PNB, the second largest state-owned bank, confessed itself as the victim of India’s largest bank fraud on February 14, 2018. PNB has filed a fraud case against Nirav Modi and Mehul Choksi, the promoter of Geetanjali Jewels for allegedly obtaining fake LoU’s from PNB Mumbai’s Brady Road branch for last seven years.
While the scam has shaken India’s banking industry, here are few important notches we need to know about the 127 billion scam:
- The whole scam revolves around fake LoU’s that Nirav Modi’s enterprises procured from PNB. But for better understanding, one needs to know what are LoU’s? Bank provides their customers with bank guarantee known as Letter of Undertaking, under which customers are allowed to raise money from foreign branches of banks for overseas import payments.
- In order to generate a LoU, the customer has to pay margin money to the bank raising LoU ( in this case PNB) according to which credit limit is determined. But in Nirav Modi’s case, no margin money was paid to the bank.
- Nirav Modi’s three enterprises- Diamond R Us, Solar Exports and Stellar Diamonds managed to get loans for last seven years to pay its suppliers of rough stones. The payment was made in lieu of Axis Bank, UCO Bank, and Allahabad bank by showing LoU issued by PNB.
- Surprisingly, LoU’s are reissued every year by the bank but here, no official record of such LoU’s was found while scrutiny of PNB records.
- In this case, PNB (issuer of LoU), is liable to pay on behalf of his customer’s commitment.
How the fraud unearthed??
When Modi’s firm requested further LoU’s from the PNB, the bank officials refused and asked them for 100% security against the LoU. Modi’s firm asserted that no such money was kept for last seven years on margin. Consequently, the bank scanned their records and found no history of such transaction. This brings out that bank guarantee was issued neglecting the rules of the bank in association with PNB employees. After which, the matter was reported to CBI against Mehul Choksi and Nirav Modi. Absconding Modi left India on January 1, before the first complaint was filed.
After actualizing India’s biggest banking scam, it becomes mandatory to know few facts about Nirav Modi-
- The 48-year-old diamond tycoon is the 85th richest man in India who hails from a family of diamond merchants from Gujarat.
- He started his career in 2008 when he first designed a pair of earrings for his friend.
- His elite clients include Kate Winslet, Steven Spielberg, Sharon Stone, Aishwarya Rai, Priyanka Chopra and many others.
- His jewelry range starts from Rs.5 lakhs up to Rs.50 crores.
- Brand Nirav Modi has his flagship stores in London, New York, Las Vegas, Beijing, and Macau. In India, his stores are in Mumbai and Delhi.
The fraud has jolted the government and raised their interests in similar cases. The Finance Ministry has set a 15-day deadline for state banks to take into consideration all the potential cases involving such a huge amount of loans.