THE KETAN PAREKH SCAM
Case Code- FINC006
Published - 2002
"All
my lifetime's savings are gone. I don't know how to feed my family."
- A small investor hit by the Ketan Parekh scam, in April 2001.
THE CRASH THAT SHOOK THE NATION
The 176-point[1] Sensex[2] crash on
March 1, 2001 came as a major shock for the Government of India, the stock
markets and the investors alike. More so, as the Union budget tabled a day
earlier had been acclaimed for its growth initiatives and had prompted a
177-point increase in the Sensex. This sudden crash in the stock markets
prompted the Securities Exchange Board of India (SEBI) to launch immediate
investigations into the volatility of stock markets. SEBI also decided to
inspect the books of several brokers who were suspected of triggering the crash.
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Meanwhile, the Reserve Bank of India (RBI) ordered
some banks to furnish data related to their capital market exposure. This
was after media reports appeared regarding a private sector bank[3] having
exceeded its prudential norms of capital exposure, thereby contributing to
the stock market volatility. The panic run on the bourses continued and
the Bombay Stock Exchange (BSE) President Anand Rathi's (Rathi)
resignation added to the downfall. Rathi had to resign following
allegations that he had used some privileged information, which
contributed to the crash.The scam shook the investor's confidence in the
overall functioning of the stock markets. By the end of March 2001, at
least eight people were reported to have committed suicide and hundreds of
investors were driven to the brink of bankruptcy. |
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The scam opened up the debate over banks funding capital
market operations and lending funds against collateral security. It also raised
questions about the validity of dual control of co-operative banks[4] .
(Analysts pointed out that RBI was inspecting the accounts once in two years,
which created ample scope for violation of rules.)
The first arrest in the scam was of the noted bull[5], Ketan Parekh (KP), on
March 30, 2001, by the Central Bureau of Investigation (CBI). Soon, reports
abounded as to how KP had single handedly caused one of the biggest scams in
the history of Indian financial markets. He was charged with defrauding Bank of
India (BoI) of about $30 million among other charges.
KP's arrest was followed by yet another panic run on the bourses and the Sensex
fell by 147 points. By this time, the scam had become the 'talk of the nation,'
with intensive media coverage and unprecedented public outcry.
[1] A
change of Re. 1 in the price of a share when one speaks of a share rising or
falling by so many points. In stock market indices, however, a point is one unit
of the composite weighted average on market capitalisation of rupee values.
[2] A
stock market index indicating weighted average of 30 scrips, also known as the
BSE Sensitive Index. The daily closing figure of this index broadly reflects the
performance of the capital markets.
[3]
It was alleged that Global Trust Bank exceeded its Capital
market exposure.
[4] Co-operative banks are under the dual control of RBI and the Registrar of
Co-operative Societies. The RBI regulates banking functions while the registrar
looks after the managerial and administrative functions.
[5] An investor who expects share prices to go up and hence buys them.
THE MAN WHO TRIGGERED THE CRASH
THE FACTORS THAT HELPED THE MAN
THE SYSTEM THAT BRED THESE FACTORS
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