System Defects that led to Ketan Parekh Scam
First: Indian Banking Systems
Ketan parekh was a very good broker but he did not had enough money to make it big by investing into larger stakes. For this he borrowed from various banks public and private both and also from companies. According to reports, the 12 lakh shares he owned of Global would have cost him Rs 200 million and stocks of aftek Infosys would have cost him Rs. 50 million, Zee and HCFL around Rs. 250 million each. His methods were very simple. Ketan Parekh used to buy shares of high growth companies when they were trading at low prices and then waited for the prices to go up, once the prices were high enough he used to pledge the shares with the banks as collateral for the funds. He borrowed funds from various banks against shares of dubious real…show more content… Other mutual fund investors also followed them believing that the market activity indicated that these companies had a good future ahead.
Second: The Badla System
All this was allowed to happen because of the Badla System, this system was later corrected by the SEBI, that is after the Ketan Parekh Scam came into light.
Badla System is a trading involving buying of stocks using borrowed money with stock exchange as an intermediary at some interest rate which is determined by the demand for the stocks and the maturity date which is not greater than 70 days. In badla system of trading, broker is responsible for the maintenance of stocks.
‘Badla’ literally means ‘something in return’ and it is the charge that the investor pays for carrying his position forward. It is a hedge tool and lets the investor to take position in the scrip without even taking an actual delivery of the stocks. Badla transaction system was in practice for several decades in the stock exchange of Mumbai.
The mechanism of badla transaction system of trading can be explained as