EP 06: Indian Stock Broker Ketan Parekh Scam | हिंदी - YouTube

Today we will talk about Ketan Parekh Scam.

Ketan Parekh, who is a Chartered Accountant, used to run the family business of stock broking

As we saw in Harshad Mehta Scam's video, Ketan Parekh was also a trainee in Harshad Mehta's company

Ketan Parekh was using Pump and Dump scheme and some other techniques to run his scam

So, let us first learn what this Pump and Dump scheme is.

Pump and Dump Scheme is a fraud scheme in which scam operators first buy the shares in a large amount

and try to lure investors through fake information and showoffs

Misguided by fake information, many investors are caught in the net and start buying the shares

This leads to increase in the demand of shares and hence, it eventually increases the shares' prices.

Seeing the increasing demand of that stock and its price, most investors trust that stock and hence, end up buying it.

As a result, the share's price increases i.e it is pumped

When the shares price is increased, the operators dump/sell that stock to make better profits

When operators have sold those stocks and stops promoting it

Then the share price starts falling because of being overvalued or misleading info spread by the opertors about the shares

And the investors who invested in that stock suffer from a big loss

Ketan Parekh used to buy sufficient stakes i.e shareholdings in a few stocks

and then he used to start manipulating them

Basically, there are two types of investors- Retail Investors and Institutional Investors

Retail investors are individuals who buy shares for themselves or for their personal account such as you and me.

Institutional investors are organizations who invest for their investment portfoilo or people.

For example, mutual funds, insurance companies, hedge funds, etc.

As we saw that Harshad Mehta used to attract as much retail investors to his stocks as possible

However, Ketan Parekh planned to lure institutional investors because they invest quite a big amount.

Ketan Parekh very well knew how to attract institutional investors and what they wanted.

Because Ketan Parekh was an institutional stock broker

He started using various strategies to manipulate the stock market & to attract investors.

Most investors, especially institutional investors give utmost importance to Liquidity.

That'a why Ketan Parekh started circular trading.

One can artificially increase the stock volume using cicular trading.

Stock volume is the number of shares traded on a particular day uptill a specific time

Share volume increases with the no. of trades in a day

In circular trading, operators trade among themselves Like the first opertor sells shares to the second one, he sells it to the third, and he sells it back to the first one

Likewise, this trading takes places within a circle and shares are rotated among the same operators.

This increases the volume of the stock. Ketan Parekh was also increasing the prices of those stocks by investing a lot of money in them.

In a circular trading, firstly all operators together decide the no. of shares to be traded, at what price, and when.

Then the buying and selling operator of that stock enter the amount of order at the same price and at the same time.

It means that they order the exactly similar order.

As a result, the share is traded among the same traders which gives rise to the volume of shares.

For circular trading, Ketan Parekh used to buy & sell shares among his own companies and increase shares' volume.

Ketan Parekh was manipulating mainly 10 stocks which used to known as K-10 stocks Because of being high volume, those stocks were trading actively.

It appeared that investors' interest for those stock were developing.

Due to this reason, other investors started participating in these stocks.

Ketan Parekh had a great relationship with some institutional investors. Nobody was even a bit aware of the stock manipulation by Ketan Parekh.

Those investors also started investing in the K-10 stocks.

When institutional investors would invest in those stocks, then both demand & price of the stock would rise.

Because of increasing price & volume, retail investors also started investing in those stocks.

From 1997 to 2001 & 2002, Dot-com Boom was running where Technology & Telecom companies were growing rapidly.

Investors were taking utmost interest in those stocks.

Just then only, Ketan Parekh started manipulating technology, telecom equipment providers, and media companies.

In short, Ketan Parekh was having a great time.

It seemed that K-10 stocks was growing due to good future growth, fundamentals, and Dot-com Boom.

Ketan Parekh would try his best that the stocks in which he would invest must gather good media attention.

And these stocks must always remain in headlines so that more investors would get attracted which will eventually increase the stock price.

After manipulating the stock price of Pentafour Software, Ketan Parekh increased the stock price from Rs 175 to Rs 2700.

Similarly, the stock price of Global TeleSystems was increased to Rs 3100 from Rs 85,

HFCL's price to Rs. 2300 from Rs. 42 and Zee's stock price was moved to Rs. 11000 from 750

And likewise, he manipulated a lot of other stocks.

As the stocks' prices reached to their highest level, Ketan Parekh started dumping those stocks

and he focused at a very few selected stocks.

Plus he created better positions in those stocks by buying more stakes in them.

Ketan Parekh arranged the fund required to run this scam from two different places- Company's promoters and Banks.

When promoters wanted to sell their shares, they wanted to sell them when the shares prices are at their peak value.

This would provide them better profits.

The promoters of a few companies avail loan by mortgaging their shares.

When the shares prices increase enormously, then promoters get good amount of loans on those shares.

That's why the company's promoters would ask Ketan Parekh to manipulate the stock price by lending him excellent loans.

Now let us talk about the funds Ketan Parekh was getting from Banks.

Ketan Parekh used to get funds mainly from two banks, namely- GTB (Global Trust Bank) and MNCB (Madhavpura Mercantile Co-operative Bank).

When the share prices would increase, Ketan Parekh would put his shares collateral (mortgage) to the banks to avail loans.

and he would again use those money to manipulate the stock prices.

Ketan Parekh bought some impressive stakes in GTB (Global Trust Bank).

This was also a part of Ketan Parekh's plan.

Along with the officials of GTB, he used GTB to arrange funds for himself.

While MMCB which is a Gujarat-based bank played a big role in this scam.

Some officials of MMCB helped Ketan Parekh a lot & with their help, Ketan Parekh availed big loans from MMCB.

