The Indian Stock Market, in small doses, can act as fuel to move us sky-high, essentially when we are feeling discouraged. For some people stock market is a wish-granting factory and for some it's a terrible nightmare. Many investors become billionaire overnight and many turned to bankrupt while investing into the market. This sector being the victim of such roller-coaster ride mandates the need for its regulations. To monitor trading in the stock market Stock Exchange Board of India (SEBI)[1] has been incorporated as a "watchdog" of the share market to prevent various malicious activities.

Ketan Parekh scam (K-10 Scam) is one of the biggest stock market scams of the Indian stock market. It is believed that it is the biggest scam after the HARSHAD MEHTA SCAM. Ketan Parekh is also known as the 'pied piper' of the Indian stock market only to direct its doom, just like the story.

He was held guilty for stock manipulation and insider trading; his scam leads to downfall of the SENSEX by 176 points[2] and as a result the budget of 2001 was collapsed. He used the technique of pumping and dumping i.e., he used to invest in some stocks in a huge amount to increase the demand of the stock which resulted in price appreciation and after that he used to dump as in sell those stocks in a very high price. His scam was estimated at more than 40,000 crores rupees[3] by Serious Fraud Investigation Office (SFIO).

Who Is Ketan Parekh?
Ketan Parekh or 'Bombay Bull' was a trainee of the 'Big Bull' i.e., Harshad Mehta. He is a CA by profession but started his career by inheriting his family business of stockbroking, under the name of NH Securities. With the emergence of dot com boom in the late 1990s, he started investing in the low liquidity IT and Telecom stocks, his K-10 stocks. His K-10 stocks were Pentamedia Graphics, HFCL, GTL, Silverline Technologies, Ranbaxy, Zee Telefilms, Global Trust Bank, DSQ Software, Aftek Infosys and SSI.

He enjoyed very close relations with many famous Bollywood celebrities, political leaders and businessmen and they connected him with Kerry Packer, an Australian Media Entrepreneur. Both Kerry and Ketan joined hands and started a venture capital firm called as KPV venture with 250 million USD on 27 March 2000, this venture focused on investing money on start-ups.

How He Executed The Scam?
He used to select the stocks of those companies whose business was small, has low volume, has low market capitalisation but with high growth prospects. Just like his mentor he was also very bullish in nature. Due to the scam of 1992, the Bombay Stock Exchange (BSE) became very cautious and was monitoring each and every trade very closely, therefore, Ketan chose to trade in Kolkata Stock Exchange as it lacks various restrictions.

In the late 1990s the sector which was emerging the most was the information and communication sector due to the invention of the internet; this emergence was called as dot com boom. After the emergence of dot com boom, Ketan mainly focused on the technology, communication and entertainment industries. He named those stocks as 'K-10' stocks.

He used to raise funds from the promoters of the K-10 companies, institutional investors through mutual funds, hedge funds, insurance companies or from the banks for the purpose of pumping and dumping and circular trading.

He used the technique of pumping and dumping for this he acquired 20-40 percent of the shareholdings of the K-10 companies to artificially inflate the prices of the stocks which resulted in overvaluation of those stocks and it attracted institutional investors or investors with a huge amount of purse to invest in those overvalued stocks and then he used to dump those shares, causing the share prices to fall significantly.

He used to inflate the stock prices by trading of stocks between his entity and his friendly entities in a manner known as circular trading, wherein he along with his team executed similar sell orders in same price in same number in same time which increased the share trading volume and this acted as a bait to attract high potential investors to invest in those stocks.

For the purpose of pumping and dumping and circular trading he acquired loan from various banks including Madhavpura Mercantile Cooperative Bank (MMCB). MMCB granted him a loan without receiving sufficient securities. At that time RBI traders to acquire loan of an amount not exceeding of rupees 15 crores.

In March 2001, MMCB issued pay order of an amount of rupees 137 crores to Ketan's 3 companies, Classical Shares & Stockbroking- 65 crores rupees: Panther Investrade- 20 crores rupees:
Panther Fincap- 52 crores rupees. Later MMCB discounted these pay orders from Bank of India as all these companies had an account in the Bank of India. As these pay orders were lacking sufficient securities, the discounted pay orders got dishonoured and therefore, RBI intervened in between and returned those dishonoured pay orders. MMCB was unable to clear those defaults and therefore, it was declared as a defaulter and Bank of India suffered losses of 137 crores rupees[4].

Ketan Parekh repaid only 7 crores rupees, a case of fraud for 130 crores rupees was filed against him and his entire scam was exposed when he got detained by the Central Bureau of Investigation.

