India's Pied Piper of Tech

Scores of investors blindly followed a Bombay broker

In March, 2000, the managers of KVP Ventures, a $250 million venture-capital fund specializing in India's New Economy companies, threw a grand launch party at Bombay's luxurious Oberoi hotel. There were celebrities galore--Indian movie stars, politicians, and Australian media tycoon Kerry Packer, a partner in the fund. But the real star of the evening was KVP's Indian partner, Bombay stockbroker Ketan Parekh, 39. He had helped make a fortune for many in the room, and for himself, as the market guru of India's hottest companies.

A year has passed, the global high-tech-stock boom has evaporated, and Parekh's own day of reckoning has come. On Mar. 30, India's top police agency, the Central Bureau of Investigation, placed him under arrest on charges of bank fraud. The Securities and Exchange Board of India is investigating allegations that Parekh manipulated markets. "We want integrity in the market, not artificial price creation that's against investor interest," says Lakshman Singhvi, SEBI's senior executive director.

Now Parekh is in a cell at the CBI office in Bombay. Journalists can't speak to him. Repeated efforts to get comments from him or his lawyers were unsuccessful. The Bombay Stock Exchange's Sensex Index is down 16.5% since Mar. 1, the day before Parekh's empire began to collapse.

How could one man have wreaked such havoc? Until two years ago, only stock market insiders knew Ketan Parekh. An accountant by training, he started trading with his father, Vinoobhai, who ran the family brokerage on Dalal Street, Bombay's Wall Street. Parekh had an eye for value stocks. By 1996, his shop was among India's top 10 brokers, along with DSP Merrill Lynch Ltd. and Kotak Securities.

In 1998, Parekh discovered tech stocks; his modus operandi was to take big positions in young companies. Parekh bought shares in a software-services and film-animation company called Pentafour. The company did well, and Pentafour's stock shot from $8 to $18 in six months. When word got out, other investors jumped in.

POWER MAD. Soon Parekh had a cult following. Parekh's favorite stocks came to be known as the K-10, which hit price-earnings ratios of about 160 at its peak. With tech stocks everywhere in the stratosphere, few questioned such valuations. One company, Himachal Futuristic Communications Ltd., a telecom-equipment and fiber-optic maker, rose 335% in eight months. At its peak in March, 2000, it was worth $4.3 billion. Australia's Packer even bought a 10% stake.

Everybody who bet on tech stocks rode the wave, from foreign brokerages to the state-owned Unit Trust of India, whose $21.5 billion in assets includes millions of Indians' life savings. At some point, though, securities regulators believe that entrepreneurs began asking Parekh to promote stocks in exchange for discounted shares. Once the news got out that he'd bought, the price would spike. Banks lent freely to Parekh, who used securities as collateral. The press fawned over the Bull of Bombay. Parekh began appearing with the city's rich and famous, and even called himself a "brand."

Then, on Mar. 2, 2001, the market began to fall--the K-10 stocks harder than most. Regulators say they are investigating rumors that brokers with inside information on Parekh's highly leveraged positions began the selling. Everyone else followed suit, and his empire crashed. Parekh's losses are estimated at over $1 billion, and his debt to the banks--backed by almost worthless stock--at $200 million or more. The K-10 market cap is down 88% from its March, 2000, peak.

The scandal has claimed others, too. The President of the Bombay Stock Exchange, Anand Rathi, resigned under suspicion of insider trading days after the crash of K-10 shares. Even foreign brokers are under scrutiny. Credit Suisse First Boston and JM Morgan Stanley confirmed that securities regulators inquired about share-price movements.

Finance Minister Yashwant Sinha is determined to punish Parekh and use the case to push for better regulation. "Anyone who indulges in criminal manipulation of the market will and must be hanged," he told the press. A person close to Parekh, however, says that he committed no crime. "Ketan will honor his debts," he says. Meanwhile, Parekh sits in his cell. "He appears genuinely contrite," reports a senior CBI officer. Not contrite enough, no doubt, for those who followed the piper to the cliff.

By Manjeet Kripalani in Bombay

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