Author: Kotapothula Venkat Rao, Damodaram Sanjivayya National Law University
Introduction
The Nirav Modi scam stands as one of the most audacious financial frauds in India’s history, shaking the nation’s banking sector and exposing critical vulnerabilities in its oversight mechanisms. Orchestrated by Nirav Modi, a celebrated diamond merchant once hailed as a visionary entrepreneur, the scam involved the fraudulent siphoning of approximately ₹14,000 crore from Punjab National Bank (PNB), India’s 2nd largest public sector bank. This elaborate scheme, which unfolded over several years, relied on a combination of forged documents, complicit bank officials, and the exploitation of a little-known banking instrument called the Letter of Undertaking (LoU).
The Rise of Nirav Modi in Business:
Born in 1971 into a Gujarati family with a legacy in the diamond trade, Nirav Modi grew up in Antwerp, Belgium, a global hub for diamond commerce. After a brief stint at the Wharton School of the University of Pennsylvania, which he left without graduating, Modi joined his uncle Mehul Choksi’s business in India. Choksi, the head of Gitanjali Gems, played a pivotal role in Modi’s early career. By 2010, Modi had emerged as a prominent figure in the luxury jewellery market, launching his self-titled brand, “Nirav Modi,” in 2014. With flagship stores in New Delhi, Mumbai, New York, and Hong Kong, his designs adorned celebrities like Kate Winslet and Priyanka Chopra, cementing his status as a billionaire with an estimated net worth of $1.7 billion by 2017, according to Forbes.
The Process of Exploiting Letter of Undertakings (LoU):
At the heart of the scam was the misuse of Letters of Undertaking (LoUs), a financial tool used in international trade. An LoU is essentially a guarantee issued by a bank, promising to repay a short-term loan extended by another bank typically an overseas branch of an Indian lender to a client importing goods. For Modi, who dealt in diamonds sourced globally, LoUs were ostensibly a legitimate means to secure credit for his firms named Diamonds R Us, Solar Exports and Stellar Diamonds.
The fraud began as early as 2011, when Modi, with the help of rogue PNB employees, started obtaining LoUs without providing the required collateral or recording these transactions in the bank’s core banking system (CBS). Normally an LoU issuance demands cash margins or securities to mitigate risk, but in this case these safeguards were bypassed. Two key PNB officials at the Brady House branch in Mumbai Gokul Nath Shetty, a deputy manager, and Manoj Kharat, a clerk allegedly facilitated this by issuing fraudulent LoUs via the SWIFT (Society for Worldwide Interbank Financial Telecommunication) messaging system. These messages instructed foreign branches of Indian banks, such as Allahabad Bank and Axis Bank, to extend credit to Modi’s companies, with PNB as the guarantor.
It began as a modest manipulation snowballed into a massive fraud through a Ponzi-like mechanism. When the initial loans matured, Modi did not repay them with business profits. Instead, he obtained new LoUs of higher value from PNB, using the fresh credit to settle the older debts while pocketing the surplus. Between 2011 and 2018, over 1,200 fraudulent LoUs were issued, with the amounts escalating over time. This cycle continued undetected for seven years, largely because the transactions were not logged in PNB’s internal systems, evading audits and regulatory scrutiny as everything was manipulated to exploit huge amounts of money.
The Unravelling: A Whistleblower’s Trigger
The scam came to light in January 2018, when Modi’s firms approached PNB’s Brady House branch for a new LoU. By then, Gokul Nath Shetty had retired, and a new employee, unfamiliar with the prior arrangement, demanded collateral a standard procedure. Modi’s representatives protested, claiming they had never been asked for guarantees before. This discrepancy prompted an internal investigation, which uncovered a trail of unauthorized LoUs dating back years. On January 29, 2018, PNB filed a complaint with the Central Bureau of Investigation (CBI), initially reporting a fraud of ₹280 crore. Subsequent probes revealed the true scale: a staggering ₹11,400 crore, later revised to ₹14,000 crore with accrued interest.
