Title of the Scam: The Ketan Parekh Scam
People Involved in the scam including designations:
Ketan Parekh, a former stock broker from Mumbai, India, who was convicted in 2008, for
involvement in the Indian stock market manipulation scam that occurred from late 1998 to
2001. He is a Chartered Accountant by profession and used to manage a family business,
NH Securities started by his father.
Companies involved in the scam:
The companies in which KP held stakes included
Amitabh Bachchan Corporation Limited (ABCL),
Mukta Arts,
Tips,
Pritish Nandy Communications,
HFCL,
Global Telesystems (Global),
Zee Telefilms,
Crest Communications, and
PentaMedia Graphics.
Ketan Parekh selected these companies for investment with help from his research
team, which listed high growth companies with a small capital base. According to media
reports, he took advantage of low liquidity in these stocks, which eventually came to be
known as the 'K-10' stocks.
Year of Scam: 2001
Financial benefit to the scam committer/ Amount vanished due to scam: Rs. 1200 Crores
Key notes of scam (the Methodology used):
Ketan Parekh’s Modus Operandi
Ketan Parekh had a cover story to back his unscrupulous dealings and throw skeptics off
track. He was said to be a believer of the Information, Communication and Entertainment
sector i.e. the ICE sector. This was nothing special given the fact that late 90’s and early
2000’s were the time when the IT boom took place and these were the stocks which were
actually growing by leaps and bounds worldwide.
Hence, it seemed to appear that the stocks Ketan Parekh was picking were growing because
of their fundamentals. The massive 200% growth in his shares was therefore not as
astounding and did not attract as much attention as Harshad Mehta’s escapades did.
However, in reality, Ketan Parekh was looking out for stocks which had a low market
capitalization and low liquidity. He would then pump money into these shares and start
fictitious trading within his own network of companies. The average person on the bourses
may begin to believe that his stocks were rising and they too would start investing driving
the prices even higher. Then, as the market took over Ketan Parekh would liquidate his
holdings slowly, once again making less noise than his mentor Harshad Mehta would have
done.
Ketan Parekh used this modus operandi repeatedly for 10 stocks which he had picked. These
stocks came to be known as the K-10 stocks and the market always seemed to be bullish
about the future of these stocks.
What is Dabba Transaction?
Dabba means a box and a Dabba trader is one who carries out such transactions. Also
known as bucketing, such transactions exist only in the books of the stockbroker. These
transactions are generally illegal, as they exist only in the books. When they are carried out
in a legally acceptable manner, after paying taxes, they form a part of the forward market.
Role played by Ketan Parekh
Dabba transactions were first started in India by Ketan Parekh. Let’s take an example to
understand the working of this. Assuming that the shares of Reliance industries ltd. is valued
at rs.1000. Ketan Parekh would approach one group of investors, who believed that this
price would fall to 900 the next month. He would make a contract with these investors to
sell 10000 shares at a price of Rs. 900, in the following month, irrespective of what the price
becomes. Similarly, he would approach another group of investors, who believed that the
price would rise to rs.1100, and make a similar contract with them. Now after one month,
the share price falls to rs.800. Ketan Parekh would purchase the shares at Rs. 800 and then
sell at a cost of rs.900 and 1100 respectively thereby making a profit in both these cases. In
fact, there would be no exchange of shares, the only net settlement would take place. The
first group of investors would pay Ketan Parekh an amount of Rs. 100 per share, as their
price estimate was inaccurate by that amount. The second group of investors would pay him
a sum of Rs. 300 per share, as that was the amount of their inaccuracy. The net profit he
would make from such a transaction would be 40,00,000. For this to be successful, the
prices must move in a favorable direction. In order to enable this, Ketan Parekh would enter
the market 3 days before the contract date and invest money in such a manner, that the
prices would fluctuate in his favor. After executing the contract, he would withdraw his
money. This was noticed by SEBI, and on close scrutiny, the fraud was discovered and Ketan
Parekh was tried in the court of law.
Consequence
The government realized that this kind of Organised Betting had become widespread in the
country. Banning it would serve no purpose, as the people would then resort to illegal
means to carry out such transactions. Hence, the government introduced a new market,
known as the Forward Market, with the regulation that any such transaction would attract
tax.
Conclusion
Ketan Parekh, the dynamic personality was eventually adjudicated in the court of law,
however, it cannot be ignored that he pioneered the creation of an entirely new market for
trading
