The Indian Stock Market, in small doses, can act as fuel to move us sky-high,
essentially when we are feeling discouraged. For some people stock market is a
wish-granting factory and for some it's a terrible nightmare. Many investors
become billionaire overnight and many turned to bankrupt while investing into
the market. This sector being the victim of such roller-coaster ride mandates
the need for its regulations. To monitor trading in the stock market Stock
Exchange Board of India (SEBI)[1] has been incorporated as a "watchdog" of the
share market to prevent various malicious activities.
Ketan Parekh scam (K-10 Scam) is one of the biggest stock market scams of the
Indian stock market. It is believed that it is the biggest scam after the
HARSHAD MEHTA SCAM. Ketan Parekh is also known as the 'pied piper' of the Indian
stock market only to direct its doom, just like the story.
He was held guilty for stock manipulation and insider trading; his scam leads to
downfall of the SENSEX by 176 points[2] and as a result the budget of 2001 was
collapsed. He used the technique of pumping and dumping i.e., he used to invest
in some stocks in a huge amount to increase the demand of the stock which
resulted in price appreciation and after that he used to dump as in sell those
stocks in a very high price. His scam was estimated at more than 40,000 crores
rupees[3] by Serious Fraud Investigation Office (SFIO).
Who Is Ketan
Parekh?Ketan Parekh or 'Bombay Bull' was a trainee of the 'Big Bull' i.e., Harshad
Mehta. He is a CA by profession but started his career by inheriting his family
business of stockbroking, under the name of NH Securities. With the emergence of
dot com boom in the late 1990s, he started investing in the low liquidity IT and
Telecom stocks, his K-10 stocks. His K-10 stocks were Pentamedia Graphics, HFCL,
GTL, Silverline Technologies, Ranbaxy, Zee Telefilms, Global Trust Bank, DSQ
Software, Aftek Infosys and SSI.
He enjoyed very close relations with many famous Bollywood celebrities,
political leaders and businessmen and they connected him with Kerry Packer, an
Australian Media Entrepreneur. Both Kerry and Ketan joined hands and started a
venture capital firm called as KPV venture with 250 million USD on 27 March
2000, this venture focused on investing money on start-ups.
How He
Executed The Scam?He used to select the stocks of those companies whose business was small, has
low volume, has low market capitalisation but with high growth prospects. Just
like his mentor he was also very bullish in nature. Due to the scam of 1992, the
Bombay Stock Exchange (BSE) became very cautious and was monitoring each and
every trade very closely, therefore, Ketan chose to trade in Kolkata Stock
Exchange as it lacks various restrictions.
In the late 1990s the sector which was emerging the most was the information and
communication sector due to the invention of the internet; this emergence was
called as dot com boom. After the emergence of dot com boom, Ketan mainly
focused on the technology, communication and entertainment industries. He named
those stocks as 'K-10' stocks.
He used to raise funds from the promoters of the K-10 companies, institutional
investors through mutual funds, hedge funds, insurance companies or from the
banks for the purpose of pumping and dumping and circular trading.
He used the
technique of pumping and dumping for this he acquired 20-40 percent of the
shareholdings of the K-10 companies to artificially inflate the prices of the
stocks which resulted in overvaluation of those stocks and it attracted
institutional investors or investors with a huge amount of purse to invest in
those overvalued stocks and then he used to dump those shares, causing the share
prices to fall significantly.
He used to inflate the stock prices by trading of
stocks between his entity and his friendly entities in a manner known as
circular trading, wherein he along with his team executed similar sell orders in
same price in same number in same time which increased the share trading volume
and this acted as a bait to attract high potential investors to invest in those
stocks.
For the purpose of pumping and dumping and circular trading he acquired loan
from various banks including Madhavpura Mercantile Cooperative Bank (MMCB). MMCB
granted him a loan without receiving sufficient securities. At that time RBI
traders to acquire loan of an amount not exceeding of rupees 15 crores.
In March
2001, MMCB issued pay order of an amount of rupees 137 crores to Ketan's 3
companies, Classical Shares & Stockbroking- 65 crores rupees: Panther Investrade-
20 crores rupees:
Panther Fincap- 52 crores rupees. Later MMCB discounted these
pay orders from Bank of India as all these companies had an account in the Bank
of India. As these pay orders were lacking sufficient securities, the discounted
pay orders got dishonoured and therefore, RBI intervened in between and returned
those dishonoured pay orders. MMCB was unable to clear those defaults and
therefore, it was declared as a defaulter and Bank of India suffered losses of
137 crores rupees[4].
Ketan Parekh repaid only 7 crores rupees, a case of fraud
for 130 crores rupees was filed against him and his entire scam was exposed when
he got detained by the Central Bureau of Investigation.
