Ketan Parekh Inventory Market Manipulation of 2000-01 [Explained]

On the planet of inventory markets, tales of extraordinary beneficial properties and dramatic falls will not be unusual. Nevertheless, some tales reveal the darkish aspect of buying and selling. These tales speak about manipulations changing real market exercise. One such case entails the alleged market manipulation in India throughout 2000-01. It was a inventory market rip-off and it was linked to Ketan Parekh, a stockbroker recognized for his experience in creating synthetic market booms.

In as we speak’s information, you need to have examine Ketan Parekh once more. He has been banned by SEBI for orchestrating a front-running scheme. He has been exploiting personal info of a US-based fund’s trades to generate illicit income of Rs 65.77 crore. Learn extra about this newest information right here.

Is that this the identical Ketan Parekh of 2000-01 years? Sure, this is similar Ketan Parekh infamous for the 2000-01 inventory market rip-off. In these days, he was once more banned for manipulating inventory costs.

On this article I’ll share with you the story and particulars of the 2000-01 Ketan Parekh fiasco.

What Occurred in 2000-01?

Ketan Parekh and entities related to him reportedly engaged in practices like round buying and selling and synchronized trades.

What’s round buying and selling? In easy phrases, round buying and selling is like passing a ball in a circle amongst pals to make it seem to be everyone seems to be actively taking part in. In inventory market, comparable type of factor occur, however new pals maintain becoming a member of the sport. In round buying and selling no new gamers be part of.

What’s synchronised buying and selling? Equally, in synchronised trades, two events agree upfront to purchase and promote shares at predetermined costs. This creates an phantasm of demand for a inventory which is definitely unfaithful.

These ways allowed Parekh and his associates to pump up inventory costs artificially.

They used intermediaries, like brokers and financiers, to execute these trades. Shares would alternate fingers inside a managed group, giving the looks of excessive buying and selling volumes.

This led to inflated inventory costs, attracting real traders who have been unaware of the manipulation and received trapped resulting in losses.

Instance

Let me clarify this buying and selling rip-off utilizing an instance.

Let’s say the inventory of Firm XYZ is buying and selling at Rs.100.

Ketan Parekh’s group, by way of round and synchronized buying and selling, exchanges the inventory amongst themselves at Rs.100, Rs.105, and Rs.110, making it appear like demand for XYZ is growing.

Traders this “exercise” would possibly suppose that the inventory is on an upward development and begin shopping for it at Rs. 120, Rs. 125, and even increased.

Ultimately, the inventory crashes again right down to Rs.100 as soon as the manipulation ends. What it does to real traders? Such unsuspecting traders are left with losses.

Precise Story

Ketan Parekh manipulated costs of Ok-10 shares. It was finished by round buying and selling and collusion with merchants, firms, and institutional traders.

• Shares like Zee Telefilms skyrocketed from Rs.127 to Rs.10,000 underneath his schemes.
• The promoters of firms additionally funded Parekh to artificially inflate share costs.
• Examples like Visualsoft surging from Rs.625 to Rs.8,448.
• Sonata Software program from ₹90 to ₹2,936.

In February 2001, a bear cartel was fashioned. It was a gaggle of merchants betting on inventory costs to fall (that’s why “Bear” cartel). Ketan Parekh was not a part of the bear cartel. He was doubtless unaware of their dealings. The bear cartel opposed him, focusing on his Ok-10 shares to revenue from their decline.

This cartel, within the BSE, started promoting Ketan Parekh’s Ok-10 shares aggressively. Their actions triggered a pointy decline within the costs of those manipulated shares.

As costs plummeted, it created a fee disaster available in the market, the place merchants and brokers confronted difficulties settling their dues.

To reduce his losses and generate some liquidity, Parekh too resorted to dumping (promoting off in bulk) his Ok-10 shares.

Nevertheless, this was finished outdoors common buying and selling hours (between 5 PM and midnight) on the Calcutta Inventory Change. It was finished like this to bypass the everyday checks in place throughout market hours. This mass sell-off brought on panic amongst traders, resulting in a inventory market crash the next day.

The crash deeply affected institutional traders, together with mutual funds and insurance coverage firms, which had holdings in these artificially inflated shares.

Additional investigations revealed that Parekh had ties with entities like World Belief Financial institution (GTB) and Madhavpura Mercantile Cooperative Financial institution (MMCB), which have been allegedly used to finance his manipulative actions.

