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Ketan Parekh Scam Explained

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The Man who Trigerred the Crash

KP was a chartered accountant by profession and used to manage a family business, NH Securities started by his father.

Known for maintaining a low profile, KP’s only dubious claim to fame was in 1992, when he was accused in the stock exchange scam.

He was known as the ‘Bombay Bull’ and had connections with movie stars, politicians and even leading international entrepreneurs like Australian media tycoon Kerry Packer, who partnered KP in KPV Ventures, a $250 million venture capital fund that invested mainly in new economy companies. 

Over the years, KP built a network of companies, mainly in Mumbai, involved in stock market operations.

The rise of ICE (Information, Communications, and Entertainment) stocks all over the world in early 1999 led to a rise of the Indian stock markets as well.

The dotcom boom6 contributed to the Bull Run7led by an upward trend in the NASDAQ.8 The companies in which KP held stakes included Amitabh Bachchan Corporation Limited (ABCL), Mukta Arts, Tips and Pritish Nandy Communications. 

He also had stakes in HFCL, Global Telesystems (Global), Zee Telefilms, Crest Communications, and PentaMedia Graphics KP selected these companies for investment with help from his research team, which listed high growth companies with a small capital base. According to media reports, KP took advantage of low liquidity in these stocks, which eventually came to be known as the ‘K-10’ stocks

The Factors that Helped the Man

According to market sources, though 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 Aftek Infosys would have cost him Rs 50 million, while the Zee and HFCL stakes would have cost Rs 250 million each. 

Analysts claimed that 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 also borrowed from companies like HFCL…

The System that Bred These Factors

The small investors who lost their life’s savings felt that all parties in the functioning of the market were responsible for the scams.

They opined that the broker-banker-promoter nexus, which was deemed to have the acceptance of the SEBI itself, was the main reason for the scams in the Indian stock markets. 

SEBI’s measures were widely criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in certain shares over an 18-month period prior to February 2001. 

Analysts also opined that SEBI’s market intelligence was very poor.

The People that the System Duped

KP was released on bail in May 2001. The duped investors could do nothing knowing that the legal proceedings would drag on, perhaps for years.
Observers opined that in spite of the corrective measures that were implemented, the KP scam had set back the Indian economy by at least a year. Reacting to the scam, all KP had to say was, “I made mistakes.” 

It was widely believed that more than a fraud, KP was an example of the rot that was within the Indian financial and regulatory systems. 

Analysts commented that if the regulatory authorities had been alert, the huge erosion in values could have been avoided or at least controlled.

KP Scam

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