PRESENTED BY AMLIN DAVID

STEVENSON PRAKASIA

KETAN PAREKH SCAM

INTRODUCTION

A Mumbai based stock broker chartered accountant by profession

KP took advantage of low liquidity in certain stocks which later came to be known as ‘K-10’ Stocks

Held significant stakes in the K-10 companies

The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially

As a result other brokers and fund mangers started investing heavily in these stocks

INTODUCTION

Aftek Infosys DSQ software Global telesystems Himachal Futuristic

Communications Pentamedia Graphics Satyam computers Silverline Technology SSI Zee Telefilms Pritish Nandy Communications

THE K-10 STOCKS

176 points fall in the sensex on march 1st, 2001

Prior day union budget tabled prompted 177 sensex points increase.

SEBI launched immediate investigations

SEBI inspected the books of several brokers suspected of triggering the crash

RBI ordered some banks to furnish data of Capital market exposure

BSE President Anand Rathi’s resignation added to continued downfall of sensex

DEVELOPMENT LEADING TO

KP SCAM

Opened debate over banks financial capital market operations, Lending funds against collateral security, Dual control of co-operative banks

Ketan Parekh was arrested by CBI on 30th March 2001. He was charged befrauding Bank of India by almost $20 Million

Another sensex fall of 147 Points

CONTINUED…

Though KP was a successful broker, he did not have money to buy large stakes as he held the stakes of more than Rs 750 million in July 1999, according to a report.

Analyst claimed that he had borrowed from various companies and banks for this purpose.

His financing method was fairly simple.

He bought shares when they were trading at low price and saw the prices go up in the bull market while continuously trading.

When the prices was high enough, he pledged the shares with banks as collateral for funds, and also borrowed from the companies like HFCL.

It could not have been possible without the involvement of banks.

FACTORS THAT HELPED KETAN PAREKH

A small Ahmedabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP’s main ally in the scam. KP and his associate started tapping the MMCB for funds in early 2000.

In December 2000, when KP faced liquidity problem in settlement he used MMCB in two different ways-

First was the pay order route, where as KP issued cheques drawn on BoI to MMCB, again which MMCB issued pay orders, the pay order discounted at BoI.

The second route was borrowing from a MMCB branch at Mandvi (Mumbai) where different companies owned by KP and his associates had accounts. KP used 16 such accounts, either directly or through other broker firms, to obtained funds.

CONT…….

Lack of regulations and surveillance on the bourse allowed a highly illegal and volatile badla business

CSE had the third-highest volumes in the country after NSE and BSE

CSE helped KP to cover his operations from his rivals in Mumbai. Brokers at CSE used to buy shares at KP's behest

These brokers had to keep shares in their name and they were paid 2.5% weekly interest

IMPACT ON CALCUTTA

STOCK EXCHANGE

By Feb 2001, CSE were reduced to an estimated Rs 6-7 billion from their initial worth of Rs 12 billion

KP's badla payments of Rs 5-6 billion were not honored on time for the settlement and about 70 CSE brokers, defaulted on their payments

By mid-March, the value of stocks held by CSE brokers went down further to around Rs 2.5 - 3 billion

CONT……

Ketan Parekh was threatening to sue the Bank of India for defamation because it complained of bouncing of 1.3 billion pay orders issued to the broker by Madhavpura Merchantile Cooperative Bank

Investigations by SEBI and CBI reveal that sheer magnitude of money moved by Parekh was a staggering 64 billion

IMPACT OF THE SCAM ON

FINANCIAL INSTITUTIONS

The stock exchange acts as an intermediary between you and the actual lender.

You will be charged an interest rate for borrowing, which will be determined by the demand for that stock under badla trading

Thus, higher the demand for Wipro under badla trading higher will be the interest rate. You can keep your borrowing unpaid for a maximum of 70 days, after which you will have to repay the badla financier through the exchange

WORKING OF BADLA

SYSTEM

• An additional 10% deposit margin was imposed on outstanding net sales in the stock markets

• The limit of application of the additional volatility margins was lowered from 80% to 60%

• To revive the markets SEBI imposed restriction on short sales and ordered.

• It suspended all the broker member directors of BSE’S governing board

• SEBI also banned trading by all stock exchange presidents, vice presidents and treasurers

• SEBI allowed banks for collateralised lending only through BSE and NSE

SEBI’S ROLE AFTER SCAM

RS. 2000 billion lostKP released on bail on May 2001All Ketan Parekh had to say was I

made mistakesThe Retail investors were the worst

hitSBI, BOI, PNB had to suffer huge

lossesMMCB also suffered huge losses

CONCLUSION

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