The Fallout: Financial and Political Repercussions
The revelation sent shockwaves through India’s financial ecosystem. PNB’s stocks wiped out billions in market value, while the broader banking sector faced a crisis of confidence. Investors lost faith in public sector banks, and the NIFTY and SENSEX indices suffered significant declines in February 2018. The scam implicated not just Modi but also his uncle Mehul Choksi, whose Gitanjali Gems was intertwined with the fraud, as well as several PNB employees and executives from other banks.
Politically, the scandal sparked a fierce blame game. The opposition accused the ruling Bhartiya Janata Party (BJP) of negligence, pointing to Modi’s escape from India in early 2018 days before the scam broke as evidence of government complicity. The BJP countered that the fraud originated under the previous Congress-led government, citing the issuance of the first LoUs in 2011. Meanwhile, whistleblower Hari Prasad claimed he had alerted the Prime Minister’s Office in 2016, only for his warnings to be ignored, adding fuel to the controversy.
The Escape and Legal Battle
Nirav Modi, his wife Ami, brother Nishal, and uncle Mehul Choksi fled India in January 2018, just as the CBI began its investigation. Modi surfaced in London by June 2018, living extravagantly despite being a fugitive. India’s Enforcement Directorate (ED) and CBI launched a multi-pronged effort to seize his assets valued at over ₹7,000 crore, including jewellery, properties, and bank accounts and sought his extradition. Arrested in London on March 19, 2019, Modi has since been detained in Wandsworth Prison, fighting extradition. Despite multiple bail rejections and a lost appeal in November 2022, his case remains mired in legal proceedings as of now.
Abstract
The Nirav Modi scam, a ₹14,000 crore fraud, exploited Punjab National Bank’s Letter of Undertaking (LoU) system through forged documents and complicit officials. Orchestrated over seven years, it involved a Ponzi-like cycle of fraudulent LoUs. Exposed in 2018, it triggered financial turmoil, political blame games, and Modi’s escape to London. Arrested in 2019, he remains detained, battling extradition, while investigations continue to uncover the scam’s full extent and systemic failures.
Case Laws
Enforcement Directorate vs. Nirav Modi (PMLA Case, 2018)
The Enforcement Directorate (ED) registered a money laundering case under the Prevention of Money Laundering Act (PMLA), 2002, following the CBI FIR. On May 24, 2018, the ED filed a prosecution complaint against Nirav Modi, his sister Purvi Modi, brother-in-law Maiank Mehta, and others, alleging laundering of ₹6,498 crore in proceeds of crime. The ED sought to confiscate assets under the newly enacted Fugitive Economic Offenders Act (FEOA), 2018.
On December 5, 2019, the Special PMLA Court declared Nirav Modi a “fugitive economic offender” under Section 4 of the FEOA, the first such designation in the PNB scam. This allowed asset confiscation without trial, leading to the attachment of properties worth over ₹2,596 crore in India and abroad by 2024, with ₹1,052 crore restored to PNB and consortium banks.
Conclusion
The Nirav Modi scam is a cautionary tale of ambition unchecked by ethics, enabled by systemic lapses. Once a symbol of India’s entrepreneurial success, Modi’s fall from grace underscores the need for robust financial governance. As of now the saga continues, with Modi’s fate hanging in the balance and India’s banking sector still grappling with the scars of his deception. This billion-dollar fraud serves as a stark reminder that even the most glittering empires can crumble when built on a foundation of deceit.
FAQS
How did the scam impact the credibility of the public sector banks in India?
Ans: Punjab National Bank suffered a massive hit to its reputation, with billions wiped off its market value. The broader banking sector faced a crisis of confidence, as the scam highlighted systemic risks and inefficiencies in governance and auditing.
What systematic reforms could be introduced to prevent similar frauds in the future?
Ans. Few of the preventive measures were to be implemented such as strengthening audit mechanisms, enhanced digital marketing, stricter banking regulations and whistleblower protection.
