Published on March 12, 2014
Presented by: Vasu ruthvick Preetish Dhulshetti Somnath benarjee INTERNATIONAL SCHOOL OF BUSINESS & MEDIA BANGALORE
Pied Pieper of Dalal Street Ketan Parekh is a former stock broker from Mumbai, India Popularly known as ‘Bombay Bull’. KP arrested on 30 march 2001 for the security market scam known as Ketan Parekh scam. He was convicted in 2008, for involvement in the Indian stock market manipulation scam in late 1999-2001. Currently he has been debarred from trading in the Indian stock exchanges till 2017 He was trainee of Harshad Mehta. Ketan Parekh can be best described as the Pied Piper of Dalal Street. Parekh came from a family of brokers which helped him to create a trading ring of his own.
How it happened? Formed a network of brokers Identified and targeted 10 stocks. Zee telefilms went up from Rs. 127 to Rs. 2330, Himachal Futuristic – Rs. 194 to 2553.
Funding Mechanism Simple borrowing mechanism Badla System
Badla System Indigenous carry-forward system invented on the Bombay Stock Exchange Badla trading involved buying stocks with borrowed money. The stock exchange acts as an intermediary. Interest rate determined by the demand for the underlying stock Maturity not greater than 70 days
How it happened? When stock prices were high, they were pledged with banks as collateral. No problems as long as prices were rising.
How was it detected Stock market crash of 2000 KP started borrowing heavily Attempted to rig the price upwards and later sell. But failed to do so. IT department found discrepancies in sources of funds of KP Routine market surveillance of 5 stocks
FACTORS THAT HELPED KETAN PAREKH Though KP was a successful broker, he did not have money to buy large stakes as he held the stakes of more than Rs 750 million in July 1999, according to a report. Analyst claimed that he had borrowed from various companies and banks for this purpose. His financing method was fairly simple. He bought shares when they were trading at low price and saw the prices go up in the bull market while continuously trading. When the prices was high enough, he pledged the shares with banks as collateral for funds, and also borrowed from the companies like HFCL.
CONT……. It could not have been possible without the involvement of banks. A small Ahmadabad-based bank, Madhavapura Mercantile Cooperative Bank (MMCB) was KP’s main ally in the scam. KP and his associate started tapping the MMCB for funds in early 2000.
Implications Ketan Parekh was arrested by CBI on 30th March 2001. He was charged defrauding Bank of India by almost $20 Million Global Trust Bank and Bank of India 's merger failure RBI ordered some banks to furnish data of Capital market exposure SEBI inspected the books of several brokers suspected of triggering the crash
Implications One of the biggest Fall in BSE -700 points KP and other traders were banned from trading for 17 years Short selling was banned for 6 months. Badla system was banned All shares that were put as collaterals should be done so through NSE and BSE. 10% additional deposit Margins.
IMPACT OF THE SCAM ON FINANCIAL INSTITUTIONS Ketan Parekh was threatening to sue the Bank of India for defamation because it complained of bouncing of 1.3 billion pay orders issued to the broker by Madhavpura Mercantile Cooperative Bank Investigations by SEBI and CBI reveal that sheer magnitude of money moved by Parekh was a staggering 64 billion
Steps taken by SEBI after scam SEBI launched immediate investigation on the scam. • It suspended all the broker member directors of BSE’S governing board SEBI also banned trading by all stock exchange presidents, vice presidents and treasurers SEBI banned naked short sales. RBI started inspecting accounts and sub-accounts twice a year in spite of once in two year. SEBI allowed banks for collateralised lending only through BSE and NSE
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