Ketan Parekh Scam – The Notorious Stock Market Scam!

Ketan Parekh Scam: One of the biggest stock market scams that raised alarm not only among stock investors but also Indian stock exchanges and other regulators was the Ketan Parekh scam.

The market henanigans were done in such a way that he could earn multiple times his annual profits on the stocks he manipulated. Ketan Parekh was a god to many investors, creating the illusion that everything he touched turned to gold and the market would grant him whatever he wanted.

In just two years, the Ketan Parekh scam has duped so many investors, as well as banks and the stock market, that it has become a case study for many these days.

The stock market has the power to make someone rich and someone else lose money in just a few seconds. On the one hand, there are cases of successful trading in the stock market by people who became millionaires by investing in the stock market, such as Warren Buffett, Carl Icahn, and George Soros.

On the other hand, there are Harshad Mehta and Ketan Parekh who not only dominated the stock market but were also found guilty of economic crimes. Let’s take a closer look at what the Ketan Parekh scam was, how he succeeded in deceiving investors and shaking up the stock market, what his next trick was planned, and how he was caught.

Ketan Parekh – Background and Fundamentals

From 1999 to 2000, Ketan Parekh, popularly known as the ‘Bombay Bull’, was the mentee of Harshad Mehta (who was also involved in another scam that rocked the Indian stock market). By profession, the Ketan, California native began his career in the late 1980s, running the family business of NH Securities, a stock brokerage firm started by his father.

Through this, he thoroughly grasped the trends of the stock market and the psychology of investors.

Before the Ketan Parekh scam reached its peak, marketers blindly followed his every move, using stock prices to gain the trust of investors. Additionally, he enjoyed close relationships with many celebrities, political parties and business managers in Bollywood, which helped him connect with leading Australian media entrepreneur Kerry Packer.

Kerry and Ketan have joined forces to launch KPV Venture, a $250 million venture capital firm focused on investing money in new startups.

how Ketan Parekh scam was implemented.?

Ketan Parekh was a strong believer in the ICE sector (Information, Communications and Entertainment), which was in 1999 and 2000 when the dot-com boom was just beginning. This allowed him to prove that his predictions were true to many other investors.

Moreover, from 1999 to 2000, as Ketan Parekh was dominating the stock market, many businessmen from investment companies, foreign companies, banks and listed companies donated money to him to manage.

Ketan Parekh traded using Kolkata Stock Exchange as it is a stock exchange where strict and pivotal rules and regulations are not formed. He abused these exchanges and also connected with many other brokers to trade on his behalf and take commissions.

With this huge amount of money, he purchased 20-30% shares of several unknown companies, and the stock prices of those companies suddenly soared, making them a hot topic. Once his price reached a certain level, he quietly exited and sold his securities, making countless profits.

Not only did he manipulate stock prices, but he also played games with banks to raise funds to defraud stock prices and dominate the market. He first purchased shares of Madhavpura Mercantile Commercial Bank so that he could gain the trust of the bank when he approached it for a loan in the form of Pay Orders.

A payment order is an instrument similar to a check, but is issued by a bank upon payment of a small advance payment from the customer. When he successfully defrauded the share price of MMCB, he approached other financial institutions such as UTI to promise payment orders, which also included investments in HFCL. His loan accumulated to Rs. 750 million.

He created the following portfolio: K-10 It consists of top 10 hit picks handpicked by Ketan Parekh. These included Aftek Infosys, Zee Telefilms, Pentamedia Graphics, Mukta Arts and others. He was interested in well-known companies with low market capitalization and liquidity. So he was able to manipulate the company’s price using the ‘Pump and Dump’ formula.

He was also reported to have engaged in insider trading by deliberately influencing the stock prices of certain companies to bribe him and take advantage of price increases to take advantage of investors.

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How did everything Ketan Parekh touched turn into gold?

• At that time, the ICE sector was booming and Ketan invested heavily in this sector, which helped it gain investor confidence.
• He was trading on the Kolkata Stock Exchange, which itself lacked strict regulation. Therefore, no one was watching his movements.
• He used to buy stocks of famous companies when they were trading at low prices, and joined hands with other traders to buy and sell stocks of such companies frequently, resulting in rapid price increases.
• The financing method of buying shares, taking pay orders and later being promised them when the price soars, also helped him make a bull run in the stock market.
• Many investors believed that SEBI’s erratic response and regulation, which was able to notice unusual price movements in the market, helped them accumulate more losses due to fraud.
• His relationships with celebrities, political and religious leaders also helped him obtain most of his funding from large corporations and businessmen.

Allegations and clarification of Ketan Parekh scam

SEBI and RBI had launched a probe into the Ketan Parekh scam following a massive market crash of 176 points in a day in 2001, just a day after the Budget was announced. Ketan Parekh was accused of engaging in insider trading, circular trading, pump and dump, and misrepresenting borrowings from banks.

Ketan Parekh was found guilty of plagiarizing the Indian stock market and was banned from trading on the Bombay Stock Exchange (BSE) for 15 years until 2017 following the Ketan Parekh fraud conviction. He was also found to have been involved in circular dealings and insider trading with many banks and was sentenced to a rigorous prison term of one year.

However, the SEBI investigation revealed that despite the ban on trading, he made good use of his network to conduct transactions for specific companies. In late 2008, many of these companies were tracked down by SEBI and banned from trading.

In 2014, the CBI found him culpable and sentenced him to two years of rigorous imprisonment along with a fine of up to Rs. 50,000. He also siphoned money abroad. In April 2001, SEBI reported that he had outstanding funds with the conglomerate worth Rs. 12.73 billion and MMCB Rs. 8.88 billion to Global Trust Bank Rs. 2.66 billion.

The said amount was reported in 2006 and reached an astonishing level of Rs. 400 billion. He is also known to have received stocks from various companies using sub-accounts of overseas corporations and foreign institutional investors and transferred funds overseas.

To summarize Ketan Parekh’s fraud charges, he misrepresented facts, falsified accounts, misappropriated stock market prices, exploited investors’ decisions, mishandled public funds, and encouraged company directors to engage in insider trading. It was found that he was involved in banking fraud, including by paying bribes.

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Closing Thoughts

In this article about the Ketan Parekh scam, we discussed how Ketan Parekh was able to guide investors’ decisions through his negligence. Not only the exchanges and investors, but Ketan Parekh also called the bank’s bluff. And all that piled up into huge debt and one day in 2001 it became the historic case of the biggest fraud in the Indian stock market.

How many other companies are still operating on the stock market after he and others were banned from trading is part of the current investigation.

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After graduating with a Bachelor of Commerce degree from Mangalore University, Aron entered the world of equity research to explore his interest in financial markets. Outside of his work, you can find him crazy about the show, supporting RCB and dreaming of visiting Kasol soon. He also believes that getting kids to eat ice cream is the best way to teach them taxes.

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