Shivani

Introduction

Famously known as a ‘Bombay Bull’ during 1999-2000, Ketan Parekh was a mentee of Harshad
Mehta (who was also involved in another scam that shook the stock market in India). Ketan, CA
by profession, started his career in the late 1980s and was running a family business of NH
Securities – a stockbroking firm that was started by his father. This was how he managed to
thoroughly understand the inside outs of the stock market trends and the investors’ mindsets.

During his peak, marketmen literally followed his every move blindly as he used to exploit the
stock prices to gain the trust of these investors. Not only this, but he also enjoyed close
connections with many celebrities from Bollywood, political parties and business managers
which helped him connect with Kerry Packer, leading Australian Media Entrepreneur. Kerry and
Ketan joined hands to start a venture capital firm, KPV venture with $250 million that focused
on investing money into the new start-ups.

Pranay

Pump and dump scheme is a fraud scheme where scam operators buy a large number of shares
of any stock and try to attract the investors giving them wrong information. Many investors buy
the stock falling on the operator's trap or believing the wrong information. As a result the
demand of this share is growing and hence the share price is also growing. Other investors buy
the same share because of the growing of stock's demand and price. As a result the share price
touches a high level means share price is pump. When the share price reaches a good position
scam operators dump or sell their all shares of this stock and they become profitable. After
selling the stocks when operators stop to promote the stock or stop to give the wrong information
then the share price falls because the stock is overvalued and for the wrong informations that
scam operators spread into investors. As a result the investors who invest in this stock they face a
huge lose.  Ketan Parekh would buy a large stake of any stock at first and then he started to
manipulate the stock. Basically there is two types of investors in stock market and they are: 1)
Retail Investors. 2) Institutional Investors. Retail investors are individuals who buy the share
for their personal account like you and i. Institutional investors are organisation who invest for
their investment portfolio or for people like mutual funds,insurance companies,hedge funds etc.
But here ketan parekh tried to attract the institutional investors because they invest in stock
market with a large capital. Ketan knew well that how and in what way he could attract the
institutional investors. Because he was a institutional stock broker. Using different stratagem to
attract the institutional investors he started to manipulate the stocks. Many investors(basically
institutional investors) give more importance to liquidity. For this ketan started circular trading.
Stock's volume can be increased using circular trading. On a particular day or particular time that
much stocks are traded is called the volume of this stock. On that day if the trade number of any
stock is growing then the volume of the stock is increasing. In circular trading operators trade the
stock between themselves. First operator sell the stock to second operator and the second
operator sell the stock to third operator and the third operator sell to first operator. In this way
circular trading is going on and the stocks are rotated between them and the volume of this stock
is growing. In circular trading operators decides at first how much,when and in what price shares
are traded. And then first and second operator placed sell and buy order at same time and
quantity and in same price. Means they place exactly matching orders. Because of this stocks are
traded between operators and the volume of the stock is increasing.

Afzal

So as mentioned by pranay ketan parekh used pump and dump method for which the first thing
required was to take the market up for which Ketan Parekh used Kolkata stock exchange to trade
as this was the stock exchange where no strict and pivotal rules and regulations were formed.

Second thing was the selection of stocks. He looked 4 qualities for selecting stocks: 1.Small Co.
2. Less Volume 3. Future perspective 4.Less market capital

Also Ketan Parekh was the strong believer of the ICE sector – Information, Communication, and
Entertainment and that was the time during 1999 and 2000 when the dotcom boom had just
started. So, he selected 10 stocks from these sectors which were known as k-10 stocks.
  These included names like Global Telesystems, Zee Telefilms, HFCL, Silverline, Satyam
Computers, Aftek Infosys, DSQ Software, Ranbaxy, Pentamedia Graphics and Visual Soft.
Sometimes Digital Global and SSI. 
This stock were bullish which enabled him to prove his predictions to be true to many other
investors. Moreover, many investment firms, overseas corporates, and banks, businessmen from
listed companies many of them gave their money to be managed by him as during 1999-2000,
Ketan Parekh was ruling the stock market.

Thus in just a few months, scrips of virtually unknown companies like Visualsoft rose from Rs
625 to Rs 8,448 per share and Sonata Software rose from Rs 90 to Rs 2,936.60. 

