Article on Indian Stock Market Scam: “The Ketan Parekh scam was an example of the inherently weak financial, regulatory and legal set up in India.”

Ketan Parekh is a Mumbai based share and stock broker. He is from a well to do share-brokerage based family. He was involved in the shares scam of the year 2000/01.

The study by SEBI found that the flow of funds originating from Ketan Parekh, when paired with securities market transactions of connected clients leads to the possibility that these trades were executed to confuse the funds trail and to integrate the money originating from the banned stock broker into the system of banking.

Ketan’s possible involvement was found by SEBI during its investigation into professed manipulative trading in the scripts of Cals Refineries Limited, Confidence Petroleum India Limited, Bang Overseas Limited, Shree Precoated Steels Limited and Temptation Foods Limited.

Earlier, SEBI had Ketan and 17 other entities from participating in the market following a study into purchase sale and dealing in the shares of companies like HFCL, Zee Telefilms, Adani Exports, Ranbaxy and Aftek Infosys between October 1999 and March 2001.

In its time order, SEBI banned 26 entities and persons, including Maruti Securities Limited and asked them to reply in 15 day’s time. The government had set up the Joint Parliamentary Committee (JPC) to study the securities scam that hit the stock market during the year 1999-2001.

According to SEBI, the starting point was ‘routine market surveillance’ that revealed set trades in five scripts. It also had information from the IT department on Ketan Parekh’s source of funds which trailed back to certain entities.

SEBI’s investigation showed that these entities built up large volumes in the five scripts chosen for investigation; strangely enough, they often made losses on their transactions, but continued to trade. SEBI has opinion that these independently incurred losses have a secondary motive that needs to be separately investigated by the appropriate agency. It seems to have specific concerns relating to money laundering to the enforcement and IT investigators.

SEBI also found that the ‘connected entities’ or fronts used by Ketan for his transactions often sold shares without having them in their possession. They subsequently obtained the shares in time for delivery through off-market transactions through other ‘connected entities’ within the circle of operators.

Evidence of Ketan Parekh’s massive market activities was his ability to pay back well over Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which had collapsed and caused thousands of depositors to lose money when he pump off Rs880 crore to fund his market misbehavior in the year 1999-2000.

SEBI’s team led by Mr. S.Raman (chief general manager) must be congratulated for breaking this seemingly impenetrable system; but let us recognise that this is only the tip of the market manipulation. Ketan Parekh is not the only manipulator to use this system; there are plenty of others doing it too. Also, the number of scrips in which Ketan has traded is substantially higher than the five that were investigated by SEBI.

One of the best kept secrets is the action taken against those involved in the scam of 2000, which led to large-scale losses, the drop of two banks, Madhavpura Merc-antile Cooperative Bank (MMCB) and Global Trust Bank (GTB) and split the giant Unit Trust of India (UTI) into two, after pushing it to the brink of a collapse.

Whether the BSE directors had used their recourse to price sensitive information or not for transactions in the market, having had direct access to the data was in direct violation of SEBI rules, observes Oommen A. Ninan.

When the Sensex crossed the dizzy 5000 mark in October 1999, Bombay Stock Exchange (BSE) brokers literally took to the terrace of Jeejebhoy Towers and released balloons. The celebration also marked their “bullish sentimentalism” and showed lack of market prudence – that what goes up has to come down; that the market is driven by its own dynamics.

The built up position of Mr. Parekh in certain equities known as `K 10′, in the normal circumstances, would not have had any major impact on the market. With the elected directors, including the BSE president, having had recourse to the price sensitive information relating to outstanding positions, purchases and sales by leading operators it is to be seen whether they have used this advantage to depress the prices. The Securities and Exchange Board of India (SEBI) investigation will reveal it in the next few days.

The excitement indicated on Budget day by a sharp rise in the Sensex was rather on the high side. There is actually nothing much in the Budget to promote savings. On the contrary, savings have been discouraged by a drop in interest rates.

It is now very doubtful whether demutualization or corporatisation of broker-driven exchanges is the answer. The experience of some of the stock exchanges like the London Stock Exchange, the Australian Stock Exchange, the Nasdaq, etc. Is to be fully ascertained. Assuming that the brokers are kept away from the management of stock exchanges, restarting their role only to their trading rights, what is the guarantee that a new management will act in an objective manner.

There has been a flow of money from banks to capital market in recent months. Private sector banks are prominent among them, including the Global Trust Bank (GTB). However, a reversal of banks’ exposure to capital market recommended by the RBI-SEBI committee in September last year is not a solution. What is essential is that the banks should have expertise in judging the risk of the business as well as the organisational ability to administer such schemes.

Moreover, the prima facie evidence in price rigging of GTB shares raises doubts over the regulators’ surveillance mechanism. The RBI was aware of some unusual price movements in GTB share prices in November last year itself and the SEBI took another three months to inform the RBI that it had found evidence of price rigging in GTB share prices. The true measure of regulatory competence is the ability of the regulators to take quick corrective action. Further, the GTB’s loan to Mr. Parekh without collateral is another issue that raises questions on the RBI’s role as a regulator. Regulation and supervision and the quality of on and off-site supervision of the RBI and the SEBI should be strengthened and they should be delinked from the Finance Ministry with more autonomy and powers.

The regulator should continuously monitor the investment pattern so that any undue change in a particular stream, like the broker position, could be identified and immediate investigation conducted. The Government also should strengthen the investment institutions to facilitate long-term investments. Flow of money to the capital market from the lending institutions should be more transparent so that undue concentration of lending on particular scrip is avoided.

The financial crisis in Asia in 1997 has led to a fundamental re- think about the way in which financial markets should be governed. While other Asian countries are converging towards an international set of governance best practices, India is still lagging behind in terms of quality and speed of implementation. In a globalize economy, countries which fail to base the financial liberalization on strengthened economic policies and institutional structures are bound to suffer financial crisis.

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