The Ketan Parekh Scam

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Case Details:

Case Code : FINC006
Case Length : 9 Pages
Period : -
Pub. Date : 2002
Teaching Note : Available
Organization : SEBI
Industry : Finance
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"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-point¹ Sensex² 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. Meanwhile, the Reserve Bank of India (RBI) ordered some banks to furnish data related to their capital market exposure.

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

This was after media reports appeared regarding a private sector bank³ 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. 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 banks⁴...

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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.