The Ketan Parekh Scam: Scam Story 1999-2001

The Ketan Parekh Scam

Ketan Parekh was an apprentice of Harshad Mehta who quickly earned the respect of market men on Dalal Street. While remaining relatively understated in his actions, many market people closely observed his movements.

After the stock market crashed 176 points post budget announcement in 2001, SEBI and RBI began investigating his dealings and found evidence of him engaging in circular trading, pump-and-dump schemes, misrepresenting facts in order to secure bank loans, pump and dump strategies as well as misrepresenting facts in order to obtain them.

The Genesis of the Ketan Parekh Era

In the latter part of 1990 in particular, around 1999 and 2000, Ketan Parekh emerged as a major player within the Indian stock market. He is often referred to as the “Bombay Bull,” Parekh’s impact was due to his profound understanding of the dynamics of markets and investors psychology. This was a skill developed under the guidance of Harshad Mehta, as well as through his experience as an Chartered Accountant. The company was mainly run by NH Securities, a brokerage firm that was founded by his parents, Parekh’s early years were characterized by rapid growth, due to his savvy knowledge of markets and the strategic decisions he made in the rapidly growing fields in Information, Communication, and Entertainment (ICE).

Circular Trading

Ketan Parekh was an expert at manipulating the stock market. He employed Circular Trading strategies such as purchasing low-profile companies’ stocks at discounted rates before selling them later at higher prices if their share prices rose, to demonstrate their high liquidity. Furthermore, he employed another strategy known as Pump and Dump wherein funds would be raised via pledged shares held with banks before using these funds to jack up stock prices further; ultimately creating vast profits through an increase in share value.

Ketan Parekh was revered by market players at his career’s peak for both his skills and connections in the market. He fostered close relationships with Bollywood celebrities, political parties, business managers, brokers and traders; as well as an extensive network of brokers and traders.

Market players once revered him. Unfortunately, market players were caught red-handed engaging in fraudulent activities and banned from the stock exchange. He eventually relocated to London for his daughter’s treatment, repaying most of what he borrowed from people as well as accepting all restrictions placed upon him by court – yet many still view him as a scammer.

Pump & Dump         

Ketan Parekh utilized the pump-and-dump strategy to manipulate stock prices and generate huge profits. He would purchase shares of one company before selling them back at artificially elevated prices to create artificial demand, inflating its share price before flipping those stocks for profit later. His schemes worked brilliantly – producing 200% returns on some shares! He used this tactic at Pentamedia Graphics, HFCL, DSQ Software, Ranbaxy among many others!

He used illegal trading techniques and fake bank receipts to manipulate stock prices and spur a bull market, costing investors billions in losses as part of this scheme.

Parekh took advantage of India’s generous margin trading rules to take advantage of another loophole he found: borrowing money from brokers to purchase large positions on the market at once and quickly turn a profit while at risk of potentially losing his entire investment.

Parekh further manipulated share prices by persuading institutional investors to purchase his manipulative stocks, believing this to be a more efficient means of reaping massive profits than retail investors. Shell companies and fraudulent transactions were employed as fundraising vehicles for his manipulations while bankers were bribed and loans against his shares secured using Global Trust Bank and Madhavpura Mercantile Cooperative Bank boards of directors as leverage.

Badla System

After Harshad Mehta’s scam, India’s stock market was again rocked by fraudster Ketan Parekh who took advantage of several loopholes within Indian trading such as circular trading and pump and dump, using shell companies to raise investors funds then dump shares for quick profits.

Parekh took full advantage of India’s generous margin trading rules at that time to use margin borrowing funds from his broker to purchase stocks at discounted prices and increase profits, something which Parekh utilized to buy large quantities which he then traded between his entities and friends – creating what is known as the Badla System.

He further increased his profits by borrowing money from banks to purchase stocks. Utilizing celebrity and political connections, he secured loans from Global Trust Bank (GTB) and Madhavpura Mercantile Cooperative Bank (MMCB). Bribing board members gave him credit to buy shares at reduced costs; which then enabled him to manipulate share prices to earn tremendous gains in profits.

Sucheta Dalal wrote in her book that Ketan Parekh’s scam cost many of them their life savings and was difficult to come out from for those like Paleja who lost so much money.

Pay Orders

As its name suggests, stock manipulation involves purchasing shares in bulk in order to increase their price and then selling them back on the market, yielding profits for fraudsters who employ this strategy known as circular trading.

Ketan Parekh took advantage of this loophole to purchase shares in various companies like Pentamedia Graphics, HFCL, GTL, Ranbaxy, DSQ Software and Aftek Infosys for 200% annual returns – purchasing up about 20-30% before selling back when prices began to increase.

Harshad Mehta helped Parekh become adept in stock market trading by teaching him how to manipulate it and gain recognition during the dotcom boom, resulting in him making enormous wealth during this period. As a result, Parekh became very well known during this era and made substantial sums.

Parekh wanted to expand his operations further and found an opportunity for him to fund them: India’s generous margin trading rules allowed him to obtain loans against his fraudulent pay orders from banks, and raise funds from promoters of stocks whose share prices had skyrocketed through manipulation; these promoters could pledge their shares as collateral against loans for his fraudulent activities.

Insider Trading

Ketan Parekh successfully exploited multiple channels to manipulate the Indian stock market. Aside from engaging in an extensive pump-and-dump scheme, he also utilized funds belonging to promoters and banks for purchasing shares of scrips that he was manipulating; an act which clearly violated insider trading laws.

He used an intricate network of investment firms, overseas corporate bodies, and cooperative banks (such as Madhavpura Mercantile Cooperative Bank ) to raise money, using these funds to manipulate share prices in key stocks such as Visualsoft, HFCL, GTL, Ranbaxy and Silverline Technologies – collectively referred to today as K-10 shares.

CPA by profession, Parekh had an unparalleled grasp of business and financial details which he used to manipulate stock prices and deceive investors. Combine that with his insider connections and it became apparent he was adept at using price manipulation to make huge profits – all at his own hands! His case serves as a cautionary tale highlighting the need for due diligence when investing as well as having an effective regulatory framework in place.

Misrepresentation of Facts

Ketan Parekh began his career as a chartered accountant. NH Securities became part of his family business before working under Harshad Mehta to learn his trade.

He used volume sales of specific stocks to artificially inflate share prices and make them more desirable to retail investors while charging them fees for his services.

This scandalous scheme involved millions in stolen funds and was responsible for an almost total collapse of the stock market, financial institutions were hit hard, Rupee value plummeted and investors lost everything.

At the core of this scandal was corporate promoters’ involvement. These promoters pledged their shares as collateral against bank loans in violation of RBI guidelines to increase trading volumes for their companies – leading to circular trading situations which eventually collapsed the entire market, leading to losses estimated at over 40,000 crores.

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