The Ketan Parekh Scam

The Pump and Dump Scheme:

The pump and dump scheme is a fraud scheme where the operators buy the shares of the company in big quantities and then spread false rumors about the company that the company is a very good company and it is performing really well. This attracts many investors towards the particular stock as they feel it is a great buy. Hence, the demand of the stock rises and the price goes up and looking at the increasing prices more investors are attracted towards the stock. So, the prices rise further. Now, when the prices of these stocks rise to a great level the operators dump (sell) these stocks at a very good profit. Hence, the operators earn money and the other investors lose money as the stock price plummets once the operators start dumping the shares.

Ketan Parekh used to buy large stakes in companies and then he used to manipulate these stocks. He wanted to attract the institutional investors to invest in these stocks as they would invest in huge amounts unlike Harshad Mehta who trapped retail investors.

Use of circular trading. How it works?

Now, institutional investors like to invest in stocks that have high volumes in them hence Ketan Parekh created artificial volumes in stocks via circular trading. In circular trading operators trade the stocks among themselves only. These operators know each other and they purposely trade to increase volumes. Let’s say there are three operators who know each other: Operator 1, Operator 2, Operator 3

The operator 1 sells the shares to operator 2. Then operator 2 sells it to operator 3 and then operator 3 again sells it back to the 1^st operator. In circular trading the operators decide the quantity, price and timing of the trade beforehand so the shares go to that particular operator only and not anyone else. Then, both the operators place the buy and sell order at the same time and at the same price. This way the volume of the stock rises artificially.

To do this Ketan Parekh used to use his own different companies to buy and sell shares. He mainly traded in 10 stocks which were also known as the K-10 stocks. That was the time of the Dotcom bubble and so Ketan invested mainly in these stocks so no one came to know that these stocks are manipulated, everyone thought the rise is due to the rise in the technology industry.

Some stocks that Ketan manipulated

Some stocks that Ketan manipulated

Satyam computer, Sterlite and Aftek, Infosys were some of the other companies in the K10 pack.

Note- The scam mainly took place between March 1999 to March 2000 and prices plummeted there onwards till March 2001.

Where did Ketan get the funds to run the scam?

He mainly got the funds from 2 places

1. Promoters of the company- If their stock was manipulated it would take their stocks to great levels and then the promoters of that company could sell their shares or take a loan against those high-priced shares.
2. Banks- He mainly got money from 2 banks. Global trust bank (GTB) and Madhavpura Mercantile Co-operative Bank (MMCB). Ketan joined hands with the top management of the banks and they illegally issued loans to Ketan Parekh without proper collateral. According to RBI guidelines no bank could give loans of more than 15 crore rupees to a stock broker. At that time MMCB gave loans worth 800 crore rupees to Ketan Parekh and GTB gave loans in excess of 100 crores.

Conclusion of the scam

Ketan Parekh had dues of worth 130 crores to the Bank of India. When BOI asked him for repayment he refused. After that BOI filed a case of fraud against him. Later Ketan was arrested by the CBI. MMCB suffered huge losses and it could not pay back its depositors. In 2012 RBI