AUTHOR: Harshi Gautam
Student at National Law University, Sonipat
ABSTRACT
Share market and stock broking is often considered a very profitable and dynamic money-making strategy, while for others, it is totally a nightmare. It has produced many billionaires like Warren Buffett, Radha Kishan Damani many more. But on the other hand, the stock market has also produced few scammers and tricksters, who went way beyond the rules and regulations of the share market to become rich. Among such scammers, Ketan Parekh’s name has been among the most sought-after scammers, stock market has ever produced. For many years, shareholders viewed Ketan Parekh as the “Stock Market God” who made money on everything he touched. He was convicted in 2008 for his involvement in the Indian stock market manipulation scam that happened in the late 1998 to 2001.
INTRODUCTION
The Indian stock market is monitored by the Securities and Exchange Board of India (SEBI). Presently, there are seven recognized stock exchanges in India: Bombay Stock Exchange, National Stock Exchange, Calcutta Stock Exchange Ltd., Indian Commodity Exchange Ltd, Metropolitan Stock Exchange of India Ltd., Multi Commodity Exchange of India Ltd., and National Commodity and Derivatives Exchange Ltd. Ketan Parekh alone was responsible for one of the biggest scams in the Indian financial market between 1999 and 2001and he also worked under Harshad Mehta. Each and every move by Parekh was closely monitored and followed by many brokers, as he was considered to be the “Man with the Midas Touch”. He was named as one of the key culprits in Sensex’s 176-point fall, which caused the 2001 Budget to collapse. He used to artificially rig the prices of handpicked shares referred to as K-10 stocks, by obtaining loans from banks such as Global Trust Bank and Madhavpura Mercantile Cooperative Bank. Ketan Parekh’s scam was estimated at more than 40,000 crores by the Serious Frauds Investigation Office (SFIO). The major flaws attributed to this scam are SEBI’s lax attitude and circular trading and broker rigging practice. It highlighted the vulnerabilities in the system and led to regulatory reforms and greater scrutiny of market activities to safeguard the interests of investors.
HISTORY AND BACKGROUND
Ketan Parekh, belonged to a Gujrati stock broker family in Mumbai and was raised in Mumbai itself. After completing his studies, he studied Chartered Accountancy (CA) and joined his family broking business. Soon he left his family business to join the most sought-after stock broker and big bull Mr. Harshad Mehta, to learn the basics of stock broking. He joined as a trainee in Grow More Consultancy, owned by Mr. Mehta to gain the share market basics. The Mehta and the Parekh duo can be clubbed to be named as the “Guru chela scammer”, as both became the famous stock broking scammers in India. After working under Mehta for a few years, he joined his family broking firm named Narbheram Harakchand Securities (NH Securities). In the year 1992, when the Harshad Mehta scam was exposed, Parekh was the part of the company, he was though not investigated as he was just a junior level employee with no direct connection with the company operations. But in the same year he was held guilty in the Canfina Mutual Fund scam, a fraud of more than 47 crores and was sentenced to one year of imprisonment.
THE SCAM OF 2001
Ketan Parekh was no less than Harshad Mehta when it came to manipulating the stock market. He is commonly known as the “Bombay Bull” and referred to as “the Pied Piper of Dalal Street”. Unlike Harshad Mehta, he chose to keep his low-key image and portrayed a simple living with a humble profile. His qualification as CA and his family history of brokers, helped him create his own trading ring and later helped him become the bull of the stock market. He then got closer to celebrities and was often in the limelight and media’s eye. He then formed KVP Ventures along with Vinay Maloo and the Australian magnate Kerry Packer primarily focusing on information technology software, internet, e-commerce, media and entertainment, and telecommunications with an initial capital of $250 million on 27 March 2000. He also formed an investment bank named Triumph International. With the emergence of the dot com boom in the late 1990s, he began investing in low-liquidity IT and telecom firms, which were known as the ‘K-10’ stocks. K-10 stocks were Aftek Infosys, DSQ Software, Global Tele systems, Himachal Futuristics Communications, Pentamedia Graphics, Satyam Computers, Silverline Technology, SSI, Zee Telefilms and Pritish Nandi Communications. He owned roughly 16 percent of Global’s floating shares, 25 percent of Aftek Infosys, and 15 percent of Zee and HFCL, respectively. As a result of the significant growth in the value of K-10 stocks, brokers and fund managers began to invest extensively in K-10 stocks. He traded in the Kolkata Stock Exchange which happened to be advantageous to him due to the lack of rules and regulations as compared to the Bombay Stock Exchange. He ruled the stock market during the years from 1999 to 2000. He misused the Kolkata Stock Exchange and also tied up with many other brokers to trade on his behalf and gave them the commission. For fraudulently rigging the pricing of K-10 shares, he was barred from trading in the Indian stock market for 14 years.
