PNB fraud may cause a loss of whopping Rs 17,632 crore to banks, says Income Tax Department

As of March 2017, banks had extended loans and guarantees worth $2.74 billion to firms tied to billionaire jeweller Nirav Modi and his maternal uncle Mehul Choksi.

Nirav Modi. (File Photo)

New Delhi: Indian banks could take a hit of at least $2.7 billion from loans and corporate guarantees provided to Punjab National Bank (PNB) in a $1.77 billion fraud case, the Income Tax Department said on Saturday.

As of March 2017, banks had extended loans and guarantees worth Rs 176.32 billion ($2.74 billion) to companies tied to billionaire jeweller Nirav Modi and his maternal uncle Mehul Choksi, the I-T department said in a note seen by news agency Reuters.

But the total hit to Indian banks "may well exceed" that amount the taxman said in its note.

On Wednesday, Gitanjali and Firestar hit headlines after state-run PNB disclosed that it spotted fraudulent transactions of about Rs 11,400 crore involving Nirav Modi, Mehul Choksi and a few of the bank’s employees. 

The cash was ostensibly used to buy rough diamonds, pearls and other precious stones for jewellery making. 

According to reports, Mehul Choksi also reduced his stake in Gitanjali Gems from 31.04 percent to 27.76 percent in the December quarter. Currently, almost all his stake is pledged with lenders. 

In fact, Gitanjali’s woes started long back. In 2013, market regulator Sebi banned Mehul Choksi and 25 other entities from accessing the capital market for alleged share price rigging.

All about the PNB fraud

On 16 January 2018, billionaire Nirav Modi's company sought a Letter of Undertaking (LoU) from the Mumbai branch of the PNB. However, by then Gokulnath Shetty, deputy manager of PNB, who is accused of being the main facilitator for providing LoUs for Nirav Modi in the past, had retired. Then, executives from Nirav Modi's firm approached Shetty's successor at the bank for the letter but unfortunately for Nirav Modi, the deal with the new official did not fall in place, say sources. 

The new deputy manager apparently asked them to submit 100 percent margin as a deposit. But, the company retaliated saying that never in the past had they been asked to submit any such amount to get the LoUs. On knowing this, the new deputy manager got suspicious and alerted his seniors. The bank then began to fish out the details and begin a probe.

In the past, whenever Nirav Modi's company wanted any LoU, Shetty had been able to successfully conspire and materialise a way out to get it issued illegally. It was with the help of these fraudulently issued LoUs that the company approached the foreign branches of Allahabad Bank and Axis Bank and executed the Rs 280.7 crore fraud.

As per the FIR lodged with the CBI, Shetty transmitted SWIFT instructions to the above-mentioned banks for raising buyers credit and for funding the Nostro accounts of PNB, without due procedure. The LoUs were issued on behalf of Diamond R US, Solar Exports, Stellar Diamonds.

While PNB was trying to figure out the fraudulent transactions in January this year, the term of these LoUs which were issued by the Mumbai branch of the bank was due to end. The other banks approached the PNB to recover the loan amount. It was then that the PNB figured out what was going on and the scam was unearthed.  

The PNB sent out an urgent alert message to all the other banks stating that if they too have received such a letter, it needs to be verified. 

The raids by the ED are now on at Nirav Modi's properties across India. He with his family, however, had left the country in the first week of January.  

Meanwhile, after being on the run since the scam came to light, Gokulnath Shetty was on Saturday arrested by the CBI. Along with Shetty, Manoj Kharat, the single window operator (SWO) and Hemant Bhat, the Authorised Signatory of the Nirav Modi Group of Firms, have also been arrested.

(With agency inputs)