India houses many players in the diamond industry, but one of them most definitely stands out: Nirav Modi. Modi was a businessman hailing from a family in Surat, Gujarat. As you would already know, he was involved in one of the largest corporate frauds in the country, involving an estimated amount of close to $2 billion. It is imperative to understand the case from the beginning to get a complete picture of this scandal of truly epic proportions.
Nirav Modi came into the global picture when he opened his stores in the USA and the UK. He had a successful opening in Old Bond Street with top models, politicians, and other A-list celebrities. Mr. Modi had always been surrounded by diamonds and art from a very young age. He learned the most about this business when he worked as an apprentice for his uncle for about ten years. He separated from his uncle in 1999 and started his own company called 'Firestar Diamonds'. Under this, he created a unique image for himself with prompt payments to employees, good working conditions, and many other provisions. He soon wanted to enter the high-margin retail industry for diamonds. Around 2010, he started researching the Asian retail markets and their auction houses. Nirav Modi achieved his first breakthrough when he produced a piece full of diamonds from the famous Golconda mines of South India. Modi’s company was expanding, but no one was questioning how it was financing this expansion.
In 2011 Mr. Modi started taking a series of loans from the Punjab National Bank (PNB). For this, he used an instrument called the 'Letter of Undertaking' (LOU), which is a guarantee issued by banks to certain individuals for short-term credit from the branches of Indian Banks overseas. This document guarantees payment regardless of who has the negotiable instrument or what happens in between. It is a way of raising foreign exchange without paying the conversion fees. You have to provide the bank with cash collateral to avail the LOUs, which Modi capitalised on. One particular branch of the PNB was targeted for this, and the bank officials were bribed to complete this process without coming under the radar of the people in the bank or the company.
His partner, Ami Modi, had all the right networks and was proficient in making quick connections to further the business's sales. In 2014, however, small pieces of his business started to crumble. Trade was slack, and stores were not making enough profits. Despite all this, he managed a global launch of his company in September 2015 and later expanded the 'Nirav Modi' company to Hong Kong, London, Mexico, Beijing, Singapore, and Hawaii. By 2017, he had been taking these LOUs for six and a half years.
The fraud was detected when Modi's companies ‘Stellar Diamonds’, 'Diamonds R Us’ and 'Solar Exports' asked for buyer's credit to PNB. By this time, the deputy manager of the branch had retired, so the bank officials were different. They explained that a certain limit was not sanctioned for this and that they had to provide some collateral. To this, they replied that they had been taking such LOUs earlier without any cash collateral. This moment was when the bank decided to start its investigation and find out the path Nirav Modi has been taking around the entrenched system. PNB filed the first complaint with CBI with the mention of fraud of Rs.280 crore. Later it was discovered that the credit from the earlier LOUs was used for other banks. Such LOUs have an expiry period. However, these officials rolled them over time and again for the company. So, without Nirav Modi having to pay his earlier dues, he was remitted with more funds from these banks. Then the case unfolded, and it was discovered that for payment of collateral, there was a backlog of $1.8 million. A total fraud of $1.77 billion was committed from just one branch of a public sector bank in India. The two main bank officials accused were deputy manager Gokulnath Shetty and Manoj Kharat, a data entry clerk. They had issued multiple LOUs without securing any collateral or without any entry into the bank's official recording system. Both of them are still under investigation and have denied any wrongdoing.
Five banks, including PNB, had been directly impacted by this fraud. The Union Bank of India reported an Rs.633 crore loss in terms of their market capitalization, while the Allahabad Bank reported a loss of Rs.484 crores. The share prices of Axis Bank and SBI fell by 3.4% and 3.3% respectively. This also had a huge impact on the stocks of the jewellery companies. The RBI did take some action by discontinuing the LOUs one month after the PNB fraud case.
Today, Nirav Modi has three cases against him - the fraud case, intimidating witnesses, and money laundering. A ruling of the magistrate's court will decide upon the extradition of Nirav Modi to India for further trials and possible imprisonment.