KETAN PAREKH SCAM

PRESENTED BY-

Komal Jain

INTRODUCTION

• Ketan Parekh was a CA by profession and belong to a family where his father and brothers were also traders in stock market.

• Learned stock market with a Finance firm –money care.

• Managed Family Business – NH Securities.

• He started dreaming big from Dot Com Boom.

• He tested his skills of Financial Engineering in Pentafour.

INTRODUCTION

• He was popularly known as “Bombay Bull”, “Pied Piper of Dalal Street” and “Pentafour Bull”.

• He used to trade in his K10 series of stock which were –

ABCL MUKTA ARTS TIPS PRITISH NANDY COMMUNICATIONS HFCL

INTRODUCTION

GLOBAL TELEFILMS ZEE TELEFILMS CREST COMMUNICATIONS PENTA MEDIA AFTEK

INTRODUCTION

• K10 Stocks were mostly media stocks with low liquidity.

• Mutual Funds invested heavily in K10 stocks.

• K10 regularly featured in top traded stocks in 2000.

• He targeted smaller exchanges like the Allahabad Stock Exchange and the Calcutta Stock Exchange, and bought shares in fictitious names.

MODUS OPERANDI OF KP

WAYS OF FUNDING THE SCAM• THE PAY ORDER ROUTE

KP issued cheques drawn on BoI (Bank of India) to MMCB (Madhavapura Mercantile Cooperative Bank), against which MMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits.

KP reportedly used his BoI accounts to discount 248 pay orders worth about Rs 24 billion between January and March 2001. BoI's losses eventually amounted to well above Rs 1.2 billion.

WAYS OF FUNDING THE SCAM

• BORROWING FROM MMCBThe second route was borrowing from a MMCB

branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts.KP used around 16 such accounts, either directly or through other broker firms, to obtain funds.

• Borrows 250 crores from GTB (Global Trust Bank) and 1000 crores from MMCB.

• According to RBI regulations, a broker is allowed a loan of only Rs 15 crore (Rs 150 million). There was evidence of price rigging in the scrips of Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer.

END OF SCAM

• His mode of raising funds were going on well only till prices of shares went up, but– It reversed when shares started falling from March

2000. The crash was a result of fall at NASDAQ that saw a fall in K-10 stock as well In next 2 months, sensex declined by 23% and K-10 stock declined by 67%.

– In May 2000, the market picked up back and the prices of K-10 rises again.The prices of stock doubled like HFCL doubled from Rs 790 to Rs 1353 by July

• By December 2000, the NASDAQ fell back again and the KP stocks went down as the prices of stock falls globally.

• KP faced liquidity problems.

• The CSE has payment crises and was a set back for KP because of following reasons -– Stocks held by KP and his broker were reduced to

6-7 bn from 12bn.– Situation worsened when KPs badla payment was

not honored.– 70 CSE brokers along with top 3 brokers made

default.– By mid March the value of shares went to 2.5-3

bn.

• KPs brokers started pressuring him for payment.

• SEBI tricked the regulatory norms and several other rules were framed Finally KP was arrested.

CHANGES AFTER SCAM

• Many gapping loopholes in the market were identified.

• Badla was banned and operators could not carry forward trade in its primitive form.

• Trading cycle was now reduced from one week to one day.

• Forward trading formally introduced in form of Exchange – Traded Derivatives.

• Broker control over Stock Exchange was demolished.

• To contain volatility, SEBI has imposed an additional 10 per cent volatility margins on all the A Group shares and additional margins on stocks in Automated Lending and Borrowing Mechanism (ALBM) and Borrowing and Lending of Securities Scheme (BLESS).

COMPARISON BETWEEN HARSHAD MEHTA & KETAN PAREKH SCAM

• Both are known as Big Bulls.• Both Bulls used to buy stocks at rock-bottom

prices and then push it up.• Harshad Mehta was very much media savvy

while KP kept away from media publicity despite his big investments in media companies including K10 companies.

• In the Harshad Mehta scam, the controversy was related to bankers’ receipts, while it was pay order in the Ketan Parekh scam.

• Harshad operated through a close network of brokers while Ketan had a wider network of brokers, even those located in Calcutta.

• In the Hashad Mehta scam, foreign banks including Citibank, Standard Chartered and ANZ Grindlays were involved. In the Ketan Parekh scam, foreign nstitutional investors including Credit Suisse First Boston and JM Morgan Stanley are involved.

• In the case of Harshad Mehta scam, the State Bank of India suffered the loss of Rs. 660 crore while Ketan Parekh owes around Rs 130 crore to the Bank of India.

• Favorite stocks of Harshad Mehta were “Old Economy” stocks such as ACC, Apollo Tyres, Reliance and Tisco. While Ketan Parekh was playing with “New Economy” stocks such as HFCL, Aftek Infosys, Global Trust Bank and Pentasoft.

• After the scam, Harshad Mehta was not legally allowed to trade but he carried out trading through his front companies. One does not know yet the fate of Ketan Parekh.

LEARNING

• Stock Markets are less Speculative.• Beginners should start with Mutual Funds.• Do not expect Miraculous returns.• Track the company and not the share.• Never invest with Borrowed Capital.• Diversify your risk.• Invest Capital which is not immediately

required.

• CIRCULAR TRADING :– A trading scheme whereby buyer & seller of the

share come to an understanding whereby both sell order & buy order will be matched with both price & quantity & thereby creating large volumes in the trading of specific scrip of those companies with whom they both enter into an agreement thereby pushing the Share price of the company & take undue advantage from increase in prices.

• PRICE RIGGING – An illegal action performed by a group of

conspiring businesses that occurs when the firms agree to artificially inflate prices in an attempt to recognize higher profits at the expense of the consumer.

– Also known as "price fixing" or "collusion".

THANK YOU