Author: Annliya Anil, A student at the School of Excellence in Law, Tamil Nadu Dr. Ambedkar Law University.
One of the most notorious financial scams in India, the Nirav Modi-PNB scam featured Nirav Modi and his associates at Punjab National Bank (PNB) issuing false Letters of Undertaking (LoUs), which resulted in a staggering loss of over Rs. 13,000 crores. The case brought to light widespread violations of banking laws and prompted concerns about the effectiveness of supervision procedures.
NIRAV MODI:
Nirav Deepak Modi was born on February 27, 1971, into a family of diamond traders in Palanpur, Gujarat. He relocated to Antwerp, Belgium, not long after. Modi was accepted to the University of Pennsylvania’s Wharton School but subsequently left the school. When Modi was nineteen, he and his father, Deepak Modi, moved back to India and settled in Mumbai to work with his uncle, Mehul Choksi, and his Gitanjali Group, a retail jewelry company that operated around four thousand stores throughout India. Modi eventually wed Ami Choksi, the daughter of diamond merchant Amukuraj Choksi, with whom he had gone to Wharton School.
Nirav Modi established Firestar Diamond International Company in 1999, with a focus on luxury jewelry. In addition, the brand “NIRAV MODI” was established in 2014 when its first location opened in New Delhi, India. Nirav Modi launched retail locations in 2015 in Hong Kong, Madison Avenue in New York, and Mumbai. It is alleged that his company’s sales exceeded $2 billion. Under the names Solar Exports, Stellar Diamonds, and Diamond R US, he also owns additional businesses.
Without a doubt, Nirav Modi was a successful and imaginative businessman, even though history will remember him as a scammer.
PNB SCAM STORY:
In addition to starting a political slugfest, the USD 2 billion theft raised concerns about the nation’s financial practices.
A letter of intent (LoU) is a type of assurance that a bank issues to an organization so that it can obtain short-term credit from any Indian lender’s overseas branch. These LoUs are used for commercial or trade transactions rather than being issued against typical retail purchases.
These letters of intent were acquired by companies connected to Nirav Modi from PNB’s Brady House office in Mumbai; however, rather than being used for legitimate business dealings, the money was purportedly embezzled with the assistance of a few dishonest workers of the nation’s second-largest state-run lender.
In March 2011, Modi received his first LoU from the Brady House branch of PNB. Over the next 74 months, he was able to secure 1,212 more of these assurances. The Nirav Modi Group also received 53 legitimate (non-fraudulent) LoUs over these six years; the first was issued in March 2011 and the last was issued in November 2017. Investigative agencies, however, claim that later on, the main purpose of the LoUs was money laundering. Days before a complaint was filed against him and his partners, Nirav Modi left India in 2018 to avoid prosecution.
The scam was discovered by PNB on January 25, 2018, and on January 29, the Reserve Bank of India (RBI) received a fraud notification from PNB. A criminal complaint was also filed with the CBI on that day to register a FIR. On February 7, the day after another complaint was lodged with the CBI, the RBI received yet another fraud report. An FIR against the Nirav Modi Group, the Gitanjali Group, and Chandri Paper & Allied Products Pvt Ltd was filed with the CBI on February 13, 2018. Additionally, a complaint was sent to the Enforcement Directorate. The following day, stock exchanges were notified.
PNB had claimed in the complaint that Modi and entities associated with him had conspired with some of its staff, namely Gokulnath Shetty, a former deputy general manager assigned to the foreign currency department of the Mumbai branch.
They obtained guarantees for USD 1.77 billion or Rs 11,400 crore through deception to get loans from Indian banks abroad. They pretended to need the money to import pearls.
AFTERMATH OF THE CASE:
The Nirav Modi PNB Scam rocked India’s financial industry, and the following happened shortly after:
About one month after the scam made headlines, on March 13, 2018, the RBI published a notification prohibiting banks from providing guarantees in the form of Letters of Undertaking (LOU) to stop any future abuse of this tool, effective immediately. As a result, commercial banks in India immediately stopped issuing LoUs for trade-related credits for imports by an RBI directive. Additionally, within the allotted time, RBI required integrating the SWIFT system with the bank’s Core Banking System (CBS), which serves as its record-keeping system.
