Ketan Parekh is one of the repeat offenders in Indian stock market history. He was involved in the Canbank Mutual Fund scam of 1992, in which funds received from a group firm for purchasing government securities, were diverted to the accounts of stockbrokers.
Yet, by 2001, he was back to it, engineering his very own stock market scam.
As the 21st century dawned, Parekh was the reigning bull of the Indian markets. K-10 stocks—Pentamedia Graphics, HFCL, GTL, Silverline Technologies, Ranbaxy, Zee Telefilms, Global Trust Bank, DSQ Software, Aftek Infosys and SSI — which were so named since they were Parekh’s favourites, were on fire. The Pentafour bull, one of the many monikers for Parekh, would take advantage of the low liquidity in these stocks, and in collusion with the promoters, ramp up the stock prices.
Parekh’s rise to fame and riches coincided with the dotcom boom of 99-00 when he made a killing in shares of IT and telecom companies that were then the flavor of the season. With tech booming across the world, most people attributed his rise to his ability to pick the right stock and ride the wave. The reality of course was different.
As it unfolded, his funds were secured through borrowings against dud pay orders issued by Ahmedabad-based Madhavpura Mercantile Cooperative Bank. The bank whose officials were complicit in the scam did not even have enough funds to cover the POs. Another bank that provided the funds was Global Trust Bank. Parekh’s other sources were the promoters of many of the companies who were in on the scam and were hoping to make a profit on their own holdings.
In what was a perfect pump-and-dump operation, Parekh
would build large positions in his selected companies, talk them up in the market and exit when the shares had climbed. For his exit, he targeted institutional investors and to lure them he would create large volumes in the stock through circular trading between his own and other friendly entities. Such was his deviousness that the stocks he picked climbed astronomically. Thus, Pentafour Software, one of the K10 stocks saw its price go from Rs 175 apiece to Rs 2,700 while that of Global Telesystems climbed from Rs 185 to Rs 3,100.
In March 2001, as the dotcom bubble burst, traders and brokers started dumping the K10 stocks. Parekh who had large leveraged positions in these stocks was now stuck. The nefarious operation unravelled once RBI
declared MMCB a defaulter which led to a massive loss for the Bank of India. After the markets crashed by a whopping 176 points a day after the 2001 Union Budget
, SEBI and RBI began investigations. Parekh was accused of insider trading and misrepresentation of facts to swindle banks.
Eventually, Parekh was convicted for market manipulation and barred from trading till 2017. However, in 2009 SEBI discovered that Parekh was trading through front companies and his trades had led to the Calcutta Stock Exchange suffering a payment crisis. Parekh was sentenced to rigorous imprisonment in March 2014, while MMCB’s license was finally cancelled by RBI in 2012 and GTB was merged with Oriental Bank of Commerce in 2004.
—Sundeep Khanna is a former editor and the co-author of the recently released Azim Premji: The Man Beyond the Billions. Views are personal
(Edited by : Ajay Vaishnav)