And another big bull fell to bears

MUMBAI : The modus operandi of operators involved in most stock market scams is very simple: pick up a stock whose price is sufficiently low and keep buying to drive up the stock price, and dump the stock once the price has gone up to a good level to book profits.

Ketan Vinod Parekh’s modus operandi was no different. As Debashis Basu and Sucheta Dalal write in their book, The Scam - Who won, who lost, who got away, “Scam 2001 was fairly simple. Money picked up from half-a-dozen companies, a couple of banks and money procured from private sources (mainly NRIs) and put into a few select, bubble stocks that lost 95% of their value forcing a chain of huge defaults.”

Ketan Parekh, like Harshad Mehta before him, took the market by storm for the short period of time that he became famous. It is said that he learned the tricks of the trade from the big bull himself and was one of the accused even in the 1992 scam. Having said that, Parekh seemed to have learnt from the mistakes Mehta made. He was a low profile market participant, at least initially and did not show a fascination for cars. As the authors write, “It was as though Ketan, who was the youngest of Harshad’s associates in 1992, had learnt a lot from Harshad’s meteoric rise and fall. After all, one of his closest advisors was Ashwin Mehta, Harshad’s low profile brother.”

Parekh also learnt from the mistakes other stock market operators had made. “The first step was the same basic trick in any stock operator’s handbook: picking up substantial stakes from promoters at a large discount to the market price and putting the stock in ‘play’. The rest of Ketan’s steps, however, were different.

All operators have to necessarily think of an exit. To protect themselves from being saddled with dud stocks if something goes wrong, they usually have an understanding with promoters to sell the stock back to them. Having seen this technique from close quarters, Ketan knew that this was the Waterloo for many operators.

Most Indian promoters refuse to honour their commitment if things go wrong,” write the authors

So, Ketan had to figure out where to dump his shares after ramping them to a high price. The answer was institutional investors. “So, he would identify stocks, take them up to appoint and dump them on to fund managers’ laps. He had to anticipate beforehand whether he would create enough appetite in a particular stock for fund managers. Blend these three - choice of promoter, need for an exit (promoter buyback being a no-no) and focus on fund managers and you have Ketan’s game plan.”

Gradually, Ketan started making deals with entrepreneurs and building a stake in 10 stocks which were labelled as the K-10.

“It started with a dud stock like Pentafour, a ‘profit making’ software company quoted at a P/E of about 2. Ketan picked up the stock, generated massive liquidity and exited when the government-controlled mutual funds and retail investors got in. Following this, Ketan struck a deal with the late Parvinder Singh of Ranbaxy. To the amazement of fund managers and pharma analysts tracking it, Ranbaxy went up steadily on whispers of research breakthrough that nobody but Ketan seemed to know about. It could have attracted charges of insider trading but nobody probed.”

But, as it often happens, success sucks people in. Ketan Parekh announced his arrival on the big league by hosting a huge millennium party on the new year’s eve of 2000. As Sucheta Dalal wrote in one of her columns, “Top fund managers, financial institutions, bankers, CEOs (particularly the emerging software company brigade) and those who were part of the charmed circle around the big time stockbroker were the invitees. They were linked by a common factor — all of them counted their profits through market operations only in crores of rupees, the numbers varied from tens of crores to hundreds.

The guests assembled for a champagne reception at the Sea Lounge and were then ferried in high security catamarans across the sea to the picturesque resort town of Mandwa where the stockbroker owned sprawling property. The difference between this broker and Harshad Mehta was his low profile, which bordered on the reclusive. He rarely gave interviews even though the press as well as industrialists and fund managers made a beeline to his door. The Mandwa bash, a sort of coming out party for the broker, was a departure from his usual low profile”

As the market moved up, so did Parekh’s wealth. But, at a certain level, he became disconnected from the realities of the market. “Ketan, coming from a traditional broking firm and Jain family, would spend far too much time partying and making merry with film industry bigwigs, stars and starlets. It was this, say his industrialist friends, which finally did him in.

“He would be out partying until 3.30 pm; he simply lost grip and was unaware of the market forces shaping up to destroy him,” says a friend whose shares he helped ramp up to dizzy heights,” write the authors. And this is when the bears struck. “The bear cartel included a couple of the savviest old Dalal Street players, like Radhakishan Damani. Soft spoken and extremely sharp, Damani has made more smart bets than anybody has for years. Adept at both sentiment-driven trading and research-driven investment, he is easily the wealthiest investor in India, with large stakes in multinationals. He had been out of the market for over a year during the maniacal bull-run….bears like Damani have been biding their time to make money short selling. They started building a short position since early 2001.”

Parekh till then had ended up with huge positions in his favourite stocks. He could not easily exit them as there were not enough buyers to sustain the price levels.

Further, the bears had been observing that world over, technology, media and telecom (TMT) stocks were not doing well. And most of the K-10 stocks fell in the TMT category. The straw that broke the camel’s back came in the form of the budget on February 28, 2001, presented by the then finance minister, Yashwant Sinha. The market was at best unimpressed and the panic selling that followed let to the K-10 stocks going on a freefall.

At this point, Ketan made the cardinal mistake of trying to fight the market. This he did through money coming out of two banks - the Global Trust Bank and the Madhavpura Mercantile Cooperative Bank. As the authors write, “By March ‘01, when he was neck-deep in losses, he had access to a phenomenal Rs 2,000 crore from these two banks and his favourite promoters.” Through this money, he hoped to buy the stocks which were falling and prevent a fall in price. But, things did not work out the way he wanted to.

But things did not work out the way he wanted to. On March 12, 2001, the MMCB defaulted on a pay order of Rs 137 crore. The bank, as per the prevailing law, could have given Parekh a loan of Rs 15 crore, but ended up giving Rs 800 crore.

Then, in order to save itself, the bank had to dump the shares it had held with it as collateral. This led to the value of the K-10 stocks going down even further. The Government of India stepped in by launching a CBI enquiry and Ketan Parekh was  arrested on March 30, 2001.