Sucheta Dalal :The usual suspects of all scams Brokers banks corporates inactionR30; and cover-ups?
Sucheta Dalal

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The usual suspects of all scams Brokers, banks, corporates, inaction… and cover-ups?  

Apr 16, 2001

The usual suspects of all scams Brokers, banks, corporates, inaction… and cover-ups? (16 April, 2001)


In 1992 the Joint Parliamentary Committee (JPC) investigating the securities scam said in its report that it had come across “various instances of close nexus between prominent industrial houses, banks and brokers”. It specifically named Reliance Industries, Apollo Tyres and United Breweries and asked for a detailed investigation which never happened.


It was the same in 1998. BPL, Videocon and Sterlite Industries were found to have colluded with scamster Harshad Mehta in ramping up their share prices. Although the investigation was completed over a year ago, the Securities and Exchange Board of India (SEBI) has still to punish these corporate manipulators.


Once SEBI’s reluctance to proceed against powerful industry houses became apparent, Ketan Parekh embarked on the most brazen saga of price rigging in collusion with industrialists and banks. The various dimensions of this nexus are still in the process of being unearthed.


At a basic level, Ketan’s deal with industrialists involved their parting with a substantial chunk of shares at a huge discount to market. KP then puts these shares into play and pushed up their prices. Once a deal was struck every significant announcement by the company--its large contracts/assignments, acquisitions exports turnover and profits were carefully planned and announced in collusion with the broker to ensure maximum price benefit.


The controversial Himachal Futuristic Communications (HFCL) utterly discredited after the Sukhram controversy and its share languishing at Rs 50 is a good example of how this worked. Ketan not only ramped up the share to Rs 2400 plus in less than a year but also roped in the Australian magnate Kerry Packer to acquire a 10 per cent stake and enhance its credibility. Zee Telefilms was another scrip that KP had allegedly planned to ramp up to an astonishing Rs. 10,000. Friendly mutual funds and Foreign Institutional Investors (FIIs) came in at various times to mop up stock or book profits in order to fine-tune the operation.


Thus far, Ketan Parekh’s strategy mirrored that of Harshad Mehta. Instead of Harshad’s replacement cost theory as a justification for incredible prices, KP focussed on Information Technology, entertainment and communication companies and a regular release of feel-good announcements.


As in 1992, mutual funds played a key role and those whose portfolios mirrored the K-10 index bear further scrutiny. Another common factor is Unit Trust of India (UTI), which is again in the eye of the storm. In 1992 three JPC members – George Fernandes, Rabi Ray and S. Jaipal Reddy had written about how UTI was “used by the unscrupulous among industrial houses for their manipulative games and for many other illegitimate deals” and had called for a full investigation. Nine years later, its flagship scheme Unit 64 remains outside the supervisory purview of SEBI – so much for the JPC and its recommendations.


Where KP differed from Harshad was in his ability to cast his net far and wide. He was probably bleeding the same companies whose shares he ramped up, in order to fund his acquisitions. Recent investigations show that Zee and HFCL have both been willing to borrow heavily from banks and institutions and divert funds to bail Ketan out of the downward price spiral. Unfortunately for them, the problem was far too big. Only a detailed investigation going back over two years would show whether diversion of short term borrowing for price rigging was routine and whether there is any merit to Zee’s strenuous denials.


In the meanwhile, DSQ software and its notorious promoter Dinesh Dalmia may provide some clues through his operations. DSQ used to be part of the K-10 portfolio, but Dalmia’s penchant for large-scale speculation obviously outran Ketan’s appetite for manipulation and the two parted ways. Did Dalmia learn to divert corporate funds to the market from Ketan? He recently sought post facto permission for lending over Rs 220 crores to three broking firms. Though he claimed that the money had been returned, the number of creditors chasing him for payment suggests otherwise.


Global Trust Bank (GTB) seems central to all of Ketan’s operations. He ramped up its price, made Ramesh Gelli his friend and used it for his operations. At least 10 KP companies/associates figure among the top 100 borrowers of GTB; apart from these, almost all his shell companies (Nakshatra, Goldfish, etc.) have accounts with GTB. Further, all the K-10 companies and their many shell/investment companies also had accounts with the bank. Most of these entities are also understood to have depository accounts with GTB too.


Sources say that the advantage of concentrating his activities in one friendly bank branch and Depository Participant (DP) ensured that only a small trusted group knew about the flow of shares or money from one entity to another. It also allowed money to move very swiftly from KP’s front companies, into shell companies and then into the market. Companies such as Nirma, Ranbaxy, Kopran and possibly the diamond firm B.Arunkumar & Co. provide an interesting new dimension to KP’s operations. These companies (some of these have denied being used as conduits for KPs dealings) seem to have lent their investment companies to Ketan Parekh to park his holdings of GTB and HFCL and others. By distributing the holding and keeping it below five per cent, Ketan avoided suspicion and disclosure under the takeover code. Indian industrialist routinely play the stock market, but this is the first time they have been caught lending their books for price manipulation and parking of shares. The investigations have yet to reveal what was the quid pro quo for providing this service. Did they benefit from inside information or was there more? Investigators suspect a direct nexus between various diamond traders, KP and GTB, but their investigations have not been made public so far.


Ironically, the much-touted Corporate Governance code has become applicable on April 1 – bang in the middle of the investigation into the broker-corporate nexus. This suggests that even as the corporate sector was piously discussing best corporate practices some of its top companies were doing murky deals with brokers. Confession time will come in a few weeks when Annual Reports will begin to be published. Will independent audit committees make frank revelations about the diversion of funds? Or, will the corporate governance code kick off its first year by providing ingenious ways of obfuscating the truth? It will certainly be interesting to watch what these companies will have to say. 


-- Sucheta Dalal