Different situations of fraud by Ketan Parekh:

• 1995: His malpractice wasn’t restricted to Ok-10 shares; it spanned years, with comparable ways courting again to 1995.
• 1992: On this 12 months Parekh confronted his first conviction, leading to a one-year sentence for irregularities involving Canara Financial institution.
• 2009: Regardless of being barred from inventory buying and selling, SEBI discovered proof in 2009 that firms and people have been performing as proxies for Parekh. They have been persevering with to control the markets on his behalf. This led to buying and selling bans for 26 entities.
• 2014: He was a CBI court docket additionally put Ketan Parekh to 2 years imprisonment.
• 2025: On this 12 months, Ketan Parekh is once more caught is Rs.65 crore front-running operation.

Why Did They Do It?

In fact the larger function was to make straightforward cash however he used banks to leverage his returns. Let’s perceive it utilizing analogy and a hypothetical instance.

Think about you hear a couple of live performance by a well-known artist, and tickets are promoting quick.

You rush to purchase one since you don’t need to miss out. However once you arrive on the venue, you understand there’s no live performance. It was only a pretend commercial to trick folks into shopping for tickets.

Equally, within the inventory market, manipulated inventory costs give the phantasm that the inventory is “scorching,” tempting real traders to purchase it.

Ketan Parekh and his associates created this phantasm by artificially inflating inventory costs. Their aim was easy: elevate cash with out counting on conventional financial institution loans. Financial institution loans include guidelines, documentation, and curiosity funds. As an alternative, Parekh manipulated inventory costs to generate cash sooner.

They Used Settlement Cycles (T+5 or T+2) To Their Benefit

Settlement cycles are the time-frame inside which a inventory market commerce is accomplished.

• T+5 (Commerce Date + 5 Days): On this older settlement system, a commerce made on Day 1 (Commerce Day) needed to be totally settled by Day 6.
• T+2 (Commerce Date + 2 Days): Within the newer system, trades settle sooner, on Day 3 after the commerce.

In the course of the settlement cycle, you don’t instantly pay for the shares you purchase or obtain cash for the shares you promote. There’s a spot between the commerce and settlement. Parekh exploited this hole.

How This Exploitation Labored:

Parekh used round and synchronized buying and selling to inflate inventory costs.

Instance: A inventory value Rs. 50 is repeatedly traded inside his group to make it appear like it’s value Rs. 100.

After inflating the worth, he may pledge these shares to brokers or financiers as collateral to borrow cash. Instance: Think about pledging shares value Rs. 100 (inflated value) to get a mortgage of Rs. 80.

Parekh would use the borrowed funds to purchase extra shares, repeat the manipulation, and lift much more cash earlier than the settlement cycle ended.

By the point the settlement day arrived (T+5 or T+2), the inventory value have been artificially pumped. Then he would promote and e-book income.

It left unsuspecting traders holding overpriced shares when the manipulation collapsed.

Instance in Motion: Let’s assume Parekh begins with Rs. 10 crore. He buys 1 lakh shares of Firm ABC at Rs. 50 every and inflates its value to Rs. 100 by way of round buying and selling. Subsequent, he pledges these shares value Rs. 1 crore (at inflated costs) to borrow Rs. 80 lakh. Utilizing the borrowed Rs. 80 lakh, he repeats the cycle with one other inventory, inflating its costs and elevating extra funds.

By the point the settlement cycle catches up, Parekh has raised important short-term funds.

The harmless traders who purchased the inventory at inflated costs lose cash as soon as the bubble bursts.

This technique allowed Parekh to generate massive sums of cash in a short while.

Affect on the Market

The essence of the inventory market is the pure value discovery of the shares. Market manipulation disrupts the pure means of value discovery.

For instance, suppose the worth of mangoes is determined not by the its demand available in the market however by a cartel secretly elevating costs. On this case the patrons would find yourself paying unfairly excessive costs.

Equally, manipulated inventory costs damage real traders who imagine within the equity of the market.

What’s The Lesson For Us:

1. Look Past the Hype: All the time confirm why a inventory value is rising. Is it backed by robust firm’s fundamentals or simply rumors?
2. Diversify Investments: Don’t put all of your cash into one inventory and even one asset class. Why? It’s crucial that some shares will carry out and a few will free. Spreading cash throughout a number of asset courses will increase the resilience and longitivtiy of our portfolio.
3. Belief the Information: We are able to rely solely on monetary reviews and audited statements to evaluate an organization’s worth. Do your individual evaluation or take recommendation of your trusted monetary advisor earlier than investing.

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Have a cheerful investing.