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Ketan Parekh Scam

  • Ketan Parekh was a prominent stockbroker and investor who was known for his ability to manipulate stock prices and create bull markets in the market.
  • Parekh used a variety of illegal tactics such as insider trading, circular trading, and price manipulation to increase the stock prices of some companies and create false demand for those companies' shares. He also used fake bank receipts and fictitious transactions to further manipulate stock prices.
  • Parekh's actions led to the collapse of several major Indian banks and financial institutions, including the Bank of India and the Madhavpura Commercial Cooperative Bank. The scam eventually led to a sharp drop in the Indian stock market, costing investors billions of dollars.
  • In 2002, Ketan Parkh was arrested by Indian authorities and charged with fraud, forgery and other financial crimes. He was found guilty in several cases and sentenced to imprisonment and a fine. The Ketan Parekh scam is still considered one of the biggest financial scandals in Indian history.
  • Market players followed his every move during his prime as he used his stock price to build confidence. In addition, he has established strong relationships with many Bollywood superstars, political organizations, and corporate executives.
  • Ketan Parekh was convicted in 2008 of his involvement in a stock market manipulation scandal in late 1998 and early 2001. During this period, Parkh borrowed large sums of money from banks, including the Madhavpura Commercial Co-operative Bank, of which he was a director, to invest in a handful of selected assets (known informally as K-shares). -10 is known) used. Price from the Securities and Exchange Board of India (SEBI) conducted extensive investigations before convicting Palk and his parent company of manipulating the stock prices of 10 companies known as K-10. SEBI subsequently issued a 14-year trading ban against Pare and its affiliates.
  • India's stock market was rocked by the Harshad Mehta scandal in 1992, but Ketan Parekh almost tore it apart nine years later. The most prominent stockbroker of his time held several preferred stocks, commonly referred to as "K-10 shares": Penta media Graphics, HFCL, GTL, Silverline Technologies, Ranbaxy, Zed Telefilms, Global Trust Bank, DSQ Software, Aftek Infosys, and SSI. A CPA by profession, he knew financial and business details well, so he knew the market inside and out.

Facts Of The Case
Ketan Parekh has thoroughly reviewed Harshad Mehta's 'pump and dump' technique. Banks and other financial institutions illegally financed the Big Bowl. With the help of this money, he bought several stocks directly or indirectly in bulk and caused their prices to skyrocket, I believed you would choose. Eventually, more investors will buy the stock, driving the price even higher. Mehta and his friends made huge profits when prices reached their highest levels.

The working method of Ketan Parekh
He is said to be a follower of the Information, Communications and Entertainment Division, i.e. the ICE division. This is not unusual given the fact that the late 90s and early 2000s were the time of the IT boom and these stocks were growing exponentially around the world. Therefore, the stocks that Ketan Parekh picked seemed to be growing because of their fundamentals. So his massive 200% stock surge was not surprising and never received the same attention as Harshad Mehta's escape.

But in fact, Ketan Parekh was looking for stocks with low market value and low liquidity. He then invested in these stocks and started fictitious trading in his corporate network. Ordinary people in the stock market will start to believe that their stock is going up and they will start investing to push the price even higher.

Ketan Parekh used this trick over and over for his 10 selected strains. These stocks became known as K-10 stocks and the market always seemed bullish on the future of these stocks.

Pump and Dump Scheme
In a pump-and-dump scheme, scammers typically spread false or misleading information to "boost" the price of stocks and then sell their own shares at a high price to "dump" the stocks. Triggers a buying frenzy. price sale. When the scammer sells the stock and stops promoting the stock, the stock usually goes down and the investor loses money The initial phase of the pump and dump strategy was to artificially inflate the value of stocks.

He invested in K-10 stock by acquiring about 20-30% of the company's stock, which was less known in the stock market, and increased the price of the stock, which eventually became overvalued, which prompted institutional brokers and investors to invest. in shares. He then dumped the stock, causing stock prices to drop drastically.

Circular trading
He traded shares between his entity and other friendly entities in circular trading also known as the "badla system". The stock valuation prices were boosted by luring investors and traders for high liquidity through the large volume of trades by its operations teams with similar sell orders for the same number of shares and at the same price and at the same time, which showed high demand and created large volumes of shares in the market.

Loopholes In The Law
Ketan Parekh is a stockbroker who became infamous for his involvement in a securities scam that rocked the Indian stock market in the early 2000s. The scam involved using manipulated stock prices to benefit himself and his associates.

