1

A REPORT ON

Governance and ethics

BY
ROHAN-323
SRAVYA-384
JAYASREE-139
KRISHNA PRIYA-962
Demystifying how Ketan Parekh Scam was executed: One of the biggest stock
market frauds that became an eye-opening event for not only the equity investors but also for
the Securities Exchange Board of India and such other regulatory authorities was Ketan
Parekh Scam.
 Ketan parekh scam
Who is Ketan Parekh?

Ketan parekh was born in 1963(age 60 years; as of 2022) into an affluent upper-middle-class
family of CAs and stockbrokers. His father Vinay Chandra N parekh, introduced him to the
ever-changing world of the stock market. After becoming a charted account, KP started his
career at a well reputed institutional brokerage firm called Narbheram Harakchand securities
(NH securities). His wife name is mamta parekh and the couple has two daughters’.

Parekh, after becoming a Chartered Accountant, started his career in the late 1980s at
Narbheram Harakchand Securities (NH Securities), a reputed institutional brokerage firm. In
the 90s, he came in contact with Harshad Mehta, a well known stock broker and subsequently
joined Mehta's firm Grow More investments, a firm that Mehta had set up and which was
involved in the 1992 Indian stock market scam. Though one of the accused in some of the
scams that invested heavily in stocks related to IT, media and communication and propagated
them. As cover stories emerged in the financial media of his malpractices related to the stock
market, scrutiny shifted to his activities leading to his arrest on 30 March 2001.

who was convicted in 2008 for involvement in the Indian stock market manipulation scam

that occurred from late 1998 to 2001. During this period, Parekh artificially rigged prices of
certain chosen securities (informally referred to as K-10 stocks), using large sums of money
borrowed from banks including the Madhavpura Mercantile Co-operative Bank, of which he
himself was a director.
After so many investigations by Securities and Exchange Board of India, Parekh and his front
entities were found guilty of rigging share prices of ten companies called K-10 and SEBI had
banned Parekh and associated firms from trading in the market for 14 years.
Role in 2001 stock market crash
Ketan Parekh purchased large stakes in less known small market capitalization companies,
and jacked up their prices through circular trading with other traders, and collusion with these
companies and large institutional investors. This resulted in steep hikes in share prices (for
example: shares of Zee telefilms zoomed up from Rs 127 to a price of Rs 10,000.[11] This set
of ten stocks was colloquially referred to as "K-10" stocks and Parekh was playfully referred
to as "Pentafour".

It later transpired that promoters and industrialists often gave Parekh funds to artificially rig
up their share prices. 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. However, 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 1 March 2001, just after the Indian Union Budget had been presented, the BSE
Sensex crashed 176 points, prompting the then NDA government to set up an inquiry into the
market reaction. Subsequently the RBI refused to clear pay orders (POs) that had been given
by Parekh as collateral for loans to BOI (Bank of India), as they found them to be suspicious.
The RBI commenced an investigation against Parekh. Around the same time, a bear cartel of
brokers in Mumbai opposed to Parekh tried to dump their shares of K-10 stocks. Panicking,
Parekh sold off his entire ownership of the so called K-10 stocks that he had successfully
jacked up over the past two years, especially those of two entities - GTB bank and MMCB
bank. He carried out this large scale dump in the evening, after regular trading hours, from 5
PM to midnight at the Calcutta Stock Exchange. This resulted in a stock market crash the
next day, resulting in large scale losses for large institutional investors, including insurance
companies and mutual funds.

A 30 member Joint Parliamentary Committee (JPC) investigation ensued which found that

Parekh had been involved in circular trading throughout the time period from and with a
variety of companies, including Global Trust Bank (GTB) and Madhavpura Mercantile
Cooperative Bank (MMCB). The JPC found him to have played a major role in rigging the
prices of a set of ten Indian companies, from 1995 up to 2001.

This resulted in Parekh's first conviction, which carried a one-year sentence, coming as a
result of a transaction he conducted involving a unit of Canara Bank in 1992.

Though Parekh was subsequently barred from stock trading, the Securities and Exchange
Board of India alleged in 2009 that a variety of companies and other actors were trading on
behalf of Parekh. An investigation ensued and 26 entities were banned from trading as a
result of that investigation. In March 2014 he was convicted by a special CBI court
in Bombay for cheating and sentenced to two years rigorous imprisonment.

Ketan Parekh scam case involved two key strategies, namely “circular trading” and “pump
and dump scheme”. 

