Ketan Parekh scam: One of the biggest scam by Harshad Mehta's friend

How Ketan Parekh's business turn into one of the biggest financial scam of India

Ketan Parekh was a chartered accountant and he was the one of the intern of Harshad Mehta. His only dream was to rule the stock market of India, so he dicided to join Harshad Mehta's firm to learn some tricks to deceive the Investors. Before executing his master plan he first used the pump and dump scheme to raise some money which was going to help him to execute his master plan. 

What is pump and dump scheme

He purchased major shares (20-30) % of new companies for increasing thier price to a certain level just to attract the other investors.

When the price was too high, he was would sell his stake in those companies, and collect huge profits from of those. So first he pumpee the share price by purchasing them and then dumped those share by selling them. 

After Ketan Parekh scam, the laws of stock market amended in every aspect. And niw pump and dump scheme is illegal in stock market. 

Unlike Harshad Mehta, who concentrated on retail investors like you and me (individual), Ketan Parekh concentrated on institutional investors (mutual funds, insurance companies - who invest our money behalf ou us). Pump and dumo scheme wasn't enough to attract huge institutional investors, so he tricked them through circular trading.

What is circular trading

We usually buy shares by calculating its volume (total number of share of a particular company purchased or sold during a day) on a particular day.

If the volume is high, the share is preety active in the market and had probability of making profit. So to manipulate the volume, some tricksters continuously purchase and sell shares between themselves to make that share active throughout the day. Ketan Parekh was one of the tricksters and through the help of other, he started circular trading to tempt institutional investors to purchase those shares and rise its price. When the price would reach its peak, he would sell his stake and made a huge profits out of it. 

To popularise his name and plan, he targeted media, telecommunications ( due to DOTCOM boom), and manufacturing companies for circular trading. He named them K10 shares. Now a day circular trading is also banned in stock market and its totally illegal for investors to invest in this scheme. Ketan Parekh wanted to control the entire Indian stoke market. For that he needed to find a way to bring homogeneous amount of money for purchasing shares. That's when he used to pay orders to raise money. 

What is PAY ORDER

It's like bank demad draft, or you can say as prepaid instruments. You need to pay certain amount to the bank to get payment order. (You can pledge this pay order with any other banks for loan). He first purchased major stokes of GTB bank and MMCB bank to control bank loan dicisions. He then collected the pay orders of let say 1000 rupees by paying them 200 rupees, or collecting pay orders by pledging his stakes in those banks. Then he would pledge those pay orders with other bank in lieu of money. In this way he collected 1000 Crore Ruppes from bank by pledging those pay orders. 

What went wrong?

He applied for loan from Bank of India (BOI) by pledging PO's. BOI sanctioned loan by considering the goodwill of Ketan Parekh, and sent those POs to RBI for clearance. Unfortunately RBI smelled something wrong in those POs (for the first time in 5 years) and declined the clearance of those POs. In fact, RBI started a scrutiny on those banks for approving such a huge amount as pay orders. 

Once a Genius alwas a Genius, Ketan Parekh was damn sure that, now his scam is going to be revealed by RBI (200:1000 Rupees in pay orders ratio), so he started his stake in all those K10 companies, including his shares in GTB banks and MMCB bank. 

Between 5 pm to 12 am, after Ketan Parekh's drastic step of selling shares at boom price, entire stoke market crashed. Lots of institutional investors were pushed towards insolvency. Shares of Zee TV, HFCL and many more dropped down to 10% and even less. Parliament was immediately called upon to declare a statement that the government is aware of the scam and steps have been taken. That was totally false statement. That scam was a reality check for the loopholes in security market laws and the inefficiency of government to control these bank down scenario. 

After Ketan Parekh scam security market law was amended through every page and the environment for trading get reformed for benkers as well as hilltoppers.