header image credits: DNA India
You may know the story of Harshad Mehta from the superhit web series 'Scam 1992'. Here's the story of his former employee and protégé Ketan Parekh, widely known as 'the Pentafour Bull'.
Prelude to the 2001 Scam
Ketan Parekh came from a family of stockbrokers and had a very early interest in the stock market. He became a Chartered Accountant and had started his career in the late 80s at NH Securities which was a reputed institutional brokerage firm. It was the early 90s when he came in contact with Harshad Mehta, the 'Big Bull', and subsequently joined Mehta's firm GrowMore investments, Harshad's firm. Despite working in the firm and being interrogated for his alleged involvement in the 1992 Harshad Mehta Scam he was not arrested. However, that same year he was arrested for a year while working for Canfina Mutual Fund.
As the years went on, Ketan gained a lot of experience in the field, having met influential brokers and bankers on his journey. From late 1998 onwards, he began his journey as a stock operator.
The 'K-10' stocks
After the 1992 Securities Scam, the Bombay Stock Exchange (BSE) started being on its toes and improved security and fraud detection, so Ketan chose the Calcutta Stock Exchange (CSE) as his stock exchange of choice.
Ketan would choose 10 stocks in particular that
- had a small market capitalization
- had a low trading volume
- was a future growth potential
- were in the information, communication, and entertainment (ICE) industries
Since this period coincided with the global dot com bubble, Ketan ensured that his ICE companies followed these characteristics. The K-10 stocks were
- Pritish Nandy Communications
- Pentagon Graphics
- Aftek Infosys
- Crest Communications
- Mukta Arts
- Aftek Infosys (note that this is not the same as NSE: INFY)
- Amitabh Bachchan Corp
Some of these stocks had given over 100-200% return during Ketan Parekh's tenure in the market, but it was not his own capital at all times. Like Harshad Mehta with his funds from the money market, Ketan Parekh too had multiple sources of funds.
Ketan Parekh's source of funding
It is understood that one cannot manage to keep pushing so many stocks to such high levels through one's own capital, and Ketan did use others' capital for his operations.
- Promoter's capital - it's likely for promoters of the companies themselves would have lent free unsecured loans for increasing their share price so that they can either sell their own stakes at a profit or increase their net worth.
- Institutional investors - these include mutual funds, hedge funds, endowment funds, insurance companies, P/E funds, etc. would lend money to a renowned bullish investor like Ketan who can guarantee massive returns for them with the massive funds they have.
- Banks - banks had a rule back in the days that stockbrokers could not lend more than 10-15 crores in loans but some banks made an exception for Ketan, sometimes even without collateral in a gross violation of regulations. Global Trust Bank and Madhavpura Mercantile Co-operative Bank would be the two banks helping Ketan in this regard.
Note that operating stock prices via promoter capital, insider trading, and illicit bank loans are all illegal practices but Ketan Parekh was able to find his way around all of this through his deep connections in the broking and banking industry.
Adding to this, most of the buying and selling activities would be done via circular trading where most of the buying and selling activities would be done by the same group for people, falsely showing retail and institutional investors high trading volume and liquidity. In fact, the K-10 stocks would frequently be in the top 10 highest volume list even on days without substantial news.
Beginning of the end
Ketan's strategy is a successful one as long as he can continue pushing the market up. However, the BSE crash succeeding the 2001 Union Budget in February proved to be the beginning of the end for the famed stockbroker. This crash prompted a reaction from the NDA government and around the same time, the Madhavpura Mercantile Bank scam broke on Dalal Street, leading to massive erosion in wealth and confidence, compounded by the crash of the dot com bubble.
It was found that Madhavpura Mercantile Bank and Global Trust Bank had 900 cr and 250 cr of non-performing assets (NPAs) respectively due to this scam. Even the loans that had stocks as collateral were worthless due to the crash.
The final nail in the coffin
The final nail in the coffin was the FIR filed by the Bank of India (BoI) on Ketan Parekh as he had issued a pay order to BoI issued on behalf of Madhavpura Mercantile Bank but the loan was dishonored. To avoid further investigation, Ketan sold off all his shares in a hurry overnight and this entire chaos led to not only the crashing of the Calcutta Stock Exchange but also the shutdown of the entire exchange. SEBI banned him from all forms of trading till 2017 and was convicted and jailed in 2008.