3. A Mumbai based stock broker chartered accountant by profession
KP took advantage of low liquidity in certain stocks which later came to be
known as ‘K-10’ Stocks
Held significant stakes in the K-10 companies
The buoyant stock markets from January to July 1999 helped the K-10
stocks increase in value substantially
As a result other brokers and fund mangers started investing heavily in
these stocks
5. 176 points fall in the sensex on march 1st, 2001
Prior day union budget tabled prompted 177 sensex points increase.
SEBI launched immediate investigations
SEBI inspected the books of several brokers suspected of triggering the
crash
RBI ordered some banks to furnish data of Capital market exposure
BSE President Anand Rathi’s resignation added to continued downfall of
sensex
6. Opened debate over banks financial capital market operations, Lending
funds against collateral security, Dual control of co-operative banks
Ketan Parekh was arrested by CBI on 30th March 2001. He was charged
befrauding Bank of India by almost $20 Million
Another sensex fall of 147 Points
7. 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.
It could not have been possible without the involvement of banks.
8. A small Ahmedabad-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.
In December 2000, when KP faced liquidity problem in settlement he
used MMCB in two different ways-
◦ First was the pay order route, where as KP issued cheques
drawn on BoI to MMCB, again which MMCB issued pay
orders, the pay order discounted at BoI.
◦ The second route was borrowing from a MMCB branch at
Mandvi (Mumbai) where different companies owned by KP
and his associates had accounts. KP used 16 such accounts,
either directly or through other broker firms, to obtained funds.
9. Lack of regulations and surveillance on the bourse allowed a highly illegal
and volatile badla business
CSE had the third-highest volumes in the country after NSE and BSE
CSE helped KP to cover his operations from his rivals in Mumbai. Brokers
at CSE used to buy shares at KP's behest
These brokers had to keep shares in their name and they were paid 2.5%
weekly interest
10. By Feb 2001, CSE were reduced to an estimated Rs 6-7 billion from their
initial worth of Rs 12 billion
KP's badla payments of Rs 5-6 billion were not honored on time for the
settlement and about 70 CSE brokers, defaulted on their payments
By mid-March, the value of stocks held by CSE brokers went down further
to around Rs 2.5 - 3 billion
11. 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 Merchantile Cooperative Bank
Investigations by SEBI and CBI reveal that sheer magnitude of money
moved by Parekh was a staggering 64 billion
12. The stock exchange acts as an intermediary between you and the actual
lender.
You will be charged an interest rate for borrowing, which will be
determined by the demand for that stock under badla trading
Thus, higher the demand for Wipro under badla trading higher will be the
interest rate. You can keep your borrowing unpaid for a maximum of 70
days, after which you will have to repay the badla financier through the
exchange
13. • An additional 10% deposit margin was imposed on outstanding
net sales in the stock markets
• The limit of application of the additional volatility margins was
lowered from 80% to 60%
• To revive the markets SEBI imposed restriction on short sales and
ordered.
• 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 allowed banks for collateralised lending only through BSE and
NSE
14. RS. 2000 billion lost
KP released on bail on May 2001
All Ketan Parekh had to say was I made mistakes
The Retail investors were the worst hit
SBI, BOI, PNB had to suffer huge losses
MMCB also suffered huge losses