Neha

Manipulating banks to acquire huge loans

To manipulate the market ketan parekh required huge capital. There were 2 source for the same

1. He used to take money from promoters. Eg If I had a company so I will give money
to ketan parekh to increase share prices of my company which will lead to increase in
price of my portion of shares through which I can take loans from bank by keeping
them as collateral and I can also dump them in market to earn money by reducing my
stakes. So, he was taking a huge amount of money from promoters.
2. Banks He used to raise capital with the help of banks through loan and payorders. He
bought shares when they were trading at low prices and saw the prices go up in the
bull market while continuously trading. When the price was high enough, he pledged
the shares with banks as collateral for funds. This could not have been possible
without involvent of banks. A small Ahmedabad-based bank, Madhavapura
Mercantile Cooperative Bank (MMCB) was KP's main ally in the scam. In December
2000, when KP faced liquidity problems in settlements he used MMCB in two
different ways. First was the pay order, Pay order is a financial instrument which is
issued by the bank on customer’s behalf giving an order to pay a particular amount to
a particular person. . KP issued cheques drawn on BoI (Bank of India) to
MMCB(Madhavapura Mercantile Cooperative Bank), against which MMCB issued
pay orders. The pay orders were discounted at BoI. It was alleged that MMCB issued
funds to KP without proper collateral security and even crossed its capital market
exposure limits. KP reportedly used his BoI accounts to discount 248 pay orders
worth about Rs 24 billion between January and March 2001. BoI's losses eventually
amounted to well above Rs 1.2 billion. 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 around 16 such accounts, either directly or
through other broker firms, to obtain funds. He had Borrowed 250 crores from GTB
(Global Trust Bank) and 1000 crores from MMCB. According to RBI regulations, a
broker is allowed a loan of only Rs 15 crore (Rs 150 million).
3. Avinash

How the scam came to light

His mode of raising funds were going on well only till prices of shares went up

It reversed when shares started falling from March 2000. The crash was a result of fall at
National Association of Securities Dealers Automated Quotation System(NASDAQ) that saw a
fall in K-10 stock as well In next 2 months, sensex declined by 23% and K-10 stock declined by
67%.The bear cartel in Bombay stock exchange started to hammer his K-10 stocks in February
2001, leading them to fall and precipitating a payment crisis in Calcutta. On March 1, 2001, two
days after the Union Budget, the BSE Sensex crashed 176 points, prompting the then NDA
government to set up an inquiry into the market reaction. At that time, the Madhavpura
Mercantile Bank scam broke on Dalal Street, leading to a massive erosion in wealth and
confidence, compounded by the so-called dot com bubble. 

The SEBI and RBI started investigating into this case. Ketan Parekh was accused of being
involved in the Insider Trading, Circular Trading, Pump and Dump and misrepresentation of
facts to borrow from the banks.

Ketan Parekh declared to be guilty of a criminal offense for ripping off the Indian stock market
and was barred from trading in the Bombay Stock Exchange (BSE) for 15 years up to 2017. He
was also found to be involved in a Circular Trading with many banks and Insider Trading for
which he was sentenced to rigorous imprisonment of one year.
However, SEBI investigated and found that despite being prohibited from trading, he used his
network well and made certain companies trade on his behalf. Later in 2008, many such
companies were traced by SEBI and were barred from trading too

Impact- Vrinda

The Sensex lost over 700 points and more than 500 of the 1364 actively traded shares

KP and other traders were banned from trading for 17 years

Short selling was banned for 6 months.

Badla system was banned

Broker control over Stock Exchange was demolished

Bombay Stock Exchange (BSE) President Anand Rathi resigned.

Eight people were reported to have committed suicide .

Hundreds of investors and two banks were driven to the brink of bankruptcy

The Retail investors were the worst hit-SBI, BOI, PNB, MMCB had to suffer huge losses.

STEPS TAKEN BY SEBI AFTER SCAM

SEBI launched immediate investigation on the scam.

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 banned naked short sales.

SEBI allowed banks for collateralized lending only through BSE and NSE

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.

RBI started inspecting accounts and sub-accounts twice a year in spite of once in two year.