India’s stock market has grown to become one of the world’s largest financial arenas. It now ranks among the top five globally by market capitalization. The total value of this bustling market reached an impressive $3.84 trillion. With such vast sums of money changing hands daily, the environment became ripe for exploitation. Greed and opportunity have led some to orchestrate elaborate scams. These fraudulent schemes have left lasting impacts on the Indian market and its participants. This article delves into the major scams that have rocked India’s stock market history. We’ll explore their methods, consequences, and the lessons learned.
The Ketan Parekh Fraud
Nearly a decade later, another major scam unfolded. Ketan Parekh, who had learned from Mehta’s tactics, orchestrated his own fraud in 2001. Parekh, a stockbroker by profession, employed a technique called circular trading. He used funds borrowed from banks and financial institutions to execute this scheme.
Parekh’s operation focused on manipulating the stock prices of ten specific companies. From 1998 to 2001, he artificially inflated these stocks’ values. The group of manipulated stocks became known as K-10 or KP pack. They included well-known names like Amitabh Bachchan Corp and Zee Telefilms.
The full list of manipulated stocks in the K-10 or KP pack were:
– Amitabh Bachchan Corp
– Himachal Futuristic Communication
– Mukta Arts
– Tips
– Pratish Nandy Communications
– GTL
– Zee Telefilms
– PentaMedia Graphics
– Crest Communications
– Aftek Infosys
The Recent Scam
Introduction: Unveiling the Front-Running Scam
The Securities and Exchange Board of India (SEBI) has uncovered an unusual front-running scam that involves two prominent figures: Ketan Parekh, a notorious stock market operator previously banned for his role in the 2000 stock market scam, and Rohit Salgaocar, a Singapore-based trader. The scam led to the discovery of unlawful gains amounting to around ₹65.77 crore. SEBI has issued an interim order to restrain the accused individuals from engaging in any securities trading activities.
What is Front-Running?
Front-running refers to the illegal practice where someone, typically a trader or broker, acts on non-public information (NPI) about future trades, executing their own trades in advance to benefit from the anticipated market movement.
In this case, Rohit Salgaocar and Ketan Parekh used confidential trading information about a big US-based fund to make illegal profits by executing trades ahead of the fund’s transactions. This gave them an unfair advantage in the market.
The Role of Rohit Salgaocar
Rohit Salgaocar, with his connections in the market, was able to obtain inside information regarding trades to be executed by a large US fund. Traders at the fund house would discuss their trades with Salgaocar, who had access to this sensitive information.
Salgaocar’s role was to find counterparties for these trades by contacting other market participants, including foreign funds, Indian funds, and Ketan Parekh. Salgaocar would then pass on these details to Parekh, who would capitalize on them.
Ketan Parekh’s Involvement in the Scam
Ketan Parekh, using his well-established network of entities in Kolkata, played a significant role in executing the front-running scheme. Once he received the trading details from Salgaocar, he would make use of this information to place his own trades through multiple accounts.
Parekh worked with six front-runners, or individuals, who were used to execute the trades on his behalf, thereby hiding his direct involvement. This allowed Parekh to profit from the information flow, as he could execute trades at advantageous prices before the larger fund made its moves.
Execution of the Scam and Profit Sharing
The modus operandi of the scam involved a systematic flow of non-public information. After receiving the trading details, Ketan Parekh would instruct the six front-runners to carry out the trades using their trading accounts. These trades, based on inside information, would result in profits when the market reacted to the large fund’s actual transactions. Once the profits were made, they were shared among the participants through cash or banking transactions, further concealing the illegal activity.
SEBI’s Investigation and Findings
SEBI’s investigation into the scam was detailed and wide-reaching, covering over 20 locations. The regulator’s probe revealed that Parekh and Salgaocar devised this scheme with the intent of unjustly enriching themselves. The flow of information and the use of multiple accounts to carry out front-running trades were crucial to the operation. SEBI also found that the traders of the big US fund house were unaware that their trade details were being leaked, and the information was being used for illegal gains.
Consequences and SEBI’s Interim Order
As a result of its investigation, SEBI issued an interim order on January 2, restraining Rohit Salgaocar, Ketan Parekh, and Ashok Kumar Poddar (a facilitator in the scam) from dealing in securities or associating with any intermediaries registered with SEBI.
SEBI’s order is significant because it not only implicates the individuals involved but also seeks to prevent further illegal trading activities. The regulator’s actions aim to maintain the integrity of the securities market and protect investors from unfair practices.
Conclusion: The Broader Impact
This front-running scam highlights the ongoing challenges that regulators face in curbing market manipulation. Despite the extensive regulations in place, unscrupulous traders like Ketan Parekh and Rohit Salgaocar can still exploit loopholes and manipulate markets. SEBI’s action serves as a warning to market participants that illegal activities will not go unnoticed. By investigating and taking stringent actions against those involved in fraudulent practices, SEBI aims to uphold fairness and transparency in India’s financial markets, ensuring a level playing field for all investors.
Written By: Dipangshu Kundu
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