BANKING DECEITS: ROGUE CREDIT CULTURE
“A diamond is forever” is the tag line of De Beers, the world’s household name for diamonds. Nirav Modi diamonds, which aspired to be the Indian De Beers brand equivalent, however failed to get its name etched as a diamond jeweller forever.
The unassuming Nirav Modi, owner of the once famed brand, grew up in Belgium, got admitted to Wharton School but failed to continue. He moved back to India in 1990 when he was 19. He trained for the diamond jewellery business under the sharp eyes of his uncle Mehul Choksi, promoter of another scam-hit, stock-market listed company, Gitanjali Gems.
In 1999, Nirav Modi branched out on his own, under the banner of Firestar Diamonds, starting his own diamond jewellery-making facility in India. Meanwhile the diamond industry was undergoing two major shifts. First, brands loomed large on the landscape that was once ruled by mom-and-pop boutiques and family jewellers. Clients began moving to branded jewellery – assurance of ethics was needed to repose trust. Second, design started taking precedence – shifting to ‘wearable’ creativity instead of just traditional diamonds and stones.
Nirav Modi took full advantage of these shifts in consumer preference. He realized that the luxury jewellery market was red hot, pushing into the ultra-luxe retail jewellery market in 2010. With the tagline “Haut Diamantaire”, he launched an eponymous jewellery business branded NIRAV MODI with 8 boutiques worldwide, including high street luxury stores in London, New York and Hong Kong.
Nirav Modi was just flying higher and higher in the $275 billion global jewellery market. Firestar group turnover grew to a whopping Rs 14,700 crore ($2 billion) by 2016-17 and he expressed his vision of having 100 stores by 2025. His name became the stamp of corporate India’s growing global status.
His diamonds sparkled on Hollywood red-carpets, adorning the necks and earlobes of celebrities like Kate Winslet. Back home in India, the Nirav Modi brand was splashed on hoardings across Delhi and Mumbai bearing the image of its global brand ambassador, actor and former Miss World, Priyanka Chopra.
Then came out the fraud – the mega heist structured by the borrower, aided by the lender. Nirav Modi used the classical method of relying on bank insiders, greasing palms and dodging technology, more than using it.
His lender, Punjab National Bank (PNB) stunned markets when it declared in February 2018 that its Mumbai branch in Fort area has lost over Rs 11,000 crore ($1.5 billion). Nirav Modi, three of his relatives (his wife, brother and uncle Mehul Choksi) and three firms (Diamonds R US, Solar Exports and Stellar Diamonds) in which Modi and Choksi were partners, got embroiled in one of the largest scams in the Indian financial market.
How was the fraud committed? It began with the diamond firms approaching PNB for financing import of rough diamonds. The much popular Letter of Credit (LC) facilities were opened by the bank, in favour of Nirav Modi’s firms, which allowed credit for a certain period. Nirav Modi bribed his way to obtain the LCs without any security, which is the primary requirement for any such facility. What these LCs allowed were imports for which payment can be made by the importer to the bank later that is, after the agreed credit period.
Based on the strength of the LCs, Nirav Modi firms got PNB to open Letters of Undertakings (LoUs) apparently for one year (though legally, it could not exceed three months), on foreign branches of certain Indian banks (LoU is a bank guarantee which allows bank’s customer to raise money from another Indian bank’s foreign branch in the form of short-term credit). When these LoUs were shown at the foreign branches, these banks remitted funds to PNB’s Nostro Accounts (accounts PNB had with the overseas banks). The available funds were then drawn and utilized by Nirav Modi’s team.
It was expected that Nirav Modi’s firms would settle their obligations with PNB on the expiry of the LoU period. This last leg did not happen; and this was the problem and obviously the swindle!
About 150 LoUs were fake – issued by a few PNB employees. Based on these unauthorized LoUs, PNB employees misused SWIFT network to transmit messages to foreign banks communicating details of sanctioned LoUs; by wilfully not recording these SWIFT messages in the bank’s core system. These omissions made the transactions by-pass the main PNB banking control system.
When the news of the fraud got flashed all over – ironically on a Valentine’s Day – Nirav Modi’s abrupt upsurge to eminence came crashing down.
Why did he cheat? A logical reason could be his need for continuous funding. The pace of growth of his business was so fast and furious, it was perhaps difficult for him to fund his enormous marketing cost, super-model remunerations, new luxury-stores and investing in working capital.
Nirav Modi tagline “Say Yes, Forever” was literally followed by the lax Indian bank by continuing to heed his request for incessant loan-guarantees, fraudulently or otherwise.
Nirav Modi’s troubles mirror those of another Indian tycoon, Vijay Mallya. [Both Nirav Modi and Vijay Mallya are holed up in UK with the Indian government desperately trying to lock them up in Indian jails.]
When corporate tycoons run away with the money they have borrowed from banks, what credit culture are we talking about? It is sheer corporate crime of the highest order.
Instances abound on entrepreneurs running away after loan defaults, especially when they have the ability to pay but do not do so. These instances raise doubts on the prevalent credit habits among the Indian corporates. It is true that all businesses cannot be painted with the same brush. But thousands including big names like Winsome Diamonds, Zoom Developers, Varun Industries, S Kumars and DSQ Software have taken the banking system to the cleaners.
Exasperated over the behaviour of certain borrowers, India’s largest banker lamented in 2017 that they no longer trusted ‘steel companies’. It was a sad day. Arundhati Bhattacharya, ex-State Bank of India chief, slammed steel firms for being non-transparent in their data presentation to the banks – disappointed over the way the industry misrepresented by twisting facts, while seeking loans. It was a bank-chief’s way of expressing annoyance over corporate India’s attitude towards taking bank funding and servicing thereof.
Many woes of non-payment in the Indian economy are due to past instances of political gridlocks, delayed permissions and economic slowdown. But it does not provide the license to any borrower, not to repay its liabilities willingly. Poor business conditions leading to banking defaults are excusable, but not when the borrower wilfully defaults. Sadly, numerous borrowers default in paying bank debts even when economic situations improve. This is poor corporate culture.
Tailpiece
Credit is oxygen to business. Its adequate flow is a necessity for any business to function effectively. The loans disbursed need to be supervised and recovered by the lenders, in accordance with the lending terms. But what if the borrower does not, purposefully? This is a significant issue of banking fraud. Money borrowed if properly utilised for intended purposes are often duly paid-back. But if the borrowed sums are either siphoned off, money laundered or used for unapproved projects, it becomes a huge hoax.
Not returning money borrowed are deceptions which render short term gains to the borrowers but obliterate their long term wellbeing.
Extract from the book: CORPORATE FRAUDS: BIGGER, BROADER, BOLDER by Robin Banerjee
Chapter 6 titled “Banking Deceits”, Pages 114-118
ABOUT THE BOOK
Think of East India Company. This business outfit came to India to do business and then stayed on to loot for 200 years. And this is not a solitary instance of corporate artifice.
Look around, and you will find businesses are cheating on you and me.
Take instances like banking mischiefs, which have been long known. It happens both ways. When banks are cheated and when banks cheat on us.
Many rich hide their wealth. Money laundering, creating shell companies, offshore banking and hiding ill-gotten wealth from the taxmen, are practised by many of the who’s who of our society.
