Bear-Hug And After

He was bigger than Harshad Mehta, they said. And the fact that—unlike Mehta, who got the entire Mumbai press to photograph him driving his Toyota Lexus—Parekh maintained a painfully media-shy life added to the mystique. You could get hold of his mobile number (he usually uses one number for incoming calls and another when he wants to call someone) but it is unlikely you would get to speak to him. KP seldom communicates with people he is not familiar with. Also, unlike Mehta, who was an upstart from humble origins, KP was born into a family of powerful brokers, with relatives firmly anchored in bourses around the country. He was the inheritor of the Great Easy Money Dream that every punter nurses in his heart, and he made a lot of people very rich.

And then reality threw a sucker punch, like Lex Luthor with a fistful of green Kryptonite. As the stockmarkets metamorphosed into a trapeze act gone dangerously awry, as panic snowballed, as heads rolled and fortunes evaporated, the myth of Ketan Parekh died.

The myth had been fuelled by one of the two primary emotions that rule the stockmarkets: greed. It’s today dying a messy death in the hands of the other primary emotion: fear. And Ketan Parekh’s fall will spread blight and decay in all possible directions.

When an Outlook correspondent called up Parekh’s mobile number on May 8, he got no reply. That was no surprise. But within 30 seconds, he also got a call from an enforcement agency officer, who asked who he was and why he had called this number.

Yashwant Sinha’s bold budget sent the markets zooming more than 300 points in two days, with the Sensex touching a high of 4386.98 on March 1. And then the rumours began. The index had slid to a low of 3947.71 on March 5 before recovering to close at 3998.12: a stomach-churning up-down of over 700 points or 17 per cent in just four trading sessions! Much of the carnage was concentrated in a few ice stocks that have been long considered Parekh’s favourites: "KP stocks". When the markets opened again on March 7, all hell broke loose. The Sensex rose 52 points, then dropped by 176 points, and then hurtled up 109 points. The regulators moved in with stringent trading restrictions. And by the end of the day, the roller-coaster had claimed its first victim, Anand Rathi, president of the Bombay Stock Exchange (bse), who resigned on insider-trading charges.

What happened? To put it simply, like many operators before him, Parekh took a liking to some stocks and pushed their prices up, by buying heavily and getting other people to do the same. When due to a number of factors he found it more and more difficult to push the prices up or even stop them from falling, he and his cronies started borrowing heavily, first from banks, against collateral (shares they already owned), and then from the unofficial badla markets which provide cash at usurious rates. The only way they could return the money was if they could haul the prices up again and sell. But as they got dragged deeper into debt, the prices kept falling. And then, at the right moment, the bears smelt blood and moved in, driving prices down steeply and effectively marooning Parekh and friends on a mountain of debt with no way to climb down. Though no clear figures are available, just in Kolkata, the capital of the unofficial badla financing (illegal loans for buying stocks), Parekh and his cronies’ outstanding position could be about Rs 1,000 crore. On March 8, settlement day on the Calcutta Stock Exchange (cse), Parekh’s brokers defaulted on Rs 96 crore worth of payments due. On March 16, the next settlement, the default could rise to Rs 600 crore, which would be a catastrophe for the cse.

Parekh got into the New Economy stocks early and was the prime mover behind the stratospheric rise in 1998-99 in share prices of any company that had the word "Technology" or "Software" in its name. Insiders say that major financial institutions (FIs) and a host of mutual funds played along happily, backing the shares KP was backing and cashing out at the right moments to leave the small investor to take the losses. But the Nasdaq—the world’s bellwether index for technology stocks—crashed in April 2000, and the contagion spread to ice stocks across the world. The FIs and the more prudent mutual funds backed off but KP, by that time, had begun to believe that he could do no wrong. He now focused on a smaller number of scrips—Zee Telefilms, Himachal Futuristic Communications Ltd (hfcl), Global Telesystems, Pentamedia Graphics and Silverline—and kept up his aggressive buying. Trouble was, times had changed. In spite of his best efforts, Zee fell from a high of above Rs 1,600 in February 2000 to Rs 124 on March 9, and hfcl from Rs 2,260 on March 9, 2000, to Rs 328 exactly a year later.

At some point, in a series of deals that should definitely be investigated by the authorities, Parekh bought huge chunks of Global Trust Bank (gtb) shares, jacking the price up in the process. He also borrowed money from gtb with hfcl shares as collateral. Now gtb is in the process of merging with uti Bank, and there are strong accusations that the gtb management colluded with Parekh to take a strong position in gtb shares which they could sell at a profit once the merger news became public and the prices went up. Nothing is purely black and white in the murky and incestuous world of the Indian stockmarkets. For instance, Parekh had close business dealings with gtb; the merchant banker for the gtb-uti merger was sbi Capital Markets, which is a consultant for the vsnl divestment along with Credit Suisse First Boston (csfb); and csfb is one of the foreign institutional investors (fii) being accused by the stockmarkets watchdog, the Securities and Exchange Board of India (sebi), of being in collusion with Parekh!