PAREKH’S MODUS OPERANDI
Ketan Parekh’s initial step was to pick up the substantial stakes from promoters at large discounts and shifted his focus primarily on institutional investors. He was bullish in nature regarding the stock market. He required three elements to boost the market: stocks, the stock exchange, and finance. Ketan Parekh’s stock selection was based on four key factors:
- the business must be small;
- the company must have a low volume;
- the company’s future prospects must be high; and
- the company’s market capital must be low.
His stock portfolio was mostly focused on the technology, communication, and entertainment industries after the emergence of the dot com boom, popularly known as the ICE sector. He referred to them as ‘K-10’ stocks. Funds were raised through promoters such as Global Tele systems, Himachal Futuristic Communications Ltd, and Zee Telefilms or by his own money. Some funds were also raised through institutional investors through mutual funds, Hedge funds, Insurance companies, P/E funds, or banks such as Global Trust Bank and Madhavpura Mercantile Cooperative Bank in the form of loans and pay orders without providing sufficient securities. He purchased some shares of Madhavpura Mercantile Cooperative Bank to sway the bank’s loan decision in his favor. When he successfully managed to rip-off the price of MMCB’s shares, he approached the other financial institutions including HCFL and UTI and pledged the pay orders with them. His loans accumulated to Rs. 750 million. Back then, RBI permitted traders to acquire loans of about 15 crores.
In March 2001, MMCB issued Pay Orders of Rs. 137 Crores for Ketan’s Companies: 65 crores to Classical Share and Stockbrokers, 20 crores to Panther Investrade, and 52 crores to Panther Fincap which were discounted by Bank of India and all these companies had their accounts in Bank of India as well. However, the Reserve Bank of India intervened in 2001 and returned the bounced pay orders to the Bank of India. MMCB was unable to clear the payments because it lacked adequate money. RBI labelled MMCB a defaulter, and BOI suffered a loss of Rs. 137 crores. Ketan Parekh paid back only Rs. 7 crores, which led to the filing of a 130 crore Rupees fraud case against him. The entire scheme was exposed after Ketan was detained by the Central Bureau of Investigation.
He adopted two methods for his operation, pump and dump scheme, and circular trading:
- Pump and Dump Scheme
The initial stage of the pump and dump strategy was to inflate stock value artificially. He invested in K-10 stocks by acquiring about 20-30% of the company’s stock which was less well-known in the stock market and inflated the price of the shares, which eventually became overvalued leading to enticing the institutional brokers and investors to invest in the shares. Then he dumped the shares, causing the stock prices to fall drastically. This was his Pump and Dump scheme, like for Zee Telefilms, whose share price was Rs. 127 per share rose to Rs. 2330 and similarly for Himachal Futuristics which had a rise from Rs. 194 per share to Rs. 2553 per share.
- Circular Trading
In circular trading also known as the “badla system”, he traded the stocks between his entity and other friendly entities. Prices of the stock valuation were raised by luring investors and traders for high liquidity through his operational team’s large volume of trading of similar sell orders for the same number of stocks and at the same price and at the same time which showed the high demand and created large volumes of the stock in the market.
