SCAM OF KETAN PAREKH

Ketan Parekh is a ex stockbroker from Mumbai. 2008, Who was responsible for involvement in the Indian stock market manipulation scam

Table of Contents

Share Market

A share market is a point where financial instruments like stock, derivatives, mutual funds, or bonds are traded between buyers and sellers on public listed shares and security.

The Indian stock market is scrutinized by the Securities and Exchange Board of India (SEBI). Currently, there are 7 recognized stock exchanges in India:

Bombay Stock Exchange,

National Stock Exchange,

Calcutta Stock Exchange Ltd.,

Indian Commodity Exchange Ltd,

Metropolitan Stock Exchange of India Ltd.,

Multi Commodity Exchange of India Ltd., and

National Commodity and Derivatives Exchange Ltd

Scam

SEBI has convicted former stockbroker Ketan Parekh of stock manipulation and insider trading.

Obtaining loans from Global Trust Bank and Madhavpura Mercantile Cooperative Bank and used to artificially rig the prices of handpicked shares referred to as K-10 stocks.

Ketan Parekh was found guilty in the Canfina Mutual Fund scam case and was also held guilty in the case related to the 1992 stocks scam, duping CFS of more than Rs 47 crores. And his Scam was estimated at more than 40,000 crores by the Serious Frauds Investigation Office (SFIO).

Who is Ketan Parekh (Introduction)

Ketan Parekh is a Chartered Accountant (CA) by profession.

Narbheram Harakchand Securities (NH Securities), the institutional brokerage business, was a family business of Mr Parekh which he inherited from his father. He was a trainee in “GrowMore” Harshad Mehta’s company. He was a suspect in numerous frauds that Growmore was involved in, while he was never found guilty.

With the arrival of the dot com boom in the late 1990s, he began investing in low-liquidity IT and telecom firms, which were known as the ‘K-10’ stocks. K-10 stocks were

Pentamedia Graphics,

HFCL,

GTL,

Silverline Technologies,

Ranbaxy,

Zee Telefilms,

Global Trust Bank,

DSQ Software,

Aftek Infosys and

SSI.
He owned roughly 16% of Global’s floating shares, 25% of Aftek Infosys, and 15% of Zee and HFCL. As a result of the substantial growth in the value of K-10 stocks, brokers and fund managers began to invest expansively in K-10 stocks. 27 March 2000, Ketan Parekh and Vinay Maloo along with Kerry Packer launched KVP Ventures primarily focusing on information technology software, internet, e-commerce, media and entertainment, and telecommunications with an initial capital of $250 million. For unfairly rigging the pricing of K-10 shares, he was barred from trading in the Indian stock market for 14 years

Mode of Operation

Parekh’s early step was to pick up the substantial stakes from promoters at huge discounts and shifted his focus mostly on institutional investors. He was strong in nature regarding the stock market.
He required 3 elements to boost the market:
Stocks,
The Stock Exchange, and
Finance.
The Bombay Stock Exchange (BSE) grew more careful after the 1992 Securities Scam and increased security and fraud detection. Hence, Ketan Parekh traded on the Kolkata Stock Exchange, which lacked difficult and important restrictions.

Ketan Parekh’s stock collection was based on four main factors:
There must be small Business
The company must have a low volume;
There must be a high future prospect for the Company; and
The company’s market capital must be low.
His stock portfolio was mostly focused on the technology, communication, and entertainment industries after the arrival of the dot com boom, popularly known as the ICE sector referred as ‘K-10’ Stocks.

Funds raised –

By Promoters

Global Telesystems,
Himachal Futuristic Communications Ltd, and
Zee Telefilms or by his own money.

By Institutional Investors

Mutual Funds
Hedge funds
Insurance companies
P/E funds
Global Trust Bank and Madhavpura Mercantile Cooperative Bank in the form of loans and pay orders without providing sufficient securities.

