The Ketan Parekh Scam of 2001

Most of us have heard of Harshad Mehta and how he committed one of the largest financial scams in the history of the Indian stock market. He was a master manipulator, and his influence over the market and other institutions helped him rig share prices. But did you know that one of his mentees, Ketan Parekh, pulled off another infamous and ruthless scam that completely shook the markets? Government agencies have estimated that the extent of the fraud could be up to Rs 40,000 crore! 

In today’s article, we discuss the Ketan Parekh Scam of 2001.

Who is Ketan Parekh: The Pied Piper of Dalal Street?

Ketan Parekh was a Chartered Accountant (CA) by profession. He started his career in the late 1980s and initially ran a business called NH Securities— a stockbroking firm established by his father. Parekh later joined Harshad Mehta’s firm (GrowMore Research & Asset Management), where he closely observed market trends and the mindset of investors. He learnt the techniques used by the Big Bull and his associates to manipulate the stock market. Although he was said to be soft-spoken and discreet, Ketan Parekh made connections with politicians, actors, and businessmen. 

He even partnered with Australian media mogul Kerry Packer to launch a venture capital firm that invested in Indian startups.

In 1992, journalist Sucheta Dala exposed the fraudulent activities committed by Harshad Mehta. The scam involved officials from SBI, several brokerage firms, politicians, and bank employees. SENSEX crashed during this period, and Harshad Mehta was arrested. However, Ketan Parekh was never involved/convicted in any case related to Scam 1992.

The Scam

Ketan Parekh looked into the “Pump and Dump” system used by Harshad Mehta in-depth. The Big Bull illegally received money from banks and other financial institutions. He used these funds to directly or indirectly buy certain stocks in bulk, whose prices would then skyrocket. Market participants had the perception that whichever stock the Big Bull chose would turn into gold. Eventually, more people would invest in these stocks, further driving up prices. When the prices reached their peak, Mehta and his associates would book MASSIVE profits!

Parekh wanted to use the same system to his advantage…. but with a few tweaks.

He strongly believed in the potential growth of companies within the Information, Communication, and Entertainment (ICE) sector. The dot-com boom had just started between 1999 and 2000, and many of his stock predictions were pretty accurate. He was able to pump up the share prices of several firms. However, Ketan Parekh wanted to take it a step further, and encouraged institutional investors to invest in stocks he had manipulated. He felt that it would be easier to control major institutional investors rather than retail investors who had varying interests and views.

So How Did He Convince Institutional Investors?

• Upon further research, Ketan Parekh found out that institutional investors would only invest in those stocks that had high trading volumes and media attention. To fulfill the first criteria, he resorted to an illegal circular trading scheme: 

• For example, Broker A would place a buy order for a stock at a certain price and certain quantity. At the same time, Broker B places an order to sell the same quantity, at the same price, and matches the trade. Likewise, more brokers would join and conduct similar transactions, thereby showing high trading volumes.

• Parekh and his associates conducted circular trading primarily on IT, media, and telecom stocks that were already growing rapidly and getting media attention. Thus, Ketan Parekh's “K10 Stocks” became widely popular. It included Zee Telefilms, Tips, Aftek Infosys, Mukta Arts, Himachal Futuristic Communication Ltd (HFCL), PentaMedia Graphics, etc.

• K10 stocks like PentaMedia Graphics' price surged from Rs 175 to Rs 2,700 and that of Global Telesystems rose from Rs 185 to Rs 3,100!

Moreover, he conducted most of the investments/trades in the Calcutta Stock Exchange (CSE) as it did not have any strict regulations at the time. He artificially created a 200% annual return on some stocks! 

The Downfall

Just like his predecessor and mentor, Ketan Parekh became too greedy. He wanted to obtain more funds to pump up stock prices on a larger scale. Thus, he approached the promoters of those companies whose stocks he had been manipulating and raised funds from them! Promoters (who hold large quantities of a company’s shares) believed they would surely benefit from the surge in share prices. Their net worth would increase, and they could also pledge shares to get loans from banks. However, these were clear cases of insider trading.

Secondly, Parekh illegally raised large sums of money from Global Trust Bank (GTB) and Madhavpura Mercantile Cooperative Bank (MMCB). Interestingly, he was on the board of both banks! He reportedly bribed bank officials and persuaded them to provide loans against shares. 

According to the Reserve Bank of India (RBI) guidelines, banks were not allowed to give out more than Rs 15 crore as loans to a stockbroker. But MMCB and GTB sanctioned loans of around Rs 800 crore and Rs 100 crore, respectively, to Ketan Parekh. He also made MMCB issue a pay order worth Rs 137 crore to one of his own companies. [A pay order is a financial instrument issued by a bank on behalf of a customer that instructs another bank to pay a specific amount to a third party.] However, Parekh had never deposited this amount at MMCB. He used the pay order to obtain funds from Bank of India and manipulate share prices.

Exposed!

The news of Ketan Parekh’s scam first came into the limelight when Bank of India (Mumbai Branch) alleged that he had defrauded them to the tune of Rs.137 crore. Sucheta Dalal of the Times of India uncovered the entire scam and published a report on it. This ultimately caused mayhem and resulted in a stock market crash in 2001. The RBI initiated an investigation against Parekh.

• Ketan Parekh was found guilty of insider trading and arrested by the CBI. He was also convicted of rigging share prices and was banned from trading until 2017.
• His name also surfaced in the Canfina scam in which various entities had entered into a criminal conspiracy to siphon off Rs 47 crore.
• In 2009, market regulator SEBI discovered that he was using front companies to carry out illegal activities. Thus, nearly 26 entities were banned from trading as a result of that investigation. 

Later in March 2014, Parekh was convicted by a special CBI court for cheating and sentenced to two years of rigorous imprisonment. The most recent development came in 2021 when the Supreme Court allowed Ketan Parekh to travel to the United Kingdom to attend to his daughter's medical needs.

Broker-turned-operator Ketan Parekh was single-handedly driving the Indian stock market and eventually fell victim to his own greed. You can watch the informative episode of 'Money Mafia' on Discovery+ to understand how Ketan Parekh managed to commit the Rs 40,000 crore scam!