Stockmarket sources insist that though, officially, Parekh owns only 4 per cent of gtb, he may have actually accumulated more than 20 per cent. Parekh apparently started buying when the stock was hovering around Rs 50. In November 2000, unusually large numbers of gtb stocks were being traded. On November 7, a record 53 lakh shares were traded as against an average of around 20,000 to 30,000 shares daily. The gtb share price zoomed from Rs 59 on October 10 to Rs 113 on November 20. The merger was announced soon after.

The net has been closing in on Parekh for some time now. After all, if you are the most powerful man in the stockmarkets and seem to be able to drive up valuations at will, and you are making no bones about the fact that you are close to the promoters of several of the companies where you have huge positions, how long can it be before government sleuths decide to take a closer look? Outlook has definite information that the Department of Revenue Intelligence (dri) has been quietly investigating Parekh for more than six months now, especially whether he was a conduit for underworld funds into the markets. A senior official has told Outlook that the dri has tapes of conversations between Parekh and diamond merchant Bharat Shah, currently in judicial custody, where the two talked extensively about funding of films and stockmarket operations. The sleuths have also not missed the point that one of Parekh’s companies was the lead manager for the recent share issue of Tips Music, one of whose promoters, Ramesh Taurani, has been charged by the Mumbai Police for being an accessory in the murder of rival businessman Gulshan Kumar!

Besides Mumbai Police, the Maharashtra government, the finance ministry and the Prime Minister’s Office are fully aware of the findings," the official told Outlook. The dri has apparently also found that part of Parekh’s modus operandi was to manipulate the media. dri officials cite the case of a leading financial daily carrying a prominent story about hfcl being awarded a huge contract in Reliance Telecom’s broadband project. hfcl never had the contract. But the stock price rose on the basis of the report. And investigations are on to see if this had anything to do with the fact that hfcl was at that point negotiating with Australian tycoon Kerry Packer for a stake in the company. The Packers ended up paying Rs 1,100 a share of hfcl. As mentioned earlier, on March 9, the scrip was quoting at Rs 328, and is still falling fast. Authorities are also probing the price movements of Parekh’s favourite 10 shares, referred to in the markets as the K-10. "The entire matter has come down to Parekh’s modus operandi—whether he used underworld money and whether he exploited vast funds of both the Unit Trust of India and the State Bank of India for his operations," the official added.

Now comes the twist to the tale. Apparently, the finance ministry asked the dri to wait for the Union budget to be passed in Parliament before swooping on Parekh. But either the news leaked out (that the government was on Parekh’s case) or Parekh and cronies were already in far over their heads, with huge debt burdens while their favourite shares kept getting hammered down. The reality could have been a combination of both. In any case, by March 2, the faecal matter had hit the fan. And the worst fears of the government came true. The budget has not yet been passed.

As share after share hit the lower circuit filter (that is, the price fell so steeply that trading was stopped), even bse president Rathi apparently panicked, or so goes the allegation. He reportedly called up the bse’s surveillance department in his capacity as president to get the latest lowdown and then, along with two other bse directors—Dina Mehta and Himangshu Kazi—used that information, in the capacity of an investor, to get out of the risky stocks. If this is true, it is a clear conflict of interest and possibly insider trading and when the story spread, Rathi handed in his papers. Ironically, his partner in the alleged skullduggery, Mehta, took over from him as officiating president. However, the bse has steadfastly maintained that Rathi made no such call, and that he was resigning to "maintain the dignity of his office and highest standards of public morality". In fact, Rathi has urged sebi chairman D.R. Mehta to institute an inquiry into the matter and clear his name.

sebi has always resembled the police in Hindi films, landing up in full force as soon as the climactic fight is over. It’s the same this time around. While it was an open secret in the stockmarkets that Parekh had first recklessly pushed up prices of some shares and then, that he was overextended, sebi kept its hands off. Many brokers today allege that this is because top officials in sebi have close links with a powerful bear cartel referred to as the "Marwari" cartel in the bse, and they patiently watched as Parekh was dragged deeper into the mire and waited for the right moment to strike. By February, the bear cartel had begun short-selling K-10 shares aggressively, driving prices down. When the stockmarkets turned euphoric after the Union budget, they moved in with all their artillery, because they could not afford to let Parekh escape by piggybacking on a budget bull run.