One of the loopholes that Ketan Parekh exploited was the lack of regulation and supervision of the Indian stock market at that time. He used several shell companies to manipulate the price of certain stocks through circular trading. Circular trading is the repeated buying and selling of a stock to create artificial demand and increase its price. This allowed him to generate huge profits and attract more investors to his schemes.

Another loophole that Parekh took advantage of was India's generous margin trading rules. In margin trading, you borrow money from your broker to buy stocks. Without sufficient capital, Parikh used borrowed funds to take large positions in the stock market. This allowed him to make large profits quickly, but also exposed him to significant risks. In fact, he reportedly had arrears of membership fees of over Rs. At the time of his arrest, 1,200 Crore (about $170 million) were paid to various banks and financial institutions.

In addition to these loopholes, Parekh also had connections with high-ranking banking and financial officials. He allegedly bribed officials to cover up his wrongdoing and avoid regulatory scrutiny. Finally, the fraud was discovered in 2001 and Ketan Parekh was charged and convicted for his involvement in the fraud. The Indian government has since introduced strict regulations and monitoring measures to prevent similar scams in the future.

Governing Laws
In the late 1970s, it became clear that there was a need for laws to control and regulate domestic trade. Various committees have been formed in this field. Since the Sachar Commission was established in 1979, the key issues the Commission dealt with were the transfer of insider trading expectations and the registration of insider offers. However, there was no clear distinction as to when an insider would contact him or inform him about his future trades.

Patel Commission was established in 1986. The commission felt the need for appropriate regulations regarding the control of internal activities and their investigation. But such regulations were established only after the establishment of the Abid Hossein Commission in 1989. SEBI (Insider Trading) Regulation),1992, SEBI (Prohibition of Fraudulent and Unfair Trade Practices connecting with protections market) � 1995 were introduced to regulate unfair trade practices.

The news of the Katan Parekh scam first hit the limelight when Bank of India (Bombay branch) claimed to have defrauded them of Rs 137 crore. Sucheta Dalal, a journalist of The Times of India, exposed the entire scam and published a report on it that eventually caused chaos and led to the stock market crash of 2001. RBI has initiated an inquiry into Parekh.

Ketan Parekh was found guilty of insider trading and arrested by the CBI. He was also convicted of stock market manipulation and banned from trading until 2017.His name has also appeared in the Canfina scam, in which various organizations conspired to siphon off Rs 470 crore.

In 2009, market regulator SEBI found that it was using front companies to carry out illegal activities. Therefore, approximately 26 businesses were banned because of that review.

In late March 2014, Parekh was convicted of misconduct by a special CBI court and sentenced to two years in prison. The latest development came in 2021 when the Supreme Court allowed Ketan Parekh to travel to the UK to attend to his daughter's medical needs.

Ketan Parekh, a broker-turned-operator who single-handedly drove the Indian stock market, eventually fell victim to his own greed. You can watch an informative episode of 'Money Mafia' on Discovery+ to find out how Ketan Parekh pulled off a Rs 40,000 scam!

The Indian regulatory mechanism is among the world's most stringent. There are too many regulators in the market like the RBI, SEBI, FMC, IRDA, PFRDA and the Ministry of Finance, to name a few. Since there is only one umbrella organization that is the Ministry of Finance to oversee the activities of individual regulators, it often leads to loopholes and results in frauds and scams. After the Ketan Parekh scam, few regulators and rules were imposed, and the SEBI introduced Clause 49 of the Listing Agreement to ensure that the companies follow good corporate governance practices in the best interests of the market.

  • Mishra, A., Mishra, V., & Smyth, R. (2015). The Random-Walk Hypothesis on the Indian Stock Market. Emerging Markets Finance & Trade, 51(5), 879�892.
  • Amrut S. Joshi & M.P. Kartik, The Development of Universal Banking: An Analysis of the Legal Regimes in USA and India, 14 Student B. REV 1 (2002)
  • Sandeep Parekh, Why India Must Resist a Derivatives Crackdown, 23 INT'l FIN. L. REV. 41 (2004).
  • Radhika Pandey & Ila Patnaik, Legislative Strategy for Setting up an Independent Debt Management Agency, 10 NUJS L. REV. 395 (2017).
  • B. Mahapatra. "JPC Report." Economic and Political Weekly, vol. 38, no. 12/13, 2003, pp. 1086�1086. JSTOR.
  • Debashis Basu and Sucheta Dalal , 2021, The Scam, Third Edition, Mumbai, Ken Source, 414
Written By: Shashank Pandey, BBALLB - Alliance University, Bangalore

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