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 s
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