1 month ago
How the 2001 market crisis strengthened NSE's position
A long time ago, in 2001, something went wrong in India's stock market.
A stockbroker named Ketan Parekh made some special stocks seem very popular.
He did this by borrowing lots of money and trading the same stocks back and forth.
When people caught on, the prices of those stocks fell very fast.
Many people lost a lot of money in the crash.
The Calcutta Stock Exchange had a very hard time because of an old money system called Badla.
But another exchange, called the National Stock Exchange (NSE), had computers that did the trading automatically.
It also had smart rules that made people pay back money they owed.
Because the NSE was safer, many investors moved their business there.
Later, the government made new rules so a crash like this would be less likely to happen again.
In 2001, the collapse of stockbroker Ketan Parekh's market manipulation scheme in 'K-10 stocks' caused substantial investor losses and exposed weaknesses in market infrastructure.
Parekh used extensive borrowing, circular trading and synchronized deals to inflate prices of technology, media and telecom stocks.
The Calcutta Stock Exchange (CSE) was among the most severely affected, suffering broker defaults and weakened confidence due to its reliance on the Badla financing system.
The National Stock Exchange (NSE) maintained stability through its electronic order-driven trading system, Value-at-Risk (VaR) based margining and NSCCL central counterparty settlement.
Regulator SEBI phased out Badla, strengthened margining and disclosure, and expanded electronic surveillance, while investors shifted trading to NSE and raised its market share.
- Who
- Stockbroker Ketan Parekh; exchanges including the National Stock Exchange (NSE), Calcutta Stock Exchange (CSE) and Bombay Stock Exchange (BSE); and regulator SEBI.
- What
- The collapse of Parekh's market manipulation scheme triggered a market crisis that exposed infrastructure weaknesses, strengthened NSE's position and prompted regulatory reforms.
- Where
- India's securities markets, affecting the Calcutta Stock Exchange (CSE), Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
- When
- 2001
- Why
- NSE's electronic trading, VaR-based margining and central counterparty settlement kept it stable during the stress, drawing investors away from other exchanges and prompting SEBI-led reforms.
Key facts
- Market event
- Collapse of stockbroker Ketan Parekh's market manipulation scheme involving 'K-10 stocks'
- Year
- 2001
- Affected stocks
- Technology, media and telecom stocks (K-10 stocks)
- Most affected exchange
- Calcutta Stock Exchange (CSE)
- NSE commenced operations
- 1994
- NSE risk management
- Value-at-Risk (VaR) based margining and NSCCL central counterparty settlement
- Regulator
- Securities and Exchange Board of India (SEBI)
- Key reforms
- Phase-out of Badla financing, stronger margining, enhanced disclosure and electronic surveillance
Sources
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