MMCB issued Pay Orders of Rs. 137 Crores for Ketan’s Companies, In March 2001

65 crores to Classical Share and Stockbrokers, 20 crores to Panther Investrade, and 52 crores to Panther Fincap which were discounted by Bank of India and all these companies had their accounts in Bank of India as well. But, the Reserve Bank of India interfered in 2001 and returned the bounced pay orders to the Bank of India. MMCB was unable to clear the payments because it lacked adequate money. RBI labeled MMCB a defaulter, and BOI suffered a loss of Rs. 137 crores.

Rs. 7 crores, paid back by Ketan Parekh, which led to the filing of a 130 crore Rupees fraud case against him. Ketan was detained by the Central Bureau of Investigation and the whole scheme was exposed. He adopted two methods for his operation, Pump and dump scheme, and Circular trading.

What is Pump and Dump Scheme

The early stage of the pump and dump strategy was to expand stock value artificially. He invested in K-10 stocks by acquiring about 20-30% of the company’s stock which was less well-known in the stock market and magnified the price of the shares, which eventually became overvalued leading to tempting the institutional brokers and investors to invest in the shares. At that moment he dumped the shares, causing the stock prices to fall severely.

What is Circular Trading

Circular trading also known as the “Badla System”, he traded the stocks between his entity and other friendly entities. Prices of the stock valuation were raised by enticing investors and traders for high liquidity over his operational team’s large volume of trading of similar sell orders for the same number of stocks and at the same price and at the same time which showed the high demand and created large volumes of the stock in the market.

