An overview of Ketan Parekh scam presented by me and my friend.

1. PRESENTED BY
AMLIN DAVID
STEVENSON PRAKASIA

3.  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

4.  Aftek Infosys
 DSQ software
 Global telesystems
 Himachal Futuristic
Communications
 Pentamedia Graphics
 Satyam computers
 Silverline Technology
 SSI
 Zee Telefilms
 Pritish Nandy Communications

5.  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

6.  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

7.  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.

8.  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.

9.  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

10.  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

11.  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

12.  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

13. • 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

14. RS. 2000 billion lost
KP released on bail on May 2001
All Ketan Parekh had to say was I
made mistakes
The Retail investors were the worst
hit
SBI, BOI, PNB had to suffer huge
losses
MMCB also suffered huge losses