Author: Manvi Tokas, The Northcap University
Introduction
The Nirav Modi scam is one
of the largest and most shocking financial frauds in Indian banking history. Exposed in 2018, the scam involved fraudulent transactions worth approximately ₹13,500 crore carried out through the Punjab National Bank (PNB), one of India’s oldest and largest public sector banks. The case not only revealed massive loopholes in India’s banking system but also raised serious concerns about corporate governance, regulatory oversight, and the accountability of financial institutions. The scam became a turning point in India’s fight against economic offenders and led to major reforms in banking operations and fraud detection mechanisms.
Who is Nirav Modi?
Nirav Modi was a renowned diamond jeweller and businessman with an international presence. He owned luxury jewellery brands such as Nirav Modi and Firestar Diamond, with stores in global fashion capitals like New York, London, Hong Kong, and Paris. Prior to the scam, he enjoyed immense credibility and social prestige, even featuring alongside prominent political leaders in high-profile events. His companies were engaged in exporting diamonds and jewellery, primarily using bank credit facilities to finance their operations.
Background of the Scam
The scam came to light in January 2018, when Punjab National Bank filed a complaint with the Central Bureau of Investigation (CBI) stating that it had discovered fraudulent transactions worth thousands of crores. The fraud was perpetrated over several years, allegedly beginning as early as 2011, without detection by internal audits or regulatory inspections.
The scam revolved around the misuse of a banking instrument known as a Letter of Undertaking (LoU). LoUs are guarantees issued by banks on behalf of customers, allowing them to obtain short-term credit from overseas branches of Indian banks. These are typically used in international trade to facilitate imports.
Modus Operandi of the Scam
Nirav Modi and his associates, including his uncle Mehul Choksi, colluded with a few corrupt officials at PNB’s Brady House branch in Mumbai. These officials fraudulently issued LoUs to Nirav Modi’s firms without proper authorization, collateral, or entry into the bank’s core banking system.
The key elements of the fraud included:
Unauthorized Issuance of LoUs
Bank officials issued LoUs without following mandatory banking procedures, bypassing internal checks.
SWIFT System Misuse
The LoUs were sent via the SWIFT messaging system but were not recorded in PNB’s Core Banking Solution (CBS), making them invisible to auditors.
Rolling Over of Loans
Old LoUs were repaid using new LoUs, creating a cycle of ever-increasing debt.
Lack of Collateral
Contrary to banking norms, no margin or security was taken for issuing these guarantees.
Foreign branches of Indian banks such as Allahabad Bank, Axis Bank, and Union Bank of India extended credit relying on these LoUs, assuming they were legitimate.
Detection and Exposure
The scam was detected when a new PNB official demanded collateral for issuing fresh LoUs, prompting Nirav Modi’s firm to claim that such collateral had never been required earlier. This raised suspicion and led to an internal inquiry, which uncovered years of fraudulent transactions.
Upon discovery, PNB reported the matter to investigative agencies, causing widespread panic in the banking sector and sharp declines in stock markets.
Legal Proceedings and Charges
Several agencies investigated the case, including the CBI, Enforcement Directorate (ED), and Serious Fraud Investigation Office (SFIO).
Criminal Charges
Nirav Modi was charged under multiple laws, including:
Indian Penal Code, 1860 – for cheating (Section 420), criminal conspiracy (Section 120B), and forgery.
Prevention of Corruption Act, 1988 – for bribing public servants.
Prevention of Money Laundering Act, 2002 (PMLA) – for laundering proceeds of crime.
Arrest and Extradition
Nirav Modi fled India before the scam became public. He was arrested in London in March 2019 and has since been lodged in a UK prison. India has been pursuing his extradition, and UK courts have approved it, although final extradition has been delayed due to legal appeals and asylum claims.
Mehul Choksi, another key accused, fled to Antigua and Barbuda and remains involved in separate extradition proceedings.
Impact on the Indian Banking System
The scam severely damaged public confidence in Indian banks, particularly public sector banks. Punjab National Bank reported massive financial losses, leading to a decline in profitability and share value. The government had to step in with capital infusion to stabilize the banking sector.
Key systemic failures highlighted by the scam included:
Weak internal controls
Poor integration between banking software systems
Inadequate employee rotation
Failure of audits and inspections
Regulatory and Policy Reforms
In response to the scam, the Reserve Bank of India (RBI) and the Government of India introduced several reforms:
Ban on LoUs and Letters of Comfort
RBI discontinued the issuance of LoUs for trade credit.