Allegations And Conviction
Seeing excessive index movements in February, March and April 2001 SEBI realized that it is slightly fishy and hence it conducted an investigation., the SEBI got to know that all the stockbroking entities owned by Ketan Parekh were indulged in various unfair practices;

1. Synchronised trades
2. Circular trading for fake price appreciation
3. Manipulative buying and selling
4. Pumping and dumping
5. Insider trading
6. Misrepresentation of facts to borrow money from the bank

While considering the above allegations the SEBI filed a case against Ketan Parekh and his associates. In the case of SEBI v Ketan Parekh and Others (2003)[5], SEBI debarred Ketan Parekh and his companions or associates from trading in the stock market for 14 years under section 11 and section 11B read along Rule 11 of SEBI(Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 which states that the SEBI may order in the interest of investors to issue investigations or enquiry or after completion of such investigations or enquiry suspend the trading of the security if being conducted in a fraudulent manner, restrain any person to access the securities market, suspend any officer of the stock exchange, retain the proceedings of such fraudulent trade practices, direct any person related to such transactions to dispose of any assets forming part of such fraudulent transaction, restrain any person to trade in security market in a particular manner, prohibit any person to alienate any securities acquired from such fraudulent transaction, any other order as the SEBI may deems fit[6]: and Regulation 11 of SEBI(Prohibition of Insider Trading) Regulations, 1992 which gives SEBI the power to initiate criminal prosecution under section 24 of the Act, in the interest of investors or securities market and for the compliance of the provisions of the Act, and the SEBI may issue an order for directing an insider or any other person to not deal in securities in a particular way, prohibiting any insider or any other person from alienating any securities acquired from violating these regulations, restricting any insider to communicate the information, declaring the transactions in securities null and void, directing the person who acquired securities from violating these regulations to reverse the transaction, directing the person to transfer the proceeds of such transactions to Investors Education Protection Fund[7].

A petition was filed by Ketan Parekh against the order of SEBI in SAT in the year 2006, which debarred him and his associates from accessing in the stock market. However, SAT dismissed this petition upon considering the gravity of the scam. Another case has been filed by SEBI against Ketan Parekh and his stockbroking entities in the Special Court (judicature at Bombay), established under the Securities and Exchange Board of India Act, 1992.

In the case of SEBI v Panther Fincap and Management Service Limited and Others (2018)[8], the Special Court ordered that Ketan Parekh was found guilty of an offence under section 24(2) of Securities and Exchange Board of India Act, 1992, which states the punishment for non-compliance with the directions of SEBI and accordingly he was punished with a rigorous imprisonment of 3 years along with a fine of rupees 5,00,000 also he was directed to compensate an amount of rupees 3,25,000 to the SEBI.

Conclusion
Ketan Parekh scam was the second largest fraud in the history of Indian Stock Market, the estimated amount of fraud is rupees 40,000 crores. Just like the Scam of 1992, Indian economy suffered huge losses, stock fell terribly there was a bloodbath in the Indian stock market, many people committed suicide after losing their savings of lifetime in the stock market crash, financial institutions got hit very hard, value of Rupee saw a downgrade against the value of Dollar, investors' trust was shattered after seeing the implications of the fraud.

In order to regain the investors' trust SEBI incorporated additions in the Clause 49 in the provisions of the Listing Agreement, the new additions were related to the provisions of independent directors, audit committee, financial disclosures, related party transactions proceeds from public issue and whistle blower policy. This was done to make sure that the companies behave in the interest of the market.

The RBI, to stop these frauds or scams, established a new body called as Central Fraud Registry Portal, with the aim to assist the banks to deter frauds in initial stages, this new portal is accessible by all the banks of the country.

End-Notes:

• Securities and Exchange Board of India Act, 1992, section 3, No. 15, Acts of Parliament, 1992 (India)
• Aron Almeida, Ketan Parekh Scam- The Infamous Stock Market Fraud, Trade Brains (Jan. 1, 2023, 9:40 PM), https://tradebrains.in/ketan-parekh-scam/
• Hindustan Times, https://www.hindustantimes.com/india/ketan-parekh-scam-may-touch-rs-40-000-cr/story-oJmJMXEV7993vsVEBiUEXP.html (last visited Jan 1, 2023)
• Tarini Kalra, Ketan Parekh Scam, iPleaders (Jan. 1, 2023, 9:56 PM), https://blog.ipleaders.in/ketan-parekh-scam/
• SEBI vs Ketan V. Parekh, Kartik K. Parekh, on 12 December, 2003
• SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003, section 11, 2003 (India)
• SEBI (Prohibition of Insider Trading) Regulations, 1992, 1992 (India)
• SEBI vs Panther Fincap and Management Service Limited and Others, on 27 February, 2018

Written By: Shubham Rungta