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"All my lifetime's savings are gone. I don't know how to feed my family."

DetailsThemes: Corporate scams /ControversiesPeriod : ­Organization : SEBIPub Date : 2002Countries : IndiaIndustry : Finance

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Case Code : FINC006Case Length : 09 PagesPrice: Rs. 200;

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The Ketan Parekh Scam

­ A small investor hit by the Ketan Parekh scam, in April 2001.

The Crash that Shook the NationThe 176­point1 Sensex2 crash on March 1, 2001 came as a major shockfor the Government of India, the stock markets and the investors alike.More so, as the Union budget tabled a day earlier had been acclaimed forits growth initiatives and had prompted a 177­point increase in theSensex. This sudden crash in the stock markets prompted the SecuritiesExchange Board of India (SEBI) to launch immediate investigations intothe volatility of stock markets. SEBI also decided to inspect the books ofseveral brokers who were suspected of triggering the crash.

Meanwhile, the Reserve Bank of India (RBI) ordered some banks tofurnish data related to their capital market exposure. This was aftermedia reports appeared regarding a private sector bank3 having exceededits prudential norms of capital exposure, thereby contributing to the stockmarket volatility. The panic run on the bourses continued and the BombayStock Exchange (BSE) President Anand Rathi's (Rathi) resignation addedto the downfall. Rathi had to resign following allegations that he had usedsome privileged information, which contributed to the crash. The scamshook the investor's confidence in the overall functioning of the stockmarkets. By the end of March 2001, at least eight people were reported tohave committed suicide and hundreds of investors were driven to thebrink of bankruptcy.

The scam opened up the debate over banks funding capital market operations and lending funds against collateral security. Italso raised questions about the validity of dual control of co­operative banks4. (Analysts pointed out that RBI was inspectingthe accounts once in two years, which created ample scope for violation of rules.)

The first arrest in the scam was of the noted bull,5 Ketan Parekh (KP), on March 30, 2001, by the Central Bureau ofInvestigation (CBI). Soon, reports abounded as to how KP had single handedly caused one of the biggest scams in the historyof Indian financial markets. He was charged with defrauding Bank of India (BoI) of about $30 million among other charges.KP's arrest was followed by yet another panic run on the bourses and the Sensex fell by 147 points. By this time, the scamhad become the 'talk of the nation,' with intensive media coverage and unprecedented public outcry.

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8/22/2015 The Ketan Parekh Scam | Free Management Articles | Free Management Case Studies

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1] A change of Re. 1 in the price of a share when one speaks of a share rising or falling by so many points. In stock market indices, however, a point is one unit ofthe composite weighted average on market capitalisation of rupee values.2] A stock market index indicating weighted average of 30 scrips, also known as the BSE Sensitive Index. The daily closing figure of this index broadly reflects theperformance of the capital markets. 3] It was alleged that Global Trust Bank exceeded its Capital market exposure.4] Co­operative banks are under the dual control of RBI and the Registrar of Co­operative Societies. The RBI regulates banking functions while the registrar looksafter the managerial and administrative functions.5] An investor who expects share prices to go up and hence buys them.

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