Punjab National Bank, the second largest government-run bank in India announced earlier this month that it has been the victim of the largest ever bank fraud committed in the country.
Fraudulent transactions by jeweller Nirav Modi’s company and other associated entities totalled up to $1.77 billion or above Rs 11,000 crore.
Scam Affects Numerous Other Banks As Well
The bank has said in a complaint filed with the Central Bureau of Investigation, that Modi and several companies related to him had colluded with bank officials to obtain Letters of Undertaking (LOUs) or bank guarantees that support buyer’s credit from other overseas banks.
According to PNB, the funds which were purportedly raised for the purchase and sale of diamonds, had not been used for that purpose. Subsequently, it has been revealed that the fraud extends to several other banks including Union Bank, State Bank of India and Axis Bank Ltd.
Modi had flown out of India on Jan. 1 and the CBI is now trying to nab him.
The agency has approached the Interpol to help in tracing Modi and his family. A fresh FIR has also been filed against Mehul Choksi, an uncle of Modi and promoter of Gitanjali Group, who has also been implicated in the fraud.
How The Scam Was Operated
Three companies linked to Modi (Diamonds R US, Solar Exports and Stellar Diamonds) applied to PNB seeking buyer’s credit in order to pay overseas suppliers.
In PNB’s complaint it has stated that as per preliminary investigations two bank officials had issued LoUs to these three firms without the necessary due process. These LoUs were then transmitted via the SWIFT messaging system, using which the firms were able to obtain credit from other banks.
So as a result, overseas banks had been lending money to the companies with the assurance that PNB was providing the necessary guarantee in case of a default. However that was not the case.
PNB Management Response
At a press conference held by PNB on Feb. 15 the bank has said that it would be honouring all bona-fide commitments.
Managing Director and Chief Executive Officer Sunil Mehta stated that prompt action had been initiated against staff members who had not entered the right information into the system. Modi has also been asked to submit a formal repayment plan.
The management has informed investors that even if it is forced to pay out the entire sum loaned it will not breach the mandatory capital thresholds.
Liability For Repayment
In regards to the liability, the CBI would be determining if PNB needs to repay the banks that had loaned money to the firms related to Modi.
The best-case scenario is if Modi or his companies pay up the funds loaned to it, which PNB would use to repay banks that had loaned money to Modi.
Background – Nirav Modi
India’s 85th richest person Nirav Modi is a high profile jewellery designer whose creations have been seen on stars like Priyanka Chopra and Kate Winslet.
He has set up 10 boutiques globally – two of them in the U.S., two in India, one in Beijing, and two in Hong Kong.