The Ketan Parekh Scam

<< Previous

The System that Bred these Factors Contd...

A market watcher said,16 "When prices moved up, SEBI watched these as 'normal' market movements. It ignored the large positions built up by some operators. Worse, it asked no questions at all. It had to investigate these things, not as a regulatory body, but as deep-probing agency that could coordinate with other agencies. Who will bear the loss its inefficiency has caused?" An equally crucial question was raised by media regarding SEBI's ignorance of the existence of an unofficial market at the CSE. Interestingly enough, there were reports that the arrest was motivated by the government's efforts to diffuse the Tehelka controversy.17 Many exchanges were not happy with the decision of banning the badla system as they felt it would rig the liquidity in the market. Analysts who opposed the ban argued that the ban on badla without a suitable alternative for all the scrips, which were being moved to rolling settlement, would rig the volatility in the markets. They argued that the lack of finances for all players in the market would enable the few persons who were able to get funds from the banking system - including co-operative banks or promoters - to have an undue influence on the markets.

The People that the System Duped

KP was released on bail in May 2001. The duped investors could do nothing knowing that the legal proceedings would drag on, perhaps for years. Observers opined that in spite of the corrective measures that were implemented, the KP scam had set back the Indian economy by at least a year. Reacting to the scam, all KP had to say was, "I made mistakes." It was widely believed that more than a fraud, KP was an example of the rot that was within the Indian financial and regulatory systems. Analysts commented that if the regulatory authorities had been alert, the huge erosion in values could have been avoided or at least controlled.

After all, Rs 2000 billion is definitely not a small amount – even for a whole nation.

Questions for Discussion

1. Study the developments that led to the Ketan Parekh scam and comment on SEBI's actions after the scam was unearthed.
2. Comment on SEBI's decision to ban badla. What effect would this move have on the stock markets?
3. The Ketan Parekh scam was an example of the inherently weak financial and regulatory set up in India. Discuss the above statement, giving reasons to justify your stand.

Exhibits

Exhibit I: Mumbai Stock Market Index Movements
Exhibit II: Changes in Market Capitalization of K-10 Stocks
Exhibit III: A Note on Badla

---

16] Business India, April 16-29, 2001.
17] In March 2001, a website, Tehelka.com exposed an alleged corruption racket in defense deals. Many leading politicians, bureaucrats and army personnel were caught on camera indulging in unethical practices. It led to a huge uproar in the media and public, eventually threatening the government's stability. It was alleged that KP's arrest was a ploy by vested interests to divert the nation's attention off the Tehelka controversy.