CASE ANALYSIS ON PUNJAB NATIONAL BANK Vs. NCT OF DELHI & Anr. ( NIRAV MODI SCAM CASE )
- Author:- RAJA LAKSHMI R, CHRIST ACADEMY INSTITUTE OF LAW , BANGALORE
BACKGROUND OF CASE
Nirav Modi and his uncle Mehul Choksi, working together with Punjab National Bank employees, were the scammers’ leaders. Unauthorised Letters of Undertaking (LoUs), which are essentially bank guarantees that let recipients obtain funds abroad, were a part of the scam. After reviewing the LoU, foreign banks—which are branches of Indian banks—lend money to the debtor, keeping the LoU as collateral in case the debtor is unable to repay the loan. Typically, the bank issuing the letter of intent (LoU) requests collateral, which can be either a fixed deposit (FD) or real estate held in the borrower’s name. Corrupt authorities issued illegal letters of intent without a sanctioned credit limit or collateral as security. For record-keeping reasons, these transactions were not entered into the PNB’s Core Banking System (CBS). The dishonest personnel operated with illegal LoUs by using the SWIFT system, which was not connected to the bank’s primary record-keeping system. Modi and his companies were immediately given loans by overseas Indian bank branches, which they used to pay for import-related expenses and settle outstanding debt. For about seven years, Modi, Choksi, and their allies engaged in these unregulated actions in cooperation with dishonest PNB personnel.
In the Nirav Modi scandal, Nirav Modi and his companies were granted letters of intent (LoUs) without providing collateral, then unscrupulous PNB officials in Mumbai sought collateral. PNB was contacted by foreign banks that had extended loans in accordance with its LoUs. Despite the start of internal inquiries, no evidence of unapproved LoU transactions was discovered. The Nirav Modi scam began when the Punjab National Bank disclosed fraudulent transactions of almost 1.8 billion dollars to stock exchanges, the Reserve Bank of India, the Central Bureau of Investigation, and the general public on February 14, 2018.
CURRENT SCENARIO
Nirav Modi was detained at Wandsworth Prison following his arrest on March 20, 2019, and he has been incarcerated for three years. His extradition to India is still pending in court; the Westminster Magistrates’ Court in the UK ruled in favour of his extradition, and the Appellate Court has not yet rendered a decision. UK Prime Minister Boris Johnson restated that Modi is not welcome to remain in the UK and that extradition to the UK was already ordered by UK authorities.
Now, Modi’s attorneys are depending on his mental status to prevent his extradition, claiming that either his mental state is not healthy enough for treatment or that it is not strong enough to withstand the strain of the extradition procedure to Indian facilities. In an effort to prevent his extradition, they also cite Section 91 of the Extradition Act of 2003 (Provision relating to physical or mental ill-health) and Article 3 of the European Convention of Human Rights, 1950 (ECHR’s provision on Prohibition of Torture), focusing on the “high risk of suicide” and the “adequacy of any measures capable of preventing successful suicide attempts.”
In order to prevent Modi’s mental health from worsening after his extradition, the Indian government has diplomatically assured Lord Justice Jeremy Stuart-Smith and Justice Robert Jay, who are presiding over the hearing at the Royal Courts of Justice, that Barrack 12 of Mumbai Central Prison will have sufficient specialised medical care as well as an ambulance. Modi can cease being extradited if he prevails in his High Court appeal unless the Indian authorities are granted permission to file an appeal at the UK Supreme Court regarding a legal matter of public interest.
IMPACT OF THE SCAM IN INDIA
In February 2018, there was a notable impact on the stock market from the Nirav Modi scam, and investors suffered a substantial loss from the PNB scam. Axis Bank, UCO Bank, Allahabad Bank, Union Bank of India, and SBI were among the bank stocks that had large losses totaling more than 6,000 crore rupees. The majority of the loss was incurred by the affected banks, which included UCO Bank, Allahabad Bank, Axis Bank, Union Bank of India, and SBI.
The shares of Nirav Modi’s jewellery companies, such as Firestar Diamond International Company, plunged as the scandal became public, despite not being listed on stock exchanges. Investor wealth decreased as a result of the jewellery industry’s heightened volatility. Since Life Insurance Corporation (LIC) was the sole major institutional investor in the compromised banks, the scam also indirectly impacted this other state-owned enterprise.
