The 2001 Scam ( Ketan Parekh Scam)

All over world investment in ICE (Information Technology, Communication and Entertainment) shares was the trend. Ketan Parekh colluded with promoters of the new economy (ICE) shares and changed the complexion of the market by buying stock known as K-10 scrips. He succeeded in lifting scrips such as HFCL, Satyam and Global to international P/E levels.

Parekh’s modus operandi was to route orders through his three broking outfits and 40 satellite brokers. He had contacts with brokers in Kolkata and Ahmedabad, who were rewarded with badla payments. His sources of funds were non-resident Indians and the new private sector banks who accepted shares as collateral. He would pledge the shares with banks as collaterals when the share prices were high. Mutual funds and foreign institutional investors by investing heavily in technology stocks helped KP scrips to rise high. He placed shares of Satyam at a premium of Rs 1,000 with UTI and the shares of HFCL for Rs 1,400 with mutual funds and foreign institutional investors. Parekh would increase the liquidity of stock when there was a strong demand or buy aggressively if one of the portfolio stocks fell.

The bull run started in May- November 1999 when Parekh started his first major round of trading aggressively in HFCL, Global, Satyam, and Zee scrips. The Sensex rose from 3,378.4 to 4,491 points. The Sensex peaked to 6,100 before it started falling due to a global meltdown in ICE shares. There was a sharp decline in prices due to factors such as global economic slowdown, significant market capitalization erosion at NASDAQ and other leading stock exchanges, and bear hammering on the Indian stock exchanges in sectors such as telecommunication, media, and information technology. The sudden sharp fall in prices of these scrips resulted in a huge depletion in the margins on shares that were placed as securities with the banks. Consequently the banks were, on the one hand, obliged to ask Parekh and his associates to either pledge more shares as collateral or return some of the borrowed money, and on the other they were driven to prop the prices by pumping more money into the capital market. This resulted in a financial crunch for some major bull operators, which led to disputes in the Kolkata Stock Exchange (CSE). The crisis snowballed as the Kolkata brokers took more long positions then Parekh. Trading at Kolkata is 90 per cent unofficial. It is a cash badla market where Rs 1,500-2,000 crore is rolled every month at 21-30percent. As the circumstances developed, badla rates shot up to 80 per cent at the Kolkata stock exchange. So, Parekh defaulted on payment to Kolkata brokers which resulted in a payment crisis between March 12 to17 2001. Seventy CSE brokers defaulted as the exchange plunged into crisis. The bear cartel on BSE, which was hear hammering the market with inside information was caught red handed by SEBI who suspended all the seven members form the BSE governing board.

Ketan Parekh desperately borrowed huge sums from the Ahmedabad based Madhavpura Mercantile Cooperative Bank (MMCB). The bank issued pay orders running into crores of rupees without receiving cash payment or collateral from Parekh. Pay orders are instruments issued between branches of bank in one place. They are issued to banks, collect the cash or have significant collateral. Hence, the discounting bank is sure of collection. As Parekh colluded with Ramesh Parekh the chairman of MMCB, the latter issued pay orders without having the balance in the bank’s accounts. The Bank of India (BOI) discounted Rs 137 crore worth of pay orders which bounced. Ketan Parekh paid only Rs 7 crore and BOI went to a criminal court against him. The Reserve bank specifically prohibits cooperative banks to invest in the stock market or to lend to stockholders. However, the latter are free to lend to individuals against a pledge of shares upto Rs 10 lakh per borrower if the shares are in a physical form and up to Rs 20 lakh if they are in dematerialized form. MMCB flouted the norms of the Reserve Bank to earn higher rates of return.

The Crime Branch of India arrested Ketan Parekh on the charge of defrauding BOI. The BSE Sensex plummeted from a peak of 6,100 points to 3, 788.2 on March 30, 2001. SEBI banned all deferral products including badla from all stock exchanges.

  • informative article. Also that time Indian share market index and most major stocks came down in a huge which had shaken the investors.