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PNB Fraud: 2017 EY Report red-flagged flaws in Gitanjali Gems' account, Nirav Modi blames bank's 'haste' for fiasco

By FnF Desk | PUBLISHED: 20, Feb 2018, 9:20 am IST | UPDATED: 20, Feb 2018, 9:34 am IST

PNB Fraud: 2017 EY Report red-flagged flaws in Gitanjali Gems' account, Nirav Modi blames bank's 'haste' for fiasco Mumbai: Bankers across India were probably blinded by the glitter of jewels and the glib charm of Mehul Choksi. By the time they sensed that Gitanjali Group, Choksi’s empire, was a smoking gun, it was too late.

Meanwhile, Nirav Modi knows who's to blame for the losses faced by public-sector lenders due to the Rs 114-billion scam at Punjab National Bank (PNB). According to the absconding businessman, it's PNB and its "haste" that are to blame. Modi reportedly wrote to banks, saying that the firms controlled by him were unable to clear their dues because of the actions taken in "haste" by PNB. He also asked the banks to pay salaries to the 2,200 employees working in those firms.

Modi also said the dues were much less than what the bank had claimed, and that his relatives booked in the cases filed by the central agencies had nothing to do with the operations of the firms under their scanner. At the same time, the Centre has shot written to the Reserve Bank of India (RBI), asking whether at any stage it detected the fraud, involving letters of undertaking (LoUs) issued on behalf of companies promoted by Nirav Modi and his uncle Mehul Choksi.

A special report prepared by an external consultant, hired by anxious lenders last year, only deepened suspicions. The confidential report, titled Project Jewels and submitted in May 2017 by EY, talks about dealings between Gitanjali GemsBSE -9.99 % and group companies, inadequate records maintained by the listed entity, absence of provisions for doubtful debts, and delays in collection of dues.

Gitanjali Group companies together owe more than Rs 7,000 crore to around 35 banks, which includes some of the large state-owned lenders as well as the biggies among private sector banks. This is believed to be over and above the unrecovered credit through PNB’s secret letters of undertaking.

A month after the report, a senior manager of PNB’s Brady House branch in Mumbai, which is now in the eye of the storm, asked Gitanjali to provide an “updated net worth statement” of Priti Choksi, wife of Mehul Choksi. While the reason for this was not stated in the letter, banks typically ask promoter members who stand as guarantors to share details of wealth and assets. The letter was addressed to Kapil Khandelwal, joint president, banking and finance of Gitanjali Gems and copied to ICICI Bank, one of the lenders.

Trans Exim and Crown Aim

“Invoking personal guarantee is a pressure tactic banks employ to recover loans. But if assets underlying such guarantees are either insufficient or have been alienated, there’s not much that can be done,” said a senior banker.

According to the EY report which has been reviewed by ET, two parties – Trans Exim and Crown Aim – constitute 54% (amounting to Rs 2,081 crore) of export debtors as of mid-2016. Crown Aim is a group company and Trans Exim was incorporated by one of the relatives of the Gitanjali promoters. Group receivables constitute 33% of total receivables of Gitanjali Gems, the flagship and the largest borrower in the group.


The agency had pointed out that the company was not maintaining invoice-wise database for domestic collections and were knocking off the same on FIFO (first-in first-out basis). Also, there were no provisions for doubtful debts despite suffering bad debts in the previous three years.

The Gitanjali management had clarified to EY that as a policy it extended longer periods for greater penetration in foreign markets (which accounted for 80% of jewellery sales).

Gitanjali Gems did not share sample of the ‘confirmation letter’ (that companies typically sent to debtors at the close of an accounting period) with EY officials. The correspondents for follow-ups with debtors were also not shared by the company. Some of its overseas customers, such as Good Mark Jewellery, Infinite Gems, Munic (DBA) and New York Diamonds had the same signatory. According to Gitanjali, this was because “the companies were being managed by the same accountant”.

In this context, there is an interesting observation by EY: “Confirmation given by various debtors were not on their respective letterheads.

However, the confirmation were stamped and signed by the signatories. The letterheads in the confirmations provided for six entities looked similar in terms of their structure. As per the management, this is in line with industry standards.”

After meeting some of the debtors of Gitanjali Gems, EY concluded that the company had no policy for providing for doubtful debts and had no proper processes and internal system to periodically assess the recoverability from debtors.

Of the Rs 7,000-odd crore outstanding loans to Gitanjali group, Gitanjali Gems owed about Rs 5,000 crore. Other borrowers included GECL (whose merger with Gitanjali Gems was approved a few years ago), Bezel (formerly, D’Damas), GILI, NBL, Asmi, Nakshatra World (formerly, Gitanjali Brands).

Banks, which are yet to fully provide for the exposure, are understood to be planning a forensic audit of Gitanjali. While this time-consuming and probably expensive exercise may track the flow of money, not many believe it would help in salvaging the loans.

Here are what Modi wrote in his letter and the top developments in the largest banking scam in the country's history:

1) PNB's 'haste' to blame: Nirav Modi, the alleged kingpin of the largest banking scam in the country's history, has said PNB's overzealous approach shut the doors on his ability to clear the dues. "In the anxiety to recover your dues immediately, despite my offer, your actions have destroyed my brand and the business and have now restricted your ability to recover all the dues leaving a trail of unpaid debts," Modi said in his letter to banks.

2) Raids shut down Nirav Modi companies: He said the operations of his companies Firestar International Private Ltd (FIPL) and Firestar Diamond International Private Ltd (FDIPL) had effectively ceased owing to raids launched by investigative agencies, including the Enforcement Directorate and the Central Bureau of Investigation.  

