The stock market is a dynamic market. It is a hub of scams. The stock market can either make or break you. One such scam was done by Ketan Parekh. He was a lethal combination: Gujarati, Chartered accountant and a stockbroker. Added to this, he was a student of Harshad Mehta. He wanted to make money in the stock market but had no money to invest. He understood that a bank loan wouldn’t help, as, after the Harshad Mehta scam, banks were strictly regulated. Hence he came up with an innovative idea and named it the Dabba Transaction. Let’s understand what it is.
What is Dabba Transaction?
Dabba means a box and a Dabba trader is one who carries out such transactions. Also known as bucketing, such transactions exist only in the books of the stockbroker. These transactions are generally illegal, as they exist only in the books. When they are carried out in a legally acceptable manner, after paying taxes, they form a part of the forward market.
Role played by Ketan Parekh
Dabba transactions were first started in India by Ketan Parekh. Let’s take an example to understand the working of this. Assuming that the shares of Reliance industries ltd. is valued at rs.1000. Ketan Parekh would approach one group of investors, who believed that this price would fall to 900 the next month. He would make a contract with these investors to sell 10000 shares at a price of Rs. 900, in the following month, irrespective of what the price becomes. Similarly, he would approach another group of investors, who believed that the price would rise to rs.1100, and make a similar contract with them. Now after one month, the share price falls to rs.800. Ketan Parekh would purchase the shares at Rs. 800 and then sell at a cost of rs.900 and 1100 respectively thereby making a profit in both these cases. In fact, there would be no exchange of shares, the only net settlement would take place. The first group of investors would pay Ketan Parekh an amount of Rs. 100 per share, as their price estimate was inaccurate by that amount. The second group of investors would pay him a sum of Rs. 300 per share, as that was the amount of their inaccuracy. The net profit he would make from such a transaction would be 40,00,000. For this to be successful, the prices must move in a favorable direction. In order to enable this, Ketan Parekh would enter the market 3 days before the contract date and invest money in such a manner, that the prices would fluctuate in his favor. After executing the contract, he would withdraw his money. This was noticed by SEBI, and on close scrutiny, the fraud was discovered and Ketan Parekh was tried in the court of law.
The government realized that this kind of Organised Betting had become widespread in the country. Banning it would serve no purpose, as the people would then resort to illegal means to carry out such transactions. Hence, the government introduced a new market, known as the Forward Market, with the regulation that any such transaction would attract tax.
Ketan Parekh, the dynamic personality was eventually adjudicated in the court of law, however, it cannot be ignored that he pioneered the creation of an entirely new market for trading