KETAN PAREKH SCAM

Ketan Parekh was a Chartered Accountant and he was an intern of Harshad Mehta.
His only dream was to rule the stock market of India, so he decided to join Harshad
Mehta's firm to learn some tricks to deceive the investors.

Raising Money: — Before executing his master plan, he first used the pump and
dump scheme to raise some money which was going to help him execute his master
plan.
PUMP AND DUMP SCHEME: — He purchased major shares (20–30%) of new
companies for increasing their price to a certain level just to attract other investors.
When the price was quite high, he was would sell his stake in those companies, and
churn huge profit out of those.
So first he pumped the share price by purchasing them and then dumped those shares
by selling them.

After this scam, the laws of stock market amended in every aspect. And now pump
and dump scheme is illegal in stock market.

Master Plan: — Unlike Harshad Mehta, who concentrated on retail investors like
you and me (individuals), Ketan Parekh concentrated on institutional investors
(mutual funds, insurance companies—who invest our money on behalf of us).
Pump and Dump scheme wasn’t enough to attract huge institutional investors, so he
tricked them through circular trading.
CIRCULAR TRADING: —We usually buy shares by calculating its volume (total
number of shares of a particular company purchased or sold during a day) on a
particular day. If the volume is high, the share is pretty active in the market and has
probability of making profit. So to manipulate the volume, some tricksters
continuously purchase and sell shares between themselves to make that share active
throughout the day.
Ketan Parekh was one of the tricksters and through help of others, he started circular
trading to tempt institutional investors to purchase those shares and raise its price.

When the price would reach its peak, he would sell his stake and made a huge profit
out of it.

To popularize his name and plan, he targeted media, telecommunication (due to

DOTCOM boom), and manufacturing companies for circular trading.

He named them K10 shares.

Now a days circulate trading is also banned in stock market and its totally illegal for
investors to involve in this scheme.

GREED: — He wanted to control the entire Indian stock market. For that he needed
to find a way to bring humongous amount of money for purchasing shares. That’s
when he used pay orders to raise money.

PAY ORDER: — It’s like Bank demand draft, or you can say as prepaid instrument.
You need to pay certain amount to the bank to get payment order. (You can pledge
this pay order with any other banks for loan)
He first purchased major stocks of GTB bank and MMCB bank to control bank’s loan
decisions.

He then collected the pay orders of let say 1000 rupees by paying them 200 rupees, or
collecting pay orders by pledging his stake in those banks.
Then he would pledge those pay orders with other banks in lieu of money.

In this way, he collected 1000 crores of rupees from banks by pledging those pay
orders.

WHAT WENT WRONG: — He applied for loan from BOI by pledging POs. BOI
sanctioned loan by considering the goodwill of Ketan Parekh, and sent those POs to
RBI for clearance.
Unfortunately, RBI smelled something wrong in those POs (for the first time in 5
years) and declined the clearance of those POs. In fact, RBI started a scrutiny on those
banks for approving such huge amount as pay orders.

ONCE A GENIUS ALWAYS A GENIUS:— Ketan Parekh was damn sure that,
now his scam is going to be revealed by RBI (200:1000 rupees in pay order ratios), so
he started selling his stake in all those K10 companies, including his shares in GTB
bank and MMCB bank.

Between 5 pm to 12 am, after Ketan Parekh’s drastic step of selling shares at boom
price, entire stock market crashed.

Lots of institutional investors were pushed towards insolvency. Shares of Zee TV,
HFCL and many more dropped down to 10% and even less.

Parliament was immediately called upon to declare a statement that the government is
aware of the scam and steps have been taken.

That scam was a reality check for the loopholes in security market laws and the
inefficiency of government to control these break down scenario.