PNB’s credit ratings were severely damaged by the two billion dollar scam. CRISIL placed PNB’s credit rating on “watch,” India Ratings, the local arm of Fitch, downgraded PNB’s long-term issuer rating from “IND AAA” to “IND AA+” with a negative outlook, and Moody’s downgraded the rating of the state-run Punjab National Bank (PNB) from Baa3/P-3 to Ba1/NP.
The Nirav Modi scandal had a noteworthy effect on the export-import sector as well because Letter of Undertakings (LoUs) were necessary to offer low-interest short-term finance. The export-import industry as a whole was put in jeopardy by the total prohibition of LoUs, since increased interest rates burned a hole in businesspeople’s wallets and forced other companies to foot the bill for Nirav Modi’s avarice. The worst hit were small-time traders who lost out on arbitrage and saw the value of the Indian rupee decline.
REFORM INTRODUCED AFTER THE PNB SCAM
To stop abuse of the facility, the Reserve Bank of India (RBI) published a notice prohibiting banks from providing guarantees in the form of Letters of Undertaking (LoU). This choice was denounced as a panicked, impulsive judgement. In an effort to stop scams in the future, the RBI also mandated the integration of the SWIFT system with the banks’ Core Banking System (CBS).
An effective system of checks and balances was put in place along with a better risk management framework. YH Malegam established an expert group to look into the causes of fraud incidences, trust breaches, and substantial divergence in asset classification. Prompt Corrective Action (PCA) frameworks were distributed by the RBI to banks in an effort to promote capital conservation and discourage riskier bank activities.
Additionally, the RBI directed banks to restrict individual foreign currency payment instructions, tighten the use of the SWIFT framework, and add extra protection to transactions exceeding a predetermined level.
In an effort to reduce the threat of criminals fleeing to other nations and evading justice, the Indian government passed the Fugitive Economic Offenders Act (2018). Fugitive economic offenders are those who have committed crimes totaling at least Rs. 100 crores, fled India to evade prosecution, and have made no effort to return. The Indian government will become the owner of all rights and titles in the event that the central government seizes any of their assets, including benami properties.
RBI’s Measures to Prevent Scams in India
• RBI banned banks from issuing Letters of Undertaking (LoU) to prevent misuse of the facility.
• The process of issuance of LoUs for trade-related credits for imports in India was discontinued by commercial banks.
• The Reserve Bank of India (RBI) ordered the integration of the SWIFT system with the banks’ record-keeping system, the Core Banking System (CBS), to prevent future scams.
• A Better Risk Management Framework was implemented with an efficient system of checks and balances.
• An expert committee was set up to investigate high divergence in asset classification, fraud incidents, and breach of trust.
• Prompt Corrective Action (PCA) framework was issued to banks to encourage abstaining from riskier bank practices and stress on capital conservation.
• The RBI ordered banks to tighten the use of the SWIFT framework, limit foreign currency payment instructions, and add an additional layer of security on transactions above a certain threshold.
• The Fugitive Economic Offenders Act (2018) was enacted to curb offenders escaping to foreign countries and avoiding prosecution.
CONCLUSION
The Punjab National Bank scam put other banks at risk of default, emphasising the need to look into how the procedure was watered down and how a small number of personnel working with clients could obtain substantial sums of money without raising any red flags. The bank’s internal activities should adhere to standard operating procedures and be protected by strong controls. The unmonitored use of the SWIFT financial messaging system was another breach of compliance that allowed the Rs 11,400 crore scam to happen. Other authorities were unable to witness the quick, collateral-free transactions with Nirav Modi and other bank conspirators, and it was astonishing that they went unnoticed for seven years, not even during the external audit procedure.
The bank’s risk management system needs to be strengthened because frauds have been occurring often, which points to a shaky and haphazard internal risk management system. Proactively following up with the paying/intermediary banks that are of concern could avert financial loss. The RBI’s role in banks is being questioned since banks should be able to deal with fraudsters quickly in order to prevent red tape. There is a lot riding on the banking industry’s reputation, particularly now that the world is paying more attention to the financial sector’s increased efficiency and stabilisation of bank reforms.