Today, Adani's stocks are in the news for all sorts of wrong things. But this is not new.
Something eerily similar happend 25 years ago - thanks to a devious stock market operator - Ketan Parekh.
#TimeTravelWithMe to revisit a scam that brought India to a standstill
1/n
The story begins in the late 90s when the Internet was a new phenomenon & people were waking up to its possibilities.
The stock market buzz for companies that dealt with the internet was crazy & there was a large demand for the next big thing in the country 2/n
In this climate entered Ketan Parekh, a stock broker born into a family of brokers who operated both in Bombay & Calcutta stock exchanges. He was an upcoming star on Dalal Street & started building his own set of associates & followers 3/n
Ketan chose to make money from the internet wave but didnt go with the big companies like Infosys or Wipro but chose an unknown company from Chennai - Pentafour Software.
Pentafour had already defaulted once & was in crisis. So the stock was available cheaply. 4/n
Pentafour wanted to raise more money & colluded with Ketan. The promoters gave their shares to Ketan to play around with & Ketan started selling it and buying it through his own associate thus blowing up the price. From Jan to May 1998, the price went up from 150 to 1000 Rs!! 5/n
Pentafour started making noises about operations, partnerships etc inviting the interest of bigger fund houses. Ketan had artificially hiked the prices but he needed someone to buy at those prices & now he had them. He could gradually dump them on fund houses & make money! 6/n
This loophole started to be called the 'Pentafour Formula' & it was so successful that Ketan started doing this with multiple stocks - even non internet ones. Zee Media, HFCL, Ranbaxy etc. 10 Stocks that Ketan played with came to be called the K-10 stocks!! 7/n
These K10 stocks just rose & rose. Any rumour that KP was interested in a stock made that fly. KP looped in more promoters in his kitty to take their shares & bloat the price & pass the risk to innocent mutual fund investors!! But the crazy return blinded people to the risks! 8/n
KP also added another route to his fraud. India signed the DTAA - Double Taxation Avoidance Agreement with Mauritius. Funds based out of Mauritius had to pay taxes on capital gains on Mauritius rates only & not India rates. And Mauritius had 0% tax on stock gains! 9/n
KP jumped in to make use of this tax benefit & created a few shell companies as funds which was nothing but another front for his own activites. This way of taking out money & bringing it back in was called Round Tripping! He rerouted illegal money of promoters to boost prices!
Ketan became a superstar on his own right. He started becoming flashy with his new wealth & famously threw a New Year party in a ship off Gateway of India attended by politicians, bollywood stars & CEOs. More ppl started taking notice of him! 11/n
With the Y2K bug eventually being resolved, KP made another kiling in 2000 as his K10 stocks continued to go astronomical prices. PE ratio (a measure of stock price to profits) assumed unexplainable levels but ppl who bought it more justified it with all sort of reasons 12/n
The golden rule of stock markets is that how fast a stock price goes up, it comes down even faster. The party started to slow down by Diwali of 2000. Foreign funds started moving away from India & the buzz around internet stocks started fading. KP's gameplan was in danger. 13/n
KP also became close to Samajwadi Party etc which irked leaders in BJP & many started planning to closely look out for him. The bloated companies started reporting losses eventually. The 2001 budget further intensified the selling & the market started going down rapidly. 14/n
Other operators who knew the fraud of KP & waiting for their chance pounced. Enmasse they started short selling K10 stocks. KP tried to salvage by taking more promoter money to buy but the fall was rapid. The prices dumped within days. 15/n
KP tried his last act & used funds from friendly promoters of Madhavpura Mercantile Bank to issue him cheques with his shares as collateral. But his shares were falling. Rumours spread & people started taking money out from their accounts from the banks! The end was near 16/n
When Bank of India presented the cheque to MMCB, it bounced. They promptly called the CBI. On 30th March 2001, Ketan Parekh was arreseted after market hours on a Friday. It was so bad that on Monday, sensex rose instead of falling. People had already sold everything in fear! 17/n
The funds which had brought at high prices passed on the losses to unsuspecting common man investors. Millions lost hard earned savings. UTI, the govt's mutual fund's flagship fund went under within couple months. 99% of the fund was invested by Retail investors who were stunned
A greed of few led to calamity for many.
In Adani's episode today, all of what happened here is alleged. Operator circular trading, Mauritius Round tripping, promoter manipulation, astronomical stock prices, investment by state like SBI, LIC
The short sell has come as well.
How will this story pan out eventually is yet to be seen!
But history always has the answers & the lessons. Only if one wants to learn from it.
K10, A10 - whatever, greed always ends badly.
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