Chain of events

Crisis containment

DRAMATIS PERSONAE

Ketan Parekh

Behind every great fortune, there is a crime

-- the opening line of The Godfather, by Mario Puzo

After Harshad Mehta, who propelled the stock markets to dizzying heights in the early 90s only to bring it down to its knees, it was Ketan Parekh who gamely shouldered the mantle of the

Piped Piper at the turn of the millennium. It was Parekh who made ICE fashionable outside the cocktail circuit.

And it was the meltdown in ICE (Information, Communication, Entertainment stocks) that began late last year in the US markets that caused the doom of Parekh, who had siphoned off funds from the banking channels to prop up the New Economy stocks. In fact, one bank, the Ahmedabad-based Madhavpura Mercantile Co-operative Bank, had an exposure of over Rs 1,000 crore, i.e., more than 80% of its deposit base to the capital markets, most of which is believed, to belong to Parekh.

The broker’s payment problem came to a head after the massive bear hammering on 2 March, following the budget. The 177-point drop in the market opened a can of worms, and the crisis snowballed, taking in its wake the toll of BSE president Anand Rathi, the elected broker-directors on BSE board, Madhavpura Bank and many other Gujarat-based co-operative banks, and the Global Trust Bank-UTI Bank merger. It culminated with the arrest of Parekh by the Central Bureau of Investigation on the basis of the complaint filed by Bank of India that Parekh had defrauded the bank by cashing in Rs 137-crore fictitious pay orders issued by Madhavpura Bank. Parekh has reimbursed Rs 7 crore, small change for a man whose seven (of the ten) favourite New Economy stocks shaved off Rs 13,000 crore of market cap since 15 February till 4 April 2001.

Though an insider, his ancestral securities firm is Narbheram Harakhchand & Co, Parekh was a late comer to the game. He has been about five years in the securities business. It was in the late nineties that Parekh began to take huge positions in the New Economy shares, which earned him a nickname of `one-man army’ for his ability to move the market. In fact, avid investors monitored K-10, an informal index of his top 10 holdings, more closely than the BSE 30-share Sensex.

Parekh spotted the boom in Indian software stocks ahead of the others. His penchant for media scrips was legendary. It was Parekh’s merchant banking arm, Triumph International Finance, which was responsible for shepherding many entertainment companies like Tips Industries, Balaji Telefilms and Mukta Arts to the IPO market.

Anxious to don the garb of a venture capitalist, Parekh joined hands with Himachal Futuristic Communication (HFCL) promoter Vinay Maloo and Australian media tycoon Kerry Packer to float KVP Ventures last year to incubate media start-ups.

After the arrest of Parekh, the market is not expected to be the same again, feel players. Parekh was to be under CBI’s remand till 9 April. His custody was later extended. The broker has reportedly admitted of receiving funds from the Zee group of companies and HFCL. Players say that more skeletons will emerge as the investigation of Parekh continues. This is likely to keep the market on the tenterhooks in the coming days.

Finally on 21 May, the Mumbai High Court granted bail to Parekh on a bond of Rs 5 lakh and ordered him to present himself to the Central Bureau of Investigation twice a week. However, on 1 June, Parekh filed a writ petition against the CBI in the Bombay High Court contending that the FIR filed by the CBI was baseless and the investigating agency had suppressed material facts to make a criminal case against him. The CBI, on 5 June, requested to transfer the Ketan Parekh case to the Chief Metropolitan Magistrate court.

Sebi, in its final report on the market crash to be submitted by August this year, is expected to come out with clinching evidence of the violations of Parekh. It is also expected to throw light on alleged links with FIIs and overseas corporate bodies.

On 5 July, the Swiss authorities froze the Swiss bank accounts of Parekh, after the CBI requested the Interpol for an international probe into siphoning of money. This was later denied by Parekh who also sought an anticipatory bail which was granted by the High Court on 10 July.

The Swiss authorities, in December, began examination of the Letters Rogatory sent by India seeking details of Parekh's bank account. The account, which has millions of Swiss Francs, has been frozen by Swiss authorities after CBI requested Interpol for an international probe into the alleged siphoning of money from India.

