no other specific query about further repatriation of funds, SEBI is
silent about other flight of capital through the OCB window. However, it does admit there are
clear inter-linkages between the OCBs and that some of them have issued participatory notes
abroad to route funds to India. It also says Parekh’s entities have conducted many of their trading
transactions.

In its preliminary investigation report, SEBI unearthed a transfer of nearly Rs 11 billion to

Calcutta brokers, most of whom have had their businesses suspended because of payment
defaults. In an answer to a JPC query, SEBI now says Parekh had sent over Rs 27 billion to
Calcutta brokers between January 2000 to March 2001. This suggests that as soon as the
infotech, communication and entertainment stock-led boom began to lose momentum, Parekh
shrewdly began to move his speculative activities to the unofficial market in Calcutta in order to
avoid detection. SEBI says it is investigating the source of these funds and how they were
utilised.

Ketan Parekh’s stock holding

The process of ferreting out information on his portfolio is slow and tedious because SEBI has to
depend on ‘third party sources’ such as banks, depositories and stock exchanges and because
‘Ketan Parekh is not co-operating with the investigation.’ Yet, three of the companies identified
by SEBI where he held over five per cent are Aftek Infosys, Shonkh Technologies and Global
Trust Bank. According to SEBI, these companies had omitted to inform stock exchanges about
his holding having crossed five per cent. It is not quite clear if the broker continues to hold these
shares and what would be the value of this holding.

If one were to simply add up the amounts mentioned in SEBI’s various reports, the size of
Parekh’s manipulations is far bigger than the Rs 50-odd billion securities scam of 1992. Yet,
unlike the previous scam, this one is absurdly simple and brazen in its execution. Sebi says that
Rs 27 billion was sent by Ketan to Calcutta brokers; Rs 29 billion vanished overseas, Rs 3.4
billion ($ 80 million) was in a Swiss bank account; Rs 7 billion went to him from Himachal
Futuristic; Rs 5.15 billion from the Zee Group and Rs 2.56 billion directly from the Global Trust
Bank.

 NEDUNGADI BANK: After the Ketan Parekh bubble burst in 2001, the RBI suddenly
swung into action and began to go through Nedungadi’s books with a toothcomb. Punjab
National Bank took over the bank that was up for sale after RBI initiated the move to
weed out the broker promoter Rajendra Bhantia from the bank.
 GLOBAL TRUST BANK: Ramesh Gelli’s search for high returns took the new
generation private bank to the stock market, where its involvement in the speculative
activities associated with the Ketan Parekh scam and its high exposure soon resulted in
substantial losses. The bank’s promoters attempted to merge the entity with the UTI
Bank, and in the process the share price was rigged so that the promoters could make a
profit despite the mess in the the bank. It was clear that unless some drastic measures
 were taken, the bank was heading for closure. This led to the exit of Ramesh Gelli in
2001. Eventually, Oriental Bank of Commerce (OBC) took over the troubled bank.
 CO-OP BANKS: The saga of failed co-operative banks is continuing. The collapse of
Madhavpura Mercantile Co-operative Bank after Ketan Parekh used the bank to fund his
stock market rigging was the high point. As per the RBI data, the accumulated losses of
cooperative banking sector has touched Rs 1598 crore — an alarming rise of 241 per
cent. The gross non-performing assets were Rs 5053 crore — enough to fund a world-
class airport.

While the latest fraud may not be on the scale of the scams involving Harshad Mehta (around
Rs.5,000 crores) or Ketan Parekh (Rs.800 crores), what is alarming is that this time the
scammers’ tentacles have spread to the Public Provident Fund (PPF) – the repository of the
savings of millions of ordinary Indians. More than Rs.92 crores is missing from the Seamen’s
Provident Fund, which has 26,500 members. Worse still, the regulatory authorities admitted that
they were aware of the mess and gave various excuses for not having taken timely action.

Global Trust Bank

Global Trust Bank was on the verge of getting merged with UTI Bank to become one formidable
entity in the Indian banking sector, when the Great Crash of March 2001 occurred, and along
with stock prices, the marriage too came unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs
6,198.85 crore as on 31 March 2000.)

The report was believed to have noted that there was evidence that Parekh was involved in
manipulating the stock prices of GTB prior to the merger announcement on 20 January 2001, and
a swap ratio of 2.5 shares of UTI Bank for 1 share of GTB, two days later.

