SCAMS AND SCANDALS_Ketan Parekh

SCAMS AND SCANDALS

Mr. Ketan Parekh

Mr. .Ketan Parekh was a small time blunder. Rumors of an income tax raid on Ketan Parekh resulted in the stockmarket getting smashed on January 11, 2000. The Sensex fell 222 points. Eventually, it turned out to be an income tax survey that found Rs 92 crore (Rs 920 million) of undisclosed money. Parekh paid an advance tax of Rs 13 crore. It wasn’t the first time when the Sensex fell on "Parekh rumours" the rumours that have come and gone have included Parekh in a payment crises (this has happened several times). Columnist Sucheta Dalal was planning to expose a scam in the newspaper but the result is always the same: the market gets smashed, a panic follows, small operators and day traders are forced to exit from their positions (they normally exit from long positions at the slightest hint of a problem), some big operators (who know the truth) buy stocks at bargain prices and subsequently pull the market up rapidly and these are not all of the Parekh rumours. The market loves discussing him. Ketan Parekh came into prominence and has since built a solid reputation and substantial wealth. He makes day traders feel ecstasy and paranoia.

Ketan Parekh” buy a stock and his killings in Zee Telefilms, Pentafour Software and Ranbaxy are legendary.

What he can do to a stock is evident from three examples:-

He bought into a small software company Aftek Infosys at Rs 30, 40 levels about a year ago and there hasn't been any looking back for the stock since then. It now trades at Rs 2,400 levels. The company is expected to grow at a fantastic pace and the stock has entered many a mutual fund portfolio. But Parekh was there first.

Pentafour was another case. In June 1998, the stock was hammered to half the price in a few days on bad publicity. Parekh entered and pulled it up, also selling the idea to most fund managers. The company performed well thereafter.

Ranbaxy was different. KP's reputation was strengthened further with this stock. It was a unique case as the participation of smaller traders/investors was high. The company was changing and was on the last leg of developing a new drug delivery system in mid-1999. The stock had risen from Rs 500 to Rs 750 and declined back to Rs 550 from April to June 1999. This was one story where every BSE liftman and panwallah around Dalal Street made money as the stock scaled a high of Rs 1,264.

After the Ranbaxy killing, the bull trained his guns on Global Tele-Systems and Himachal Futuristic. Both stocks are up five times since their August 1999 levels. By now, Parekh had leader status and the crowd bought shares in which he was interested.

His market style and personality are often compared to Big Bull Harshad Mehta. But there are some stark differences.

First, Mehta was a poor man's son. Ketan isn't. His family has been into stockbroking for some time, and he is related to many big brokers.

Second, Harshad operated in a closed-but-liberalising market and with other people's money (as it transpired later) as the last recourse. Parekh works in a more mature market with electronic trading, higher volumes and a stronger institutional environment.

What WERE HIS FAVOrite stocks?

He picks out-of- favorite stocks that are expected to grow rapidly. These are also companies that investors think lowly of or have doubts about the business, accounting standards and management. He was the first to see the software boom spreading over to second-rung software companies in 1998. His first killing came in Pentafour which had been consciously avoided by most institutional investors. Parekh came and sold them a solid growth story and the rest is history.

Ranbaxy had moved in a narrow trading range for five years. There were pending warrant conversions and institutional investors feared that the management came and sold at higher levels. Parekh spotted the change in management and the company's new drug discovery system becoming successful. He sold this story again and reaped a rich harvest.

Global, Himachal and DSQ Software will not fit in the universe of an institutional investor, but for Parekh's presence. The country's largest mutual fund, UTI's Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and Global Tele-Systems (1.05 per cent) on September 30, 1999.

Parekh is also one of the few brokers who understands the power of online trading.

As every big broker has enough enemies. These are the people he has crossed or the people who crossed him on his way to the top. Alleges one of his adversaries, "Most of these rumours are spread by the KP gang so that they get to smash prices, enter at lower levels and then pull the market up."

Does he always succeed? There are two ways of judging this. One is the level that a stock reaches and then declines. BPL is a good example. The stock went to Rs 600 levels; it is currently at Rs 270 levels. That has happened in many companies. The other is of a stock just not moving up after he buys it -- that happened in MTNL some time ago when it would find some new seller to stanch the stock's rise. This is an aberration when you compare stocks like Aftek, Himachal, Global, Zee and Pentafour which are on a continuous upswing and an investor getting in at any point will be in the money.nline trading.

