Billionaire diamantaire Nirav Modi loots Indian banks

Shocking level of corruption and poor auditing systems in place

Business & Politics

February 16, 2018

/ By / New Delhi

The magnitude of Nirav's alleged crime is massive Photo: Scroll

The magnitude of Nirav’s alleged crime is massive
Photo: Scroll

The USD 1.8 billion fraud by billionaire Nirav Modi has exposed the chinks in the Indian banking system. Will India wake up or will it wait for another daylight heist?

Billionaire diamantaire, Nirav Modi, woos women, hugs the powerful, loots a bank and then scoots. The scam gave enough news for the Indian media as law enforcement authorities conducted searches across the country. It provided fodder for political parties too to blame each other, even as Nirav Modi has allegedly escaped to Switzerland.

Extent of scam: The maverick diamond merchant in collusion with bank officials of the Punjab National Bank at a single branch in South Mumbai, has syphoned off USD 1.8 billion. Besides, evidence has emerged of an additional USD 470 million worth of exposure of 17 banks— including Central Bank of India, Dena Bank, Vijaya Bank, Bank of India, Syndicate Bank, Oriental Bank of Commerce, Union Bank of India, IDBI Bank and Allahabad Bank.  Investigations are on to unravel the extent of the scam.

Who is Nirav Modi?

He is ranked 1,234 in Forbes’ list of world’s billionaires for 2017,  and 85 in India.  Surat-born Modi’s financial worth is estimated at USD 1.73 billion through his jewellery design and retail businesses, according to the Forbes website. Far more than the impressive financials listed above are his charming ways of wooing the heads of government, leaders, business tycoons, cine stars, glitterati and chatterati of the world.

Brought up in Antwerp in Belgium, the hub for the global diamond trade, young Nirav dreamt of becoming a music conductor. A dropout of Wharton Business School, Nirav was trained and mentored in India by his uncle Mehul Choksi, who heads Gitanjali Gems.

In 1999, Modi set up a diamond sourcing and trading company called Firestar Diamond. The Company is worth USD 2.3 billion today. Kate Winslet, Steven Spielberg, Sharon Stone and Aishwarya Rai are some of his high-profile clients. Donald Trump, now US President, inaugurated his first store in New York’s Madison Avenue in 2015. Last year, Priyanka Chopra, who scored Hollywood success with her hit series Quantico, was roped in as the brand’s global ambassador.

The high point of his career was when one of his Golconda diamond necklaces was sold for USD 3 million at a Christie’s auction in May 2014.

Nirav has set up jewellery boutiques across three continents — in London, New York, Las Vegas, Hawai, Singapore, Beijing and Macau— besides stores in Mumbai and Delhi. He fancies Bentley cars and expensive Italian suits. Under investigation for “fraudulent and unauthorised” transactions, Nirav Modi’s firm, Firestar International, was moving to go public and raise funds in December last year.

What is the scam?

Nirav Modi allegedly acquired fraudulent letters of undertaking (LoU) from a branch in Mumbai to secure overseas credit from other Indian lenders. An LoU is essentially a letter of credit, where one bank tells another that it will meet a customer’s liability.

Not alone in Rogue’s Gallery:  Nirav is not an isolated case of a billionaire scamster, although his scam may be much bigger than that of his predecessors. Vijay Mallya, India’s liquor baron, faces several cases in India, where his companies have defaulted on loans of around USD 1.41 billion from Indian banks. Currently in the United Kingdom, Mallya—who is fighting an extradition case—was allowed by a London Court to spend 18000 pounds as a weekly allowance.

Deepak Talwar, a leading aviation and corporate consultant; Lalit Modi, ex-chairman of India’s cricket IPL and Sanjay Bhandari, controversial arms dealer, are some of the others who face prosecution and are absconding.

Impact of the scam

The fall-out of the scam is both political as well as economic. A day after the scam broke out, the ruling BJP and a resurgent Congress traded words.

Union Law Minister Ravi Shankar Prasad clarified that Nirav Modi was not part of the delegation to Davos led by Prime Minister Narendra Modi and had reached there on his own. However, the scam will provide enough fodder to political parties to fire at each other ahead of the elections.

Immediate Fallout

Of course supervisory lapses are being probed, and the Enforcement Directorate has initiated a money laundering case against the main accused—billionaire-jeweller Nirav Modi, his wife Ami Modi and close associates and relatives. The state-run Punjab National Bank has suspended ten officials so far for their involvement in the scam. More heads will roll.

But the larger question is, who will clean the Augean stables of the Indian banking system?  Last December, addressing FICCI—one of the leading industry chambers—Prime Minister Modi had said that his government is constantly taking steps to strengthen the banking system. He had assured that the interest of the banks would be secure, and would that of the customers, and as a result, the interest of the country would also be safe.  The last government had put pressure on banks and forced them to lend to influential people, which further led to NPAs.

Will Prime Minister Narendra Modi walk the talk?

Why is the scam serious? The scam amount is nearly double the amount of funds the Government infused into the Bank, India’s second-largest public lender, to help cover its non-performing assets issue. It was one-third of the Bank’s entire market capitalisation at the time when it was reported. It is also equivalent to 8.5 times the Bank’s profit for the financial year 2016–17.

The magnitude of this alleged crime is massive.  Says,  C.H.Venkatachalam, General Secretary, All India Bank Employees Association:  “The fraud quantum is equivalent to five years profit of Punjab National Bank. It is clear failure of the system. Earlier management said computerisation would avoid frauds but in this case, the transactions were not recorded in the computer systems at all”.

In January, the Modi government had unveiled a plan to infuse about USD 332 billion into 21 capital-starved public-sector banks this fiscal. Of this, USD 857.7 million was to be injected into PNB. Meanwhile, according to  ASSOCHAM-Crisil joint study the gross non-performing assets of banks in India are expected to rise to USD 148.8 billion by March 2018, when the Indian financial year ends.

No doubt, India’s public-sector banking system is exposed to mega scams, malpractices and weak vigilance and oversight. The fact that a scam of this magnitude went on unchecked not only reveals the shocking level of corruption but poor auditing systems in place, which have continued through UPA to NDA years. Did the Government act after the whistle blower SV Hariprasad, a jeweller, bring it to the notice of the government? Or did it turn a blind eye? It seems like business went on as usual for everybody.

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