At that time, as per RBI rules, banks were not allowed to lend more than Rs. 15 crores to any stock brokers.

Despite this, MMCB gave a loan of more than Rs. 800 crores to Ketan Parekh.

Global Trust Bank (GTB) also provided him a loan of more than Rs. 100 crores.

Along with breaking the RBI rules, MMCB also issued loans to Ketan Parekh without any proper collateral.

As Harshad Mehta inappropriately used Read Forward Deal to arrange funds

Similarly, Ketan Parekh used Payment Order inappropriately to raise funds and took helf from MMCB for the same.

Pay Order is a prepaid instrument just like the DD (Demand Draft).

where you need to pay the amount before taking pay order to the bank issuing the pay order.

MMCB used to issue pay orders in the name of companies

Ketan Parekh's companies had current accounts in the Bank of India (Stock Exchange Branch) also.

The Stock Exchange Brank of Bank of India was quite huge where big transactions used to take place.

And for quick payments, Ketan Parekh used to raise funds through Stock Exchange Branch of BOI by pay orders received from MMCB.

During that time, Bank of India would impose an interest of 18.5% on pay orders.

In March 2001, MMCB issued the pay orders of Rs. 137 crores in the names of Ketan Parekh's companies.

Ketan Parekh's companies gave that pay orders to the Stock Exchange Branch of BOI.

Those pay orders were then sent for clearing by the Bank of India.

After the process, the bank would get that money from the bank issuing the pay orders.

Normally, if pay orders weren't returned within 3 days, then it was understood that the pay order has been cleared.

But the RBI returned those pay orders to the Bank of India after 11-12 days.

By then, Bank of India had already trasferred those money to Ketan Parekh's companies.

Nobody expected such a response from the RBI. Even many big bankers were surpised.

Those pay orders were bounced banks as MMCB didn't participate in the clearing. Plus, they didn't have the sufficient fund.

As a result, the RBI announced MMCB to be defaulter and Bank of India suffered a loss of Rs. 131 crores.

Then Bank of India started asking Ketan Parekh to return the money.

Then Ketan Parekh returned only Rs. 7 crores and refused to return other Rs. 130 crores to BOI.

Bank of India convicted Ketan Parekh for doing the fraud of Rs. 130 crores and filed a complaint.

CBI arrested Ketan Parekh and then, this whole scam was exposed.

Just as Sucheta Dalal played an important role in exposing Harshad Mehta Scam, she did the same in exposing Ketan Prekh Scam.

Due to such behaviours of MMCB, its depositors suffered huge loss.

After being annunced as defaulter, MMCB didn't return the money of its various depositors.

Later in 2012, RBI cancelled the license of MMCB.

For stock manipulation, Ketan Parekh created a network of 20-25 companies he was operating.

Ketan Parekh would send money received fro babks and investors to one of his companies in the network

That money was then transferred to the other company in the same network.

He instantly transferred the money received from Bank of India to some other company in the network.

Ketan Parekh used that money in the stock market.

This helped Ketan Parekh to hide the fact about fund raised from and where he is using them.

Ketan Parekh used his network for circular trading and for availing loans from the bank.

When dot-com bubble began bursting, the world witnessed fall in the technology stocks.

From the beginning of March 2001, some investors & broker started short selling K-10 stocks that became overvalued due to price increase.

Due to this, people saw the market falling apart.

We will talk about short selling in the next lecture in detail.

Institutional investors and retail investors also started selling shares.

Due to this, the stock in which Ketan Parekh held good stakes started falling heavily.

This time the institutional investors, retail investors, and short sellers were selling the stocks.

On contrary, Ketan Parekh was still trying to safeguard the overvalued stocks.

But Ketan Parekh wasn't able to fight the market for a long time.

When the stocks prices started falling off, he found it difficult to raise funds from banks.

Ketan Parekh arranged some funds and tried to fight the market for sometime but he failed.

At the same time, the case of pay order came into light and Ketan Parekh scam was exposed.

Ketan Parekh's bought stocks whose price rose highly in a very little time, those stocks fell badly when the scam was exposed.

For example, Global TeleSystem's price fell from Rs. 3100 to 120, HFCL's price went down from Rs. 2300 to Rs. 90.

Similarly, the other stocks of Ketan Parekh had a great downfall.

Those who invested in K-10 stocks suffered a very big loss.

After the scam, MMCB and GTB also suffered a big loss.

After this scam, Ketan Parekh was restricted from trading until 2017.

Despite this, in 2009, in SEBI investigation, it was found that Ketan Parekh was still trading through some companies

and he is still active in the market.

Calcutta Stock Exchange suffered payment crisis and a loss of Rs. 100 crores due to Ketan Parekh.

In March 2014, special CBI court imposed Ketan Parekh with an imprisonment for 2 years.

After the scam of 2001, Ketan Parekh's name was in the limelight.

But let me tell you that Ketan Parekh was also involved in 1992's Canfina Mutual Fund Scam.

He was sent to jail for one year for the same.

During this scam, Ketan Parekh sent approx. Rs. 2000-3000 crores to foreign with the help of OCB (Overseas Corporate Body).

CBI confiscated Ketan Parekh's Swiss Bank account as well.

Not only in Swiss Bank, but Ketan Parekh would send money to different bank accounts in different countries.

Ketan Parekh maintained good relationships with big politicians which helped him a lot.

As we saw in Mr Radhakishan Damani's video, Mr Damani had a family business of stock broking.

Ketan Parekh's family business also inculded stock broking which means both hailed from the same background.

But Mr Damani is one of the most successful investors and entrepreneurs of India today and is an inspiration for many.

While Ketan Parekh had to go to jail because of his scam and still many cases are going against him in the court.

If you have any queries related to Ketan Parekh scam and the stock market, then you can call us or what's app on the given number.