End of another bull run

Will the investigative and legal process that has been set in motion with regard to the second big manoeuvre of its kind in less than a decade, lead to a clean-up of the markets?

IF someone at Ketan Parekh's New Year's-eve party had dared to suggest that the greatest bull run in the history of the Bombay Stock Exchange (BSE) was about to end, it would have been put down to too much alcohol. Late in the evening of December 31, his 500 guests had been picked up from near Mumbai's Gateway of India and sped across the moonlit Indian Ocean to the beachside village of Mandwa. There they were escorted to an opulent farmhouse done up in jungle motifs, with animal skins laid across the floors and creepers winding their way up the walls. Six dancers had been flown in from the West Indies to entertain the guests, and even the waiters had been dressed up as faux tribesmen, their faces painted in glowpaint.

Even by the sweet-life standards of Mumbai's super rich, Parekh's Africa night was a remarkably naked celebration of wealth. As it turned out, entire banks, and hundreds of thousands of ordinary shareholders, paid for that evening of revelry.

Now, a fortnight after Parekh's March 30 arrest, it is clear just how the high-profile broker was making his money. Parekh rode the bull run that began at the end of 1998 - a seemingly endless process premised on the belief that a new information age economy was coming into being. By the time of his Mandwa party, that myth was unravelling. ICE companies (short for information, communication and entertainment) were in serious trouble, and their stocks in decline around the world. The broker now made his last, desperate move. He used the Madhavpura Mercantile Cooperative Bank to issue him a Rs.200-crore credit line against his over-priced shares. The public sector Bank of India (BoI) then provided him with cash against pay orders issued by Madhavpura, which Parekh recycled to prop up his ICE stocks.

Inevitably, the chain broke. On March 8 and 9, BoI discounted six Madhavpura pay orders worth a total of Rs.137 crores. On the night of March 12, the Reserve Bank of India (RBI) discovered that the small Ahmedabad-based bank just did not have the cash to meet its obligations. The Rs.300 crores worth of shares that Parekh had pledged the bank were now worth nowhere near that amount. Incredibly, it took the RBI another week to realise the enormity of Madhavpura's default. BoI then ordered an investigation, which found that some Rs.660 crores worth of Madhavpura pay orders had been credited through it to Parekh. The money had moved through his brokerage companies, Classic, Panther Investment Traders and Panther Fincap and Management Services, to three shell companies - Chitrakoot Computers, Goldfish Computers and Nakshatra Software.

When confronted by BoI, Parekh coughed up Rs.7 crores. On March 30 he was driven to the Central Bureau of Investigation (CBI) office in south Mumbai's Walkeshwar area. Inside the office, popularly known as the White House, Parekh promptly confessed his guilt. But sources in the CBI told Frontline that several matters remained to be explored. For one, it still is not clear just why Madhavpura chairman Ramesh L. Parekh made funds available to the Mumbai broker so easily. Nor is it clear that Madhavpura was the only bank that Ketan Parekh had used to aid the bull run. Ramesh Parekh, who started off as a small time spice trader in the mid-1960s, could have acted in the expectation of either quick profits for his bank or personal gain. His interrogation, which started after his arrest on the night of April 5, could answer these issues. Spending time with the CBI, it has passed largely unnoticed, would not be a new experience for Ketan Parekh, who figures as accused number 10 in the organisations case number 3 of 1996 involving the defrauding of Canbank by Harshad Mehta.

The great bull run began to climax last year. The BSE Sensitive Index, or sensex, started that year at just above 5,000 points, but rose to 6,150 points by February 15. That meant that investors had become richer by Rs.200,000 inside of six weeks. The feeding frenzy was powered by the easy money regime brought in by the RBI to help an economic recovery. Cheap interest rates powered an expansion of money supply, inflows from Foreign Institutional Investors (FIIs) shot up, and middle class investors began to hop on the bandwagon in the hope of getting that extra rupee on their investments. Most of the investment was in ICE stocks. Of the Rs.200,000 crores added to market capitalisation in the first six weeks of 2000, half was accounted for by the computer companies Wipro and Infosys. Every other sector fared badly on the BSE through the year.

For those with their feet on the ground, signs that all was not well were evident even then. On February 14, 2000, Infosys hit the upper circuit breaker, which meant that no one on the BSE was willing to sell its shares. The next day the same share hit the lower circuit breaker, which meant no one was willing to buy it. That was not normal market behaviour.

