Sucheta Dalal :SEBI Discovers Ketan Parekh
Sucheta Dalal

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SEBI Discovers Ketan Parekh  

June 18, 2009



On 5th June, the Securities and Exchange Board of India (SEBI) banned 26 entities ‘connected’ with Ketan Parekh who had traded in five scrips (Cals Refineries, Confidence Petroleum India, Bang Overseas, Shree Precoated Steels and Temptation Foods). In doing so, the regulator officially declared what was well known to the market – that Ketan Parekh has been active in the market and in manipulating the prices of small and medium scrips, despite the 14-year ban imposed on him and his associates in 2003. In fact, he was rumoured to be active even in 2003 when SEBI first barred him from the market following the Joint Parliamentary Committee (JPC) report that named him as the central figure in the scam of 2000.
Evidence of Ketan Parekh’s massive market activities was his ability to pay back well over Rs325 crore to the Gujarat-based Madhavpura Mercantile Cooperative Bank (MCCB) which had collapsed and caused thousands of depositors to lose money when he siphoned off Rs880 crore to fund his market shenanigans in 1999-2000. Ketan Parekh negotiated bail terms where he was set free on the condition that he would repay his dues to the bank in instalments. Ever since, revenue agencies and SEBI have studiously looked the other way and allowed him to earn and pay by manipulating the market for over six years.
Naturally, all those who aided Ketan Parekh (SEBI has now discovered that Shirish Maniar, his cohort in the MCCB scam continues to operate for Parekh through his sons) have been led to believe that he has bargained for immunity from regulatory action and investigation.
On 19 November 2006, I mentioned in an Indian Express column how a senior income tax (IT) official had told me that “the money was paid through a maze of entities with a cash deposit in a bank account as the end point.” I also said that the serious frauds investigation office operating under the ministry of corporate affairs claimed to have “investigated 16 corporate entities associated with Parekh,” but no action was taken. In May 2007, I again wrote that the Custodian (appointed after the 1992 scam) moved the Bombay High Court for the first time to ask for the source of Ketan Parekh’s self-admitted Rs72.2 crore repayment to MCCB between 2002 and 2005. Even that drew a blank. Finally, in June 2009, we have a SEBI report that acknowledges what was common knowledge in the market, namely:
• That a set of brokers colluded to build up massive fictitious volumes aimed at creating layers of transactions and obfuscating trails. In fact, Moneylife has repeatedly observed that a big jump in volumes (not necessarily accompanied by an immediate price rise) is the first signal that a particular stock will be ramped up and manipulated. The irony is that some scamsters have got away by arguing (supported by academics) that such large volumes cannot be fictitiously generated and that market manipulation is impossible when there are huge trading volumes. Hopefully, SEBI’s findings will silence such motivated academics who have had a huge influence on framing market regulation.
• That synchronised trades are part of the pump, dump and obfuscation game played by speculators and used to route money into the market, from ‘related entities’ and possibly for money laundering.
• That off-market transactions need to be monitored, since they are part of the slew of tricks used to obfuscate the trail from persons and entities barred by the regulator or market manipulators. Only the regulator has a market-wide snapshot of operations across bourses, including off-market transactions and synchronised trades through the integrated market surveillance system (IMSS).
How has SEBI come to the conclusion that Ketan Parekh “conveniently used connected clients at will as his front entities for executing trades desired by him in the securities market?” According to SEBI, the starting point was ‘routine market surveillance’ (which was apparently not happening for the past eight years!) that revealed synchronised trades in five scrips. It also had information from the IT department on Ketan Parekh’s source of funds which trailed back to certain entities.
SEBI’s investigation showed that these entities built up large volumes in the five scrips chosen for investigation; strangely enough, they often made losses on their transactions, but continued to trade. SEBI has surmised that these deliberately incurred losses have an ulterior motive that needs to be separately investigated by the appropriate agency. It seems to have referred concerns relating to money laundering to the enforcement and IT sleuths.
SEBI also found that the ‘connected entities’ or fronts used by Ketan Parekh for his transactions (many of them linked to the sons of Shirish Maniar) often sold shares without having them in their possession. They subsequently obtained the shares in time for delivery through off-market transactions through other ‘connected entities’ within the circle of operators. 
Clearly, the modus operandi of Ketan Parekh and his cohorts is not unique. It is used by manipulators of various hues as is evident from the large number of synchronised trades and off-market transactions that take place with regularity. In fact, the market grapevine says that some operators have developed an automated system to keep track of the hundreds of entities and bank accounts that are created to generate millions of transactions to obfuscate price manipulation. The system, they say, draws up a matrix for the movement of funds and shares into bank and demat accounts spread across the country in order to avoid detection of ultimate beneficiaries or masterminds. If true, the manipulators are several jumps ahead of the regulator by figuring out how to beat ‘market intelligence’, ‘surveillance alerts’ and ‘know your customer’ norms and the alleged transparency of a fully automated trading system, to manipulate prices at will and enjoy the profits without detection.
SEBI’s team led by S Raman (chief general manager) must be congratulated for breaking this seemingly impenetrable system; but let us recognise that this is only the tip of the market manipulation iceberg. Ketan Parekh is not the only manipulator to use this modus operandi, there are plenty of others doing it too. Also, the number of scrips in which Ketan has traded is substantially higher than the five that were investigated by SEBI. The regulator needs to cast its net considerably wider, if it wants the Ketan Parekh, Pyramid Saimira and Passport Capital investigations to have a serious deterrent impact. 

-Sucheta Dalal

-- Sucheta Dalal