 Pump and dump are where he would purchase 20 to 30% of the share of a company
in order to cause a price rise. The increase in price will subsequently tempt other
 investors to invest. Once the prices have skyrocketed, he would simply dump them to
make an exit by liquidating his holdings. 

 Circular trading is a strategy where he made a few amateur or junior traders to buy
and sell frequently certain shares throughout the day on his call. This caused the
“traded volumes” to go up significantly. The investors who base their decisions on the
volume traded will consider such stocks to be active and make an investment. Once
the prices shoot up he would make a profit out of it and also pay the traders a small
commission. This trading via primitive traders is popularly known as the Badla
system. 

Factors Leads to Scam:

 Involvement in the Harshad Mehta Scam:

In the ‘90s when Harshad was enjoying his lavish lifestyle at that time many people
were getting inspired by him. At that time bear cartel nineties were thinking of how to
stop the Harshad’s Bull run On the other hand Ketan Parekh was a chartered
accountant and was handling his family business NH Securities which was a
stockbroking firm. Ketan was inspired by Harsbad Metha and was willing to become
like him He soon realized that if he wants to become rich then he had to think like the
rich and have to work with them.and joined Harshad’s brokerage firm Growmore.
Under his tutelage, KP learned the modus operandi of Mehta brothers (Harshad and
Ashwin). Although Ketan slipped through the cracks after Harshad Mehta scam, his
role in the scam of 1992 came under scrutiny when is own scam into light in 2001.
Subsequently, he was convicted in 2008 for shipping of Rs 48 crores from a unit of
canara bank in the 1992 scam and sentenced to one year of imprisonment. In an
interview with NDTV, Ketan parekh said,

“what we have done is only one transaction. We have received money from the
mutual fund and we have duly delivered the shares and the shares were duly
registered. Beyond that our role was not there in any manner in this transaction.

 The Midas touch

 Parekh attracted the attention of market players and they kept track of every move of Parekh
as everything he was laying his hands on was virtually turning into gold. But the Penta four
Bull still kept a low profile, except when he hosted a millennium party that was attended by
politicians, business magnates and film stars. And by 1999-2000, as the technology industry
began bracing the entire world, India’s stock markets started showing signs of hyper-activity
as well and this was when KP struck. Almost everyone, from investment firms which were
mostly controlled by promoters of listed companies to foreign corporate bodies and
cooperative banks were eager to entrust their money with Parekh, which, he in turn used to
inflate stock prices by making his interest obvious. Almost immediately, stocks of firms such
as Visual soft witnessed meteoric rises, from Rs 625 to Rs8,448 per unit, while those of
Sonata Software were up from Rs 90 to Rs 2,150. However, this fraudulent scheme did not
end with price rigging. The rigged-up stocks needed dumping onto someone in the end and
KP used financial institutions such as the UTI for this. When companies seek to raise money
from the stock market, they take the help of brokers to back them in raising share prices. KP
formed a network of brokers from smaller bourses such ashes Allahabad Stock Exchange and
the Calcutta Stock Exchange. He also used ‘BENAMI’ or share purchase in the names of
poor people living in Mumbai’s shanties.

Modus Operandi:

The pied piper of dalal street was famous for his midas touch in late’90’s. His business
practices were unconventional just like his mentor, but unlike Mr. Mehta, he did not use the
public money to rig the stock prices. Promoters of various companies provided ketan with the
capital to rig their stocks prices. Reportedly, he also made use of his contacts at global trust
bank and Madhavpura mercantile co-operative bank to access funds and illegally jack up the
prices of various stocks. He used to build up huge volumes through online trading and rig the
prices without anyone noticing. Ketan once manipulated the stocks of visualsoft, and share
price of this company skyrocketed from 625 to 8,448 per share. He dis the same thing with
zee telefilms and the share price escalated from 30 to 720 per share.
To round of the profit, Mr. parekh used financial institutions like the UTI to dump the
inflated stocks. In return, Ketan was rumoured to take heavy kickbacks in the form of equity
from such companies. He came to be known as the ‘pentafour Bull’ and the ‘one-man army’
for his aggressive style of investments. In a media interaction with India today, an
anonymous stockbroker said,

‘He may be down to the earth, but he is very smart and shrewd. He is very aggressive and is
known for his fast moves. KP stocks used go up like a rocket- there was no gradual build up.
If he decides to bring a stock down, he would do instantly.

