Ketan parekh scam

Ketan Parekh Scam

http://indiatoday.intoday.in/story/2001-Ketan+Parekh+scam:+Stock+and+bull+story+/1/75489.html


Flow• Ketan Parekh• How it happened• How was it detected• Systematic Flaws• Implications


• Ketan Parekh is a former stock broker from Mumbai, India

• He was convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1999-2001

• Currently he has been debarred from trading in the Indian stock exchanges till 2017

• He was trainee of Harshad Mehta• Ketan Parekh can be best

described as the Pied Piper of Dalal Street

• Parekh came from a family of brokers which helped him to create a trading ring of his own

Pied Pieper of Dalal Street


How it happened?• Formed a network of brokers

• Identified and targeted 10 stocks

• K-10 stock, KP Index

• Zee telefilms went up from Rs. 127 to Rs. 2330, Himachal Futuristic – Rs.Rs. 194 to 2553


Funding Mechanism• Simple borrowing mechanism

• Badla System


Badla System Indigenous carry-forward system invented on the

Bombay Stock Exchange Badla trading involved buying stocks with

borrowed money. The stock exchange acts as an intermediary Interest rate determined by the demand for the

underlying stock Maturity not greater than 70 days


How it happened? • When stock prices were high, they were pledged

with banks as collateral

• No problems as long prices were rising

• Pay order fraud• Issued cheques to MMCB drawn on BOI• Went to BOI, SBI, and PNB and got pay orders

discounted


How was it detected• Stock market crash of 2000• KP started borrowing heavily• Attempted to rig the price upwards and later sell• But failed to do so• International bear cartel

• IT department found discrepancies in sources of funds of KP

• Routine market surveillance of 5 stocks


Systematic Flaws• Trading system lag of one week

• Credit Check

• High exposure allowed

• Lack of records and margins at Calcutta stock exchange

• Lending without proper collateral


Implications BOI complains to CBI-KP is arrested Global Trust Bank and Bank of India 's merger

failure SBI's loss was minimal. So it did nothing MMTC was liquidated ; KP paid its stockholders

Rs.400 Crores. He still owes them Rs. 400 Crores


Implications One of the biggest Fall in BSE -700 points KP and other traders were banned from trading for

17 years Short selling was banned for 6 months. Badla system was banned All shares that were put as collaterals should be

done so through NSE and BSE. Options and Index Future derivatives was

introduced 10% additional deposit Margins.


“All my lifetime’s savings are gone. I don’t know how to feed my family.”-A small investor hit by KP scam in April 2001

Economy & Finance

Ketan parekh scam