Nirav Modi was accused of criminal conspiracy, deceit, fraud, theft, breach of contract, and breach of trust. There were significant adverse effects on the banking, jewelry, and insurance sectors. PNB was required to pay off about Rs. 11,400 crores, or 1.8 billion dollars, that it owes to foreign branches of Indian banks, including UCO Bank, Allahabad Bank, Axis Bank, Union Bank of India, and SBI, in the form of bank guarantees.
EFFECTS OF THE SCAM:
Nirav Modi was not alone in this massive scheme of crime. The Indian authorities are looking into allegations of helping Nirav Modi and money laundering through family-owned businesses against his uncle Mehul Choksi, wife Ami Modi, brother Neeshal Modi, and sister Purvi Modi concerning the PNB Scam. In August 2020, Interpol issued a Red Notice for US citizen Ami Modi, the wife of Nirav Modi, at the request of the Enforcement Directorate (ED). This was almost a year after Nirav Modi’s detention in Great Britain and two years after the scam made headlines. Although the Red Notice is not an actual arrest order, it will enable all 192 Interpol members to keep an eye out for Ami Modi, and as she will be listed in the Interpol database at all ports and airports worldwide, her freedom of movement will be significantly curtailed.
When scandals of this size occur, investors lose faith in the banking industry, and the PNB Scam was no different. NIFTY and SENSEX were dealt severe hits following the Nirav Modi scam.
When the Nirav Modi scandal was made public in February 2018, the banking stocks fell precipitously, and the combined market capitalization of these thirty-four institutions dropped by almost thirty-six thousand crores of rupees. Investor wealth totaling eight thousand crores of rupees was destroyed on PNB equities alone. It is possible to state that the vulnerable banks do not go too far into the numbers and data. After the scandal became public, Mehul Choksi, the uncle of Nirav Modi, saw a sharp decline in Gitanjali Gems’ stock price. A sizable chunk of the Indian jewelry market was controlled by Nirav Modi and Mehul Choksi. As a result, the banks were very reluctant and skeptical to extend credit to other jewelry manufacturers.
REFORMS INTRODUCED AFTER THE CASE:
- By an RBI directive, commercial banks in India immediately stopped issuing LoUs for trade-related credits for imports. Experts later denounced this complete ban of LoUs as RBI’s panicked, hapless response.
- Additionally, the RBI mandated that the banks’ record-keeping system, the Core Banking System (CBS), be integrated with the SWIFT system within the allotted timeframe. The SWIFT and CBS integration will stop similar schemes in the future.
To maximize the risk management system, a more effective system of checks and balances was implemented.
- An expert committee led by YH Malegam, a former member of the RBI Central Board of Directors, was also established by the RBI to look into the reasons behind the high divergence in asset classification, various fraud incidents, breaches of trust, and necessary interventions, including IT interventions, to stop such frauds in the future.
- To reduce the threat of criminals fleeing to other nations and evading justice, the Indian government passed the Fugitive Economic Offenders Act (2018) on April 21, 2018. Fugitive economic offenders are those who have fled India to evade prosecution and refuse to return after committing offenses such as forging government stamps or currency, dishonoring checks, money laundering, transactions defrauding creditors, and other offenses under this Act totaling at least Rs. 100 crores. Furthermore, the federal government has the authority to seize all of its assets, including benami properties, and all associated rights and titles will automatically transfer to the Indian government.
CONCLUSION:
The Nirav Modi-PNB Scam is a stark expose of the weaknesses in the Indian financial system. Its astounding scope, which resulted in a loss of more than Rs. 13,000 crore, rocked the foundations of public confidence in the banking industry and prompted serious concerns about regulatory monitoring. The example demonstrated the ease with which people can take advantage of systemic flaws for their gain despite strict processes and protections, highlighting the vital necessity for ongoing attention and strong enforcement measures.
The criminals’ complex web of deceit was revealed through court cases and investigations conducted by organizations like the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI). The case demonstrated the extent to which financial misconduct can transpire while disguising legal banking operations, ranging from the forgery of Letters of Undertaking (LoUs) to the employment of intricate techniques to hide unlawful transactions.
India’s financial authorities must take note of the lessons that have been learned and strengthen the regulatory framework while implementing proactive measures to prevent such future violations.