K-10 STOCKS:

At the peak of his reign over the stock market, Ketan had a pick of 10 favourite stocks, which
included zee telefilms, HFCL, Silver line, sat yam computers, Aftek Infosys, DSQ Software,
Ranbaxy, Penta media graphics, Sonata software and visual soft. This set of 10 stocks was
euphemistically referred as K-10 stocks by other stock brokers. Ketan being an astute
investor, was well aware of the IT boom of the late 90’s, so he heavily invested in software
companies and other tech- related companies.
 The drop in the prices of Ketan parekh stocks after the market crash.
His Millennium Bash:

Although ketan attained a flamboyant image after he threw a grand- scale party in 2000,
known as millennium bash, he was a shy and soft- spoken stockbroker, who kept a low
profile, lived a simple life, and maintained his distance from media interactions before this
happened. This made it hard for people to believe his involvement in the scm. Even sucheta
dalal (the journalist who exposed the Harshad Mehta Scam), in her 2003 article in Rediff
quoted,

‘when I met him sometime in July 2000. I too came away with the impression that he has his
feet too much on the ground to go the harshad war. In fact, until august 25(2000), when th
market hinted at the first signs of trouble, most newspapers did not even have a photograph of
the broker.
However, things changed after hus famous millennium bas (new year,2000) at his lavish
seaside bungalow in mandwa off th coast of Bombay. The party was filled with high-class
businessmen, fund managers, and Bollywood glitterati. The guests first gathered for a
champagne reception at the Taj mahal hotel’s sea lounge restaurant, and then they were
escorted in a high-security ferry ride to his bungalow. The party was covered on the front
pages of many tablodis, thereafter, ketan went on to buy a fleet of luxury cars including a
Cadillac and a lexus (just like the one harshad had). He was admired by a lengthy list of
famous personalities ranging from Bollywood superstars including Amitabh Bachchan to
global tycoons such as Kerry packer. Reportedly, KP became good friends with Mr.
Bachchan after he transformed Amitabh Bachchan corporation LTD (a filling company) into
a profitable company, later Mr. Parekh started getting featured on front pages of business
newspapers, stating his views on union budgets and other finance- related topics, it was also
reports in the newspapers that ketan was forming a joint venture with inidan businessman
vinay maloo and Australian mogul Kerry packer.

The exposure of his scam:

In the late 90’s the world economy was going through a tough time. The excessive conjecture
by the internet-based trading companies led to a massive market crash in 2001, often called as
the dot-cum bubble. KP was also caught in the technological bubble along with the rest of the
world. On 1st march 2001, two days after the union budget was passed, the BSE Sensex
plunged 176 points, which provoked the then NDA government to setup an inquiry into the
market crash. Being the key player in stock market, KP’S transactions were under heavy
scrutiny. RBI found his pay orders suspicious, which he had given as collateral for bank
loans, and investigation begin against Mr. Parekh, at the same time, a payment crisis was
trigged by a Kolkata -based beer cartel, who dumped their shares of K-10 stocks. KP and
other brokers who were holding shares in his name, dumped a huge chunk of his k-10 stocks
after regular trading hours at the Calcutta stock exchange. This led to the sensex tanking by
another 149 points.
Aftermath:

The scam caused a massive erosion of wealth leading ketan and his followers into
bankruptcy. According to the report by SFIO (serious fraud investigation office), the scam
was estimated between 30,000-40,000 crores. The CBI arrested ketan on 30 march 20001,
charging him with defrauding the bank of india od rs 137 crore, and they kept him in custody
for 53 days, the scam led to SEBI fixing the loopholes in the system. The trading cycle of one
week was reduced to one day. Operators were banned from carrying forwarding the trades.
The control of brokers over various stock exchanges was diminished.

Trial sentence:
A joint parliamentary committee (of 30 members) was set up to investigate the role of ketan
parekh in the financial scam of 2001. The committee found Mr. Parekh feel guilty of circular
trading. Another report by the intelligence bureau implied kp’s involvement in rigging the
share prices of dewan housing finance, Goenka diamond, orchid chemical, IVRCL, GMR
infra, pantaloon retail, TBZ IPO, KS OILS etc., subsequently, ketan was banned from stock
trading till 2017 for illegally manipulating the stock market. It is reported by economic times
that ketan was sentenced to two years of imprisonment for cheating by a special CBI court in
march 2014. In 2018, a fast track court sentenced him to three years of imprisonment for
violating the SEBI act. Later, the Bombay high court suspended his sentence and granted him
bail.
How people and society affected due to this scam?