3) Modi claims his companies owe only Rs 50 billion: Modi also said the dues were much less than what the bank has claimed, and that his relatives booked in the cases filed by the central agencies had nothing to do with the operations of the firms under their scanner. In a letter Modi written on February 15-16 to the Punjab National Bank management, a copy of which was accessed by news agency PTI, Modi pegged the money his companies owed to the bank at under Rs 50 billion (Rs 5,000 crore). PNB, the second-largest state-run bank, had, on February 14, informed the exchanges about detecting a $1.77-billion fraud at its Brady House branch in Mumbai, and named the firms led by Modi and his uncle Choksi's Gitanjali Group, and some other diamond and jewellery merchants, as suspects. Central government agencies, the CBI and the Enforcement Directorate, have registered cases on the complaint by the bank, and launched nationwide searches on dozens of offices and residences of the alleged fraudsters. The bank has named Modi's brother, his American wife Ami, and uncle Choksi, besides some others, in the FIR.

On the over Rs 110-billion (Rs 11,000-crore) loss claimed by PNB in its FIR, Modi said, "As you are aware, this is entirely incorrect and the liability of the Nirav Modi Group is substantially less...." "The erroneously cited liability resulted in a media frenzy which led to immediate search-and-seizure operations, and which in turn resulted in Firestar International and Firestar Diamond International effectively ceasing to be going concerns," his letter said.

4) Modi wants banks to pay his employees' salaries: Nirav Modi has asked the banks to pay salaries to the 2,200 employees working in those firms. "I would request you to permit salaries for FIPL and FDIPL to be paid for the 2,200 employees from the balance lying in the current accounts. Our HR head will send you a breakup of the monthly salary," Modi, who left the country along with his family in the first week of January, before the alleged scam became public, wrote in the letter.

5) Modi wants to sell his firms: Nirav Modi requested banks to allow him to sell the Firestar group. "Even after your complaint was filed, in good faith I wrote to you saying please sell/allow me to sell Firestar Group, or their valuable assets, and recover the dues not just from Firestar Group, but also from the three firms," Modi's letter said. He said the inventory, including assets and receivables of FIPL and FDIPL and three other firms could have settled the pending dues to the banks. "However, now that stage appears to have passed, and there is a general panic," he said, adding that the valuation of the firms stood at Rs 65 billion.

6) There has been no default: He went on to state that PNB had time and again acknowledged that the buyer's credit facility had been extended by it to the three partnership firms for several years, and that there had been no default on the part of any of these firms over all these years. He said that money went through PNB all these years for the repayments of the advances given by the overseas bank branches under the buyer's credit. "That Firestar International and Firestar Diamond International have never been in default to any bank, and the bankers are fully secured". He also said that PNB had over the years been earning bank charges to the tune of billions of rupees on the buyer's credit facility extended by the bank to the three partnership firms. He added that PNB had extended the money to the firm's buyers as well, from where also it has been receiving full payments, with interest and on time, all these years.

7) Govt seeks RBI's view on lapses in banking system: The Union government has shot off a letter to the RBI on the alleged Rs 114-billion PNB scam, asking whether at any stage the banking regulator had detected the fraud, involving LoUs issued to foreign branches of Indian banks on behalf of Nirav Modi and Choksi companies. "Under the Banking Regulation Act, the RBI has a major role related to inspection, regulation, audit and the oversight of banks. We have written to the RBI, asking how the alleged scam, which had been going on for years, went undetected, and whether the regulator exercised its role under the law," an official said on condition of anonymity.

 8) Three more PNB officials arrested: The CBI on Monday arrested three more PNB officials after intense grilling during the day in connection with the scam involving billionaire jewellery merchants Nirav Modi and Mehul Choksi, officials said. The agency also started searches late Monday evening at group offices of Nirav Modi at Peninsula Business Park in lower Parel, Mumbai. The total number of arrests by the CBI has risen to five -- four PNB officials and a retired employee of the bank -- after Monday's development. Manoj Kharat, a single-window operator at PNB, and the retired employee Gokulnath Shetty were arrested earlier. Bechhu Tiwari, the then chief manager in the forex department; Yashwant Joshi, Scale-II manager in the forex department; and Praful Sawant, Scale-I officer handling the exports section were arrested by the agency Monday evening, officials said. The agency had started searches at their residences located in Navi Mumbai, Andheri and Dombivilli, they said.

9) 'PNB solely liable for fraud': The public sector banks (PSBs) affected by fraudulent LoUs issued by PNB have told the government that PNB is wholly responsible for the alleged Rs 114-billion scam related to the groups of companies led by Nirav Modi and Mehul Choksi. A senior banker disputed the claim made by PNB that the fraud went undetected because the bank's core banking system (CBS) was not integrated with the Society for Worldwide Inter-Bank Financial Telecommunication (SWIFT), a global financial messaging system that was used to instruct foreign branches of Indian banks to release money, amounting to Rs 114 billion over the years, for companies owned by Nirav Modi and Mehul Choksi. The executive also said all the LoUs issued by PNB were genuine and in accordance with norms set out by the RBI. "Once our foreign branches transferred the money to the PNB's nostro account how can it claim that the transaction was not recorded in its books? It should reflect in its accounts," the banker said on condition of anonymity.

10) CVC demands an explanation: The Central Vigilance Commission (CVC) on Monday asked the PNB and Ministry of Finance officials to submit a report on how the scam took place, despite monetary regulations being in place. CVC has given the bank 10 days to prepare and submit the report. Earlier, officials from PNB, RBI, and Department of Financial Services gave a two-hour long presentation to CVC about the case. The law enforcement agency has asked for names of officials who were involved in the scam and sought identification of officials who could have taken action and prevented it. #Source: BS/ ET