In May 2002, additional magistrate B A Shelar rejected the bail plea of Parekh, his brother Kartik Parekh and Jatin Survai, one of the directors in their broking firm and remanded them to police custody till 29 May. In October, Sebi, in its pre-final report on the developments leading to the market crash declared that the entities relating to Parekh had created an artifical market and engaged in price rigging in the Aftek Infosys case.

Early December 2002, Parekh was arrested again in Mumbai in connection with the payment crisis at the Calcutta Stock Exchange. Parekh was taken to Kolkata to be produced before the courts. However, on the very next day, Parekh was granted bail by a Mumbai court against the sum of Rs 1 lakh and a surety of the same amount.

In its report tabled in the Parliament in mid-December, the JPC has zeroed in on Parekh as the main culprit behind the stock market scam in March 2001, the CSE payment crisis and for the crash of Madhavpura Bank.

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D R Mehta

Regulating one of the biggest and chaotic securities markets in the world is not an easy job. And D R Mehta, chairman of the Securities & Exchange Board of India (Sebi), certainly must have realised this, particularly in the past one month or so.

An investigation led by Mehta into the 177-point drop in the market on 2 March 2001 has resulted in the sacking of the entire elected board of directors of BSE, undoing of the UTI Bank-Global Trust Bank merger, arrest of broker Ketan Parekh, income-tax raids on many other brokers, collapse of many co-operative banks in Gujarat, the near-collapse of an exchange (Calcutta Stock Exchange), and, ironically, doubts about his own invincibility.

For the longest serving chief of the capital markets watchdog (he is on to the second year of his extension after completing five years tenure), innuendoes about his proximity to brokers and lax supervision must have been particularly galling, considering that he spearheaded many reforms in the stock markets. His biggest achievement was in converting the Indian capital markets into a paperless one, when even some of the developed markets like the US have still not completely eliminated physical delivery of shares. Other significant milestones include putting in place a takeover and corporate governance codes, introducing rolling settlement in 166 scrips (which, post-March 2001 crash, was extended to 246 more scrips with effect from July 2001), and flagging off online trading.

Though a career bureaucrat (he was deputy governor of RBI before his current posting), Mehta was willing to give an ear to the other side, particularly brokers. His supposed lack of enthusiasm in extending the coverage of rolling settlement, apparently agreeing with brokers that it would kill speculation and liquidity, is cited by his critics as being soft on brokers. To be fair, he has taken a few tough actions like suspension of the board of Pune Stock Exchange and forcing the then BSE president J C Parekh to resign over the BPL, Videocon and Sterlite price-rigging controversy in mid 1998.

Stung by media lashing on bolting the stables after the horses have decamped, Sebi has swung into action in a hyperactive mode – suspensions, bans, hearings, inspections et al. He has barred three broking outfits – First Global, CSFB and Bang Broking – from carrying out their business till investigation into their role in the 177-point crash on 2 March 2001is over, banned Harshad Mehta for life from brokering for ramping up prices of Videocon, BPL and Sterlite, and the three companies from accessing the capital markets for three, four and two years respectively.

But even this does not seem to have pleased his detractors. Harsh (ban on short sales) and arbitrary (expelling all broker directors and barring former BSE president Anand Rathi from carrying out his securities business) are some of the sobriquets that are being bandied about now. In these difficult times, Mehta, probably acknowledges, you cannot please all the people all the time. Nonetheless, even his critics will concede that his insistence on complete disclosure in prospectuses has made the primary market a little less dangerous.

In a bold move, Mehta banned carryforward trading,  shifted another 246 scrips to rolling settlement with effect from 2 July 2001 and introduced uniform settlement on the remaining scrips.

Finally, after having served Sebi for a long time, Mehta retired from his post of Sebi chairman in February 2002. G N Bajpai, former LIC chairman, takes over the Sebi post.

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Anand Rathi

Anand Rathi is the second president of the Bombay Stock Exchange (BSE) to be expelled from office before the end of the term. Jaswant Parekh was the first BSE president who was asked to resign from his post three years ago.

Rathi’s rise to fame has been as rapid as has been his fall from grace. He acquired BSE membership only in 1995, and went on to become the president of BSE four years later.