State Bank of India

However, this time, SBI’s losses are restricted to about Rs 40 crore, lent against pay orders
issued by Ahmedabad based Classic Co-operative Bank. According to bank analysts polled by
Capital Market, this is “loose change” for the bank of its size.

Bank of India

Of the five banks hit by pay order defaults, Bank of India has unfortunately been the worst hit. It
cashed Rs 137-crore fictitious pay orders issued by the Ahmedabad based Madhavpura Bank to
arrested broker Ketan Parekh. The banking sector is estimated to have taken a hit of more than
Rs 1,000 crore due to the pay order scam indulged in by many Gujarat co-operative banks.

It was Bank of India’s complaint to Central Bureau of Investigation that resulted in Parekh’s
arrest on 30 March 2001.

Bombay Stock Exchange

The Bombay Stock Exchange witnessed one of the worst bear runs leading to a 177-point crash
on 2 March 2001.

On 23 May, the BSE announced the launch of trading in index options in the first week of June, 
based on the Europian style.  For this purpose, the exchange has joined hands with the Chicago
Mercantile Exchange to adopt its system of calculating margin requirements  and managing risk,
known as Standard Portfolio Analysis of Risk (SPAN).

Calcutta Stock Exchange

In fact the 177-point crash on 2 March 2001 was triggered by the payment crisis at Lyons Range
(CSE) and Dalal Street (BSE). While investors were still trying to digest the shortfall of Rs 100
crore for the settlement ended 1 March on the CSE, the market was gripped with rumours of a
fresh payment crisis on CSE for the following settlement ended 8 March. Although the CSE
authorities denied the payment crisis initially, Sebi went ahead and suspended 40 brokers on
CSE.

Co-operative banks

It is now estimated that exposure to co-operative banks is going to cost the banking sector above
Rs 1,000 crore.

To stem the losses, nationalized banks and money market intermediaries have reportedly stopped
dealing with co-operative banks. The National Stock Exchange, too, has decided not to accept
fresh bank guarantees and renewals from 5 private banks as a precautionary measure in the wake
of the pay order scam.

Unit Trust of India

As on June 2000, UTI was believed to have a total investment of Rs 5,000 crore in K-10 stocks
(10 New Economy stocks backed by arrested broker Ketan Parekh), which today stands at less
than one-fifth of its value. Another fallout of the crash was that UTI-promoted UTI Bank’s
merger with Global Trust Bank was called off by the latter, stung by allegations of price
manipulation to get a better swap ratio with UTI Bank (2.25 shares of UTI Bank for 1 share of
GTB) .
Article on Indian Stock Market Scam: “The Ketan Parekh
scam was an example of the inherently weak financial,
regulatory and legal set up in India.”
You are Here:
Home > Management Articles > Article on Indian Stock Market Scam: “The Ketan Parekh scam
was an example of the inherently weak financial, regulatory and legal set up in India.”
Share

Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do share-brokerage
based family. He was involved in the shares scam of the year 2000/01.

The study by SEBI found that the flow of funds originating from Ketan Parekh, when paired
with securities market transactions of connected clients leads to the possibility that these trades
were executed to confuse the funds trail and to integrate the money originating from the banned
stock broker into the system of banking.

Ketan’s possible involvement was found by SEBI during its investigation into professed
manipulative trading in the scripts of Cals Refineries Limited, Confidence Petroleum India
Limited, Bang Overseas Limited, Shree Precoated Steels Limited and Temptation Foods
Limited.

Earlier, SEBI had Ketan and 17 other entities from participating in the market following a study
into purchase sale and dealing in the shares of companies like HFCL, Zee Telefilms, Adani
Exports, Ranbaxy and Aftek Infosys between October 1999 and March 2001.

In its time order, SEBI banned 26 entities and persons, including Maruti Securities Limited and
asked them to reply in 15 day’s time. The government had set up the Joint Parliamentary
Committee (JPC) to study the securities scam that hit the stock market during the year 1999-
2001.

According to SEBI, the starting point was ‘routine market surveillance’ that revealed set trades
in five scripts. It also had information from the IT department on Ketan Parekh’s source of funds
which trailed back to certain entities.

SEBI’s investigation showed that these entities built up large volumes in the five scripts chosen
for investigation; strangely enough, they often made losses on their transactions, but continued to
trade. SEBI has opinion that these independently incurred losses have a secondary motive that
needs to be separately investigated by the appropriate agency. It seems to have specific concerns
relating to money laundering to the enforcement and IT investigators.

