What exactly happened?
On February 05,2018, PNB informed India’s stock exchanges of a Rs280 crore fraud. The bank followed it up on February 14,2018, informing the stock exchanges once again that it had discovered fraudulent transactions, dating back to 2011, “for the benefit of a few select account holders”. The note did not name designer jeweller Nirav Modi, but media got to know that some of the bank’s employees at a Mumbai branch allegedly issued letters of undertakings, or LoUs, to Modi’s companies, which enabled them to raise money from international branches of other Indian banks in the form of buyer’s credit. The PNB note said “these transactions are contingent in nature and liability arising out of these on the bank shall be decided based on the law and genuineness of underlying transactions.” The money involved is “$1,771.69 million”
The very next day, in yet another detailed clarification to the stock exchanges, PNB said that when Modi’s employees approached the Mumbai branch on 16 January seeking an LoU, the bank asked for 100% cash margin; but they contested this, claiming the group had been enjoying the facility for years without any cash margin. That led to the discovery of the fraud—issuances of LoUs through SWIFT without any official sanction.
By January 25,2018, the first devolvement of a set of LoUs occurred, leading to $44.2 million liability for PNB. Subsequently, more LoUs started devolving on PNB. Apart from Modi group firms, the involvement of Gitanjali group firms of Mehul Choksi (Modi’s uncle) surfaced. By 12 February, PNB discovered some Rs11,304.02 crore of unauthorized issuances of LoUs and other trade finance instruments to the Modi firms, Gitanjali group companies and Chandri Paper and Allied Products Pvt. Ltd, owned by Aditya Ishwardas Rasiwasia and Ishwardas Agarwal.
What is an LoU?
What is an LoU? It’s an explicit undertaking offered by a bank to another bank on behalf of its customer, who is importing goods from overseas. Backed by the LoU, the overseas bank gives the so-called buyer’s credit to the importer.
Buyer’s credit is a short-term credit available to a buyer (importer) from overseas lenders such as banks and other financial institutions for goods being imported. The overseas banks usually lend the importer on the basis of an LoU issued by the importer’s bank. The bank which gives the LoU earns a fee, typically 0.2-0.25% of the amount; the bank which gives the buyer’s credit earns interest (Libor, or London Interbank offered rate, plus a spread, depending on the profile of the customer); and the importer gets a cheap line of foreign credit.
The maturity of an LoU could be between 30 days and one year, depending on the operating cycle of the importer. For instance, a diamond merchant may need two-to-three months’ time to cut, polish and export the raw diamond imported from South Africa, while an entity that imports crude palm oil from Malaysia may need less time for converting it to RBD palm oil through degumming, bleaching and deodourizing. In Reserve Bank of India’s (RBI’s) lexicon, such facilities are short-term external commercial borrowing and they cannot be rolled over. The idea behind having such a scheme is to enable an importer to access low-cost foreign currency funds overseas.
Under RBI guidelines, buyer’s credit for import of platinum, palladium, rhodium and silver and rough, cut and polished diamonds, precious and semi-precious stones should not exceed 90 days from the date of shipment. The list, however, does not include pearls. I am not aware what exactly Modi’s companies were importing. Media reports suggest Modi was importing cultured pearls.
How the fraud was detected ?
According to the complaint filed by PNB with the CBI on January 28, the fraudulent issuance of Letters of Undertakings (LOU) was detected at the Mid Corporate Branch, Brady House in Mumbai.
A set of partnership firms -- Diamond R US, Solar Exports and Stellar Diamonds -- approached the bank on January 16 with a set of import documents and requested for Buyer's Credit to make payments to overseas suppliers. The firms have Nirav Modi, his brother Nishal Modi, Mr. Nirav's wife Ami Nirav Modi, and Mehul Chinubhai Chokshi as partners.
Buyers Credit is, typically, a short-term loan facility extended to an importer by a bank to finance goods and services. It is a common mode of transaction in international trade where a bank extends credit to the importer and a finance agency based in the exporter's country guarantees the loan.
As there was no sanctioned limit in the name of the firms, the branch officials requested the firms to furnish 100% cash margin for issuing the LOU for raising the Buyer's Credit. At this, the firms contested that they have been availing this facility in the past; but the branch records do not corroborate this.
On digging further, the bank officials discovered that two of its employees had fraudulently issued LOUs in the past without following prescribed procedures and approvals. The employees had then transmitted SWIFT instructions to the overseas branches of Indian banks for raising Buyer's Credit without making entries in banking system to avoid detection.
