AUTHOR: Eshanya Verma, Atal Bihari Vajpayee School of Legal Studies,CSJMU
ABSTRACT
One of the most shocking and biggest financial scam in the history of scams is the Nirav Modi-PNB Scam with a value of approximately ₹12,000 crore. It was one of the biggest banking fraud in India. It raised questions about regulatory oversight, and led to a nationwide debate on banking governance and accountability. It mainly took place in Mumbai branch of Punjab National Bank(herein after referred as PNB) (2018).
WHAT HAPPENED?
Nirav Modi, an Indian diamond merchant and owner of Gitanjali Gems and Firestar, sought a loan from Punjab National Bank (PNB) to import diamonds. PNB offered the loan but with a 10% interest rate, which Nirav found too high. He then decided to secure a loan from an overseas bank, where the interest rate was much lower—LIBOR plus 2%, with LIBOR at around 1.5%.
To facilitate this, PNB issued a Letter of Undertaking (LOU) to Nirav Modi and his company, which is a bank guarantee committing the issuing bank to pay a specified sum on a certain date. However, PNB failed to follow proper procedures and did not record these transactions in its core banking system.
PNB later claimed that Nirav Modi and his company obtained loans totaling $1.77 billion through fraudulent bank guarantees. To avoid detection, they bypassed the lender’s internal messaging system.
Nirav Modi secured loans from an overseas branch via Letters of Undertaking (LOU) issued by Punjab National Bank (PNB), using the SWIFT network.
However, the criteria for evaluating these transactions were not clearly defined in the bank’s main banking system. According to bank officials, the employee who initially issued these LOUs retired in 2017, and the new officer who took over refused to roll over the LOU that was due in January 2018.
As he couldn’t locate any records of the previous transactions in the system. On February 14, 2018, PNB revealed that it had uncovered fraudulent transactions amounting to approximately Rs 11,400 crore at one of its Mumbai branches.
The FIR states that two junior employees at PNB had been issuing unauthorized guarantees for a period of seven years. One of them retired in January.
When Modi’s companies requested new guarantees, the bank’s new employees asked for collateral security. They were informed that this had never been required in the past. This prompted the bank to investigate, and they discovered hundreds of guarantees linked to these companies. Nirav Modi, an Indian diamond merchant and owner of Gitanjali Gems and Firestar, sought a loan from Punjab National Bank (PNB) to import diamonds. PNB offered the loan but with a 10% interest rate, which Nirav found too high. He then decided to secure a loan from an overseas bank, where the interest rate was much lower—LIBOR plus 2%, with LIBOR at around 1.5%.
To facilitate this, PNB issued a Letter of Undertaking (LOU) to Nirav Modi and his company, which is a bank guarantee committing the issuing bank to pay a specified sum on a certain date. However, PNB failed to follow proper procedures and did not record these transactions in its core banking system.
PNB later claimed that Nirav Modi and his company obtained loans totaling $1.77 billion through fraudulent bank guarantees. To avoid detection, they bypassed the lender’s internal messaging system.
PEOPLE INVOLVED
- Nirav Modi – The Billionaire Diamond Jeweler
- Mehul Choksi – The Gitanjali Group Owner
- Some Punjab National Bank (PNB) Employees
- M.K. Sharma – Internal Auditor and chief manager of PNB
- Vipul Ambani – CFO of Nirav Modi’s Company
- Kavita Mankikar – Executive Assistant and Authorised Signatory
- Arjun Patil – Senior Executive of Five Star Group
- Kapil Khandelwal – CFO of Nakshtra and Gitanjali Group
- Niten Shahi – Manager of Gitanjali Group
- Rajesh Jindal- General Manager of PNB
- Bishnubrata Mishra – Former Internal Auditor of PNB
- Miten Anil Pandaya – Financial Manager of Firestar International Ltd.
- Sanjay Rambiya – CA firm Sampat&Mehta
- Ami Modi – Wife of Nirav Modi
- Neeshaal Modi – Brother of Nirav Modi
CHRONOLOGY
29/1/2018- Punjab National Bank filed a scam complain against modi group.
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On 4/2/2018- Central Bureau of Investigation gave warning to Nirav Modi.
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On 5/2/2018-Punjab National Bank informed stock exchange about the 281 crore scam involved in Modi group.
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On 14/2/2018- PNB informed the stock exchange of the magnitude of the scam.
WHO WAS THE WHISTLE BLOWER?
Hari Prasad a Bangalore based entrepreneur had written to the prime minister’s office to draw attention of the authorities towards what he thought could lead to a scam. He gave all the details .
IMPACT
The repercussions of the Nirav Modi-PNB scam were extensive, impacting not only Punjab National Bank (PNB) but also the wider Indian banking industry, public trust, the economy, and regulatory practices. PNB, one of the country’s largest public sector banks, was at the heart of the fraud. The scandal resulted in a substantial financial loss, severely affecting the bank’s financial stability and its capacity to extend loans to other customers. The bank underwent significant operational challenges as it attempted to recover the misappropriated funds, conduct thorough internal audits, and implement corrective actions. To manage the fallout, PNB had to reorganize its finances, increase provisions for potential losses, and account for bad loans, which further weakened its overall financial performance.
This scandal eroded public confidence in the Indian banking sector, especially within public sector banks. The fact that such a massive fraud could occur in one of India’s largest banking institutions led to a trust crisis among consumers, depositors, and investors. The scam also caused a sharp drop in PNB’s stock value, with investors responding negatively to the news, resulting in billions of dollars in lost market value. Other public sector banks faced similar stock declines, as concerns about governance, systemic risks, and the potential for further financial misconduct spread throughout the sector.
CONCLUSION
The Nirav Modi-PNB scam is one of the most substantial financial frauds in India’s history, with widespread consequences that have impacted the banking sector, the economy, and public confidence. The fraud, which involved the misuse of Letters of Undertaking (LoUs) and Foreign Letters of Credit (FLCs), exposed serious weaknesses in the regulatory mechanisms of public sector banks and highlighted vulnerabilities within the financial system.
The immediate repercussions for Punjab National Bank were severe, with significant financial losses and operational challenges. Additionally, the broader banking sector faced a significant loss of trust. In response, the government implemented substantial regulatory reforms designed to strengthen internal controls and improve fraud detection mechanisms. Legal proceedings are still ongoing, with Nirav Modi and his associates facing extradition and criminal charges, but the lessons from this incident have prompted a focus on enhancing governance and transparency in the banking system.
In conclusion, the Nirav Modi-PNB scam underscores the critical need for stringent financial oversight, accountability, and transparency. The reforms triggered by this scandal are essential in rebuilding confidence in India’s banking sector and ensuring the long-term stability of the nation’s financial system against similar risks in the future.