ALLEGATIONS ON PAREKH AND TIMELINE OF THE CASE
The K-10 shares were the major reason for Sensex’s 176-point loss. The Sensex fell by 175 points, and three famous brokers were held in default against the Calcutta Stock Exchange, one of them was Ketan Parekh. Bank of India filed a criminal case against Ketan Parekh for his involvement in the pay order scam of Madhavpura Mercantile Cooperative Bank and he was arrested by CBI. Ketan Parekh admitted acquiring funding from Zee and HFCL. Ketan Parekh was arrested by CBI for fraud and misappropriation of public funds and the case was filed by Madhavpura Mercantile Cooperative Bank. Ketan Parekh was released on the grounds that he will deposit Rs. 16 crores within 6 months. Zee sued Ketan Parekh to recover Rs. 90 crores from him. Ketan Parekh was served with a notice by Global Trust Bank (GTB) to recover Rs 180 crore outstanding to the bank. Ketan Parekh failed to pay the amount due to Madhavpura Mercantile Cooperative Bank. SEBI directed Ketan Parekh’s companies to not buy, sell or transfer any shares of Global Trust Bank till investigations. Ketan Parekh agreed to pay dues to the Bank of India. SEBI banned Ketan Parekh and his associates for 14 years from the stock market. SEBI cancelled the registration of Ketan Parekh’s broking entities. Central Government filed a petition against M/S Kopran Limited, a company of Ketan Parekh for recovering Rs. 28 crores from him. A case was filed to investigate the nature and mode of operation of the transactions by the company, Shonkh Technologies International Ltd, as Ketan Parekh acquired shares of Shonkh Technologies International through his company, Panther Fincap and Management Services, which was beyond the permissible limit and without the required disclosures. A petition was filed by Ketan Parekh against the order of SEBI but it was dismissed considering the huge scam. NH Securities Ltd challenged an order of CIT(A) which affirmed the loss disallowance. Ketan Parekh filed an appeal against a CIT(Appeals), Central-VII, Mumbai judgment dated 13-03-2009 for Rs.3,00,000/- in unexplained spending from income in his capital account. The appeal was allowed because after being declared an offender under the Prohibition of Fraudulent and Unfair Trade Practices Regulations Act, 2003, the appellant had to rely on other family members for personal costs. A petition was filed by Ketan Parekh for dismissing the order of the Division Bench of the Bombay High Court due to financial hardships. The appeal was dismissed by the court and directed to pay off the penalty of Rs. 80 crores within four weeks. Ketan Parekh was sentenced to imprisonment for 2 years with a fine of Rs 50,000 by a special CBI court in Mumbai for cheating. On 27th February 2018 Ketan Parekh and his cousin were found guilty of fraud under the SEBI Act by a special SEBI Court and were given three years in prison and a penalty of Rs. 10 lakhs.
LAWS SURROUNDING KETAN PAREKH CASE
The legal provisions in the following case were:
Legal provisions and implications relating to financial fraud under the Securities Exchange Board of India Act, 1992.
Legal provisions and implications relating to financial fraud under the Indian Penal Code, 1860.
Legal provisions and implications relating to financial fraud under the Companies Act, 2013.
In the case of Sebi v. Ketan V. Parekh and Others (2003), Ketan Parekh and his associates were debarred from the stock market under the Sections 11 and 11B of the Act read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and Regulation 11 of SEBI (Prohibition of Insider Trading) Regulations, 1992. In the case of Securities and Exchange Board of India v. Panther Fincap and Management Services Limited and Ors (2018), Ketan Parekh was found guilty of the offense and he was imprisoned for a term of 3 years with a fine of Rs.5,00,000 under Section 24(2) of the Securities and Exchange Board of India Act, 1992.
CONCLUSION
The second-largest fraud in India was the Ketan Parekh scam. In the aftermath of the fraud, SEBI incorporated Clause 49 to the Listing Agreement to make sure that businesses behave in the best interests of the market by adhering to excellent corporate governance principles. To stop these frauds, RBI has also sought to make the laws and regulations better. To assist banks in finding cases of borrower fraud at an early stage, the RBI has established a Central Fraud Registry Portal, a searchable database and all Indian banks have access to the platform.
