Ketan Parekh was threatening to sue the Bank of India for defamation, because it complained about the bouncing of Rs 1.3-billion pay orders issued to the broker by the Madhavpura Mercantile Cooperative Bank. He seemed to suggest there is nothing more that the authorities would be able to pin against him.
At last investigations by the Central Bureau of Investigation and the Securities and Exchange Board of India reveal that the sheer magnitude of money moved around by Parekh or available to him for his market manipulation was a staggering Rs 64 billion.
The CBI called a press conference to announce it had unearthed a Swiss bank account in which Parekh was listed as the beneficiary. The Bureau claimed there was $ 80 million (Rs 3.4 billion) in the account, which has since been frozen. In the past, CBI announcements were usually followed up with a quick arrest, this time it has gone silent.
New Overseas Corporate Bodies
The Securities and Exchange Board of India’s preliminary investigation in May revealed that Rs 29 billion was transferred out of the country through five Overseas Corporate Bodies between March 1999 to March 2001. These OCBs had together invested just Rs 7.77 billion in the Indian market but remitted a whopping Rs 36.77 billion out of the country. This direct flight of capital occurred through European Investments, Far East Investments, Wakefield Holding, Brentfield Holdings and Kensington Investment. Three of these companies have a paid up capital of just $ 10.
SEBI says the pattern of investments and transactions through these accounts shows a clear misuse of the OCB/Foreign Institutional Investor route. They seem to be used as a channel to repatriate profits earned through stock price manipulation. Many of these OCBs were sub-accounts of Credit Suisse First Boston whose brokerage operations have been suspended. But there were other FIIs too. Strangely, SEBI has not yet placed any restrictions on them so far.
All it has done is to request the Mauritius Offshore Business Activities Authority to give details in respect of actual beneficiaries, source and utilisation of funds of OCBs and sub-accounts mentioned in its preliminary report.
In answer to a Joint Parliamentary Committee query, Sebi now admits to have unearthed six more OCBs, where there is evidence that Parekh’s companies may have used them for ‘cornering and parking of stocks.’ Dossier Stock Inc, Greenfield Investments Ltd, AOM Investments Ltd, Symphony Holdings Ltd, Almel Investments (Mauritius) Ltd, and Delgrada Ltd.
However, since there was no other specific query about further repatriation of funds, SEBI is silent about other flight of capital through the OCB window. However, it does admit there are clear inter-linkages between the OCBs and that some of them have issued participatory notes abroad to route funds to India. It also says Parekh’s entities have conducted many of their trading transactions.
In its preliminary investigation report, SEBI unearthed a transfer of nearly Rs 11 billion to Calcutta brokers, most of whom have had their businesses suspended because of payment defaults. In an answer to a JPC query, SEBI now says Parekh had sent over Rs 27 billion to Calcutta brokers between January 2000 to March 2001. This suggests that as soon as the infotech, communication and entertainment stock-led boom began to lose momentum, Parekh shrewdly began to move his speculative activities to the unofficial market in Calcutta in order to avoid detection. SEBI says it is investigating the source of these funds and how they were utilised.
Ketan Parekh’s stock holding
The process of ferreting out information on his portfolio is slow and tedious because SEBI has to depend on ‘third party sources’ such as banks, depositories and stock exchanges and because ‘Ketan Parekh is not co-operating with the investigation.’ Yet, three of the companies identified by SEBI where he held over five per cent are Aftek Infosys, Shonkh Technologies and Global Trust Bank. According to SEBI, these companies had omitted to inform stock exchanges about his holding having crossed five per cent. It is not quite clear if the broker continues to hold these shares and what would be the value of this holding.
If one were to simply add up the amounts mentioned in SEBI’s various reports, the size of Parekh’s manipulations is far bigger than the Rs 50-odd billion securities scam of 1992. Yet, unlike the previous scam, this one is absurdly simple and brazen in its execution. Sebi says that Rs 27 billion was sent by Ketan to Calcutta brokers; Rs 29 billion vanished overseas, Rs 3.4 billion ($ 80 million) was in a Swiss bank account; Rs 7 billion went to him from Himachal Futuristic; Rs 5.15 billion from the Zee Group and Rs 2.56 billion directly from the Global Trust Bank.
- NEDUNGADI BANK: After the Ketan Parekh bubble burst in 2001, the RBI suddenly swung into action and began to go through Nedungadi’s books with a toothcomb. Punjab National Bank took over the bank that was up for sale after RBI initiated the move to weed out the broker promoter Rajendra Bhantia from the bank.
