Ketan Parekh siphoned a huge sum from many bank.

1. Ketan Parekh
Scam
Bombay bull siphoned a huge sum of money from banks.
By, Kapil Mani Nirola
MBA IV Sem
Finance
ICFAI UNIVERSITY SIKKIM

2. Background
Ketan, CA by profession, started his career in the late 1980s and was
running a family business of NH Securities – a stockbroking firm that
was started by his father.
Ketan Parekh had also been the trainee under Harshad Mehta once
joined Mehta's firm GrowMore investment.
Ketan Parekh’s name was also involved in the 1992 Canfina Mutual
Fund due to which he spent 1 year in jail.
Ketan was famously known as a ‘Bombay Bull’ during 1999-2000. Just
within two years of time, Ketan deceived so many investors as well as
banks and the stock market.
Ketan Parekh was the God for many investors as he created a
delusion that whatever he touched turned into the Gold and whatever
he wished the market seemed to grant him.
At his peak he had close connection with many politician, celebrities
from bollywood and business managers.
Kerry Packer and Ketan joined hands to start a venture capital firm,
KPV venture with $250 million that focused on investing money into the
new start-ups.

3. How Scam was carried out!
Ketan Parekh used Kolkata stock exchange to trade as this was the stock
exchange where no strict and pivotal rules and regulations were not formed.
1999-2000, Ketan Parekh was ruling the stock market. So, many investment
firms, overseas corporates, and banks, businessmen from listed companies
many of them gave their money to be managed by him.
He misused such exchange and also tied up with many other brokers to trade
on his behalf and gave the commission. [Circular Trading]
He bought less known companies’ 20-30% stake once the price would reach to
a certain level, he would silently exit and sell the securities and make countless
profits. [Pump and Dumb Techniques]

4. Further Execution
Ketan, not only manipulated stock prices but also played games
with banks and institutional investor to attract more funds.
Ketan bought shares of the Madhavpura Mercantile Commercial
Bank and became the director.
Ketan approached the other financial institutions including HCFL
and UTI and pledged the loan from them. [Pay Order]

5. K-10 Portfolio
• 1999 and 2000 when the dotcom boom had just started Ketan
Parekh started manipulating the stocks of technology, and
telecom equipment provider companies.
• Low profile corporates with low market capitalization and liquidity.
So, he was able to manipulate the prices of such companies
using the ‘Pump and Dump’ formula.
• Aftek Infosys
• DSQ software
• Global Telesystems
• Himachal Futuristic Communications
• Pentamedia Graphics
• Satyam computers
• Silverline Technologies
• SSI
• Zee Telefilms
• Pritish Nandy Communications

7. Pump and Dump Technique
• This scheme is a fraud scheme. The operators who run this
scam, first buy the shares of some companies in a huge
amount, and after this by faking incorrect information, they
try to attract investors.
• A lot of investors get trapped in their fraud and start buying
their shares.
• The operators stop promoting the shares, then because the
share is overvalued and of the fake and incorrect
information about the share, the price of that share starts
falling.
• Once the price of the share goes high. the operators dump
(sell)the shares and earn good profits.
• Ketan Parekh applied the same formula and manipulated
many other stocks. The moment stock prices had gone
high, Ketan Parekh started dumping those stocks and he
left his focus on selected stocks and made a good position
and bought more stakes in those companies.
Company Price Rise in Price
Pentafour Software 175 2700
Global Telesystems 185 3100
HFCL 42 2300
ZEE 750 11000

8. Circular Trading
• Ketan used to attract Institutional Investors because they invest in
big amounts. So, he used circular trading to increase the value of
the stock artificially,
• Ketan created had a good network and created around 20
companies, which he used for fund management and circular
trading.
• Ketan Parekh was mainly manipulating K-10 stocks. He used to buy
and sell the shares of his own company, and increase the volume of
the stocks. Because of high volume, those stocks could be seen
trading actively which was giving an impression that investors are
taking interest in that stock.
• Circular Trading, operators do trading among themselves. The
operator first decide about how much shares they will trade, at
which price, and when. After this, the operator who will buy and sell
the share, places the order at the same time, meaning they
place the exact matching orders. Similarly, the shares are
then trading among these operators only, and the volume of the
share goes up.

9. Raising Funds
• Ketan Parekh used the Payment Order to arrange funds.
• He mainly used to get funds from Global Trust Bank (GTB) and Madhavpura Mercantile
Cooperative Bank. So, he bought good share of both in order to manipulate its loan
decisions.
• MMCB sanctioned him a loan of around 800 crore rupees. Global Trust bank also
sanctioned him a loan of more than 100 crore rupees. MMCB broke the rule of RBI and
issued funds to Parekh without a proper Collateral.
• MMCB use to issue pay orders to Parekh's company. For quick transaction and big
transactions he used Bank Of India exchange transaction. The Bank of India used to
charge interest of 18.5% while issuing pay orders.
• Then he went forward to get a huge loan from MMCB in form of payment orders and when
the prices shot up he pledged them with other financial institutions like HCFL and UTI.
Nearly 1.3 million pay orders were issued.
• KPV venture with $250 million that focused on investing money into the new start-ups.
• When the price of the share used to go up, then Ketan Parekh used to take a loan against
that share, and he used to use that money again to manipulate the stock prices.
• Similarly In the year 2001, MMCB had issued pay orders to Parekh’s company of Rs
137 crore.