The timeline of the scam of Ketan Parekh

Date	Particular
2001, 2nd March	K-10 shares were the major reason for Sensex’s 176-point loss. The irregularity in the payment by Ketan Parekh accelerated the stock market and SEBI initiated an investigation into the fall.
2001, 8th March	SEBI banned short sales and rumors were in the stock market regarding the payment crisis on the Calcutta Stock Exchange.
2001, 9th March	The Sensex fell by 175 points, and 3 famous brokers were held in default against the Calcutta Stock Exchange, one of them was Ketan Parekh.
2001, 30th March	Bank of India filed a criminal case against Ketan Parekh for his involvement in the pay order scam of Madhavpura Mercantile Cooperative Bank and he was arrested by CBI
2001, 4th April	SEBI prohibits Ketan Parekh’s broking and merchant banking firms to start a fresh business.
2001, 9-11th April	Ketan Parekh admitted acquiring funding from Zee and HFCL. However, Zee denied lending any money to any broker but admitted to advancing the acquisition of 28.5% in AB Corp and 15% in B4U.
2001, 26th April	A committee of SEBI was inaugurated to abolish circular trading and the Government joined Parliamentary Committee to probe the scam.
2001, 14th March	SEBI approved JR Varma Committee’s agenda on ban on circular trading from 2nd July onwards, introduced options on individual stocks, and shifted all stock into the rolling settlement from 2nd January 2002.
2001, 18th May	Ketan Parekh was released by the Bombay High Court for a bond of Rs. 5 lakhs and he was directed to present himself to the CBI’s office twice a week.
2001, 10th August	Ketan Parekh was arrested by CBI for fraud and misappropriation of public funds and the case was filed by Madhavpura Mercantile Cooperative Bank
2001, 24th August	Ketan Parekh was released on the grounds that he will deposit Rs. 16 crores within 6 months.
2001, 6th September	Zee sued Ketan Parekh to recover Rs. 90 crores from him.
2002, 7th February	A case was filed by Ketan Parekh’s broking and merchant banking firms to lift the ban from starting a fresh business. The case was dismissed by the Securities Appellate Tribunal until the inquiry was completed in the specified time frame.
2002, 11th February	Ketan Parekh was served with a notice by Global Trust Bank (GTB) to recover Rs 180 crore outstanding to the bank
2002, 15th April	Ketan Parekh failed to pay the amount due to Madhavpura Mercantile Cooperative Bank.
2002, 2nd December	Calcutta police arrested Ketan Parekh but bail was granted to him as he fell ill.
2003, 20th January	Ketan Parekh turned himself in at Chief Metropolitan Magistrate Calcutta Court
2003, 6th June	SEBI directed Ketan Parekh’s companies to not buy, sell or transfer any shares of Global Trust Bank till investigations.
2003, 19th June	Ketan Parekh agreed to pay dues to the Bank of India.
2003, 12th December	SEBI banned Ketan Parekh and his associates for 14 years from the stock market.
2004, 8th March	SEBI cancelled the registration of Ketan Parekh’s broking entities.
2004, 15th June	Central Government filed a petition against M/S Kopran Limited, a company of Ketan Parekh for recovering Rs. 28 crores from him
2005, 13th May	A debate in Lok Sabha was initiated to consider the bill of Credit Information Companies (Regulation) which primarily focused on the regulation of credit information companies and facilitating efficient distribution of credit and for matters connected
2005, 23rd June	The Act of Credit Information Companies (Regulation) came into force.
2006, 20th April	A case was filed to investigate the nature and mode of operation of the transactions by the company, Shonkh Technologies International Ltd, as Ketan Parekh acquired shares of Shonkh Technologies International through his company, Panther Fincap and Management Services, which was beyond the permissible limit and without the required disclosures.
2006, 14th July	A petition was filed by Ketan Parekh against the order of SEBI dated 12th December 2003 which debarred him and his associates from the stock market for 14 years. The petition was dismissed considering the huge scam.
2006, 14th November	A petition was filed by Panther Fincap and Management Services Ltd and Classic Credit Ltd. against the penalty imposed on them. The petition was dismissed by the Court and directed to pay the penalty within 45 days from the date of the case
2007, 2nd August	The Appellate Tribunal ordered M/s. Panther Fincap and Management Services to pay 50% of the penalty sum, with the condition that if they fail to do so, the appeals would be rejected.
2008, 16th January	NH Securities Ltd challenged an order of CIT(A) which affirmed the loss disallowance. For statistical reasons, the appeal was allowed.
2008, 29th January	M/s.Triumph International Finance India Ltd. challenged an order issued by the Commissioner of Income-tax (Appeals) on 13.11.2007 sustaining the penalty. The impugned judgment on this issue was quashed and the appeal was permitted.
2009, 13th March	Ketan Parekh filed an appeal against a CIT(Appeals), Central-VII, Mumbai judgment dated 13-03-2009 for Rs.3,00,000/- in unexplained spending from income in his capital account. The appeal was allowed because after being declared an offender under the Prohibition of Fraudulent and Unfair Trade Practices Regulations Act, 2003, the appellant had to rely on other family members for personal costs.
2011, 29th November	A petition was filed by Ketan Parekh for dismissing the order of the Division Bench of the Bombay High Court due to financial hardships. The appeal was dismissed by the court and directed to comply with the order and pay off the penalty of Rs. 80 crores within four weeks.
2014, 3rd March	Ketan Parekh was sentenced to imprisonment for 2 years with a fine of Rs 50,000 by a special CBI court in Mumbai for cheating.
2017, 4th November	Ketan Parekh was sent to judicial custody for non-appearance in court
2018, 27th February	Ketan Parekh and his cousin were found guilty of fraud under the SEBI Act by a special SEBI Court and were given three years in prison and a penalty of Rs. 10 lakhs.

Laws adjacent to the Ketan Parekh scam

The establishment of Securities Appellate Tribunals is discussed in Section 15K of the Securities and Exchange Board of India Act, 1992 . Within the ambit of Section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973, the Securities Appellate Tribunal is considered to be a civil court. The SEBI (Securities and Exchange Board of India) Special Courts is formed under Section 26A for speedy trials of offenses.

The Securities Appellate Tribunal’s (SAT) key responsibility is to review appeals against findings obtained by the SEBI (Securities and Exchange Board of India) or by evaluating matters in compliance with the Securities Exchange Board of India Act, 1992.

