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How the KP drama unfolded

NetScribes/Pallavi Rao

Kill and get killed. That seems to be the maxim that the Indian capital market seems to be facing. From the defaulting brokers at the Calcutta Stock Exchange (CSE) to the arrest of big bull Ketan Parekh, the market has been on tenterhooks. The fear now is that with the arrest of KP, more skeletons are expected out of the closet, which will further dampen the sentiment.

By the end of the week, with foreign institutional investors and mutual funds preferring to stay away, the market is poised for a further slide of nearly 200 points during the early part of next week. However, select buying in most sectors is expected during mid-week, market pundits say, as valuations become very attractive.

Early last week, the markets were recovering from the news of the Income Tax raids on BSE brokers who were involved in the bear hammering.

March 26 saw the government contemplating stronger guidelines for the regulators, which include the quality of employees at the regulators, the appointment procedures and the surveillance systems.

The Sensex opened at 3640.47 points, but remained largely range-bound during intra-day trading, touching the high of 3654.04, before closing at 3636.32 points. The investigation by the Income Tax department and the Securities and Exchange Board of India (Sebi) into the activities of the top brokers also had a dampening effect on the stock market.

Further, the Madhavpura Mercantile Co-operative Bank's default on the pay-order obligations has brought into question the bank's association in the bear hammering being witnessed. Following the default, Reserve Bank of India announced that it was considering barring co-operative banks from borrowing in the call money market.

On March 27, Calcutta Stock Exchange (CSE) declared its list of brokers, who had defaulted on their pay-in obligations in successive settlements. The big brokers included Biyani Securities, Dinesh Kumar Singhania and Co and Tripoli Consultancy Services. Each broker had a payment default to the tune of Rs 350 million.

The rattled co-operative banking sector bracing itself from the Madhavpura effect saw the Kapol Bank witnessing premature withdrawal of deposits to the tune of Rs 20 million, despite assurances by the bank management that its total loan against shares will not exceed Rs 80 million.

On March 27, the Sensex opened at 3634.48 and the index remained range-bound again giving rise to the feeling that the market has already discounted any major impact of the news relating to the brokers default on the stock market. The Sensex on March 27 closed at 3694.82 points.

The pessimism in the stock market continued as the volumes on the BSE fell almost by 75 per cent since the beginning of the bearish trend in February 2001. From Rs 63.18 billion on February 28, 2001, the daily volume has dipped to Rs 13.72 billion on March 27 as investors kept away from the markets. While the downtrend has been godsend for FIIs (considering that there has been selective buying in various sectors), retail investors remain wary affecting the business of retail brokers. On March 28, the Sensex opened at 3736.54 points and closed at 3788.21 points.

By mid-week, several of the Gujarat-based co-operative banks were learnt to have parked huge funds with Madhavpura Bank.

To ensure greater safety, RBI suggested that due to the brokers default banks that were affected would have to maintain additional margin. The shock was, however, to come later in the day, when Bank of India (BoI) was learnt to have been hit to the tune of Rs 1.2 billion following the Madhavpura Bank scam.

At the markets, all eyes were on BSE where the elections took place amidst a lot of uncertainty. Since Sebi came out with clear strictures against broker-members becoming directors to the board, the regulator banned newly appointed directors from assuming office - Sunil Shah, Apurva Shah, Ashok Kumar Damani. Meanwhile, the Sebi hearing against disgraced BSE president Anand Rathi took place at the Sebi office premises.

The next day, it was learnt that over Rs 8 billion from Madhavpura Bank had been flushed into the markets, with Ketan Parekh emerging as a major player again. Money was lent to the markets on different accounts. In these turbulent market conditions, brokers were beginning to face problems to receive fresh bank guarantees.

With the role of Ketan Parekh coming under greater scrutiny, the inevitable happened. And this time it was the CBI zeroing in on criminal offences against the broker. BoI filed criminal charges against Parekh, following which he was arrested at around 2:30 PM. The official interrogation however commenced only after market hours. Now the list of banks hit by the scam widened and it was seen that at least seven banks might have been hit in the scam. According to reports, some of the other banks in trouble may be Punjab National Bank and Andhra Bank.

The Sensex on that day fell 147 points to close at 3604 levels, having slid by 15 per cent over the past four weeks from a level of 4272 in early March.

The drama at the CSE ended with the entire governing board of the exchange stepping down. Though the CSE had taken independent action on this front, it is learnt that Sebi was behind this move. Notices were also given to 50 co-operative banks that have abstained from paying insurance premia to the Deposit Insurance and Credit Guarantee Corporation.

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