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Jul 12, 2012, 08.23 AM IST
when the market revived in 2003, Parekh is learnt to have resumed trading using fronts. And the only way his erstwhile brokers could hope to recoup the money he owed them was to execute his transactions. These deals were on a profit sharing basis. If Parekh profited on the trade, a chunk of that money would go towards repaying the debt.
Some fund managers in Singapore and India handling India-dedicated offshore hedge funds have got an interesting proposal in the last couple of months. These funds, though not very high profile, have been around for more than two years, and manage multiple schemes for their high networth global clients depending on their risk profile. The offer went something like this: set up one more scheme, and lease it out to us. We select the investors, manage their funds and take the investment calls, and you get a flat fee of anywhere between USD20-40 million for providing a legitimate vehicle for our investments.
For many hedge funds struggling to deliver decent returns over the last couple of years, and hence attract fresh, this is not a bad business proposition. The only condition is that the fund house should have been around for a few years so as not attract the regulator's attention.
Talk in FII circles is that Ketan Parekh and his associates are the ones offering the deal, on behalf of some leading global investment banks which have entrusted Parekh & Co with a sizeable pool of funds to manage. These banks are believed to have pulled out a significant chunk of their proprietary funds and are handing them to savvy traders across key Asian markets who can be counted on to deliver returns better than what they are earning right now.
And Parekh, known for his agility in trading large blocks of shares and Nifty futures, and his familiarity with complex offshore investment structures, appears to fit the bill perfectly. And for someone who is eager to stay away from the regulatory glare, this is a fairly legitimate route for covert dealings.
Parekh may be a persona non grata in the Indian market following his implication in the securities scam of 2001 and the consequent Sebi ban for 14 years till 2017. But veteran brokers swear that he has been active in the market all along despite the official ban, and enjoys a good following among promoters who play their stock, and among a section of foreign institutional investors and domestic fund managers.
And the fact that his name does not appear on any of the trade records only makes life easier for him. The onus is now on the investigative agencies and regulators to prove that he is still active in the market.
After the stock market crash in 2001, brokers who had been dealing with Parekh suffered huge losses. And since his bank accounts were frozen and he was banned from investing in the market, there was no way he could make good the losses. But when the market revived in 2003, Parekh is learnt to have resumed trading using fronts. And the only way his erstwhile brokers could hope to recoup the money he owed them was to execute his transactions.
These deals were on a profit sharing basis. If Parekh profited on the trade, a chunk of that money would go towards repaying the debt. And if he lost on the trade, the broker got nothing, and worse still, he could not complain to the regulator either. After all, Parekh should not have been allowed to trade in the first place. But a buoyant market from 2003 to 2007 helped Parekh clear the dues outstanding with his brokers, and there were more of them now willing to deal with Parekh. Of course, the depositors of Madhavpura Mercantile Co-operative Bank, which owes its failure to Parekh's actions, were not so lucky.
Brokers say Parekh's services were sought by promoters of many midcap companies, eager for lofty valuations for their shares. Some of them gained from the association, but the promoter of one South-based midcap pharmaceutical firm nearly lost control of his firm after some trading bet backfired and the stock price plunged.
In the 90s, companies like BPL, Videocon, Sterlite, Zee and Ranbaxy were indiscreet when funding market operators like the late Harshad Mehta and Ketan Parekh for ramping up their stock prices. But with the emergence of participatory notes, tax havens and offshore financial vehicles, and with some help from a savvy market operator and a pedigreed global investment, promoters have been able to manipulate their stock prices without any trace of being directly involved.
Once in a while, the Intelligence Bureau comes out with a report naming market operators and promoters working in tandem to manipulate stock prices. But there is rarely follow-up action against these players and the companies named in the report, either by Sebi or by investigative agencies. Last week, a 'top secret' IB document said stock market players like Ketan Parekh, Piyush Sampath and Raju Shah were rigging stock prices through circular trading using front entities.
The report names Dewan Housing Finance Corporation , Goenka Diamond and Jewels Limited, Orchid Chemicals and Pharmaceuticals , IVRCL , Pantaloon Retail , Tribhovandas Bhimji Zaveri and GMR Infrastructure as the stocks where prices were manipulated. There was a similar IB report involving a different set of companies in December 2010
This raises two questions that the government/regulator needs to answer:
One, if the IB has evidence of manipulation by players like Ketan Parekh who are officially banned from the market, why has there been no action so far?
Two, despite the White Paper on Black Money mentioning participatory note (PN) as a conduit for money laundering, why is there no effort to phase it out. There is all the more reason to announce some deadline for scrapping PNs now that the government stepped up its battle against tax evaders, and at the same time, is offering incentives for a wider class of global investors to directly invest in Indian securities.
Partly, the answers to both questions could have to do with politics more than policy or regulations.
It is said that one of the key reasons why the BJP-led NDA government went after Parekh with all their force was the former broker's growing proximity to Samajwadi Party leader Amar Singh. The government was concerned by Parekh turning out to be a major source of funding for the Samajwadi Party, which at that time was a key threat to the coalition.
Also, it would be naive to think that any market operator could have a free run without some political patronage. Most companies that dabble in the stock market are politically well-connected and enjoy certain immunity unless caught in a indefensible position.
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