Allegations
And ConvictionSeeing excessive index movements in February, March and April 2001 SEBI realized
that it is slightly fishy and hence it conducted an investigation., the SEBI got
to know that all the stockbroking entities owned by Ketan Parekh were indulged
in various unfair practices;
- Synchronised trades
- Circular trading for fake price appreciation
- Manipulative buying and selling
- Pumping and dumping
- Insider trading
- Misrepresentation of facts to borrow money from the bank
While considering the above allegations the SEBI filed a case against Ketan
Parekh and his associates. In the case of SEBI v Ketan Parekh and Others
(2003)[5], SEBI debarred Ketan Parekh and his companions or associates from
trading in the stock market for 14 years under section 11 and section 11B read
along Rule 11 of SEBI(Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Market) Regulations, 2003 which states that the SEBI may
order in the interest of investors to issue investigations or enquiry or after
completion of such investigations or enquiry suspend the trading of the security
if being conducted in a fraudulent manner, restrain any person to access the
securities market, suspend any officer of the stock exchange, retain the
proceedings of such fraudulent trade practices, direct any person related to
such transactions to dispose of any assets forming part of such fraudulent
transaction, restrain any person to trade in security market in a particular
manner, prohibit any person to alienate any securities acquired from such
fraudulent transaction, any other order as the SEBI may deems fit[6]: and
Regulation 11 of SEBI(Prohibition of Insider Trading) Regulations, 1992 which
gives SEBI the power to initiate criminal prosecution under section 24 of the
Act, in the interest of investors or securities market and for the compliance of
the provisions of the Act, and the SEBI may issue an order for directing an
insider or any other person to not deal in securities in a particular way,
prohibiting any insider or any other person from alienating any securities
acquired from violating these regulations, restricting any insider to
communicate the information, declaring the transactions in securities null and
void, directing the person who acquired securities from violating these
regulations to reverse the transaction, directing the person to transfer the
proceeds of such transactions to Investors Education Protection Fund[7].
A petition was filed by Ketan Parekh against the order of SEBI in SAT in the
year 2006, which debarred him and his associates from accessing in the stock
market. However, SAT dismissed this petition upon considering the gravity of the
scam. Another case has been filed by SEBI against Ketan Parekh and his
stockbroking entities in the Special Court (judicature at Bombay), established
under the Securities and Exchange Board of India Act, 1992.
In the case of
SEBI v Panther Fincap and Management Service Limited and Others
(2018)[8], the Special Court ordered that Ketan Parekh was found guilty of an
offence under section 24(2) of Securities and Exchange Board of India Act, 1992,
which states the punishment for non-compliance with the directions of SEBI and
accordingly he was punished with a rigorous imprisonment of 3 years along with a
fine of rupees 5,00,000 also he was directed to compensate an amount of rupees
3,25,000 to the SEBI.
Conclusion
Ketan Parekh scam was the second largest fraud in the history of Indian Stock
Market, the estimated amount of fraud is rupees 40,000 crores. Just like the
Scam of 1992, Indian economy suffered huge losses, stock fell terribly there was
a bloodbath in the Indian stock market, many people committed suicide after
losing their savings of lifetime in the stock market crash, financial
institutions got hit very hard, value of Rupee saw a downgrade against the value
of Dollar, investors' trust was shattered after seeing the implications of the
fraud.
In order to regain the investors' trust SEBI incorporated additions in the
Clause 49 in the provisions of the Listing Agreement, the new additions were
related to the provisions of independent directors, audit committee, financial
disclosures, related party transactions proceeds from public issue and whistle
blower policy. This was done to make sure that the companies behave in the
interest of the market.
The RBI, to stop these frauds or scams, established a
new body called as Central Fraud Registry Portal, with the aim to assist the
banks to deter frauds in initial stages, this new portal is accessible by all
the banks of the country.
End-Notes:
- Securities and Exchange Board of India Act, 1992, section 3, No. 15, Acts of Parliament, 1992 (India)
- Aron Almeida, Ketan Parekh Scam- The Infamous Stock Market Fraud, Trade Brains (Jan. 1, 2023, 9:40 PM), https://tradebrains.in/ketan-parekh-scam/
- Hindustan Times, https://www.hindustantimes.com/india/ketan-parekh-scam-may-touch-rs-40-000-cr/story-oJmJMXEV7993vsVEBiUEXP.html (last visited Jan 1, 2023)
- Tarini Kalra, Ketan Parekh Scam, iPleaders (Jan. 1, 2023, 9:56 PM), https://blog.ipleaders.in/ketan-parekh-scam/
- SEBI vs Ketan V. Parekh, Kartik K. Parekh, on 12 December, 2003
- SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, section 11, 2003 (India)
- SEBI (Prohibition of Insider Trading) Regulations, 1992, 1992 (India)
- SEBI vs Panther Fincap and Management Service Limited and Others, on 27 February, 2018
Written By: Shubham Rungta
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