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KP scam: Bigger than 1992

Just a few weeks ago, Ketan Parekh was threatening to sue the Bank of India for defamation, because it complained about the bouncing of Rs 1.3-billion pay orders issued to the broker by the Madhavpura Mercantile Cooperative Bank. He seemed to suggest there is nothing more that the authorities would be able to pin against him.

Yet, in the last couple of weeks, investigations by the Central Bureau of Investigation and the Securities and Exchange Board of India reveal that the sheer magnitude of money moved around by Parekh or available to him for his market manipulation was a staggering Rs 64 billion.

Money abroad

A couple of weeks ago, the CBI called a press conference to announce it had unearthed a Swiss bank account in which Parekh was listed as the beneficiary. The Bureau claimed there was $ 80 million (Rs 3.4 billion) in the account, which has since been frozen. In the past, CBI announcements were usually followed up with a quick arrest, this time it has gone silent.

New Overseas Corporate Bodies

The Securities and Exchange Board of India's preliminary investigation in May revealed that Rs 29 billion were transferred out of the country through five Overseas Corporate Bodies between March 1999 to March 2001. These OCBs had together invested just Rs 7.77 billion in the Indian market but remitted a whopping Rs 36.77 billion out of the country. This direct flight of capital occurred through European Investments, Far East Investments, Wakefield Holding, Brentfield Holdings and Kensington Investment. Three of these companies have a paid up capital of just $ 10.

SEBI says the pattern of investments and transactions through these accounts shows a clear misuse of the OCB/Foreign Institutional Investor route. They seem to be used as a channel to repatriate profits earned through stock price manipulation. Many of these OCBs were sub-accounts of Credit Suisse First Boston whose brokerage operations have been suspended. But there were other FIIs too. Strangely, SEBI has not yet placed any restrictions on them so far.

All it has done is to request the Mauritius Offshore Business Activities Authority to give details in respect of actual beneficiaries, source and utilisation of funds of OCBs and sub-accounts mentioned in its preliminary report.

In answer to a Joint Parliamentary Committee query, Sebi now admits to have unearthed six more OCBs, where there is evidence that Parekh's companies may have used them for 'cornering and parking of stocks.' Dossier Stock Inc, Greenfield Investments Ltd, AOM Investments Ltd, Symphony Holdings Ltd, Almel Investments (Mauritius) Ltd, and Delgrada Ltd.

However, since there was no other specific query about further repatriation of funds, SEBI is silent about other flight of capital through the OCB window. However, it does admit there are clear inter-linkages between the OCBs and that some of them have issued participatory notes abroad to route funds to India. It also says Parekh's entities have conducted many of their trading transactions.

Sawaal Rs 4.5 billion ka

Of these, Delgrada Ltd. is the most interesting. Zee Telefilms has been one of Parekh's favourite stocks and among the four scrips that scripted his doom. SEBI investigations reveal that Delgrada was issued a massive 17.5 million shares of Zee Telefilms when the latter merged with Zee Multimedia Worldwide. SEBI says Subhash Chandra, chairman of Zee Telefilms, was the sole beneficiary of this OCB and that some of these shares were later sold and the proceeds amounting to Rs 4.5 billion remitted to Mauritius. The sale of shares through Delgrada was through Parekh's firm, Triumph International.

Maybe investment analysts and research firms, who have recently put out buy recommendations for Zee Telefilms, would like to explain to investors what the implications of this information are.

On the other hand, Indian regulators are able to drag their feet over disciplinary and supervisory action, because investors insist on playing dumb and asking no questions -- not even institutional investors such as the beleaguered Unit Trust of India which was buying up Zee scrips in March 2001.

SEBI has also disclosed to the JPC that Zee had directly lent a hefty Rs 5.15 billion to Parekh in March 2001, by borrowing the funds from various sources, including the Global Trust Bank, to stop him from going under. Himachal Futuristic, whose promoter Vinay Maloo is a buddy of Parekh, organised Rs 7 billion for him. But Parekh's operations and commitments were far too big for him to be saved.

All this is the tip of the iceberg. The JPC has asked pointed questions, the answers to which could throw up a load of dirt on Parekh's deals with Himachal Futuristic, Zee Telefilms and the Global Trust Bank. Unfortunately, SEBI's answer to most of the detailed questions is to say, 'investigations are in progress.'

The Calcutta connection

In its preliminary investigation report, SEBI unearthed a transfer of nearly Rs 11 billion to Calcutta brokers, most of whom have had their businesses suspended because of payment defaults. In an answer to a JPC query, SEBI now says Parekh had sent over Rs 27 billion to Calcutta brokers between January 2000 to March 2001. This suggests that as soon as the infotech, communication and entertainment stock-led boom began to lose momentum, Parekh shrewdly began to move his speculative activities to the unofficial market in Calcutta in order to avoid detection. SEBI says it is investigating the source of these funds and how they were utilised.

Ketan Parekh's stock holding

The process of ferreting out information on his portfolio is slow and tedious because SEBI has to depend on 'third party sources' such as banks, depositories and stock exchanges and because 'Ketan Parekh is not co-operating with the investigation.' Yet, three of the companies identified by SEBI where he held over five per cent are Aftek Infosys, Shonkh Technologies and Global Trust Bank. According to SEBI, these companies had omitted to inform stock exchanges about his holding having crossed five per cent. It is not quite clear if the broker continues to hold these shares and what would be the value of this holding.

The Rs 64-billion plus arithmetic

If one were to simply add up the amounts mentioned in SEBI's various reports, the size of Parekh's manipulations is far bigger than the Rs 50-odd billion securities scam of 1992. Yet, unlike the previous scam, this one is absurdly simple and brazen in its execution. Sebi says that Rs 27 billion was sent by Ketan to Calcutta brokers; Rs 29 billion vanished overseas, Rs 3.4 billion ($ 80 million) was in a Swiss bank account; Rs 7 billion went to him from Himachal Futuristic; Rs 5.15 billion from the Zee Group and Rs 2.56 billion directly from the Global Trust Bank.

Sucheta Dalal

Money