The funds were secured from banks and financial institutions, and it was the hard-earned
savings of the ordinary people that were used to manipulate stock prices. The news of the
scam first came into the limelight, when the Bank of India (Mumbai branch) alleged that
Parekh had defrauded them to the tune of Rs.137 crore.

In the episode, senior finance journalist Paranjoy Guha Thakurta reveals that Parekh visibly
engaged in something called circular trading. By definition, it is a type of securities fraud
which causes price manipulation and is often related to ‘pump and dump’ schemes. It occurs
when identical sell orders are entered at the same time with the same number of shares at the
same price.

In March 2001, Ahmedabad-based Madhavpura Mercantile Cooperative Bank and its

officials’ involvement in the scam also came to the fore. Many of its depositors were left in a
lurch, as the bank had turned virtually bankrupt.

Not only by these many people who invested in banks and stocks got down due to this scam
and ketan followers even got down due to crash of stock market in 2001 and later on ketan
got caught and arrested.

How to avoid Investment Fraud

We need to have knowledge & awareness of scams and schemes going around. for example,

Common investment scams:

1. Advance fee scheme

In an advance fee scheme, the victim is persuaded to pay money up front to take advantage of
an offer promising significantly more in return. The catch is that the scammer takes the
money and the victim never hears from them again.

Scammers often target investors who have lost money in a risky investment. They’ll contact
the investor with an offer to help recover their losses. They may say they will buy or
exchange the investment at a substantial profit to the investor, but the investor must first pay
a “refundable” fee, deposit or taxes. If the investor sends more money, they’ll lose that, too.
 2. The pump & dump scheme 

Pump & dump schemes have been made famous in many movies based on stock markets, and
hence a much easier fraud to detect. But still, greed causes many to fall prey for it. Out of the
4900+ companies listed on the stock exchanges, over 1700 are what are called “penny
stocks”. Penny stocks are small companies with market caps of less than Rs 100 crores.
While there are many genuine small companies, there are also many that aren’t.

In a pump and dump scheme, the operators (people who hold the majority of the shares of the
company) of these penny stocks move the price of the stocks up and down at will. To move
the price up, the operators start placing small amounts of buy orders at higher prices
incrementally, and since they own all the stock, the price starts moving up. Once it has
moved up enough to make retail investors greedy – a buzz is created through SMS, social
media, and online forums to push the price up even further. This is when typically most
people get sucked into the stock and also when the operator starts selling the stocks. As soon
as the selling is done at these high prices, the buzz stops and the stock falls back to the price
where the upward journey started without giving anyone an opportunity to exit. Here are
some recent examples. 

Again, apart from the loss, there is another issue to consider. The government introduced
Long Term Capital Gains (LTCG) tax of 10% a couple of years ago to control money
laundering fraud that runs through such penny stocks, a fraud estimated to be the size of tens
of thousands of crores. The operator who moves the price of the stock from almost 0 to much
higher before selling, would also do it by holding the stock for more than 1 year to benefit
from lower long term capital gain (LTCG) tax (10% now, but was only 0% earlier) on the
profits. So the operator isn’t just potentially ruining many gullible investor’s financial health,
but is also potentially converting someone’s black money into tax-free white money in the
process. With LTCG now at 10%, this now becomes the cost for an operator to convert black
into white. Govt is hoping that it could act as a deterrent. Income tax department keeps a
close watch on everyone transacting in such suspicious companies. What this means is that,
even if you made some money trading such a stock, you could get an Income tax scrutiny
notice which potentially can lead to a penalty of more than the profits earned. 

3. Boiler room scam

Investment scams are often pulled off by a team of people who set up a makeshift office,
called a “boiler room”. To convince you their company is real, they might send you to the
company’s website, which looks very professional. They might also set up a toll-free number
and a respectable address to make the company seem legitimate.

However, the company doesn’t exist. Everything on the website is fake, and the office is just
a post office box or temporary office. By the time you realize you’ve lost your money, the
scammer will have closed up shop and moved on to another scam.
 4. Exempt securities scam
When a company wants to sell securities in Canada, it must file a prospectus with securities
regulators. Exempt securities are an exception. They may be sold without a prospectus, but
they’re limited to accredited investors or certain other conditions.

On their own, exempt securities aren’t scams. But some scammers pitch fraudulent
investments as “exempt” securities. Be suspicious if you get an unsolicited phone call or
email about a hot tip on promising business that is about to “go public”. You may be told that
the investment is only available to very wealthy people, but an exception will be made for
you. You could be asked to sign some paperwork that misrepresents your income or net
worth. If you have to lie about how much money you have, you are dealing with someone
who breaks the rules.

