SEBI to probe Black Friday, who’ll probe Ketan Parekh

SEBI to probe Black Friday, who’ll probe Ketan Parekh
SUCHETA DALAL

MUMBAI, MARCH 3: Friday morning last week, the Securities and Exchange Board of India (SEBI) called officials of two leading Mumbai stock exchanges for a hurried meeting. The massive price volatility and price manipulation on March 1 had worried the regulator since it was clear that selling pressure would continue on Friday. At the end of the day, the Sensex was down 176 points; and SEBI had identified half a dozen brokers and foreign institutional investors (FIIs) whose operations are to be probed for alleged bear hammering.

Since the names of these brokers and FIIs (C Mackertich, Radhakishan Damani, Nirmal Bang, First Global and Credit Suisse First Boston), were provided by the Bombay Stock Exchange's (BSE) surveillance department, they are clearly based on specific trading patterns. Yet, the list omits the most important name -- that of a top BSE office-bearer who allegedly extracts confidential trade data for other members.

BSE sources say the bear operators who hammered prices on Thursday and Friday last were acting on information supplied by this office-bearer about the financial difficulties of stocks operator Ketan Parekh.

SEBI's decision to probe short selling is all very well but the root of the problem lies elsewhere. For over a year, SEBI has stood by and watched Ketan Parekh grow into the biggest market operator in India whose status now rivals that of Harshad Mehta in the early 1990s.

It had access to newspaper reports about Parekh's close links with corporate houses (Himachal Futuristic and Global Telesystems) and how shares of companies close to him rallied sharply -- the market called it the KP effect. There was even a so-called KP index or the K-10 scrips representing his favourite stocks. Yet, SEBI remained unperturbed at what was seen as an authentic ICE stock (Information, Communications and Entertainment) boom.

In fact, the portfolio of several funds -- Indian and foreign seemed to mirror the so-called KP index. A fund manager says that during the ICE scrip-led boom, he was forced to buy KP shares in order to keep his Net Asset Value (NAV) in line with the Sensex.

At that time, the regulator did not worry about collusion between KP and FIIinvestment institutions. There was certainly no panic or probe. We switch back to March 2, when the 176-point fall in the Sensex which threatens to jeopardize the positive impact of the Union Budget.

Even today, SEBI's investigation is restricted to the short selling and not into the cause of the short selling -- namely Ketan Parekh's alleged financial difficulties. Reports about KP's problems have been making the rounds for nearly three weeks. A payment problem was reported at Calcutta around mid February and caused a few jitters but it was quickly settled.

In the last two weeks, the market grapevine has it that Global Trust Bank (GTB) which was a large financier of Ketan Parekh was calling in its funds and liquidating his collateral. In fact, market reports suggest that Parekh also holds a sizeable chunk of GTB equity and hence received large funding from the bank. Another rumor was that the police were probing Ketan Parekh's links with jailed diamond merchant Bharat Shah and their transactions through GTB.

Interestingly, UTI Bank, which is all set to merge with GTB is also reluctant to dig hard for information. Its attitude is that any difficulties that it encountered would have to be faced after the merger. SEBI remained unperturbed, probably because the upsurge in old economy scrips preventedthese market rumors from affecting the Sensex, although specific ICE scripsfell steadily.

Is Ketan Parekh really facing payment problems? Nobody knows for sure, because there is not investigation. Last week, I got access to a list of the top 100 accounts of GTB bank in Mumbai, which reveals that Ketan Parekh's group companies (Triumph, Panther and Classic etc), those belonging to his cousin or closely identified with him have at least eight accounts at the bank. Between them their borrowings exceeds Rs 300 crore.

On checking, I was told that this figure was not considered excessive and he had a larger exposure with another private bank.

Clearly, authentic and independently verified information about his financial status is not available. However, on February 27, the BSE pay-in was delayed because Ketan Parekh's firms had payment difficulties. The problem was resolved when an influential industry house arranged finance from a European bank.

On February 28, the Budget and the rally in software stocks seemed to resolve the problem. But it was not so. A set of bear operators close to the important BSE functionary who knew about the payment difficulties, decided to cash in on the situation and hammer prices down. Their sales caused huge volatility on March 1 and a collapse on March 2.

This long sequence of events clearly indicates that SEBI's action in investigating Friday's collapse is meaningless unless it probes the core issues.

Short-selling is a legitimate market activity, and SEBI can, at best make out a case for insider trading if it establishes that the operators had access to information that was not available to other investors. What is needed instead, is a joint investigation by SEBI and the Reserve Bank into the financial position of Ketan Parekh and his companies and their precise market exposure through various banks. Only this would restore real stability.

However, chances are that no such investigation would be launched. Neither bull operators nor the bears want a probe and least of all their powerful friends in government and among politicians. The bulls and bears are more likely to call a temporary truce and pump in money to restore stability.

Black Friday would then be dismissed as an aberration. If that indeed happens, SEBI's investigation into the bear hammering will be quietly dropped. Don't forget that we are still waiting for SEBI to complete its investigation into the Harshad Mehta-led speculation in BPL, Videocon and Sterlite stocks way back in 1998.

In June that year the unbridled ramping of these shares ultimately led to a collapse which threatened to drag down nearly 20 brokers. It was hushed up by the Bombay Stock Exchange (BSE) by opening the trading system in the middle of the night and entering fictitious trades. SEBI has yet to punish either Harshad Mehta or the promoters of the three companies for their nexus with the broker and the subsequent bailout.