Then there were growing signs that brokers were borrowing funds from banks against their shares, to push the boom along. Businessworld correspondents Niranjan Rajadhyaksha and T. Surendar noted in a February article that the volume of loans against shares had "gone up dramatically in recent months". Others suggested that FII funds were being parked in India only temporarily. In one interview, Parekh himself noted with misplaced glee that "there seemed to be a new one every day". FII funds would exit with equal speed.

But for the time being the going was good. Parekh played the boom for all it was worth. His influence on market events was considerable. The brokers favoured stocks, notably Zee Telefilms, Global Telesystems, Himachal Futuristic Communications Limited (HFCL), Global Tele Systems, Satyam, Aftek Infosys, SSI and Silverline Technologies, which began to be called the K-10, and became something of an index in themselves. When Zee Telefilms received a hammering from bear operators in June 2000, as a part the result of offloading by FIIs Jardine Fleming and Morgan Stanley, Parekh succeeded in pushing up the share prices of its holding company, Essel Packaging. The company's share price shot up from Rs.314 on June 20, 2000 to Rs.402 on July 10, 2000. Rumour has it that a bear operator who approached FIIs with a war chest of Rs.3,000 crores to knock down the K-20 stocks was sent packing, forcing him to sell short.

Consider the case of Aftek, a technology firm whose shares were selling at Rs.15 in October 1998. By March 1999, the shares were nearly unaffordable, despite the fact that the company's performance was unimpressive. One development had been that the company had added the term "Infosys" to its name, cashing in on the New Economy mania. Asahi Leasing and Finance, Arihant Housing Finance, and Paro Steel Industries had similarly prospered after metamorphosing into Sunstar Software Systems, LCC Infotech and Sanvan Software. Dozens of other companies used similar tactics with success, though they had nothing to do with computers or communications. But the real driving force behind its share price rise was Parekh's brokerage of the sale of 15 lakh shares with Triumph International Finance at a premium of Rs.26.50 apiece. Market rumour spread well before the deal was formally announced, allowing Parekh to turn a tidy profit for himself.

WHAT were the regulators doing all this while? Both the Securities and Exchange Board of India (SEBI) and the RBI have faced richly deserved criticism for their decision to bury their head in the sand through last year, despite the existence of price rigging and worse (see separate story). Less attention has, however, been paid to why these bodies might have chosen to act the way they did. One reason could have been that both were influenced by prevailing ideological doctrines which mandate that as far as possible the markets must be left alone. But it is also true that Parekh had influential friends. In January he was seen at Samajwadi Party leader Amar Singh's birthday party, forking out Rs.21 lakhs for an earthquake relief fund. Such contacts might explain why no follow-up investigation took place after income tax officials surveyed Parekh's offices last January.

Many of Parekh's business contacts had influence that cut across parties, and they have faced the heat in the past for sharp practices. In 1996, HFCL faced investigation by the CBI in the wake of allegations that its Director, Mahendra Nahata, had brokered a controversial telecommunications deal with then Union Minister Sukh Ram. HFCL emerged unscathed from that furore, only to face more trouble early this year. Film financier and diamond merchant Bharat Shah's arrest this January on charges of laundering funds for Karachi-based mafioso Dawood Ibrahim Kaksar, led to a sharp drop in HFCL stock. The friendship between the company's chairman, Vinay Maloo, and Shah was well known, and rumours spread that Maloo's arrest was imminent. The rumours were unfounded, but they did illustrate the ways of the incestuous world that Parekh operated in.

Indeed, Shah's arrest proved an ill omen for Parekh. CBI and Mumbai Police officials working on the money laundering case believe that mafia funds were channelled through Parekh into entertainment stocks. "We haven't found any hard evidence yet," says one Mumbai Crime Branch official involved in the Shah investigation, "but Parekh's arrest could open up new avenues for us". What is known is that Shah played an important role in Parekh's entry into Mumbai's entertainment industry. In April last, Parekh, Maloo and Australian media magnate Kerry Packer were seen along with Shah at a party at Mumbai's Oberoi Hotel, along with film celebrities like Amitabh Bachchan, Boney Kapoor, Sridevi and Jackie Shroff. That party was to signal Parekh's entry into the industry, and proved a precursor to plans by almost 30 film-related organisations to go public.

