Author: Kritika Prakash, a student at Government Law College, Mumbai
As the nation was still recovering from the 1992 scam, Harshad Mehta’s mentee Ketan Parekh stunned the country with his tricks. Popularly known as ‘Bombay Bull’, Ketan Parekh was considered to be the Midas of his time. Being a Chartered Accountant, with a stock-broking family business, Ketan would turn everything he touched into gold. He joined Harshad Mehta’s firm GrowMore Research & Asset Management which allowed him to closely observe the methods of manipulating the stock market at his will. Soon, he devised his methods and pulled off one of the biggest stock market scams within just two years which led him to earn more than thrice the annual amount of the securities he manipulated. His fraud could be estimated to be up to 40,000 crores. Ketan was well-trusted from way before due to his insider trading techniques that he had been practicing in his family business quite well. He had successfully gotten great connections with politicians, Bollywood celebrities, and high-profile business managers by exploiting his ways. Through these connections, he came across Kerry Packer who was a leading media entrepreneur in Australia. This is where the rip-off started when Ketan Parekh and Kerry Packer joined hands to start a new venture capital firm namely KPV Venture and the initial investment in the firm was of $250 million. The firm invested in start-ups and since Ketan invested a lot in the ICE sector i.e. Information, Communication, and Entertainment, it turned out to be a boon for him. Around the same time dot com bubble had ballooned and that worked in the favour of Ketan as people started to trust his far-sightedness and all his investments boomed in the sector allowing even foreign investors to trust Ketan blindly soon Ketan became the talk of the town. Parekh tried the pump and dump method by considering financial institutions as an easier ally and gained heavily from it. He would boost the prices by spreading misinformation and rumours leading institutional investors to get manipulated by him. They would follow his lead and start investing in lesser-known companies whose 20-30% stake were in the hands of Ketan himself. The shares would skyrocket since the financial investments would increase, creating an illusion for the retail investors that such stocks are of extreme significance. He would also trade between his ally entities and create a system of circular trading also called the badla system which again would create a false impression that these stocks are of high liquidity and fool the investors into believing that such stocks had high demands. All the methods combined would cause the stocks to skyrocket and as soon as they reached a pre-determined level, Ketan would sell all the securities and earn massive profits while other investors suffered from losses. Parekh even gained around 200% of annual returns from some of those stocks which he then named the K-10 stocks or the KP pack. This included Pentamedia Graphics, HFCL, GTL, Silverline Technologies, Ranbaxy, Zee Telefilms, Global Trust Bank, DSQ Software, Aftek Infosys and SSI.
Now, there were a lot of loopholes in the legal system concerning the stock market that Ketan exploited in his golden time. The first one included the lacking a system of regulations and supervision in the Indian Stock Market at the time. It opened the eyes of the Securities and Exchange Board of India and other regulatory authorities of India when it came to their notice that Ketan has been using shell companies to bend the stock market at his will by creating artificial demand in the market through circular trading and creating illusions in the head of the investors. The second loophole he exploited was concerned with the margin trading regulations which allow you to make investments through borrowings from your broker. Now, Parekh would borrow huge funds from numerous brokers and use them to take huge positions in the stock market. This led to a pile of debts on his name reaching up to 1,200 crore which were payable to several banks and financial institutions. But, this was not the end of such exploitations. He also bribed officials and exploited his high-profile connections to cover up for his large-scale manipulations which were too large to not have come to anybody’s notice for 2 years.
Finally, in 2001, when the Sensex crashed by 176 points raising eyebrows and the Bombay Branch of Bank of India claimed that Ketan Parekh defrauded them of ₹137 crores, Ketan Parekh’s wrongdoings started coming into the limelight and this caused widespread chaos in the nation. The NDA government started investigations following which, a journalist of the Times of India, Suchitra Dalal, exposed the entire scam nationally and the stock market crash of 2001 occurred. Parekh came under the radar of the Reserve Bank of India and enquiries were initiated. After the investigations, Parekh was held guilty of fraudulent and unfair trade practices like insider and circular trading, and the Bombay Bull and his associates were debarred from the stock market for 14 years under Section 11 and 11B of the SEBI regulations regarding the Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market Regulations, 2003 and Prohibition of Insider Trading, 1992. These laws protect the interests of the investors by criminalizing any unfair practices that may be prevalent in the market including passing significant information that may manipulate the stocks in the market and are not known to general retailers causing their exploitation. It was also brought to focus that Section 405 which talked about breach of trusts and catered to the laws related to financial fraud under the Indian Penal Code, 1860 as it deals with the situations relating to a person misappropriating the facts leading to contempt of a legal order or breach of a contract. It also discussed Section 406 which imposes imprisonment up to three years with a fine on such breaches while Section 409 adds up to it by specifically catering to the criminal breach of trust by agents, bankers, etc, and rendering such acts as criminal too. Ketan Parekh was finally imprisoned as he was found guilty in the case of Securities and Exchange Board of India v. Panther Fincap and Management Services Limited and Ors. He was imprisoned for 3 years and had a fine of Rs.5,00,000 under Section 24(2) of the Securities and Exchange Board of India Act, 1992 which states that anybody who is not able to pay the amount that has been fined, then that person will be punishable through imprisonment. This section is of extreme importance since Parekh was also supposed to compensate an amount of Rs.3,25,000 to the Securities and Exchange Board of India. It is also an alleged fact that Ketan Parekh was also involved in the Hashad Mehta Scam of 1992 but, was able to escape it. He was also a part of the Cafina scam. Such scandalous measures being taken by scammers shocked the regulatory authorities. They carried out a large-scale sweep of 26 businesses and pushed the authorities to make stricter rules and allow stringent monitoring of the market. Even though commissions like the Sachar Commission of 1979 and Patel Commission of 1986 tried regulating cases of insider trading and the internal factors of the stock market, there was still a lack of proper instructions regarding such regulations. The Ketan Parekh Scam of 2001 opened the eyes of SEBI and other regulatory authorities in a better way even after huge backlashes after the 1992 scam. The scandals had taken place right under the nose of the authorities and it was high time for SEBI to act on this. Better regulations were presented by the authorities and ‘regulation’ in the real sense of the stock market started. SEBI closely monitors every action taking place in the market. They even carry out training and education of agents working in the market and every agent has to be registered under the authority. The Companies Act of 2013 was also passed which helped in the regulation of companies before their compensation itself, making sure that no frauds are happening and keeping a check on the legitimacy. Under the same, Section 447 that deals with fraud states that any act or abuse of any position with intentions to manipulate or harm the interests of its shareholders, or any related person may lead to imprisonment and penalty. Section 36 of the same also points out to people like Ketan who tend to spread misinformation for their gains. It states that spreading such misinformation, making false promises to manipulate the market, and misleading the people for the same will also be punished under section 447 itself. Not just these but, many more regulations now work to regulate the market making sure that no such scams like that of Harshad Mehta and Ketan Parekh take place and exploit normal people. The legal system has done commendable work with its strictness and in the current scenario, it is safe to say that ‘our’ interests are being protected by SEBI.
FREQUENTLY ASKED QUESTIONS
What is a dot com bubble? It was a period between 1995 and 2000 when investors invested a lot of money into Internet-based startups, world wide web speculating large profits
Where is Ketan Parekh now? There is no such information on where he is exactly, as of now. But, the last information regarding him was that he shifted to London for his daughter’s treatment for post-viral encephalitis
