Pied Piper Parekh meets dusty death

Ketan Parekh lands in jail for spreading himself too thin—and on borrowed money

by Veeshal Bakshi

LIFE is a grindstone; whether it grinds you down or polishes you up depends on what you are made of.’ This maxim from Jacob M Braude fits perfectly on the once idolised and now disgraced stock market operator Ketan Parekh.

The pied piper of stock markets, who lured investors, foreign institutional investors (FIIs) and mutual funds into investing thousands of crores of rupees into technology stocks met, was first polished up, only to be ground into the dust in an year’s time.

When Mr Parekh emerged on the stock market scene sometime in the middle of 1999 and took it by storm just in a few months time, he made a perfect fairy tale story which most believed would not only make him a multi-billionaire but also turn average investors into millionaires.

Everyone believed that he was a genius who had spotted early the boom in information technology industry. That he was backed by solid money. That he had friends in places where it mattered, be it large financial institutions and mutual funds, whom he carried along while investing heavily in technology stocks. That he knew bureaucrats and politicians whose blessings are always required in this country if one wants to make it big.

Comparisons with the original Big Bull Harshad Mehta were scoffed at. After all, who would commit the same mistakes which landed Mr Mehta in jail and into history books. Unfortunately, he did.

He stretched himself too thin and that too on borrowed money. When bear operators, who had received a thrashing at the hands of the bull brigade which Mr Parekh headed during the late-1999 and early 2000-period, sensed that Mr Parekh was in financial trouble, they moved in for the kill. Mr Parekh’s woes were doubled by continuing depression in technology share prices on Nasdaq stock exchange in the US. As bear operators took the market in their deadly hug, everyone turned a seller, including those very mutual funds which barely a few months ago had ploughed in thousands of crores into tech stocks.

This sealed Mr Parekh’s fate, as he got entangled in a messy debt trap. On one hand, he was incurring heavy losses in the market due to falling prices of technology shares. On the other hand, he could no longer raise money from banks since he had no collaterals to offer. Instead, the banks from whom he had raised money were asking him to either submit more shares since the value of the collaterals had fallen or return the money to that extent.

The entire Madhavpura Cooperative Bank and Bank of India transaction, where he got the former to issue him a pay-order which he encashed by availing of discounting facility from the latter despite the fact that he had no balance in his account with Madhavpura, reflects the sheer desperation of a man who would resort to any means to keep himself afloat.

For a man who purchased and sold shares worth hundreds of crores of rupees in a single day and is believed to have made pay-outs of over Rs 2,000 crore over six weekly settlements in the stock exchanges between February and March, it was his inability to repay a mere Rs 137 crore to Bank of India which has landed him in jail.

The Central Bureau of Investigation (CBI) has already discovered quite a few skeletons in Mr Parekh’s cupboards which, its officials say, seem to be full of suspicious and dubious financial deals which were struck to funnel huge amounts of money into the stock market to rig share prices of a few handpicked technology stocks. CBI officials say they are not even a quarter of the way through with their combing operation of his cupboards, implying that many more skeletons could still be buried there.

There are enough reasons to believe CBI officials. Mr Parekh’s friends say he is an introvert and a man of few words but these characteristics did not come in his way when it came to forging friendships with influential people in mutual funds who were too willing to oblige him by purchasing same shares which he was buying, banks which doled out money to him against collaterals of shares whose prices have today been wiped out by anywhere between 80 to 95 per cent in just over 45 days, and corporate houses who readily lend him hundreds of crores of rupees. Today, most of those whose names are even remotely linked to him are spending sleepless nights for they never know when CBI sleuths will come knocking on their doors.
While only time will tell if the rich and mighty friends of Mr Parekh will be brought to justice or not, the biggest sufferers are small investors who have been let down badly even by the mutual funds. The Securities & Exchange Board of India (Sebi) is under fire for not detecting the rot in the market early. Its critics say if it had done so, the market would not have been in the mess which it finds itself in today. But the fact is that it is not merely Sebi which should be singled out. What was the Reserve Bank of India (RBI) doing when banks were doling out hundreds of crores of rupees to Mr Parekh against collaterals of shares which had been rigged in the most unusual manner in a short span of time. Accepting such shares as collaterals is the most high risk option.

At the same time, the mutual funds’ role too is not above board. They have a lot of explanation to give to their investors on how their and Mr Parekh’s share portfolio had so many common shares. Was it that all great men think alike or is there something more to it.

Investors will find it extremely difficult to forget the last six weeks. But they can still learn a lesson from what Bernard M Baruch once said, “Don’t try to buy at the bottom and sell at the top. This can’t be done except by liars.”