Keeping track: The Nirav Modi-PNB fraud and what is being done about it

In the politicking around the Punjab National Bank fraud allegedly perpetrated by the billionaire jeweller Nirav Modi, essential details have become muddled. The barrage of often-contradictory articles about raids by the Central Bureau of Investigation and the Enforcement Directorate and recovery of the jeweller’s assets has not helped. With the Narendra Modi government’s attempts to blame everyone but itself, nobody is any wiser about to what is being done, if anything, to contain the damage to India’s banking system.

The central characters in the unfolding tragicomedy, meanwhile, are playing cat-and-mouse. While Nirav Modi, reported to be living it up in New York after fleeing India, has all but refused to return his loans, estimated at Rs 11,400 crore, the PNB has accused him of laundering money and directed him to come up with a “repayment plan”. (What it could possibly do if he does not oblige is not known.)

Here, then, cutting through the noise, is a primer on the fraud and what is being done about it.

What’s the PNB fraud?

On Valentine’s Day, the PNB informed the Bombay Stock Exchange that it had detected “fraudulent and unauthorised transactions” amounting to Rs 11,400 crore at its Brady House branch in Mumbai. The share price of the country’s second-largest public sector bank immediately plunged 9.81%, dragging down shares of other public banks as well. Over the following week, PNB’s shares fell 28%.

The “fraudulent transactions” involved PNB officials handing out Letters of Undertaking to companies associated with Nirav Modi, allowing him to access massive foreign exchange loans that were completely unsecured.

What has the government done about it?

On January 28, the PNB had complained to the CBI about the fraud. The agency, in turn, approached Interpol to issue a notice for locating Nirav Modi, his wife Ami, brother Nishal and uncle Mehul Choksi, all of whom had left India early in January. Soon after, the Indian government suspended the passports of Nirav Modi and Choksi.

While Prime Minister Narendra Modi has not spoken about the fraud, Finance Minister Arun Jaitley sought to pass the buck. “A question for managements itself is whether they were found lacking? And, on the face of it, the answer seems to be –
yes, they were,” he was quoted as saying by The Economic Times. “They were also found lacking in being able to check who among them was a delinquent.”

Speaking at the 41st Annual Meeting of the Association of Development Financing Institutions In Asia and the Pacific on February 20, Jaitley asked, “What were the bank’s auditors doing? If both internal and external auditors have looked the other way and failed to detect the fraud, then chartered accountants must introspect.”

It was left to Defence Minister Nirmala Sitharaman to publicly articulate the government’s position. She tried to throw the fraud at the Opposition’s door by suggesting the wife of Congress leader Abhishek Manu Singhvi was a shareholder in a realty firm that had leased premises to a company associated with Nirav Modi.

Curiously, the government has opposed petitions in the Supreme Court seeking a court-monitored enquiry by a Special Investigation Team into the fraud. Attorney General KK Venugopal argued that an investigation by the Central Bureau of Investigation was already underway so there was no need for another one. The court directed the government to file a reply and adjourned the matter to March 16.

Indeed, the CBI and the Enforcement Directorate have been quite active, raiding properties associated with Nirav Modi and Choksi, sealing stores and seizing everything from luxury cars to boxfuls of imported watches. There were reports of the agencies recovering Rs 5,100-crore worth of Nirav Modi’s assets but they appeared to be of doubtful veracity.

The CBI has booked Nirav Modi for fraud and arrested five officials of companies associated with him and Choksi – Vipul Ambani and Arjun Patil of Firestar International, Kapil Khandelwal of Nakshatra Group, Niten Shahi of Gitanjali Gems, and Kavita Mankikar, the authorised signatory of three companies accused of fraud.

It has also arrested three PNB officials – Gokulnath Shetty, a deputy manager at Brady House branch, Manoj Kharat, who operated the SWIFT financial messaging system, and Rakesh Jindal, head of the bank’s Brady House branch from 2009 to 2011 and currently general manager of credit at the bank’s head office in Delhi. They had issued Letters of Undertaking without getting proper approvals and without making entries in the core banking system, the software used to support a bank’s most common transactions and which acts as a record keeper, Mint reported, quoting the PNB’s complaint.

On Friday, the Enforcement Directorate issued fresh summons to both Nirav Modi and Choksi, asking them to appear before it on February 26. Replying to an earlier summons, Nirav Modi had informed the agency he could not appear before it because his passport had been suspended, reported PTI.

What has the PNB done?

In a letter to the PNB on February 15, a day after the bank acknowledged the fraud publicly, Nirav Modi claimed the bank’s “overzealousness” had hampered his ability to clear his dues. “The erroneously cited liability resulted in a media frenzy, which led to immediate search and seizure of operations, which in turn resulted in Firestar International and Firestar Diamond International effectively ceasing to be going-concerns,” he wrote, according to PTI. “This, thereby, jeopardised our ability to discharge the dues of the group to the banks.”

Replying to the letter on Thursday, PNB accused Nirav Modi of laundering money. “You were getting LoUs issued illegally and in an unauthorised way through few bank officials,” The Economic Times quoted the bank as having written. “At no stage such facilities were extended by our bank to the three partner firms. When these illegal activities surfaced, they pointed out towards apparent violation of FEMA and money laundering aspect.”

It also asked Nirav Modi to come up with a plan to return the money. “Your commitment and undertaking for sparing of the total liability was not backed by providing upfront amounts and timelines,” the bank said in its letter, NDTV reported, quoting PTI. “However, should you have any concrete and implementable plan, do revert.”

Separately, in a clarification to stock exchanges, the bank claimed it had “followed all lawful avenues available to us as per law of land to recover our dues”.

The bank has now appointed the auditor Pricewaterhouse Coopers to investigate the alleged fraud, The Economic Times reported, asking it to collect evidence against Nirav Modi and quantify the bank’s losses from the alleged fraud.