E, for entertainment, came to join Parekh's information and communication portfolio from September. That month, he funnelled funds into Bachchan's moribund production company ABCL. The bankrupt company was soon able to clear its enormous dues and start on a clean slate. Parekh also played a role in actor Jeetendra Kapoor's Balaji Telefilms' plans for a Rs.50-crore public issue. The stockbroker sounded the clap for Kapoor's daughter's first film. Ekta Kapoor is best known for producing a series of bestselling television soaps, notably ''Kabhi Saas Bhi Bahu Thi'' (Mother-in-Law Was Once a Daughter-in-Law). The Parekh-Maloo-Packer trio is also believed to have pumped in close to Rs.17 crores into the Internet portal Cricketnext.com.

What goes up must of course come down. Parekh's fall was, if anything, even more spectacular than his rise. By February 2001, with ICE stocks in decline and FIIs pulling out, the pressure was on Parekh. Banks like Madhavpura, however, helped the broker along. But it did not last long. The bears believed their time had come, and began hammering stocks down. Calcutta-based Ajay Kayan and his firm C. Mackertich, Bombay-based brokers R.S. Damani, Nirmal Bang, and First Global, as well as two of the biggest FIIs, Credit Suisse First Boston and JM Morgan Stanley, led the bear hunt. The stock market panic in March provoked by the Tehelka expose helped their cause. Indeed, First Global's interest in Tehelka has provoked rumours that the expose was timed to help its shareholders' cause, an allegation that both organisations deny. Whatever the truth, Parekh's stocks, and the market in general, took a severe hammering.

SEBI at last moved in the first week of March, promising to punish the bear cartel and ordering an end to what are called naked short sales, or the disposal of shares below value. Events, however, had outpaced the organisation. The payments crisis at the Calcutta Stock Exchange had nation-wide repercussions (see separate story), and the climate of fear on the markets was compounded when news broke that BSE president Anand Rathi had passed on confidential information on bull activity to bear cartel brokers. Rathi's taped conversations led SEBI to mount pressure on the BSE. Rathi's resignation too proved to be a case of too little, too late: on March 30 the Sensex was down to 3,604.38, from the level of 4,330.32 in mid-February.

It is going to be a while before the pieces are picked up. Among the principal casualties so far is the proposed merger between Global Trust Bank, one of the main financiers of Parekh's market operations, and UTI Bank. Critics of the deal, announced in January, charged that Parekh had ramped up Global Trust shares before the deal. UTI, they said, had agreed to the merger on terms that would have had adverse consequences for its shareholders. A confidential report by SEBI to the RBI says that Parekh and two associates had acquired over 20 per cent of GTB in the run-up to the merger, in violation of its take-over code. Part of these shares are alleged to have been parked with three finance companies owned by Gujarat based detergent tycoon Karsanbhai Patel, who owns Nirma. Both UTI and Global Trust have pulled out of the merger; both were defending it in the face of evidence of price rigging until days before Parekh's arrest.

Those who believe that the investigative and legal process which has started could lead to a clean-up of the markets, however, might do well to consider history. As his CBI record shows, Parekh is known to have worked in close association with Harshad Mehta during both the securities scandal and the six-month-long 1998 bull run. Although he escaped investigative scrutiny on both occasions, he will doubtless have the time while in CBI custody to consider Mehta's experience. The architect of the 1992 scandal has been convicted of several offences, but continues to be free, while his appeals are pending in the Supreme Court. A final judgment could take years, perhaps decades. Meanwhile, he remains the largest single defaulter of public sector bank loans, with a total liability of Rs.812.08 crores. Mehta continues to travel from his luxury flat in Mumbai in an imported car.

Crime, it would seem, pays. Someone, of course, has to pay for it.

Hundreds of people line up each morning outside the Friends Cooperative Bank in Mumbai's Kurla area, each hoping to get back his or her deposits. Rumours of a stock crash having sparked bankruptcies have provoked a run on small banks, and many of them just cannot meet the higher demands for cash. Some people will get their deposits back. Others, quite possibly, will not. Still others, drawn to the stock markets by low interest rates, have seen their savings disappear. Despite all the furore provoked in 1992, little seems to have actually changed.