10. Pay Order
• Pay Order is an instrument similar to the cheque but it is issued by the bank
upon the payment of small advance money from the customer.
• Pay order is like a Demand draft in which before you take the pay order, the
bank which is supposed to issue you the order has to pay the amount. MMCB
used to issue pay orders in the name of Ketan Parekh’s companies.
• MMCB had issued pay orders to Parekh’s company of Rs 137 crore. Parekh’s
company had given these pay orders to the Bank of India’s Stock Exchange
Branch. Then the bank had sent these pay orders for clearing In this way, the
bank used to get the money from the Pay order bank. Normally within 3 days, if
pay order return isn't used to come to a clearing, then it is assumed that pay
order has been cleared.

11. Indicating Scam
• 176 points fall in the sensex on march 1st, 2001
• Prior day union budget tabled prompted 177 sensex points increase.
• SEBI launched immediate investigations.
• SEBI inspected the books of several brokers suspected of triggering the crash.
• RBI ordered some banks to furnish data of Capital market exposure.
• BSE President Anand Rathi’s resignation added to continued downfall of sensex.
• Opened debate over banks financial capital market operations, Lending funds against collateral
security, Dual control of co-operative banks
• RBI declared MMCB as a defaulter and Bank of India suffered a loss of 137 crores.
• Bank of India accused Ketan Parekh of 137 crore rupees and filed a complaint.

12. BSE SENSEX SENARIO

13. Detecting Ketan Scam
• Dot-com-Bub started bursting, that time the entire world was witnessing a
slowdown in the Technology stocks.
• The bear cartel in Bombay stock exchange started to hammer his K-10 stocks
in February 2001, leading them to fall and precipitating a payment crisis
in Calcutta.
• KP started borrowing heavily in an attempted to rig the price upwards and later
sell, But failed to do so.
• As SEBI investigated, it was evident that bank and promoter funds were used to
rig the markets. Parekh was arrested in After this CBI arrested Ketan Parekh on
30th March 2001,was in custody for 53 days and this entire scam unfolded.

14. Ketan Parekh scam allegations
• He was found involved in cheating with banks by misrepresenting facts,
falsifying accounts, ripping-off the stock market prices and exploiting investors’
decisions, mishandling public money, bribing company directors to enable him to
do insider trading.
• Ketan Parekh declared to be guilty of a criminal offense for ripping off the Indian
stock market and was barred from trading in the Bombay Stock Exchange (BSE)
for 15 years up to 2017.Later in 2008, many such companies were traced by
SEBI and were barred from trading too.
• The CBI in 2014 found the malpractices followed by him and sentenced him for
two years rigorous imprisonment with a fine up to Rs. 50,000.

15. Impact on Financial Instutition
• At last investigations by the Central Bureau of Investigation and the
Securities and Exchange Board of India reveal that the sheer magnitude
of money moved around by Parekh or available to him for his market
manipulation was a staggering Rs 64 billion.
 A Swiss bank account in which Parekh was listed as the beneficiary, CBI
The Securities and Exchange Board of India’s preliminary investigation in May
revealed that Rs 29 billion was transferred out of the country through five Overseas
Corporate Bodies between March 1999 to March 2001. invested just Rs 7.77 billion
in the Indian market but remitted a whopping Rs 36.77 billion out of the country.
As per the RBI data, the accumulated losses of cooperative banking sector has
touched Rs 1598 crore

16. Continue !!
The Bombay Stock Exchange witnessed one of the worst bear runs leading to a
177-point crash on 2 March 2001.
Sebi went ahead and suspended 40 brokers on Calcutta Stock Exchange.
As on June 2000, Unit Trust of India was believed to have a total investment of Rs
5,000 crore in K-10 stocks (10 New Economy stocks backed by arrested broker
Ketan Parekh), which today stands at less than one-fifth of its value.
Bank Of India cashed Rs 137-crore fictitious pay orders issued by the Madhavpura
Bank to arrested broker Ketan Parekh.
State Banl India’s losses are restricted to about Rs 40 crore, lent against pay
orders issued by Ahmedabad based Classic Co-operative Bank.

17. SEBI after Parekh's Scam!
• SEBI brought in various rules and regulations.
• It banned the Badla system and circular trading.
• It inspected all the accounts relating to the stock exchange yearly once. They also
allowed collateralised loans only via BSE and NSE.
• An additional 10% deposit margin was imposed on outstanding net sales in the stock
markets.
• The limit of application of the additional volatility margins was lowered from 80% to
60%.
• To revive the markets SEBI imposed restriction on short sales and ordered.
• SEBI also banned trading by all stock exchange presidents, vice presidents and
treasurers

18. Conclusion !
• Ketan Parekh scam case involved two key strategies, namely “circular trading” and “pump
and dump scheme”.
• Unlike Metha Scam, Parekh used Pay order fund generation.
• The ICE sector was booming during that time and Ketan would invest majorly into these sectors
which helped him gain the trust of the investors while globally dot com boom was just started.
• Ketan Parekh was barred from trading in the Bombay Stock Exchange (BSE) for 15 years up to
2017
• Worth over Rs 1200 crore, the 2001 scam was linked to investor Ketan Parekh who siphoned a
huge sum of money from banks. Later it was found by the joint parliamentary committee in 2005
that Parekh received large sums from banks and corporates when the Sensex was falling.