Sebi’s knee-jerk reaction has been to ban naked short sales, that is, short-selling a share without having the share in possession. This, sebi hoped, would take keep bear speculators out and stop the Sensex from sliding. Maybe it succeeded in the first objective but definitely not in the second. On March 9, within an hour of trading starting, the Sensex had plummeted 150 points, with nearly all K-10 stocks on the lower circuit breaker, and sellers far outnumbering buyers. On March 7 and 8, the finance ministry actually mulled the possibility of asking the FIs and their mutual funds to step in and buy ice shares to halt the slide, but wiser counsel seems to have prevailed. If the FIs were forced to save the Sensex by buying dud shares in the face of tremendous selling pressure, it would have been a travesty of all the principles of a fair stockmarket. But Parekh has enough friends in high places (see box).

What happens now? One, the Indian stockmarkets will need time to recover both its valuation and its credibility. Two, this will affect myriad sections of the economy at the worst possible time.

On March 8, Parekh apparently paid up Rs 100 crore to the bse and cleared his dues. But will he be able to settle his account again on the coming Friday, March 16? And even if he manages to keep his head above water in Mumbai, his cronies have already defaulted in Kolkata and are likely to do the same on a far higher scale on March 16. This is how the weekly settlements work. On Friday No. 1, you are holding 100 shares of Company X which were priced at Rs 100. If on Friday No. 2, the share price has come down to Rs 90 and you are still holding the shares, you have to pay the stock exchange the difference, that is, Rs 10 multiplied by 100 shares, Rs 1,000. On Friday 3, the share is down to Rs 50, so you have to pay Rs 90 minus Rs 50 into 100, Rs 4,000. As K-10 share prices keep falling, Parekh’s cronies have to either sell the shares and incur a major loss, or pay up the difference to the stock exchange, for which they need to borrow in the unofficial market. And now even those markets are refusing to lend them any more cash.

At the very least, if Parekh does not succeed in pulling some powerful strings, we are looking at some very big bankruptcies. The nightmare scenario is that foreign institutional investors will see the mayhem as a thumbs-down on the safety and credibility of the Indian stockmarket system and stop bringing in new money, or even move their money to markets they are more comfortable with.

Now come the ripple effects. The confidence of the foreign portfolio investors is crucial to the Indian economy at this stage. The country’s foreign exchange reserves, currently at a record high of $41 billion, could take a hit. Other fallouts would involve the ability of Indian companies to raise money abroad at a good valuation, and also foreign direct investment. Back home, the Opposition is bereft of real issues to pursue and have been clutching at straws like the Balco disinvestment deal. The stockmarket massacre gives them a handle to condemn the government and the fact that politicians from all parties have huge illicit fortunes invested in ice shares, and at least some of that money possibly through KP, will play a part in this attack on the government. The international welcome that Yashwant Sinha’s bold budget had received is fast getting colder by the day as the Sensex keeps falling, diverting attention from all that is positive in the budget and necessary for the economy.

And since there will be many comparisons made between this scandal and the 1992 Stock Scam, it is necessary to make a clear distinction right now between the two. The ’92 Scam was a systemic collapse: the stockmarkets had highly inefficient trading systems and regulations that had more holes than a fishing net. Since then, the systems have become far better, the stockmarkets far more transparent, especially with the birth of the National Stock Exchange. Now, it is simply a matter of the administrators of the system being lax or corrupt. It is a matter of unholy alliances that are forged in public view with the watchdogs preferring to look the other way. It is a matter of strange price movements in shares of unknown companies which no one had a clue about—what they did, whether they did anything at all. It is about auditors turning a blind eye to rampant fudging of balance-sheets by companies so they could show unrealistic profits and hype the share price up. Almost everyone following the stockmarkets closely knew that KP and his friends were riding a tiger and that the good times could not last for ever. Everyone saw the ice stocks become weaker and for months, the question buzzing around the markets was whether KP had managed to get out in time.

It was finally about greed. But the stockmarkets move in cycles. When the screw turns, greed changes overnight into terror.

This too shall pass, but the Indian stockmarkets will always live under the fear of another collapse unless some steps are taken, swiftly and visibly. The Bombay Stock Exchange should be corporatised and transformed into a professional organisation from the old boys’ club it currently is of rich and often unscrupulous brokers. Ketan Parekh and his associates should not be bailed out: the logic of risk and return in the stockmarkets dictate that boundless greed should be allowed to reach its logical conclusion of ruin. And there are enough allegations that have been muttered in the last few years about the impartiality and competence of the Securities and Exchange Board of India. The government must get these allegations investigated ruthlessly and weed out the culprits, if any. Heads must roll. For, the option is a tedious and painful trudge back to economic growth.