SEBI also found that the ‘connected entities’ or fronts used by Ketan for his transactions often
sold shares without having them in their possession. They subsequently obtained the shares in
time for delivery through off-market transactions through other ‘connected entities’ within the
circle of operators.
Evidence of Ketan Parekh’s massive market activities was his ability to pay back well over
Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which had
collapsed and caused thousands of depositors to lose money when he pump off Rs880 crore to
fund his market misbehavior in the year 1999-2000.

SEBI’s team led by Mr. S.Raman (chief general manager) must be congratulated for breaking
this seemingly impenetrable system; but let us recognise that this is only the tip of the market
manipulation. Ketan Parekh is not the only manipulator to use this system; there are plenty of
others doing it too. Also, the number of scrips in which Ketan has traded is substantially higher
than the five that were investigated by SEBI.

One of the best kept secrets is the action taken against those involved in the scam of 2000, which
led to large-scale losses, the drop of two banks, Madhavpura Merc-antile Cooperative Bank
(MMCB) and Global Trust Bank (GTB) and split the giant Unit Trust of India (UTI) into two,
after pushing it to the brink of a collapse.

Whether the BSE directors had used their recourse to price sensitive information or not for
transactions in the market, having had direct access to the data was in direct violation of SEBI
rules, observes Oommen A. Ninan.

When the Sensex crossed the dizzy 5000 mark in October 1999, Bombay Stock Exchange (BSE)
brokers literally took to the terrace of Jeejebhoy Towers and released balloons. The celebration
also marked their “bullish sentimentalism” and showed lack of market prudence – that what goes
up has to come down; that the market is driven by its own dynamics.

The built up position of Mr. Parekh in certain equities known as `K 10′, in the normal
circumstances, would not have had any major impact on the market. With the elected directors,
including the BSE president, having had recourse to the price sensitive information relating to
outstanding positions, purchases and sales by leading operators it is to be seen whether they have
used this advantage to depress the prices. The Securities and Exchange Board of India (SEBI)
investigation will reveal it in the next few days.

The excitement indicated on Budget day by a sharp rise in the Sensex was rather on the high
side. There is actually nothing much in the Budget to promote savings. On the contrary, savings
have been discouraged by a drop in interest rates.

It is now very doubtful whether demutualization or corporatisation of broker-driven exchanges is

the answer. The experience of some of the stock exchanges like the London Stock Exchange, the
Australian Stock Exchange, the Nasdaq, etc. Is to be fully ascertained. Assuming that the brokers
are kept away from the management of stock exchanges, restarting their role only to their trading
rights, what is the guarantee that a new management will act in an objective manner.

There has been a flow of money from banks to capital market in recent months. Private sector
banks are prominent among them, including the Global Trust Bank (GTB). However, a reversal
of banks’ exposure to capital market recommended by the RBI-SEBI committee in September
last year is not a solution. What is essential is that the banks should have expertise in judging the
risk of the business as well as the organisational ability to administer such schemes.

Moreover, the prima facie evidence in price rigging of GTB shares raises doubts over the
regulators’ surveillance mechanism. The RBI was aware of some unusual price movements in
GTB share prices in November last year itself and the SEBI took another three months to inform
the RBI that it had found evidence of price rigging in GTB share prices. The true measure of
regulatory competence is the ability of the regulators to take quick corrective action. Further, the
GTB’s loan to Mr. Parekh without collateral is another issue that raises questions on the RBI’s
role as a regulator. Regulation and supervision and the quality of on and off-site supervision of
the RBI and the SEBI should be strengthened and they should be delinked from the Finance
Ministry with more autonomy and powers.

The regulator should continuously monitor the investment pattern so that any undue change in a
particular stream, like the broker position, could be identified and immediate investigation
conducted. The Government also should strengthen the investment institutions to facilitate long-
term investments. Flow of money to the capital market from the lending institutions should be
more transparent so that undue concentration of lending on particular scrip is avoided.

The financial crisis in Asia in 1997 has led to a fundamental re- think about the way in which
financial markets should be governed. While other Asian countries are converging towards an
international set of governance best practices, India is still lagging behind in terms of quality and
speed of implementation. In a globalize economy, countries which fail to base the financial
liberalization on strengthened economic policies and institutional structures are bound to suffer
financial crisis.