Assignment 5

Corporate Governance
Gulisha Vjiayvergia
2018PBM5270

Ans. 1) Ketan Pareek was a chartered accountant by professional training and had

started managing his family’s brokerage business. At the height of his success Ketan
Parekh was friends with international celebrities like Kerry Packer and both of them had
together started a venture capital with the intent of funding start-ups in India.

Ketan Parekh had a cover story to back his unscrupulous dealings and throw skeptics off
track. He was said to be a believer of the Information, Communication and
Entertainment sector i.e. the ICE sector. This was nothing special given the fact that late
90’s and early 2000’s were the time when the IT boom took place and these were the
stocks which were actually growing by leaps and bounds worldwide.

Hence, it seemed to appear that the stocks Ketan Parekh was picking were growing
because of their fundamentals. However, in reality, Ketan Parekh was looking out
for stocks which had a low market capitalization and low liquidity. He would then
pump money into these shares and start fictitious trading within his own network of
companies. The average person on the bourses may begin to believe that his stocks
were rising and they too would start investing driving the prices even higher. Then, as
the market took over Ketan Parekh would liquidate his holdings slowly.

Ketan Parekh used this modus operandi repeatedly for 10 stocks which he had picked.
These stocks came to be known as the K-10 stocks and the market always seemed to be
bullish about the future of these stocks.

The problem with Ketan Parekh’s dealings was two-fold:

1. Firstly, he had been accepting money from the promoters of many companies to
take their share prices up. This can be seen as insider trading and by itself was
enough to get Ketan Parekh into severe trouble.
2. Secondly, According to market sources, though Ketan Parekh [KP] was a
successful broker, he did not have the money to buy large stakes. According to
a report 12 lakh shares of Global in July 1999 would have cost KP around Rs 200
million. The stake in After Infosys would have cost him Rs 50 million, while the
Zee and HFCL stakes would have cost Rs 250 million each. KP borrowed from
various companies and banks for this purpose. His financing methods were
fairly simple. 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. He

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 also borrowed from companies like HFCL. This could not have been possible out
without the involvement of banks. A small Ahmedabad-based bank,
Madhavapura Mercantile Cooperative Bank (MMCB) was KP's main ally in the
scam. KP and his associates started tapping the MMCB for funds in early 2000.
He was believed to have bribed the officials of the said bank to persuade them to
lend against shares to a greater extent than was permitted by law. At first, the
bank crossed its prescribed limits to lend against market securities as it extended
credit to Ketan Parekh. Then, the bank basically started making unsecured loans
to him. The loans would be sanctioned first and the collateral would be collected
a few days later making the loans unsecured for the interim duration.

Ketan Parekh also conducted majority of his tradings in the Calcutta stock exchange
(CSE). The lack of regulation in this exchange provided more flexibility to Parekh. He did
not trade on his account but instead instructed other brokers to hold securities and paid
them a commission to do so while making good any losses that they might have accrued
on the position.

However, as a bear cartel started hammering the K-10 stocks, Ketan Parekh found
himself locked out of cash. The MMCB bank was also not able to lend out credit and bail
out Parekh. As a result, the brokers that were holding positions on his behalf in the
Calcutta Stock Exchange were forced to liquidate too causing a massive sell off in the
market. Investors lost money to the tune of Rs 2000 crores ($4 billion).

Ketan Parekh was immediately arrested and tried in court. He has been prohibited from
trading in the Bombay Stock Exchange for 15 years i.e. till 2017. Also, he had been
sentenced to one year rigorous imprisonment for his economic crimes.

Ans. 2) modus operandi of Ketan Parekh-

He used a networking of various foreign institutional investors, sub-accounts, overseas

corporate bodies, institutions and mutual funds for large transactions thereby creating
an impression of market interest in certain select scrips. He normally identified
companies with relatively low floating stocks, acquired substantial holdings in these
companies either directly or through associates including FII sub-accounts and OCB. He
was said to be a believer of the Information, Communication and Entertainment sector
i.e. the ICE sector. He started pumping money in stocks related to these sectors
normally known as KP10. GTB, zee, HFCL and aftek Infosys was few of them. He used to
charge high amount of commission from companies and artificially increased the price
to the stocks of these companies by trading through various unnamed companies
owned by him. He also collected money from investor for this purpose. The more
investment gave a flare to the price of these stocks with the boom in IT sector and the
price rigging activity sore the price upto 200%. This is how he created a wide and
complicated network of entities to play with money of investors just for his own profit.

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Impact on the market-

On march, 2001 176 point sensex crashed which shook investors and market Along with
NASDAQ 5. Smelling deliberate price rigging, the Ministry of Finance asked the SEBI to
launch investigations into the matter. The SEBI investigated the books of some 20 big
players to find out whether unwarranted deals were carried out. As the news of higher
exposure of private banks and cooperative banks to stock markets came to light, the RBI
also initiated parallel investigations.

After the market crash, the SEBI has launched a series of measures to halt the decline in
the financial markets. Some of the measures are listed below:

• All brokers acting as directors and other office bearers of the Bombay Stock Exchange
have been suspended for alleged insider trading. In order to prevent misuse of sensitive
information by broker directors, stock markets will be corporatized soon.

• To contain volatility, SEBI has imposed an additional 10 per cent volatility margins on
all the A Group shares and additional margins on stocks in Automated Lending and
Borrowing Mechanism (ALBM) and Borrowing and Lending of Securities Scheme (BLESS).

• The SEBI has also imposed volatility margins on net outstanding sale positions of FIIs,
financial institutions, banks and mutual funds.

• On March 8, 2001, the SEBI banned naked short sales. In simple words, it means that
all short sales have to be covered by an equal amount of long purchases.

• Cutting gross exposure limit for brokers to 10 times the base capital in the case of
National Stock Exchange (NSE) and to 15 times in case of other stock exchanges.

• Rolling settlements (which ensures that the settlement takes place five days after
trading) will now be compulsory.

• In order to increase liquidity, SEBI has allowed banks to offer collateralized lending
only through BSE and NSE.