India’s Central Bureau of Investigation (CBI) began investigating Nirav Modi, the billionaire Indian jeweller last month for his involvement in what is reportedly the country’s largest bank fraud case “ever”.
It is alleged that between 2011 and 2017, Modi and Mehul Choksi – the managing director of jewellery company Gitanjali Gems, and Modi’s uncle – conspired with bank officials at India’s second biggest government-run bank, Punjab National Bank (PNB) to fraudulently obtain loans valued at an estimated US$1.8 billion (AU$2.3 b).
India’s federal police arrested an auditor from one of the bank’s branches in late February, bringing the number of arrested bank employees to seven, and six from Modi and Choksi’s companies. The current whereabouts of both men are reportedly unknown, despite Choksi recently claiming his innocence in an open letter to his employees. He added they should look for other work until he was able to “prove himself innocent in court.”
According to reports, India’s Gem and Jewellery Export Promotion Council (GJEPC) criticised PNB for not carrying out “proper due diligence” to prevent the alleged fraud. It added: “The case doesn’t represent normal lending practice in the industry.
“When thousands of exporters undertake business lawfully, adhering to all norms and practices, prescribed very diligently, incidents of this kind can only take place due to non-adherence of procedures.”
Local industry effects
Around 98 per cent of the world’s diamonds are cut and polished in India. This, coupled with the scale of the fraud, raises concerns that ramifications from the case could trickle down to the local industry.
A recent report by Live Mint suggested funding may “dry up” for India’s gems and jewellery sector, as banks moved to tighten their loan processes and seek higher collaterals.
“The domestic industry is essentially small jewellers and they do not take these kind of loans; [however], exporters will be impacted as they wont get liquidity,” Sankar Sen, chairman and managing director of Senco Gold said in the report. “Getting finance will be hard…I expect the number of compliances to go up,” he added.
Emkay Global Financial Services research head, Dhananjay Sinha echoed similar sentiments in an Economic Times report: “What has happened is serious and will have industry-wide implications. Banks will now become cautious towards the sector, impacting its ability to access credit, at least in the short term.”
On 28 February, India’s Finance Ministry set a 15-day deadline for all of India’s government-run banks to “take action to improve their oversight of operational and technological risks.”
Nirav Modi – whose jewellery brand trades under his name and has stores in New York, Hong Kong and Mumbai – founded his company in 2010.
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