A chartered accountant by profession, Rathi has over three decades of experience in corporate and project management, financial and capital markets and management consultancy. He played a key role in the introduction and implementation of BOLT - the on-line trading system of the exchange- setting up of the Trade Guarantee Fund and negotiating the broker insurance scheme.

Before his entry in the trading ring, Rathi was Senior President of Indian Rayon and Industries (a part of the Aditya Birla group) till 1994, when he set out on his own. At the Birla group, Rathi was believed to be one of the most trusted men of the late Aditya Birla.

Though reported to be close to Sebi chairman D R Mehta, Rathi had to resign when Sebi got hold of a tape of his conversation with an official of the surveillance department on 2 March, the day wen the market tanked by 177 points. However, Rathi contended that he had called the surveillance department at 15:00 IST, when the market had barely 30 minutes to close, and when it had already crashed by 130 points. He denied that he had passed on the sensitive information about the positions in various stocks that he learnt from the surveillance department to a bear cartel.

The BSE had stopped publishing the outstanding long-short positions in the carry-forward section after changing to the new Borrowing and Lending of Securities Scheme (BLESS) due to a technical shortcoming. This made only a few people in the surveillance department of BSE aware of the exact short sales positions. Anyone with this sensitive information and massive money power could change the direction of the market in his favour.

As if Sebi’s suspension on Rathi and his firms from carrying out any business on the stock exchanges till investigations are over was not punishment enough, his office premises were raided by the Income-Tax department, which was probing the role of some prominent brokers in the post-budget market crash.

When the Sebi axe finally fell on him, Rathi challenged the Sebi action in court and the matter is still under investigation. However, the Income Tax Department is believed to have given a clean chit to Rathi for alleged tax evasion on profits earned out of the speculative trades that took place between 28 February and 20 March which led to the bear hammering.

However, on 28 June, the Department of Company Affairs enlarged the list of companes under probe, controlled by Rathi for their alleged involvement in the crash. Besides Rathi Global, other firms of Rathi like Anand Rathi Services, Rathi Capital & Services and Navratan Capital were also brought by the DCA under the investigation ambit.

In December, Sebi, following its investigation, cleared Rathi from the alleged involvement in insider trading and fraudulent trade practices.

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Shankar Sharma

Shankar Sharma is the new face of the Indian stockbroker. Educated, suave, and not a member of the Old Boys’ network. An MBA from the Asian Institute of Finance, Manila, he quit his cushy job at Citibank in 1989 to try his hand at stock brokering. He started as a sub-broker and soon acquired his own full-fledged membership on the Bombay Stock Exchange. First Global Stock Broking, the securities firm he founded with Devina Mehra, his better half.

Whispers about Sharma’s links to the bear cartel responsible for the post-budget crash reached a peak when he came into the limelight as a shareholder of Buffalo Networks, the promoter of Tehelka.com, which exposed the defence deals scandal a few days after the budget.

After a modest beginning in the mid-nineties, First Global is now rated among the Top 5 stockbrokers in the country, and is a favourite of many foreign institutional investors (FIIs). It has offices in London and Dubai, and had obtained deemed FII status, which was recently invalidated by Sebi.

Sharma was one of the six prominent brokers whose premises were raided on 23 March by the Income-Tax department to examine his role in the post-budget crash. The market tanked by 177 points on 2 March on bear hammering. The man himself was on a business trip to the US. After arriving from the US, Sharma denied having any prior knowledge of the Tehelka tapes. He also proclaimed that his company had been a net purchaser on the budget day to the extent of Rs 14.21 crore and was a net seller on the following two days only to the extent of Rs 2.4 crore and Rs 1 crore respectively.

However, in its report on price manipulation submitted to Union Finance Minister Yashwant Sinha on 15 April, Sebi clearly mentioned that First Global did have a role to play in the 177-point crash on 2 March 2001. It, among other broking entities, barred First Global from undertaking any fresh business till further notice. And fears are that First Global might also stand to lose its membership on the London Stock Exchange.

