Ketan Parekh SCAM-2000

Rumours of an income tax raid on Ketan Parekh resulted in the stockmarket getting smashed on January 11, 2000. The Sensex fell 222 points. Eventually, it turned out to be an income tax survey that found Rs 92 crore (Rs 920 million) of undisclosed money. Parekh paid an advance tax of Rs 13 crore (Rs 130 million) and all is well; at least for the time being.
This isn't the first time that the Sensex fell on "Parekh rumours". The rumours that have come and gone have included Parekh in a payment crises (this has happened several times), various bulls and bears tussles with Parekh and a rumour that rediff.com columnist Sucheta Dalal was planning to expose a scam in the next day's newspaper. The result is always the same: the market gets smashed, a panic follows, small operators and day traders are forced to exit from their positions (they normally exit from long positions at the slightest hint of a problem), some big operators (who know the truth) buy stocks at bargain prices and subsequently pull the market up rapidly.
And these are not all of the Parekh rumours. The market loves discussing him. The Sensex does get linked to Parekh's acquisitions of a jet (false) and a new car (true). Day traders also monitor Parekh's travel plans and keep a track on his business meetings and holidays abroad. And, of course, Mumbai's 'Party of the Millennium' was Parekh's bash at Mandwa across the city's waterfront.
Show of strength
Who is this man who can cause the Sensex to tumble? Ketan Parekh came into prominence only these last two years, and has since built a solid reputation and substantial wealth. He makes day traders feel ecstasy and paranoia. "KP's in it," is often the only reason to buy a stock. His killings in Zee Telefilms, Pentafour Software and Ranbaxy are legendary.
What he can do to a stock is evident from three examples. He bought into a small software company Aftek Infosys at Rs 30, 40 levels about a year ago and there hasn't been any looking back for the stock since then. It now trades at Rs 2,400 levels. The company is expected to grow at a fantastic pace and the stock has entered many a mutual fund portfolio. But Parekh was there first.
Pentafour was another case. In June 1998, the stock was hammered to half the price in a few days on bad publicity. Parekh entered and pulled it up, also selling the idea to most fund managers. The company performed well thereafter.
Ranbaxy was different. KP's reputation was strengthened further with this stock. It was a unique case as the participation of smaller traders/investors was high. The company was changing and was on the last leg of developing a new drug delivery system in mid-1999. The stock had risen from Rs 500 to Rs 750 and declined back to Rs 550 from April to June 1999. This was one story where every BSE liftman and panwallah around Dalal Street made money as the stock scaled a high of Rs 1,264.
After the Ranbaxy killing, the bull trained his guns on Global Tele-Systems and Himachal Futuristic. Both stocks are up five times since their August 1999 levels. By now, Parekh had leader status and the crowd bought shares in which he was interested.
Who is KP?
India's two major business newspapers call him the Pentafour Bull and the One Man Army in their market gossip columns. The market, with its fancy to cut redundancy, calls him KP or associates him with his firm NH Securities.
Not much is known about the man. But a recluse he isn't. He meets people, including the press. But there is one cardinal rule: No pictures, please. We suppose he takes the Wall Street wisdom too seriously -- get your picture on the cover of BusinessWeek or Fortune and the end is near. And Ketan Parekh obviously doesn't want to retire early.
This chartered accountant by training is a down-to-earth man with an extremely sharp mind. Ask him how the market is and don't be surprised by a J P Morgan-type answer, "It will fluctuate." If you know him well, he will give you a tip too. If you are strong-hearted, you buy the share and forget it for a while. You will see some really wild swings, but in the end you will make big money.
His market style and personality are often compared to Big Bull Harshad Mehta. But there are some stark differences.
First, Mehta was a poor man's son. Ketan isn't. His family has been into stockbroking for some time, and he is related to many big brokers.
Second, Harshad operated in a closed-but-liberalising market and with other people's money (as it transpired later) as the last recourse. Parekh works in a more mature market with electronic trading, higher volumes and a stronger institutional environment.
Stories have to be created and sold aggressively to institutional investors for everybody to make money, which Parekh has done successfully. Unlike Mehta's aggressive publicity campaigns, Parekh is silent.
What are his stocks?
He picks out-of-favour stocks that are expected to grow rapidly. These are also companies that investors think lowly of or have doubts about the business, accounting standards and management. He was the first to see the software boom spreading over to second-rung software companies in 1998. His first killing came in Pentafour which had been consciously avoided by most institutional investors. Parekh came and sold them a solid growth story and the rest is history.
Ranbaxy had moved in a narrow trading range for five years. There were pending warrant conversions and institutional investors feared that the management came and sold at higher levels. Parekh spotted the change in management and the company's new drug discovery system becoming successful. He sold this story again and reaped a rich harvest.
Global, Himachal and DSQ Software will not fit in the universe of an institutional investor, but for Parekh's presence. The country's largest mutual fund, UTI's Unit Scheme-64, had Himachal Futuristic (1.48 per cent of the portfolio), Ranbaxy (1.39 per cent), Pentafour (1.35 per cent) and Global Tele-Systems (1.05 per cent) on September 30, 1999.
Parekh is also one of the few brokers who understands the power of online trading. Most operators work through a large team of trusted dealers and jobbers. (Word should not spread that he is buying or he would not be able to acquire enough shares.) An operator would also need to indulge in buy and sell orders so that his dealers remain quite confused on whether he is in or getting out.
Every big broker has enough enemies. These are the people he has crossed or the people who crossed him on his way to the top. Alleges one of his adversaries, "Most of these rumours are spread by the KP gang so that they get to smash prices, enter at lower levels and then pull the market up."
Does he always succeed? There are two ways of judging this. One is the level that a stock reaches and then declines. BPL is a good example. The stock went to Rs 600 levels; it is currently at Rs 270 levels. That has happened in many companies. The other is of a stock just not moving up after he buys it -- that happened in MTNL some time ago when it would find some new seller to stanch the stock's rise. This is an aberration when you compare stocks like Aftek, Himachal, Global, Zee and Pentafour which are on a continuous upswing and an investor getting in at any point will be in the money.
KP travels a lot and meets company managements regularly. He likes buying a substantial stake in relatively smaller companies by a private placement (like in Aftek) and then waits for other players to catch his fancy. He has also bought a stake in many unlisted companies. As is the way of the world today, he is building a nice portfolio of Internet start-ups too.
He is big for the market and getting bigger. But investors and speculators are not complaining. Nor are institutional investors and the government unhappy. The current level of the Sensex and the hope in every eye near an online terminal of ten-baggers are this man's doing, at least to some extent.