Integration of SWIFT with CBS
Banks were mandated to integrate messaging systems with core banking platforms.
Fugitive Economic Offenders Act, 2018
This law allows confiscation of properties of economic offenders who flee India to evade prosecution.
Strengthening Bank Audits
Increased accountability of auditors and enhanced supervision mechanisms were introduced.
Socio-Economic Implications
The scam highlighted the moral hazard in corporate-banking relationships and the consequences of crony capitalism. It affected not only banks but also employees, shareholders, and taxpayers, as public funds were used to cover losses.
The case also underscored the importance of ethical business practices and transparent governance in preventing large-scale financial crimes.
Conclusion
The Nirav Modi scam stands as a cautionary tale of how systemic weaknesses, corruption, and lack of oversight can lead to massive economic damage. While the exposure of the scam led to significant reforms, it also revealed the urgent need for continuous vigilance, strong regulatory frameworks, and swift legal action against economic offenders.
The case has reshaped India’s approach toward financial frauds and economic fugitives, making it a landmark episode in the country’s legal and banking history. Whether full justice will be achieved depends on the successful extradition and prosecution of the accused, but the lessons from the scam continue to influence policy and governance reforms in India.
FAQS
What was the Nirav Modi scam?
The Nirav Modi scam was a major banking fraud that came to light in 2018, involving the Punjab National Bank (PNB) and amounting to about ₹13,500 crore, making it one of the biggest financial scams in India. Nirav Modi, a prominent diamond jeweller, along with his companies and his uncle Mehul Choksi, fraudulently obtained credit from overseas banks using Letters of Undertaking (LoUs). LoUs are bank guarantees that allow businesses to raise short-term funds from foreign branches of Indian banks for import-related transactions.In this scam, a few corrupt officials at PNB’s Brady House branch in Mumbai issued LoUs to Nirav Modi’s firms without following proper banking procedures. These LoUs were issued without collateral, without approval from higher authorities, and were not recorded in PNB’s core banking system. Instead, the messages were sent through the SWIFT system, enabling the transactions to remain hidden from audits and inspections. Using these fraudulent LoUs, Nirav Modi’s companies obtained loans from foreign branches of Indian banks. When the loans became due, they were repaid by issuing fresh LoUs, creating a cycle of mounting debt. This continued for several years until the fraud was detected in early 2018. Once exposed, PNB reported the matter to investigative agencies. Nirav Modi fled India before the scam became public and was later arrested in London in 2019. He faces charges of cheating, criminal conspiracy, corruption, and money laundering. The scam exposed serious weaknesses in India’s banking system and led to important reforms, including a ban on LoUs, tighter banking controls, and stronger laws against fugitive economic offenders.
How was the Nirav modi scam exposed?
A new official at PNB’s Brady House branch in Mumbai asked Nirav Modi’s company to provide collateral (margin money) for issuing fresh Letters of Undertaking (LoUs). This was a normal banking requirement. However, Nirav Modi’s firm replied that no such collateral had ever been demanded earlier for similar LoUs issued in the past. This response raised suspicion among the bank officials. When the bank conducted an internal inquiry, it discovered that certain employees had been issuing LoUs without authorization, without taking any security, and without entering the transactions into PNB’s Core Banking System (CBS). Instead, the LoUs were sent only through the SWIFT messaging system, which allowed the fraudulent transactions to remain hidden from audits. Further investigation revealed that these LoUs had been issued over several years, and foreign branches of Indian banks had extended credit based on them, assuming they were legitimate. Old loans were being repaid by issuing new LoUs, creating a continuous cycle of fraud. Once the irregularities were uncovered, Punjab National Bank reported the matter to the Central Bureau of Investigation (CBI) in January 2018, officially exposing the scam. Thus, the scam came to light due to a routine demand for collateral and subsequent internal scrutiny, which uncovered systemic failures and long-term collusion between bank officials and the accused.
what was the punishment given to Nirav modi?
He hasn’t received a final punishment yet; he’s currently fighting extradition from the UK to India for the , facing charges of fraud, money laundering, and conspiracy, with seizing assets, but his extradition is delayed by legal appeals, though the UK government ordered it in 2021, and his asylum claim is pending.