SEBI v. Ketan V. Parekh and Others (2003)

Ketan Parekh and his associates were debarred from the stock market under the Sections 11 and 11B of the Act read with Regulation 11 of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 and Regulation 11 of SEBI (Prohibition of Insider Trading) Regulations, 1992

which deals with dismissing the investing of any security in a recognized stock exchange, omission any person associated with the securities market from buying, selling, or dealing in securities, any office-bearer of any stock exchange or self-regulatory organization can be suspended from their position, seize and hold the proceeds or securities in respect of any transaction under investigation attach after passing an order on an application or instruct any intermediary or anyone in any way affiliated with the securities market not to sell off or transfer an asset constituting part of any transaction under inquiry.

Securities and Exchange Board of India v. Panther Fincap and Management Services Limited and Ors (2018)

Ketan Parekh was found guilty of the offense and he was imprisoned for a term of 3 years with a fine of Rs.5,00,000 under Section 24(2) of the Securities and Exchange Board of India Act, 1992. This Section deals with the punishment imposed by the adjudicating officer on anyone who fails to pay or comply with any of the directions or orders, which may include imprisonment for a term of one month that may extend to ten years or a fine that may extend to twenty-five crore rupees or both and under Section 235(2) in the Code Of Criminal Procedure, 1973 states that if the defendant is found guilty, the judge follows the guidelines under Section 360, hear the defendant on the issue of sentencing before passing judgment on him in accordance with the law. He was also directed to compensate an amount of Rs.3,25,000 to the Securities and Exchange Board of India.

Legal provisions and implications relating to financial fraud under the Securities Exchange Board of India Act, 1992

SECTION	PARTICULARS
Chapter VI-A	Penalties and adjudication under the Securities Exchange Board of India Act, 1992.
Section 12A	Bars the manipulation and use of fraudulent methods, insider trading, and the direct or indirect acquisition of securities or control by any individual.
Section 15A	Penalties for failure to furnish information, return, etc
Section 15B	The penalty for failure by any person to enter into an agreement with clients
Section 15C	Penalties for failure to redress investors‘ grievances
Section 15D	Penalty for certain defaults in the case of mutual funds.
Section 15E	Penalties for failure to observe rules and regulations by an asset management company
Section 15H	Penalties for non-disclosure of acquisition of shares and takeovers.
Section 15F	Penalty for default, In the case of stock brokers
Section 15G	Insider trading
Section 15HA	Penalty for fraudulent and unfair trade practices

Section 15F

If an individual fails to issue contract notes stipulated by the stock exchange of which he is a member, he is subject to a penalty of up to five times the amount for which the contract note was required. If any individual fails to deliver any security or fails to pay the sum due to the investor in the way prescribed in the rules, he shall be subject to a penalty of one lakh rupees for each day that such failure persists, or one crore rupees, whichever is less. If an individual charges more than the amount provided in the regulations for brokerage, he will be penalised 1 lakh rupees or five times the amount charged more than the specified brokerage, whichever is higher.

Section 15G

If any individual deals in securities of a body corporate listed on any stock exchange on his behalf or behalf of any other person based on any unpublished price sensitive information, or advises, or acquires for any other person to deal in securities of any or causes any person to trade in any securities of any body corporate based on undisclosed price sensitive information, will be subject to a penalty of twenty-five crore rupees or three times the amount of profits gained through insider trading, whichever is higher.

Section 15HA

Establishes a penalty for fraudulent and unfair trade practices that may not be less than five lakh rupees and extend to twenty-five crore rupees, or three times the amount of profits derived from such practices, whichever is higher.

Legal provisions and implications relating to financial fraud under the Indian Penal Code, 1860

