CHAPTER-1 WHO IS KETAN PAREKH? "All my lifetime's savings are gone. I don't know how to feed my family." - A small investor hit by the Ketan Parekh scam, in April 2001. Ketan Parekh [KP] was a chartered accountant by profession and used to manage a family business, NH Securities started by his father. Known for maintaining a low profile, KP's only dubious claim to fame was in 1992, when he was accused in the stock exchange scam. He was known as the 'Bombay Bull' and had connections with movie stars, politicians and even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in new economy companies. Over the years, KP built a network of companies, mainly in Mumbai, involved in stock market operations. 1 | P a g e The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early 1999 led to a rise of the Indian stock markets as well. The dotcom boom contributed to the Bull Run led by an upward trend in the NASDAQ.The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest Communications, and PentaMedia Graphics KP selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the 'K-10' stocks. The shares were held through KP's company, Triumph International. In July 1999, he held around 1.2 million shares in Global. KP controlled around 16% of Global's floating stock, 25% of Aftek Infosys, and 15% each in Zee and HFCL. The buoyant stock markets from January to July 1999 helped the K-10 stocks increase in value substantially (Refer Exhibit I for BSE Index movements). HFCL soared by 57% while Global increased by 200%. As a result, brokers and fund managers started investing heavily in K-10 stocks. Mutual funds like Alliance Capital, ICICI Prudential Fund and UTI also invested in K-10 stocks, and saw their net asset value soaring. By January 2000, K-10 stocks regularly featured in the top five traded stocks in the exchanges (Refer Exhibit II for the price movements of K-10 stocks). HFCL's traded volumes shot up from 80,000 to 1,047,000 shares. Global's total traded value in the Sensex was Rs 51.8 billion. As such huge amounts of money were being pumped into the markets; it became tough for KP to control the 2 | P a g e movements of the scrips. Also, it was reported that the volumes got too big for him to handle. Analysts and regulators wondered how KP had managed to buy such large stakes. [1] When the interest rates were freed in mid-1989, it made the price of both bonds and money more volatile, and increased the link between the securities and money markets. With price volatility and increased volumes, securities broking became a profitable activity. The rising volumes were funded by banks through bank receipts (BR is a document issued by a bank acknowledging that it has sold certain government securities to a party and received payment). The scam came to light when RBI asked the SBI to show the bank receipts, and it was found that Rs 6.22 billion not been reconciled and was untraceable. The money involved in the scam was eventually ascertained to be well over Rs 30 billion. [2] The e-commerce revolution had led to a massive upsurge in the value of technology stocks across the globe, especially Internet ventures. This came to be known as the dotcom boom. [3] A bull run is an uptrend in the stock markets caused by the rise in the price of shares, sustained by buying pressure of actual investors or news of favorable economic growth, decontrol and political developments. [4] The National Association of Securities Dealers Automated Quotation System (NASDAQ) is a US-based stock exchange, which comprises largely of technology stocks. Started in 1971, NASDAQ is the first screen-based, floor less trading system and the second largest stock market in the US. [5] In September 2002, Rs 48 equaled 1 US $ Thus, he was the man who triggered the cash. 3 | P a g e As per market information, though he was a big broker, he didn‟t have sufficient funds to buy large stocks. He borrowed funds from various companies and banks for this purpose. He used to raise loan from the banks by offering shares as collateral security. The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and PritishNandy Communications. He also had stakes in HFCL, Global Telesystems (Global), Zee telefilms, Crest Communications, and PentaMedia Graphics. Ketan selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the ‘K-10′ stocks. This could not have been possible out without the involvement of banks. A small Ahmadabad-based bank, NMCB (name changed) was KP‟s main ally in the scam. KP and his associates started tapping the MMCB for funds in early 2000. In December 2000, when KP had to face some liquidity issues in settlements he used NMCB in two different ways. 1st was the pay order route, wherein KP issued cheques drawn on BoI to NMCB, against which NMCB issued pay orders. The pay orders were discounted at BoI. It was alleged that NMCB issued funds to KP without proper collateral security and even crossed its capital market exposure limits. As per a RBI inspection report, NMCB‟s loans to stock markets were around Rs 10 billion of which over Rs 8 billion were lent to KP and his firms. The second route was borrowing from a NMCB branch at Mandvi (Mumbai), where different companies owned by KP and his associates had accounts. KP used around 16 such accounts, either directly or through other broker firms, to obtain funds. Apart from direct borrowings 4 | P a g e by KP-owned finance companies, a few brokers were also believed to have taken loans on his behalf The NMCB pay order issue hit several public sector banks very hard that included big names all of whom lost huge amounts in the scam. It was also alleged that Global Trust Bank (GTB) issued loans to KP and its exposure to the capital markets was above the prescribed limits. According to media reports, KP and his associates held around 4-10% stake in the bank. There were also allegations that KP, with the support of GTB‟s former CMD Ramesh Gelli, rigged the prices of the GTB scrip for a favorable swap ratio before its proposed merger with UTI Bank. KP‟s modus operandi of raising funds by offering shares as collateral security to the banks worked well as long as the share prices were rising, but it reversed when the markets started crashing in March 2000. 5 | P a g e Chapter 2 What are his stocks? He picks out-of-favour stocks that are expected to grow rapidly. These are also companies that investors think lowly of or have doubts about the business, accounting standards and management. He was the first to see the software boom spreading over to second-rung software companies in 1998. His first killing came in Pent four which had been consciously avoided by most institutional investors. Parekh came and sold them a solid growth story and the rest is history. Ranbaxy had moved in a narrow trading range for five years. There were pending warrant conversions and institutional investors feared that the management came and sold at higher levels. Parekh spotted the change in management and the company's new drug discovery system becoming successful. He sold this story again and reaped a rich harvest. Global, Himachal and DSQ Software will not fit in the universe of an institutional investor, but for Parikh‟s presence. The country's largest mutual fund, UTI's Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and Global Tele-Systems (1.05 per cent) on September 30, 1999. Parekh is also one of the few brokers who understands the power of online trading. Most operators work through a large team of trusted dealers and jobbers. (Word should not spread that he is buying or he would not be able to acquire enough shares.) An operator would also need to indulge in buy and sell orders so that his dealers remain quite confused on whether he is in or getting out. 6 | P a g e Every big broker has enough enemies. These are the people he has crossed or the people who crossed him on his way to the top. Alleges one of his adversaries, "Most of these rumours are spread by the KP gang so that they get to smash prices, enter at lower levels and then pull the market up." Does he always succeed? There are two ways of judging this. One is the level that a stock reaches and then declines. BPL is a good example. The stock went to Rs 600 levels; it is currently at Rs 270 levels.