The Ketan Parekh scam is one of India’s stock market scams almost equivalent to the manipulation of stock prices in the early 2000s. The most dominant broker of his time, Ketan Parekh, adopted the following unethical practices such as insider trading, circular trading, and market rigging, which gave an inflated form to the stock price of certain firms and led investors to suffer extreme financial losses. It was estimated that the number of scams stood at around ₹40,000 crores and shook the foundations of the Indian financial market with the number of loopholes coming to light through these scams. The tremendous financial damage that his fraudulent activities have done did prompt the regulatory authorities such as SEBI to provide better measures to give more protection to the investors.
Who is Ketan Parekh?
Ketan Parekh was a CA by profession. He kicked off his career in the late 1980s by operating the venture called NH Securities, which is a stock broking firm his father had established. After his stay at Harshad Mehta’s firm GrowMore Research & Asset Management, he closely observed trends in the markets and the market perspective of various investors. He learned the techniques of the Big Bull and his associates in manipulating the stock market. Though he was described as soft-spoken and discreet, Ketan Parekh was able to connect with politicians, actors, and businessmen.
Ketan Parekh belonged to a family of stockbrokers and later took over the business. He gained popularity working with a firm known as NH Securities, which catapulted him into the stock market. He was seen as someone having contacts with prominent business tycoons, politicians, and media houses. He discovered and also promoted a bouquet of companies that are known today as the K-10 stocks, such as Zee Telefilms, Global Telesystems, HFCL, and several others.
During the dot-com boom of the late 1990s, Parekh capitalized on the increasing interest in technology and media companies. He targeted low-value stocks, creating artificial demand that led to inflated valuations and record profits.
Ketan Parekh Scam
It is the Ketan Parekh scam, which involved stock price manipulation and using funds from banks to control the market. Parekh’s scam revealed massive financial fraud in the year 2001.
- Manipulation of K-10 Stocks: Parekh identified stocks that were doing very badly but still held growth potential. He invested heavily in such shares, hence raising their prices artificially. With more investors finding an attraction towards such stocks, the value will be raised further.
- Circular Trading: Parekh traded through circular trading wherein he bought and sold the same stocks in two different accounts. It made his trading look busier than it was, thus fueling investor confidence.
- Banking Frauds: He borrowed loans from banks, primarily Madhavpura Mercantile Cooperative Bank (MMCB). Funds in this manner moved into the stock market rather than into his businesses. MMCB and GTB sanctioned loans of around Rs 800 crore and Rs 100 crore, respectively, to Ketan Parekh.
- Collusion with the Promoters and Media: Parekh reportedly aligned himself with the promoters of the companies to manipulate stock prices. He used the media to publicize some of the stocks so that retail investors could purchase them.
Impact of the Scam
The Ketan Parekh scam caused a major crash in the Indian stock market in 2001, where billions of wealth of investors disappeared. This was a financial disaster leaving an indelible mark mainly on retail investors who lost all their hard-earned savings.
Other banks, including MMCB, also went insolvent due to funding Ketan Parekh’s schemes. The scam not only brought revenue losses to individual investors but also shook the whole financial system by hitting at the mammoth flawed consequences of unchecked market manipulation.
Ketan Parekh Scam was Exposed?
The expose of the Ketan Parekh scam started in 2001 when several financial institutions and regulators began noticing irregularities in the transactions of the stock market.
- Crash of K-10 Stocks: By early 2001, the bubble of K-10 stocks crashed causing a stock market crash. Withdrawals of funds by the investors uncovered an artificial inflation of prices.
- Role of Madhavpura Mercantile Cooperative Bank (MMCB): Investigations in the case proved that Parekh had taken up loans of above ₹800 crores from the MMCB and was unable to recover, such a bank which was almost heading towards a great collapse.
- Complaint from ICICI Bank: It was through a complaint by ICICI Bank against him for defaulting on loans. This brought on an investigation into his financial activities.
- Regulatory Action: The Securities and Exchange Board of India (SEBI) initiated an investigation into Parekh’s trading activities. The investigation found widespread market manipulation and misuse of funds.
SEBI Action
The Securities and Exchange Board of India (SEBI) also booked Ketan Parekh for fraud. In the year 2001, SEBI issued a banning order against him which was for the trading in stock market for 14 years, this is one of the longest bans in SEBI history. SEBI ordered Parekh to pay back money to investors as well as to banks who incurred losses due to his scams but recovery was indeed tough because these transactions were all complicated.
This scam made SEBI introduce more stringent regulations to avoid such cases in the future. The reforms included improved market surveillance, rules against circular trading, and greater transparency in trading in stocks. Parekh faced several court cases, including criminal charges of fraud and embezzlement. The court convicted him in 2008 and sentenced him to one year in prison.
Parekh was convicted in the special CBI court in March 2014 on the charges of cheating and sentenced to two years of rigorous imprisonment. The last update in this case came when, in the year 2021, the Supreme Court permitted Ketan Parekh to travel to the United Kingdom to take care of his daughter’s medical requirements.
Ketan Parekh Scam FAQs
1. What is the Ketan Parekh scam?
Ketan Parekh’s scam consisted of stock price manipulation, bank fraud, and unethical trading in which many people lost large sums of money.
2. Who is Ketan Parekh in Scam 1992?
Ketan Parekh was a protégé of Harshad Mehta whose life story was portrayed in Scam 1992. Similar stock market manipulation was continued by Parekh during the early 2000s.
3. What was the amount in Ketan Parekh scam?
This amount was estimated as ₹40,000 crore making it one of India’s biggest scams in terms of financial frauds.
4. What SEBI did after the Ketan Parekh scam?
SEBI researched the case and banned the trading of this person for 14 years. Also, stronger regulations were framed for the securities market to discourage such scams from here onwards
5. What are the K-10 stocks in Ketan Parekh scam?
K-10 stocks were a set of 10 companies, which included Zee Telefilms and HFCL, whose prices were manipulated by Ketan Parekh for personal gains.
