What did demonetisation have to do with diamond mogul Nirav Modi’s gigantic financial scam?

With the first tier of international expansion rolled out, Modi turned his attention to sales. By then, business had started to slow down. According to widespread media reports, revenue was high with sales of Rs 12,500 crore for financial year 2016, but almost half, or Rs 7,000 crore, of that came from trading in diamonds. The private-label business in which he made jewellery for others accounted for Rs 5,500 crore and made for the majority of his revenues, while the retail business was generating only Rs 470 crore as revenue.

After being in business for the best part of a decade, these numbers were starting to become a problem for Modi. Stranger still, of the company’s total sales, almost half came from the Middle East and almost 40 per cent from Hong Kong. Less than 5 per cent of sales were being generated in India, where Modi had launched three stores, run all his campaigns and flexed the most amount of marketing muscle.

Then, for a business where cash transactions are common, the unthinkable happened. On 8 November 2016, the Government of India announced demonetisation of all Rs 500 and Rs 1,000 notes. At the same time, it announced that there would be brand-new currency in Rs 500 and Rs 2,000 denominations that would replace the older bills. For a country where the vast majority of trade and commerce is and has from time immemorial been conducted in cash, the move struck a multitude of chords among consumers, ranging from fear and panic to opportunism and a scramble to rush to the banks to exchange old tender for new.

A New Delhi-based customer of Modi’s who worked for a services firm said under the condition of anonymity that days after demonetisation was announced by the government in 2016, his wife received a text message from one of Modi’s junior sales associates that read, “We accept old notes”.

Here’s how that may have worked. After the ban, the government allowed citizens to deposit old banknotes in banks as long as they furnished their identification. Those account holders with, say, a million rupees in their account wouldn’t draw too much attention from the tax man if they deposited just two or three lakhs, but a deposit of, say, another million rupees that had never been made before would raise a red flag.

In that context, it was far easier for an enterprise aiming to clean up unaccounted cash to distribute, say, a million rupees among twenty employees who would claim that the money was their personal savings. Later, an adjustment could be made in their salaries and the result was a win-win for all concerned: the merchant, the employee and the person to whom the money belonged.

Shortly after the ban, in early 2017, a story began doing the rounds that there was a full-scale raid in progress and that it was being conducted not just on Nirav Modi but also on his close associates. While it is not verifiable, an official with a law firm said that the rumour is that Modi converted at least Rs 300 crore in this way. A raid in Indian business parlance is essentially a search and survey operation that is conducted by the Income Tax Department when they receive a tip-off that a person or corporation is or has been hoarding “black money”, or cash that they haven’t paid tax on.

In theory, it’s a move against corruption, but in practice it’s a search-and-sweep operation that gives the officers conducting the raid almost Gestapo-like powers that include entering and searching any building or facility that is under suspicion, breaking open sealed cupboards, locks and containers, carrying out personal searches, making an inventory of valuables, taking copies of accounts and seizing items deemed illegal. Needless to say, the cell phones of those being raided are confiscated and their communication with the outside world is cut off.

The last big raid in the jewellery world is documented as having happened some time in 2013 when the National Investigation Agency and the Income Tax Department carried out a joint operation in Mumbai. It led to a haul of diamonds, cash and bullion worth around Rs 200 crore. Those raids happened at Mumbai Central station after the authorities zeroed in on four trucks, from which over a hundred bags were seized, and the people in the vehicles, including the drivers, helpers, office peons of diamond traders and angadias, unregulated couriers who offer illegal banking services, were taken into custody.

Indeed, the Income Tax Department had raided over fifty of Modi’s offices and residential premises, and seized cash, jewellery and documents that allegedly indicated evasion by his companies, as the newspapers would report later. According to sources, the raids stretched over four days, at his properties in Mumbai, facilities in Delhi, Jaipur and special economic zone units in Surat.

The offices of the Gitanjali Group were also checked out in connection with the ongoing investigation. Once again, Modi was not able to shake off his association with Choksi. The fact that his uncle was also lobbing up a company for an IPO while Modi was doing the same heightened the scrutiny on Modi.

There was also an ongoing spate of news about some of Choksi’s former jewellery dealers going on tirades about how they had been short-changed by Gitanjali on gold loan schemes. As mentioned earlier, Digvijay Singh Jadeja, a Gitanjali franchisee in Gujarat, had notified the Gujarat High Court and the state government about Choksi’s Gitanjali Gems in 2015, but nobody moved on his complaints, he said. Jadeja claimed that Choksi duped him of Rs 60 crore by taking 106 kg of gold that he was to make interest payments on but reneged after a few instalments.

Earlier, in 2013, when Jadeja had met Choksi for lunch at his office in the Bandra Kurla Complex in Mumbai, he said that Modi was present and was introduced to him. “I am looking for another kg of gold and the plan is to start a business in Dubai where we are going to set up, because the potential there is much greater than in India,” Choksi had told him.

Jadeja said he actually toyed with the notion of getting into business with Choksi in Dubai, but dropped the idea like a hot potato when interest defaults started a few months later. These sort of very public accusations cast aspersions on Choksi and everyone associated with him, including Modi. Modi, of course, as explained earlier, admitted that he had been raided.

A former executive who oversaw sales reports indicated that while Modi’s stores in China and Delhi were profitable, and the Mumbai store was breaking even, the London and New York locations were losing money, which was worrisome given the high rental costs. The London boutique, a three-storeyed building with around 1,500 square feet of space, would have cost Modi anywhere between £600,000 and £800,000 a year according to property management companies that track that market.

Many questions remained, and the answers to all of them would not be secret for much longer. The world was to soon find out how Modi had been financing his whole show.

Excerpted with permission from Flawed: The Rise and Fall of India’s Diamond Mogul Nirav Modi, Pavan C Lall, Hachette India.