The earlier post relates to companies that misappropriated the money of small investors. But the amounts involved are small when compared to the thousands of crores (1 crore = 10 million) that were blown away in the numerous stock market scams.
Here again small investors lost their deposits in banks or watched helplessly as their wealth was wiped off in the crash of stock indices. The culprits again were the promoters of some companies, joined by the chairpersons of banks, mutual fund managers, and cliques of brokers——all of these manipulated share prices and dealt in hefty amounts of money on a daily basis.
The stock market scams of course came with the liberalization of the Indian Economy in 1990-91 but all the culprits were not private players—the government-controlled funds of the earlier socialist era were neck-deep in these financial crimes.
The first securities scam was mastered by the stockbroker Harshad Mehta and was exposed in 1992.
In early 1999 another small-time broker, Ketan Parekh, used practically the same method, but with greater sophistication, to build up his trading business. The 36-year-old was lucky because in that same year occurred, the almost crazy, worldwide boom in the Dotcom and related stocks—popularly called the ICE scrips (Internet-Communications-Entertainment). Ketan saw his opportunity of making it big by riding the crest of this boom.
Now a word about the relationship between brokers and companies—the latter when raising money from the stock markets persuade brokers to back them (by investing in their shares and boosting the share price) so they can acquire large sums from investors. It is a mutually beneficial relationship since the brokers can keep the high-priced stock to raise their trading profile. Or they can dump it on small investors and make a killing.
Ketan formed a group of ten companies for his stock profile—mostly new companies but with good prospects in the ICE businesses. This broker did not have the financial resources to manipulate their share prices on his own and he formed an alliance with groups of brokers based in the smaller stock exchanges (like Kolkatta and Ahmedabad). Ketan sweetened their alliance by promising to make good any losses they suffered as a result of a fall in share prices.
Another method of raising share prices commonly used by brokers are the Benami transactions—share purchases made in the name of poor persons living in shantytowns.
With his allies, and the worldwide boom, Ketan Parekh ensured that his group of ten companies saw their share prices shoot skywards. To keep the prices rising artificially he indulged in circular trading—selling and buying repeatedly amongst his clique of brokers and even within his own set of investing firms that repeatedly sold to, and bought shares from, each other!
But when the dotcom bubble burst worldwide, Ketan tried to keep his profile of ten stocks (notoriously called the K-10 in broker circles) clear of the crash in prices. For this purpose he borrowed hefty amounts of money from banks and companies—in some case companies and banks (particularly the Global Trust Bank) lent him money to buy into their own stocks!
At this time a group of traders (the bear cartel-Shankar Sharma, Anand Rathi, Nirmal Bang) decided that the global meltdown of stocks was definite and tried to profit from it. Bears sell stocks at high prices and buyback at low prices. At the time of the year 2000 Financial Budget this cartel placed sell orders on the K-10 stocks and crushed their inflated prices. All the borrowing of Ketan’s could not rescue his scrips—instead banks like Global Trust and Madhavpura Cooperative went bust because the money they had lent to Ketan had sunk with his K-10 stocks.
Hundreds of depositors in these banks and thousands of small investors in the stock markets were ruined because of the reckless greed of these cliques of brokers, company promoters, fund managers, and bankers.
