Frauds and scams, throwback to ‘K10’ era?

Will the PNB case result in convictions, stronger laws? Does history hold clues? Post Ketan Parekh, what has happened?

Updated - March 12, 2018 06:13 pm IST

Published - March 11, 2018 09:55 pm IST - MUMBAI:

 Ketan Parekh. File photo

Ketan Parekh. File photo

“If Harshad Mehta thought of himself as an innovator who created a system and penetrated the market, then Ketan Parekh perfected that system during more challenging times,” said a veteran stock market participant who once did a few trades for KP, as Ketan Parekh was and is still known in stock market circles.

Parekh was not the first name to be associated with a stock market scam. There were a few before him as well but the magnitude and scale with which Parekh executed his modus operandi made him stand out. Not to forget the fact that when he emerged on the scene in 2001, the Securities and Exchange Board of India (SEBI) had already grown out of its infancy thanks to the Harshad Mehta scam of 1992.

The recent revelation of fraud perpetrated at the Punjab National Bank has brought to light new ways of circumventing the system. Letters of Undertaking and the connectivity between the SWIFT messaging and core banking systems are bandied about as loopholes. What will this lead to? Convictions? Stronger laws? A look at the past punitive action on one person who attracted the attention of regulators and market participants alike, may offer some insight.

‘Is Parekh still active?’

While almost two decades have passed since Parekh was first banned from the securities market, his name still crops up in discussions with many market participants who claim he is still active through his front entities but they do not have a credible proof to back the claim.


Parekh was in the news on February 27, when a special court created to hear SEBI matters sentenced him to jail for three years, finding him guilty for not paying a penalty imposed by SEBI.

The case pertains to Panther Fincap and Management Services where Parekh was a director. when the firm acquired shares of Shonkh Technologies International, which, according to SEBI, was beyond the permissible limit and without the statutory disclosures.

SEBI initiated proceedings in the matter in 2003 and imposed a penalty of ₹6.5 lakh on the company and the directors. The firm offered a demand draft for part payment of the amount. SEBI declined saying rules do not allow part payment and deferment of the penalty.

The regulator then filed a case at the special SEBI court formed to hear specific matters related to the capital markets watchdog. Parekh, currently in his mid-50s, didn’t have to go to jail though, as the Bombay High Court granted him bail soon after the SEBI court verdict.

This was, however, only a small case in the larger scheme of things that Parekh was allegedly involved in and was ultimately tried for by regulatory and investigative agencies. SEBI first barred Parekh in an April 2001 ruling that he could not undertake any fresh business as a stock broker or merchant banker till further directions.

But, the most significant order against him came in December 2003 when SEBI banned him from the securities market for 14 years.

In a 67-page order issued by the then SEBI chairman G.N. Bajpai, the regulator stated that the “entities connected to and controlled by Ketan Parekh, if allowed to continue with their operations in the securities market, could pose constant threat to the integrity of the securities market and endanger the investors’ interests.”

“When the corporate personality is being blatantly used as a cloak for fraud or improper conduct, and where the protection of public interest is of paramount importance, it is necessary to lift the corporate veil so as to pass an appropriate order rendering justice,” said the order highlighting that Parekh’s entities allegedly undertook circular and fictitious trades to create artificial volumes in certain stocks.

‘Conspiracy, cheating’

In 2003, even the Central Bureau of Investigation (CBI) filed a charge sheet in the Madhavpura Mercantile Co-operative Bank matter against Parekh and five others accusing them of conspiracy, cheating and forgery. He was convicted by a special CBI court in March 2014 and was sentenced to two years of rigorous imprisonment though he spent only a year in jail.

Harshad Mehta. File photo

Harshad Mehta. File photo


“Harshad [Mehta] operated in an era when there was a manual trading ring with an outcry system. By the time KP came into the picture, we had electronic systems in both BSE and NSE. KP was a thinking market operator with a unique style of operation,” said Arun Kejriwal of Kejriwal Research & Investment Services.

“He worked with a wide diaspora of market participants and mastered the art of exploiting the then existing systems of the exchanges to make money,” he added. Incidentally, Parekh worked under (Harshad) Mehta before starting out on his own.

Market participants said Parekh was ‘smart’ and ‘more of a thinker than doer’ who created strategies and then sat back and saw his plans unfold with the help of his coterie.

They added Parekh, with his coterie, would target stocks in the midst of negative news and even managed to extract sensitive information regarding other players’ positions courtesy his “friends at the right places.” Information about positions of other traders or investors can greatly help in devising a strategy to derive maximum benefit from a trade.

“Unlike Harshad, KP was never solely dependent on the brute force of money that both had at their disposal,” said a broker who came to the market in 1988 and saw both Harshad and KP operate.

At the height of his market operations, his favourite stocks came to be known as K10 and included Zee Entertainment, Mukta Arts, Himachal Futuristic Communications (HFCL) and Pentamedia Graphics, among others. Some like Amitabh Bachchan Corp. and Crest Communincations are no more listed on the bourses.

Some of the market players who had worked with him in the past said that it was widely believed that he helped promoters pump up the volume and price of their stock by circular trading within connected entities and then dumping them with domestic financial institutions.

Incidentally, if the market buzz is to be believed, till a few years ago, Parekh was active in the primary market allegedly colluding with promoters to manage the subscription and post-listing performance to give attractive exits to the investors.

While the regulator did not explicitly mention that Parekh was active in the primary market, it did bring in a rule in January 2012 mandating newly-listed shares to be included in the pre-open session on the day of listing and also introduced circuit limits on such shares on the first day itself. This effectively capped the listing gains for newly-listed shares.

However, in June 2009, even as the 14-year ban on Parekh was still in force, SEBI was probing another matter of alleged manipulative trading by a few entities and found a Parekh link in the case.

The regulator found that the fund flow analysis provided by the Income Tax department showed that “many of the connected clients named in this order appear as conduits for the funds originating from Ketan Parekh group company.”

‘Front entities’

While referring the matter to the Enforcement Directorate, the regulator said that “it appears that he [Parekh] has conveniently used the connected clients at will as his front entities for executing trades desired by him in the securities market.”

“... this flow of funds originating from Mr. Ketan Parekh which were routed through the connected clients, when juxtaposed with securities market transactions of connected clients, as brought out by the instant SEBI examinations, leads to the possibility that the securities market transactions of the connected clients were executed as a part of a larger device for creating additional layers to obfuscate the funds trail and also to integrate the money originating from Mr. Ketan Parekh into the banking system,” said the order.

Interestingly, in July 2012, there were media reports that the Intelligence Bureau had submitted a report to government officials highlighting a stock market scam with Parekh and his associates targeting shares of companies such as Dewan Housing Finance Corporation, Goenka Diamond Jewels, IVRCL, GMR Infrastructure and the public issue of Tribhovandas Bhimji Zaveri.

While none of the interested parties — the IB, the government, the exchanges or SEBI — confirmed or denied the report, the talk in the markets maintained that the chartered accountant from Mumbai’s elite Marine Drive area was active in the stock markets and, as always, had found a way to work around the restrictions.

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