Later the Custodian has moved the Bombay High Court to figure out the source of Ketan Parekh’s self-admitted Rs 72.2 crore repayment to Madhavpura Mercantile Cooperative Bank (MMCB) between 2002 and 2005. The Custodian’s move probably explains several recent actions of Parekh — the only scam-accused to figure in two major financial scams investigated by a Joint Parliamentary Committee (JPC). After Scam 2000, the JPC declared him the central figure of the large-scale stock market manipulation that ended with a major crash.

In 2000 Ketan Parekh’s lawyer told to the supreme court of India that he would no longer be able to repay MMCB. At the same time, he and eight associate entities have sought the Court’s permission to be allowed to re-enter the capital market. This move may have resulted from the Custodian’s application to probe his income.

Parekh had been granted bail on the condition that he would repay the money siphoned out of MCCB, leading to its collapse and causing losses to lakhs of depositors. In the next few years, as Parekh began to repay crores of rupees, even the Income Tax authorities did not bother to question his source of income, although he has been barred from the capital market for 14 years.

Meanwhile, on April 27, 2007, the minister for company affairs told the Lok Sabha that the Serious Frauds Investigation Office (SFIO) had investigated 16 companies belonging to the Ketan Parekh Group and had received sanction for prosecution under the Indian Penal Code and the Companies Act. It has also forwarded its investigation report to all government investigation agencies, RBI, and finance ministry for action under their respective statutes.

Interestingly, the same 16 entities already figure in the Custodian’s application to the Special Court. The application says that since Parekh was notified in 2001 under the Special Courts Act of 1992, he ought to have taken the Court’s permission to make repayments to MMCB or any other entity over the past few years. It wants the court to direct Ketan Parekh and 23 entities/persons associated with him to make a full disclosure of their assets and income.

The application (No. 21 of 2007) names Ketan Parekh as the first respondent, while other entities named are — Navinchandra N Parekh, Panther Financial Capital, Luminant Investment Services, NH Parekh Financial Consultants, KNP. Securities, Triumph Securities, Oxford International, the partnership firms M/s Narbheram Harakchand, M/s KN Parekh, VN Parekh Securities, Saimangal Investrade, NH Securities, Nakshatra Software, Goldfish Computers, Chitrakut Computers, Manmandir Estate Developer, Panther Industrial Products, Triumph International, Panther Investrade, Classic Credit, Classic Shares & Stockbroking Services, Kirtikumar N Parekh and Kartik K Parekh. Many of these are also listed as having been investigated by the Serious Frauds Office, but the Custodian makes no reference to that investigation.

Instead, the Custodian says that in 2003 and again in 2006, Ketan Parekh was asked to file affidavits making a disclosure of his assets. In 2003 he disclosed negligible property and shares worth Rs 1.55 crore, yet in a submission to the Gujarat High Court, he admits to making payments of Rs 4.8 crore between June-December 2003.

Then, in October 2005, the Debt Recovery Tribunal in Mumbai had prevented Ketan Parekh and his company, Panther Fincap from creating any third party rights in respect of several properties. This was in a case filed by Bank of India, which did its own independent investigation to trace assets belonging to Ketan Parekh and his associate entities. The list includes multiple properties each at Lavelle Road, Bangalore (2350 sq ft), Junagad, New Bombay, and five large properties in upmarket locations of Mumbai including Nariman Point, Colaba, Marine Drive and Fort.

The Custodian too has alleged that all the properties listed above, in particular those held by Classic Credit, Classic Shares & Stockbroking Services have been purchased out of Ketan Parekh’s money and are hence his ‘benami properties’ and need to be investigated. It has sought the direction of the court to get to the bottom of Parekh’s repayment of Rs 72.2 crore to MMCB and to acquire all the immovable properties listed in the application. It has requested the Court to direct Ketan Parekh, the two Classic companies and the two Panther companies to submit their audited accounts from 2001-02 along with Income Tax returns to the Custodian for investigation.

Interestingly, while media reports from Gujarat have mentioned that Ketan Parekh has repaid over Rs 223 crore in connection with MCCB, it is not clear why the Custodian mentions a mere Rs 72.2 crore that he admits to repaying between 2002 to 2005. His own statement attached to the Custodian’s application says he has “endeavoured to repay outstanding amounts” to companies he was associated with or for which he stood guarantor. It is not clear if this actually led to any payments.

Interestingly, when this powerful bull market began in 2004, Ketan approached MCCB with the offer of a one time settlement, which the bank discussed and then rejected in 2004. It then filed for an application for cancelling his bail for his failure to pay Rs 380 crore within a three year period. This is less than half the money (Rs 880 crore) that was allegedly scammed out of MCCB by Parekh alone and mentioned in the JPC reports.

Neither the Custodian nor the Serious Frauds Office has sought a consolidated picture of Ketan’s activities, even though he has moved the Supreme Court to seek a re-entry into the capital market.