The Ketan Parekh Scam

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The Factors that Helped the Man Contd...

By mid-March, the value of stocks held by CSE brokers went down further to around Rs 2.5-3 billion. The CSE brokers started pressurizing KP for payments. KP again turned to MMCB to get loans. The outflow of funds from MMCB had increased considerably form January 2001. Also, while the earlier loans to KP were against proper collateral and with adequate documentation, it was alleged that this time KP was allowed to borrow without any security. By now, SEBI was implementing several measures to control the damage. An additional 10% deposit margin was imposed on outstanding net sales in the stock markets. Also, the limit for application of the additional volatility margins was lowered from 80% to 60%. To revive the markets, SEBI imposed restriction on short sales14 and ordered that the sale of shares had to be followed by deliveries. 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. A historical decision to ban the badla system in the country was taken, effective from July 2001, and a rolling settlement system for 200 Group A shares15 was introduced on the BSE.

The System that Bred these Factors

The small investors who lost their life's savings felt that all parties in the functioning of the market were responsible for the scams. They opined that the broker-banker-promoter nexus, which was deemed to have the acceptance of the SEBI itself, was the main reason for the scams in the Indian stock markets. 

SEBI's measures were widely criticized as being reactive rather than proactive. The market regulator was blamed for being lax in handling the issue of unusual price movement and tremendous volatility in certain shares over an 18-month period prior to February 2001. Analysts also opined that SEBI's market intelligence was very poor. Media reports commented that KP's arrest was also not due to the SEBI's timely action but the result of complaints by BoI.

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14] Selling of shares without physically possessing them. Usually the speculator promises to deliver the shares in future anticipating a fall in prices. If the price falls, he buys the shares at the lower rate, and makes a profit on the difference. If prices rise, he buys the shares at the higher price, and sustains a loss.
15] Group A shares are otherwise known as specified shares. These companies have the best fundamentals and growth prospects. The trading interest in these shares is high and certain exchanges also offer the carry-forward facility, which enables speculative trading of these shares. Because of the high trading volumes, the spreads are low and it is possible to easily enter and exit from these shares.