At a time when the Securities and Exchange Board of India (SEBI) has itself come under a cloud, an ex-parte order, issued on 2nd January against Ketan Parekh (KP) and 21 associates, makes for fascinating reading.
SEBI’s meticulous investigation (read: Ketan Parekh, 21 Others Caught in Front-running Scam, SEBI Asks Them To Disgorge Rs65.77 Crore Illegal Gains) has exposed a sophisticated operation orchestrated by KP, who was infamously named the central figure of the 2001 securities scam by a joint parliamentary committee (JPC). It reveals how KP constructed an elaborate network to front-run the trades of a large foreign portfolio investor (FPI).
Full credit goes to SEBI investigators, who painstakingly built a case by tracing multiple phones, code names and aliases to KP. They then linked the network of associates to his trading activities and revealed how insider information was leveraged for illicit profit. However, the investigation raises more questions about our regulatory system than it answers. The bigger story here is the enduring impunity enjoyed by the same manipulators behind the securities scams of 1992 and 2001—despite regulatory and judicial actions over three decades.
Scamsters like KP are able to blend modern online banking and trading systems with illegal old-style dabba trading (cash deals settled on the basis of official market prices) and angadias (couriers favoured by tax-dodgers to carry currency, diamonds, gold and jewellery across cities) to avoid SEBI’s real-time surveillance systems. Know-your-customer (KYC) requirements, which harass ordinary people in the name of money laundering rules, are effortlessly side-stepped by fraudsters and operators. Despite SEBI’s detailed findings on the use of angadias for large cash transfers, there is no move by other government investigation agencies, such as the tax, enforcement or central bureau of investigation (CBI) to join forces or broaden the investigation.
The Front-running Scam
For those who haven’t read SEBI’s 188-page order, here’s a summary:
SEBI uncovered a scheme where KP, with multiple phones and pseudonyms, colluded with Rohit Salgaocar, a Singapore-based trader. Together, they front-ran substantial trades of a US-based FPI, referred to by SEBI as ‘Big Client’ using complex trading strategies to generate illicit profits. The FPI had a referral agreement with Mr Salgaocar’s firm, which recommended trading through brokers Motilal Oswal Financial Services (Motilal) and Nuvama Wealth Management (formerly Edelweiss).
SEBI began by tracing mobile numbers linked to KP when he appeared for an investigation on behalf of NH Securities, his family firm involved in past scams. KP’s Aadhaar number and his wife’s phone and address provided a starting point. SEBI tracked phones from the same address, analysed call data and IMEI numbers, and identified his movement across hotels in Jaipur, Agra and Gwalior using ID proof submitted during check-ins.
WhatsApp chats further corroborated KP’s identity, as aliases like ‘Jack’ and ‘Boss’ exchanged birthday greetings and insider information. The investigation exposed a nationwide network of front-runners executing trades and transferring payments, including large cash transactions through the angadia network to hide their trail. SEBI’s interim order calculated unlawful gains of Rs65.77 crore and ordered its disgorgement by 22 entities, while barring key individuals from market access.
Unanswered Questions
The investigation may be the tip of the iceberg and raises many questions. First, KP has continued to operate with complete impunity during and after SEBI imposed a 14-year ban on him. Hence, the disgorgement of Rs65 crore jointly and severally by 22 entities should, at best, be a starting point. Secondly, I have received an email from a whistle-blower (shared with SEBI) saying the Big Client and several other large FPIs regularly colluded with KP and Mr Salgaocar’s network. The email claims that the Big Client is the Los Angeles-based Capital Group. Indeed, it is hard to believe Big Client’s officials were clueless about Mr Salgaocar’s links and depended entirely on him to direct their trades. Unless the regulator expands the scope of investigation, which began in 2021, and accelerates the pace, its effort and findings are in danger of becoming irrelevant.