Sensing a close nexus between the entities of broker Nirmal Bang and Shankar Sharma of First Global, Sebi confirmed its earlier interim barring First Global for undertaking fresh broking orders. As per the order, Bang Equity Broking had executed certain structured transactions on behalf of Shankar Sharma which matched with First Global's activity on behalf of its proprietory sub-broker, Vrudhi.  Even the Income Tax Department report on the post-budget market crash pointed out gross violations on the part of Sharma.

On 25 June, the Securities Appellate Tribunal rejected Sharma's plea to seek an interim stay on the Sebi order restraining his firms from undertaking fresh business as a stock broker, merchant banker and portfolio manager. The appeal, challenging the Sebi order, is to be heared on 19 July.

On 25 November, the Enforcement Directorate raided the offices of First Global and the residence of Sharma. Then on 17 December, Sharma and his wife were interrogated by IT sleuths for alleged Fera violation. In May 2002, Sebi finally took up the hearing of the Sharma case. This follows the Bombay High Court directive in January 2002 wherein Sebi had told the markets that a fresh hearing should be held in the Sharma case.

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Ramesh Gelli

It was supposed to create one of the largest private sector banks in India. But it was not to be. A much-hyped about engagement between Global Trust Bank and UTI Bank has ended in the confines of ignominy instead of at the altar. And the man who has been held responsible for this divorce before the nuptials is none other than the promoter of GTB - Ramesh Gelli, the man who worked towards the merger.

Unfortunately, the Securities and Exchange Board of India (Sebi) and Reserve Bank of India (RBI) think Gelli’s wooing was not above board. The groom, GTB in this case, was made attractive by cosmetic surgery. The regulators are probing allegations of price rigging by Gelli in concert with Ketan Parekh --- the discredited broker who has been arrested for his role in diverting the Ahmedabad-based Madhavpura Mercantile Co-operative Bank’s funds into stock markets to ramp up scrips. And one scrip mentioned in this connection was GTB.

Gelli was earlier associated with another extremely successful private bank-- Vysya Bank. As Vysya Bank's founder-chairman, Gelli built a business house that came to be known for its ethical practices and consistently impressive performance. He also carved an enviable position for himself in the banking sector. The government of India honoured the seasoned banker with a Padma Shri.

And at the height of his career, Gelli quit Vysya Bank to set up a new private sector bank in the liberalised era. In a short time, he put together a high-calibre professional team and with assistance from the Asian Development Bank and the International Finance Corporation, Global Trust Bank (GTB) was set up in 1994. One of the first private sector banks under the new guidelines, GTB made a name for itself in the private sector. The bank’s initial public offer was oversubscribed 60 times and, on its first day, it had a deposit base of Rs 100 crore. Within a decade, Global Trust Bank amassed a deposit base of Rs 4,000 crore, a reach of 63 branches and a staff strength of over 800.

And, again, when everybody thought that GTB had reached a high plateau, Gelli startled the industry with his announcement of the merger of GTB with UTI Bank to create one of the largest private sector banks in the country. The announcement was made on 24 January 2001.

It had all the makings of a fairy tale marriage. Gelli, known for being market savvy, was marrying off his offspring to the progeny of another market mover - UTI. However, a little over a month after the announcement of the swap ratio (one share of GTB for every 2.25 shares of UTI Bank), there was a sign that the alliance was coming unstuck. The trigger was the bear hammering after the presentation of the Union Budget.

Sebi alleged that Gelli had leaked sensitive information of GTB’s merger with UTI Bank to Parekh, who ramped up the price of the GTB scrip just before the announcement of the merger to get a swap ratio favourable to GTB’s promoters. Sebi also alleged that GTB’s promoters indulged in trading of shares ahead of the announcement of the merger.

Gelli was quick to reject Sebi’s claims of having evidence of his nexus with Parekh and insider trading. But, meanwhile, GTB’s stock price had already crashed from Rs 100 (a day after the announcement of the merger) to a dismal Rs 21 on 4 April, the day the GTB board decided to pull out of the merger. Gelli had no other choice but to resign from his post as the Chairman cum Managing Director.

Global Trust, meanwhile, found a new CMD, R S Hugar, the former chairman of Corporation Bank. He, too, stepped down from the post in November 2001, after having served the bank for over seven months.