The complaint also said that the funds so raised for the payment of the Import Bills have not been utilised for such purposes in many cases
Timeline of PNB Scam
imeline of the PNB Scam Involving Celebrity Jeweller Nirav Modi:
January 29, 2018: Deputy General Manager of PNB's Mumbai branch, Avineesh Nepalia, complains to the CBI, saying that some of its officials were causing loss to the bank and eight fraud Letters of Undertaking (LoUs) amounting to Rs. 280 crore were issued for Hong Kong-based banks.
January 31, 2018: Income Tax officials raid celebrity jeweller Nirav Modi's offices in Delhi, Surat and Jaipur which were allegedly under I-T department's scanner.
February 5, 2018: The CBI charges billionaire jeweller Nirav Modi about a multi-crore cheating case. It registers a First Information Report (FIR) for criminal conspiracy and cheating against Nirav Modi, his brother Nishal, wife Ami and Mehul Chinubhai Chowski of Diamond R and Stellar Diamonds, for causing a loss of Rs. 280 crore.
February 14, 2018: PNB complains to the CBI about celebrity jeweller Nirav Modi alleging multi-crore fraud. The complaint says that Rs. 11,000 crore of taxpayers' money had been illegally transferred abroad from its branch in Mumbai. Punjab National Bank said that its own officials violated rules and put out illegal guarantee documents to help the celebrity jeweller secure credit from banks abroad.
February 15, 2018: CBI searches Nirav Modi's showrooms and offices in Mumbai, Delhi and Surat. The Enforcement Directorate (ED) seizes diamonds, jewellery and gold worth Rs. 5,100 crore. Nirav Modi, his wife and uncle Mehul Choksi left the country in the first week of January, inform officials.February 16, 2018: The bank again approaches the CBI giving details of more transactions. PNB detected 150 Letters of Undertaking (LoUs) which were fraudulently issued by its officials in connivance with Nirav Modi and the other accused in the case, officials said.
CBI raids Gitanjali Group owned by Nirav Modi's uncle Mehul Choksi.
The Income Tax Dept Friday provisionally attaches 29 properties and 105 bank accounts of the diamond merchant, his family and firms as part of its tax evasion probe.
The CBI asks Interpol help to arrest Nirav Modi.
February 17, 2018: Government suspends passports of Nirav Modi and Mehul Choksi for four weeks.
February 18, 2018: CBI questions 11 Punjab National Bank (PNB) officials and conducts searches at PNB's Brady House branch in Mumbai.
CBI arrests former PNB Deputy Manager Gokulnath Shetty, single window operator Manoj Kharat and group's authorised signatory Hemand Bhat for their role in issuing fake guarantees at a huge cost to the taxpayer.
February 19: CBI summons Nirav Modi's Chief Financial Officer and seals Mumbai's PNB branch.
February 20, 2018: A letter that Nirav Modi wrote to the Punjab National Bank management on February 15/16 came out. In the letter, he pegged the money his companies owe to the bank at under Rs. 5,000 crore. The crackdown has jeopardised his company's ability to discharge the dues of the group to the banks, he wrote.
Nirav Modi's lawyer Vijay Aggarwal said that all transactions with PNB were documented and allegations made by the Central Bureau of Investigation (CBI) were completely wrong.
CBI arrests three more employees of the Punjab National Bank over the Rs. 11,400 crore loan fraud case involving celebrity jeweller Nirav Modi.
February 21, 2018: CBI arrests Vipul Ambani, CFO of Nirav Modi's firm and two other senior executives of Nirav Modi's firms. It also seals Nirav Modi's farmhouse in Alibaug.
The Enforcement Directorate (ED) continues raids at Nirav modi's firms and seizes assets worth Rs. 10 crore. The tax department said it has attached a total of 141 bank accounts and fixed deposits worth Rs. 145.74 crore of the Nirav Modi group. The total value of gems and gold jewellery seized by the ED stands at Rs. 5,736 crore.
CBI arrests Rajesh Jindai, a General Manager-rank officer of PNB, posted at the head office in New Delhi, who was the head of the Brady House branch of PNB during 2009-11.
February 22, 2018: A special court in Mumbai remands Vipul Ambani, the president (finance) of Nirav Modi's Fire Star Diamond, and five others in CBI custody till March 5.
The ED seizes fleet of 9 luxury cars including a Rolls Royce Ghost, two Mercedes Benz GL class, one Porsche Panamera, three high-end Honda cars and one Toyota Fortuner belonging to Nirav Modi and his group of companies. ED said that it has frozen mutual funds and shares worth Rs. 94.52 crore of the Nirav Modi and Mehul Choksi groups.
PNB asks billionaire diamond jeweller Nirav Modi to come up with a concrete and implementable plan to settle the loss caused to it
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