Now a Financial Scam Hits Indian Stock Markets

By Ehtesham Shahid

BOMBAY -- It was the proverbial fall of the Icarus. The Bank Securities and Fraud Cell of India's Central Bureau of Investigations (CBI) on March 30 arrested Ketan Parekh, the man synonymous with the biggest boom in the history of Bombay Stock Exchange (BSE). The charge against him was allegedly defrauding the Bank of India (BoI) to the tune of Rs 130 crore. Parekh's arrest triggered crash of stock markets for the seventh consecutive Black Friday. By all means, this was a repeat performance. Around the same time in 1992, another Big Bull, Harshad Mehta had brought the market to its knees and then paid the price. Sadly, the so-called watchdogs were found napping on both occasions.

In the following few days, CBI also raided companies linked to Parekh including Panther Investment Traders, Panthers Fincop and Management Services, M/S Classic Private Ltd, Chitrakoot Computers Pvt. Ltd and Nakshatra Software Pvt Ltd. Residential premises of three bank officials and the Mandvi branch of BoI and the Madhavpura Bank were also raided. The event unfolded after BoI filed a complaint with the CBI following which a case of alleged cheating and forgery was registered against Parekh. The complaint said the pay orders issued by the Madhavpura Cooperative Bank in the name of Ketan Parekh and discounted by them (BoI) to the tune of Rs 137 crore, had been dishonored. Pay orders had been credited to the three finance companies owned by Parekh and the amount routed through these companies was Rs 660 crore. The question that arose with these transactions was something had been going wrong which was not tracked by the

regulatory authorities.

Even before the Parekh scandal broke out, the stock markets had been witnessing turbulent times across the country. The Calcutta Stock Exchange (CSE) was the first to make news after Abhishek Banka committed suicide on March 19 after reportedly losing money in the market. His wife, Sona followed suit, days later. Subsequently, the BSE witnessed a series of Black Fridays. On February 16 (Friday), the Sensex fell 106.67 to close at 4330.32 and then on February 23, it further plummeted by 140.39 points to close at 4122.16. All Fridays in the month of March saw a decline in the market. March 2, 9, 16, 23 and 30 all witnessed decline in points of 176.49, 174.98, 74.12, 78.69, and 147.18 respectively. Clearly something was wrong with the way things were being run.

T Surinder, Manish Khanduri and Vikas Dhoot, in their cover story, The Unmaking of Mr Ketan Parekh said, "the story of the stock market's recent boom and bust has many elements. Brokers, analysts, fund managers, regulators (and even retail investors) stand accused. Of greed. Of fear. Of incompetence. The gyrations in the global market add spice to the story. But above all, this is the story of one man. His genius and his greed. This story is about the rise and fall of a man called Ketan Parekh." There is a curious similarity between Parekh and his predecessor Big Bull Harshad Mehta. Both belong to Gujarat and both were virtual non-entities before catching up with infamy.

Sucheta Dalal, the Indian Express reporter, who virtually unearthed the Securities scam in 1992, said, "The plot is similar, only the star cast is different. Harshad Mehta may have schmoozed with a larger figure - Rs 660 crore - but there is a ring of familiar about Ketan Parekh's default on Bank of India's Rs 130 crore." Interestingly, Harshad's brother Ashwin Mehta is Ketan's close advisor and both the bulls operated through a close group of family and friends. Ketan's business operations were aided by his brother Kartik, who has been arrested with him.

Ketan Parekh has long been a low-key but influential figure on Dalal Street and has been billed as a maker and breaker of fortunes. He had a penchant for technology shares and was described as the pied piper leading his flock in the direction of his favorite stocks, which became famous as the K-10 index. His grandfather and father Vinubhai have all been involved in the securities business. Like Harshad Mehta, Ketan too had found gaps in the system and closed in on them. Income tax officials had raided his office and residence last year. News of that search had sent shivers down the market. The Sensex, at one time, had slumped nearly 300 points, leading to an erosion of almost Rs 40,000 crore in aggregate market cap on the BSE.

The biggest losers from the entire scam were the smaller cooperative banks. Madhavpura Mercantile Co-operative Bank (MMCB) had provided guarantees worth Rs 200 crore to Ketan Parekh. According to a probe conducted by the Reserve Bank of India (RBI)'s Ahmedabad office, Madhavpura chairman Ramesh Parekh had accommodated Ketan Parekh, with whom he had business dealings. Apparently, Ketan had no account with the bank's branches either in Mumbai or in Gujarat. Following these findings, the RBI superseded the Madhavpura board and placed it under an administrator. Ketan Parekh finally surrendered before the bank fraud and security cell of the CBI on April 5. More intrigue appeared as the investigations went on. Securities and Exchange Board of India (SEBI) probe revealed that Ketan Parekh had another 4.7% holding of Global Trust Bank (GTB). Interestingly, the holding is traced not to Parekh's own companies, but three finance companies owned by detergent magnate Karsanbhai Patel.

The bourse by definition is a gamble. No one has a clue on how it will perform. This is because the market moves less on fundamentals (quality of product, management, demand, market share, etc). and more on perception. Ketan Parekh perceived media companies would do well. So he bought them lock, stock and barrel. Share prices zoomed. Newspapers and magazines wrote about how the 25-year-old directors became millionaires. And soon enough everybody was clamoring for media stocks. All that was based on perception. The other side of the speculation is the effect of international markets.

The rise and fall of technology shares have been far too often for comfort. On April 13, technology stocks reeled under heavy selling pressure for the second consecutive day after the profit warning by tech giant Infosys Technologies. Most of the tech stocks took a further beating with Infosys hitting the lower circuit barrier of 16% for the second day. Another tech giant Hughes Software, however, said it was not affected by the US meltdown, adding that the cost-cutting measures there had, in fact, helped the company to bag more business from US firms. Despite such claims, the truth is that technology stocks are no longer the market's favorite. There have been panic selling and claims and counter claims of its resurgence. Amidst all this, a recurring question surfaces -- Who is calling the shots in Indian markets?