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Themes:Corporatescams/
Controversies
Period:
Organization:SEBI
PubDate:2002

CaseCode:FINC006
CaseLength:09Pages
Price:Rs.200

Countries:India
Industry:Finance

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"Allmylifetime'ssavingsaregone.Idon'tknowhowtofeedmyfamily."

AsmallinvestorhitbytheKetanParekhscam,inApril2001.

TheCrashthatShooktheNation
The176point1Sensex2crash on March 1, 2001 came as a major shock
for the Government of India, the stock markets and the investors alike.
Moreso,astheUnionbudgettabledadayearlierhadbeenacclaimedfor
its growth initiatives and had prompted a 177point increase in the
Sensex. This sudden crash in the stock markets prompted the Securities
Exchange Board of India (SEBI) to launch immediate investigations into
thevolatilityofstockmarkets.SEBIalsodecidedtoinspectthebooksof
severalbrokerswhoweresuspectedoftriggeringthecrash.
Meanwhile, the Reserve Bank of India (RBI) ordered some banks to
furnish data related to their capital market exposure. This was after
mediareportsappearedregardingaprivatesectorbank3havingexceeded
itsprudentialnormsofcapitalexposure,therebycontributingtothestock
marketvolatility.ThepanicrunontheboursescontinuedandtheBombay
Stock Exchange (BSE) President Anand Rathi's (Rathi) resignation added
tothedownfall.Rathihadtoresignfollowingallegationsthathehadused
some privileged information, which contributed to the crash. The scam
shook the investor's confidence in the overall functioning of the stock
markets.BytheendofMarch2001,atleasteightpeoplewerereportedto
have committed suicide and hundreds of investors were driven to the
brinkofbankruptcy.

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Thescamopenedupthedebateoverbanksfundingcapitalmarketoperationsandlendingfundsagainstcollateralsecurity.It
alsoraisedquestionsaboutthevalidityofdualcontrolofcooperativebanks4.(AnalystspointedoutthatRBIwasinspecting
theaccountsonceintwoyears,whichcreatedamplescopeforviolationofrules.)

The first arrest in the scam was of the noted bull,5 Ketan Parekh (KP), on March 30, 2001, by the Central Bureau of
Investigation(CBI).Soon,reportsaboundedastohowKPhadsinglehandedlycausedoneofthebiggestscamsinthehistory
ofIndianfinancialmarkets.HewaschargedwithdefraudingBankofIndia(BoI)ofabout$30millionamongothercharges.
KP'sarrestwasfollowedbyyetanotherpanicrunontheboursesandtheSensexfellby147points.Bythistime,thescam
hadbecomethe'talkofthenation,'withintensivemediacoverageandunprecedentedpublicoutcry.
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1]AchangeofRe.1inthepriceofasharewhenonespeaksofasharerisingorfallingbysomanypoints.Instockmarketindices,however,apointisoneunitof
thecompositeweightedaverageonmarketcapitalisationofrupeevalues.
2] A stock market index indicating weighted average of 30 scrips, also known as the BSE Sensitive Index. The daily closing figure of this index broadly reflects the
performanceofthecapitalmarkets.
3]ItwasallegedthatGlobalTrustBankexceededitsCapitalmarketexposure.
4] Cooperative banks are under the dual control of RBI and the Registrar of Cooperative Societies. The RBI regulates banking functions while the registrar looks
afterthemanagerialandadministrativefunctions.
5]Aninvestorwhoexpectssharepricestogoupandhencebuysthem.

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