5. Forex scam

The foreign exchange (forex) market is considered to be the largest and most liquid financial
market in the world. Investors buy and sell currencies with the aim of making money on
changes in exchange rates. But trading in foreign currencies can be very risky. Forex ads
promote easy access to the foreign exchange market, often through courses or software. But
foreign exchange trading is dominated by large, well-resourced international banks with
highly trained staff, access to leading edge technology and large trading accounts. It’s
extremely difficult to consistently beat these professionals. You may not be told how risky
forex trading is.

In addition, some forex trading schemes may be illegal or fraudulent. Because forex trading
services are often operated online from another country, unregulated firms may be marketing
their services outside of the rules. Your money may not be invested as claimed, and you may
be asked to wire money into an offshore account before you begin trading, where the money
will be inaccessible. In any of these situations, you’re likely to lose some or all of your
money.

6. Offshore investing scam

This scam promises huge profits if you send your money “offshore” to another country. In
most cases, the goal is to avoid or lower your taxes. Be skeptical of tax avoidance schemes –
you could end up owing the government money in back taxes, interest and penalties.

There are other risks of offshore investing, too. If you move your money to another country
and something goes wrong, you won’t necessarily be able to take your case to a civil court in
Canada. It may be impossible to recover your money.
 7. Ponzi or pyramid scheme

These schemes recruit people through ads and e-mails that promise everything from making
big money working from home to turning $10 into $20,000 in just 6 weeks. Or, you may be
given the chance to join a special group of investors who are going to get rich on a great
investment. The invitation might even come from someone you know.

Investors who get into the scheme early may receive high returns fairly soon from what they
think are interest cheques. They’re often so pleased that they invest more money, or recruit
friends and family as new investors.
But the investment doesn’t exist. The “interest cheques” are paid from the investors’ own
money and money from new investors. Eventually, new people stop joining the scheme.
There’s no more money to pay out and you don’t see another cent. That’s when the promoters
will vanish, taking all the money with them.

8. Pension scam

This scam targets people who have retirement savings in a Locked-In Retirement Account
(LIRA). In most cases, you can’t withdraw money from a LIRA until you reach a certain age,
usually 55 or older. There are usually limits to how much money you can take out each year,
and you’ll likely have to pay tax on the money you withdraw.
The scam is often promoted in ads as a special “RRSP loan” that lets you get around the tax
laws and tap into your locked-in funds. To get the loan, you must sell the investments you
hold in your LIRA and use this money to buy shares of a start-up company the promoter is
selling. In return, the promoter promises to loan you back 60% to 70% of the money you
invested. They will keep the rest as a fee. You’re told you’ll get cash, pay no tax on it, and
still hold a valuable investment in your LIRA. But the investment you buy may be worthless,
and you may never see the loan. You could lose your retirement savings.

What we can do? 

o Don’t trust stock tips that promise quick returns. Do your research before investing.
At least, confirm if the business and promoters are legitimate.
o Don’t trust SMS asking to invest in penny stocks. Many scammers send SMS using
short codes that make it seem like it is from a reputed brokerage firm.
o If you receive an SMS asking you to invest in a penny stock, make sure to report it to
TRAI and help save others from falling to the fraud. 
o Stay away from penny stocks, and if you did decide to let greed take over, think of it
as a lottery ticket which potentially can be worthless. So, invest only what you can
afford to lose. 
 o Watch Out For Online Scams
o Talk To A Third Party Person
o Beware Of Promises Of High Rates Of Return And/or Quick Profits

Research before you invest:

Unsolicited emails, message board postings, and company news releases should never be
used as the sole basis for your investment decisions. Understand a company’s business and its
products or services before investing. Look for the company’s financial statements on the
SEC’s EDGAR filing system. You can also check out many investments by searching
EDGAR.

Know the salesperson:

Spend some time checking out the person touting the investment before you invest – even if
you already know the person socially. Always find out whether the securities salespeople
who contact you are licensed to sell securities in your state and whether they or their firms
have had run-ins with regulators or other investors. You can check out the disciplinary
history of brokers and advisers for free using the SEC’s and FINRA’s online databases.
Your state securities regulator may have additional information.

Be wary of unsolicited offers:
Be especially careful if you receive an unsolicited pitch to invest in a company, or see it
praised online, but can’t find current financial information about it from independent sources.
It could be a “pump and dump” scheme. Be wary if someone recommends foreign or “off-
shore” investments. If something goes wrong, it’s harder to find out what happened and to
locate money sent abroad.