ULTIMATE SHISHYA

  

This guy has proved that you don't need to be a certified CA to find loopholes in the system. You just need the willingness within to achieve something big in your life. He has got no Harvard education, nor has he ever stepped in the IIMs. He is a self-taught man who has made a lot of money in the Indian equity markets and has been looked upon by his followers like ED, SFIO, CBI, Income Tax department, etc. Shocked to see his followers? Well, you should be because he is none other than Mr. Ketan Kumar Parekh. 

According to the SFIO (serious fraud investigation officer), the scam committed by Mr. Ketan Parekh is supposed to be more than Rs 40,000 Cr. That's right. He surpassed his Guruji, Mr. Harshad Mehta. Ketan Parekh scam or K10 scam (as it is famously known as), is supposed to be 8X times the size that of Mr. Harshad Mehta's.

He was a small stockbroker in Mumbai with big ambitions. Ketan was involved in manipulating the stock rates and taking the full benefit of the pump and dump scheme. Pump and dump schemes have been famous in the 90s. Under this scheme, a person/broker/investor/group of investors take a majority position in a particular stock. Later, they ask their clients and institutions to buy that particular stock so as to rig the price and send it through the roof. 

When the investors or speculators think that the stock has been manipulated enough, they start dumping their positions. This forceful buying and sudden selling cause the stock price to behave like a Diwali rocket which motivates the retail investors to add fire to this irrationality. Humans are emotional but markets aren't. scamsters very well know this and hence it becomes easier for them to manipulate the markets. Let it be. Just enjoy the story. 

All over the world, investment in ICE (Information technology, communication, and entertainment) shares was the trend. Ketan Parekh colluded with the promoters of new economic ICE shares and changed the complexation of the markets by buying stocks known as the K-10 stocks. He succeeded in uplifting stocks life HFCL, Deepak Nitrate, ZEE entertainment, Satyam computers, etc. Parekh’s modus operandi was to route orders through his 3 broking outfits and 40 broker satellite. He had contacts with brokers in Kolkata and Ahmedabad, who were rewarded with badla payments. (Badla Transactions are transactions which are executed through borrowed funds by the beneficiary and or the transactions that are financed through the banks or financial institutions).

His sources of funds were NRIs and new private sectors banks that were accepting shares as collateral. He would pledge shares with the banks when the shares were high. Mutual funds along with foreign institutional players investing in the technology stocks, skyrocketed the share prices of tech stocks. He placed shares of companies like Satyam at Rs 1000 and companies like HFCL at Rs 1400 with the financial institutions. Parekh would increase the liquidity of the stocks when there was high demand and would buy aggressively when the any stock from his portfolio fell. The bull run started in May-Nov 1999 when Parekh started his first round of trading aggressively in HFCL, Global, Satyam and Zee Scripts. 

The SENSEX rose from 3378 to 4491 points. The SENSEX peaked 6100 before it started to fall because of global meltdown in the IT stocks or the Dot Com Boom. At this time, the Bears got activated and started shorting the markets and hence pulled down the markets to newer lows. Consequently, the banks on the other hand, asked Parekh to either increase the pledge percentage of his shares or pay the borrowings. This led to a financial crunch for some bulls in the Kolkata stock exchange. The crisis snowballed as the Kolkata bulls had more long positions than Parekh. Trading at the Kolkata exchange was 90% unofficial. It was a cash badla market where Rs 1500-2000 Cr is rolled over every month at 21-30%. As the circumstances developed, badla rates shot up to 80% at the Kolkata stock exchange. 

So, Parekh defaulted on payments to Kolkata brokers which results in a payment crisis between March 12-17, 2001. 70 CSE (Kolkata stock exchange) defaulted on the badla payment as the exchange plunged into the crisis. The bear cartel of the BSE was caught red handed by the SEBI and all 7 brokers were banned.
Parekh desperately borrowed huge sums from the Ahmedabad-based Madhavpura Mercantile Cooperative bank (MMCB). The bank issued pay orders running into Crores of Rupees without receiving cash payments or collateral from Ketan. 

Pay orders are instruments issued between banks branches in one place. They are issued after the issuing bank collects the cash or has significant collateral. Hence, the discounting bank is sure of collection. As Parekh colluded with Ramesh Parekh, then Chairman of MMCB, the latter issued pay orders without having a significant balance in the bank account. The BOI discounted Rs 137 Cr worth of pay orders which bounced. Ketan Parekh paid only Rs 7 Cr and the BOI went to a criminal case against him. The RBI then specifically prohibited cooperative banks from investing in the markets or to lend to stockbrokers. 

 MMCB flouted the RBI norms of the RBI to earn higher rates or returns. The CBI arrested Ketan on charges of defrauding the BOI. The BSE plummeted from the peak of 6100 to 3788.2 on March 30, 2001. SEBI banned all the deferral products including badla from the exchange.
 

In short, back in the 90s, Indian banks were not allowed to lend money to these brokers. Even if they were allowed, there was a limit. Private banks were emerging during the 90s. These private banks were in search of gaining market share. To do so, they started lending these brokers. What Ketan did is he pumped up the share prices and kept those shares as collateral against these banks. Against those collateral, he borrowed funds so as to pump more shares. He was successful in doing this. Looking at this, the banks started giving more loans. But the wind does not blow all the time. As the US tech stock boom collapsed, Indian markets also felt the consequence. Indian shares stared falling which resulted in margin calls for Ketan and his brokers. He had kept his shares as collateral against the bank. So, the banks were looking for interest payments which basically is the margin call. As the shares fell, he was not able to sell those shares and pay the margin call. Similar situation took place on the CSE, and the Kolkata brokers also defaulted on their loan payments. Badla loans mean if I want to make you a payment, I will borrow that money so as to pay you back. This badla transaction has 18-20% on the loans. Because these brokers started defaulting on these loans, the banks started increasing the interest rates on these badla loans. It peaked to 80%. 

On 30th March 2001, Ketan was arrested for defaulting on loans. Later when the CBI took charge of the case, they found out the scale of the crime was much bigger than what they were expecting.