- GLOBAL TRUST BANK: Ramesh Gelli’s search for high returns took the new generation private bank to the stock market, where its involvement in the speculative activities associated with the Ketan Parekh scam and its high exposure soon resulted in substantial losses. The bank’s promoters attempted to merge the entity with the UTI Bank, and in the process the share price was rigged so that the promoters could make a profit despite the mess in the the bank. It was clear that unless some drastic measures were taken, the bank was heading for closure. This led to the exit of Ramesh Gelli in 2001. Eventually, Oriental Bank of Commerce (OBC) took over the troubled bank.
- CO-OP BANKS: The saga of failed co-operative banks is continuing. The collapse of Madhavpura Mercantile Co-operative Bank after Ketan Parekh used the bank to fund his stock market rigging was the high point. As per the RBI data, the accumulated losses of cooperative banking sector has touched Rs 1598 crore — an alarming rise of 241 per cent. The gross non-performing assets were Rs 5053 crore — enough to fund a world-class airport.
While the latest fraud may not be on the scale of the scams involving Harshad Mehta (around Rs.5,000 crores) or Ketan Parekh (Rs.800 crores), what is alarming is that this time the scammers’ tentacles have spread to the Public Provident Fund (PPF) – the repository of the savings of millions of ordinary Indians. More than Rs.92 crores is missing from the Seamen’s Provident Fund, which has 26,500 members. Worse still, the regulatory authorities admitted that they were aware of the mess and gave various excuses for not having taken timely action.
Global Trust Bank
Global Trust Bank was on the verge of getting merged with UTI Bank to become one formidable entity in the Indian banking sector, when the Great Crash of March 2001 occurred, and along with stock prices, the marriage too came unstuck. (GTB assets: Rs 7,531.22 crore, deposits: Rs 6,198.85 crore as on 31 March 2000.)
The report was believed to have noted that there was evidence that Parekh was involved in manipulating the stock prices of GTB prior to the merger announcement on 20 January 2001, and a swap ratio of 2.5 shares of UTI Bank for 1 share of GTB, two days later.
State Bank of India
However, this time, SBI’s losses are restricted to about Rs 40 crore, lent against pay orders issued by Ahmedabad based Classic Co-operative Bank. According to bank analysts polled by Capital Market, this is “loose change” for the bank of its size.
Bank of India
Of the five banks hit by pay order defaults, Bank of India has unfortunately been the worst hit. It cashed Rs 137-crore fictitious pay orders issued by the Ahmedabad based Madhavpura Bank to arrested broker Ketan Parekh. The banking sector is estimated to have taken a hit of more than Rs 1,000 crore due to the pay order scam indulged in by many Gujarat co-operative banks.
It was Bank of India’s complaint to Central Bureau of Investigation that resulted in Parekh’s arrest on 30 March 2001.
Bombay Stock Exchange
The Bombay Stock Exchange witnessed one of the worst bear runs leading to a 177-point crash on 2 March 2001.
On 23 May, the BSE announced the launch of trading in index options in the first week of June, based on the Europian style. For this purpose, the exchange has joined hands with the Chicago Mercantile Exchange to adopt its system of calculating margin requirements and managing risk, known as Standard Portfolio Analysis of Risk (SPAN).
Calcutta Stock Exchange
In fact the 177-point crash on 2 March 2001 was triggered by the payment crisis at Lyons Range (CSE) and Dalal Street (BSE). While investors were still trying to digest the shortfall of Rs 100 crore for the settlement ended 1 March on the CSE, the market was gripped with rumours of a fresh payment crisis on CSE for the following settlement ended 8 March. Although the CSE authorities denied the payment crisis initially, Sebi went ahead and suspended 40 brokers on CSE.
It is now estimated that exposure to co-operative banks is going to cost the banking sector above Rs 1,000 crore.
To stem the losses, nationalized banks and money market intermediaries have reportedly stopped dealing with co-operative banks. The National Stock Exchange, too, has decided not to accept fresh bank guarantees and renewals from 5 private banks as a precautionary measure in the wake of the pay order scam.
Unit Trust of India
As on June 2000, UTI was believed to have a total investment of Rs 5,000 crore in K-10 stocks (10 New Economy stocks backed by arrested broker Ketan Parekh), which today stands at less than one-fifth of its value. Another fallout of the crash was that UTI-promoted UTI Bank’s merger with Global Trust Bank was called off by the latter, stung by allegations of price manipulation to get a better swap ratio with UTI Bank (2.25 shares of UTI Bank for 1 share of GTB) .