SECTIONS	PARTICULAR
Section 405 Criminal breach of trust	When a person dishonestly expressly or impliedly misappropriates or converts any property to his use, or dishonestly uses or disposes of property in contempt of any legal order regulating how such trust is to be discharged, or of any legal contract is in violation under criminal breach of trust.
Section 406 Punishment of criminal breach of trust	Imprisonment of a term which may extend to three years, with a fine, or both
Section 409 deals with a criminal breach of trustcommitted by a public servant or by a banker, merchant, or agent	It is punishable for a term of ten years or which may extend to life imprisonment, or fine, or both.
Section 415 Cheating.	1)When someone deceives another person, intentionally or unintentionally, or coerces the victim into giving away any property or consenting to its retention 2) When someone persuades the victim to act in a way which causes or is likely to cause injury to the victim’s body, mind, or reputation. 3) When the victim is compelled into acting in a way that he or she would not ordinarily act in if he or she were not being coerced.
Section 416 cheating by personation	Cheating by personation occurs when an individual pretends to be another person, consciously or unknowingly substitutes one person for another, or represents that he or any other person is someone different from him or another person, comes within the ambit of cheating by personation.
Section 417 punishment of cheating	The punishment of cheating with imprisonment for a term which may extend to one year, or with a fine, or both.
Section 418 cheating with knowledge that wrongful loss	Cheating with knowledge that wrongful loss may result to a person whose interest in the transaction to which the cheating relates he was bound, either by law or by a legal contract, to protect, shall be punished with imprisonment of either description for a term which may extend to three years.
Section 420 cheating and dishonestly inducing the delivery of property	When an individual cheats, alters or dishonestly obtains the transfer of property or any portion of valuable security, or anything that is signed or sealed and can be transformed into valuable security carry a sentence of up to seven years in jail and a fine.
Section 467 forgery of valuable security	Forgery of valuable security, will, or other documents by any individual who will be punished with imprisonment of either description for a term that may not exceed 10 years and shall also be subject to a fine.
Section 468	A person who commits forgery with the intent to cheat are subject to imprisonment for a maximum of seven years and a fine.
Section 471	A forged document or electronic record used as a genuine document or record is prohibited under Section 471 and is punishable in the same way as forging such a document or electronic record

Legal provisions and implications relating to financial fraud under the Companies Act, 2013

SECTIONS	PARTICULARS
Section 447	‘Fraud’ is defined as “any act, omission, concealment of any fact, or abuse of position committed by any person with the intent to mislead, obtain an unfair advantage, or harm the interests of the company, its shareholders, its creditors, or any other person, whether or not there is any wrongful gain or loss.” Any person found guilty of fraud faces a fine of at least ten lakh rupees or 1% of the company’s annual revenue, whichever is lower, as well as a term of imprisonment that must not be less than six months but may not exceed ten years. They are also subject to a fine that must not be less than the amount involved in the fraud but may not be less than three times the amount involved in the fraud. If the fraud concerns a matter of public interest, the sentence cannot be less than three years.
Section 36	The punishment for fraudulently inducing someone to invest money by making false statements, promises, or forecasts that are false, deceptive, or misleading, or knowingly conceals any material facts, in order to persuade someone to enter into or offer to enter into any agreement with a view to purchasing, selling, subscribing for, or underwriting securities or any agreement that is purportedly intended to secure a profit for any party or fraudulently obtaining credit facilities from any bank or financial institution will be punished under Section 447.
Section 38	The punishment for personation for acquisition, etc., of securities. Any person who submits an application to a company in a false identity to purchase or subscribe to its securities, or who submits multiple applications to the same company under different variations of name for acquiring or subscribing for its securities, or induces the company, directly or indirectly, to allot securities to him or any other person in a fictitious name will be punished under Section 447.
Section 229	Penalties for providing false information, document mutilation, and document destruction. When a person tampers, conceals, mutilates, misrepresents, or removes documents that pertain to the company’s or body corporate’s property, assets, or business, or when they are involved in any of these actions, or when they make false entries in documents pertaining to the company or body corporate, or when they provide an explanation that is false or that they know to be false, shall be punishable under section 447.
Section 251	The fraudulent applications for removal of name. If an application by a company under Section 248(2) has been made to evade the liabilities of the company, or to deceive the creditors or to defraud any other persons., The person in control of the management of the company is jointly and severally liable to any person or persons who had suffered loss or damage as a result of the company being notified as dissolved, and are punishable for fraud in the manner prescribed by law in Section 447.
Section 448	Punishment for false statements. Any person who makes a statement that is false in any material particulars and knows it to be false or omits any material fact and knows it to be material in any return, report, certificate, financial statement, prospectus, statement, or other required document is subjected to punishment under Section 447.

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