Thirdly, the discovery of large cash transactions through angadias underscores the prevalence of a flourishing dabba trading system which is a completely illegal cash market that settles trades based on official exchange prices. Market sources say that many fund managers and television talking-heads with powerful political connections are active dabba traders; but SEBI’s investigations usually ignore this shadow market. In fact, stringent compliances imposed on registered market intermediaries as well as high costs and taxes have helped dabba trading expand with illegal trading apps and social media acting as prime enablers and marketing tools. A multi-agency probe with appropriate legal powers is essential to uncover the full extent of these operations.
Need for Multi-agency Investigation
In 1992, the Janakiraman committee, under a Reserve Bank of India (RBI) deputy governor, produced six detailed reports, leading to a comprehensive clean-up of banking and capital markets. They formed the basis of the JPC hearings. The committee included representatives of the income-tax (I-T) department and CBI, which ensured that nothing was brushed under the carpet. In fact, the JPC that was set up after the KP-led scam of 2001, produced a wishy-washy report which openly lamented that it had no access to a Janakiraman-type investigation.
The Ketan Parekh front-running investigation raises enough of embarrassing questions for a similar, but expanded, effort to be initiated. The finance ministry must establish a multi-agency investigation, led by SEBI and RBI, incorporating cybercrime experts, enforcement officials and technology specialists. This committee should address cash trades, collusion, front-running and the failure of money laundering rules, which harass ordinary citizens, but fail to deter fraudsters.
Scam Playlist Loop
Another reason for such a committee is the national embarrassment of witnessing the same scamsters recycling the same scams, enhanced by technology, over 30-odd years. Regulators are always in a race to stay ahead of scamsters who find new ways to exploit regulatory weaknesses and loopholes. In well-regulated countries, every new scam is different from the previous one because these weaknesses are properly plugged and the perpetrators punished. Not so in India.
KP, was part of the cabal around Harshad Mehta, the key accused in the 1992 securities scam. He then emerged at the central figure of ‘Scam 2001’ (Ketan Parekh: Delusions of invincibility?).
SEBI calls him a ‘habitual offender’ and narrates his history. In Para 201 of the report, it says that KP was barred from the capital market in 2003 for 14 years. Yet, he was caught trading through a company called Gibs Computers leading to Rs1-crore penalty imposed on him on 26 June 2013. What does it say about SEBI’s understanding of regulation and deterrence, if the ‘central figure’ of a JPC-investigated scam of two decades ago dares to flout a ban?
I have also documented how KP continued to operate in the market, in 2007, (Nobody knows how much Ketan Parekh owns and owes) KP is not alone. In 2014, a CBI court convicted him for cheating and sentenced him to two years’ imprisonment. Such lenient penalties, enabled him to re-enter the market repeatedly and continue his illicit activities. And he is not alone.
Ashok Kumar Poddar of Kolkata, a key associate of KP in Scam 2001 and misappropriation of shares at the Calcutta Stock Exchange, is again part of his network. His role has also been extensively documented by the JPC. In fact, Dinesh Dalmia, notorious founder of the DSQ group, who even embarrassed the National Securities Depository Ltd and former SEBI chairman CB Bhave, is also back to his old ways of duping banks and lenders of Rs200 crore. All he needed to do was a slight change in his name and claim to starting a dairy business (Moneylife Exclusive: Serial Fraudster Dinesh Dalmia Strikes Again: Dupes Lenders of Nearly Rs200 Crore).
India’s aspiration to be a global superpower requires credible regulatory and judicial systems. The responsibility to ensure this rests squarely on the nation’s executive leadership.
Comments
iaminprabhu
2 weeks ago
SHOCKING & DISGUSTING, how these repeat big offenders take everyone & every system for a RIDE for Decades!?
It's a SHAME for our Regulatory system, Legal system & GOI that such scamsters & many similar more GET AWAY with financial sacrilege without any FEAR OF LAW!
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It's a SHAME for our Regulatory system, Legal system & GOI that such scamsters & many similar more GET AWAY with financial sacrilege without any FEAR OF LAW!