Analysing PNB's Rs. 11346 Crore Scam

Financial Services Secretary Rajiv Kumar said this seems to be an isolated case and is not going to impact other lenders. “The Finance Ministry has taken proactive steps by asking the lender to report the matter to the CBI and the Enforcement Directorate (ED) so that action can be taken quickly,” he said.

According to reports, billionaire jeweller Nirav Modi and companies linked to him managed to fraudulently get PNB guarantees worth Rs 10,000 crore, which they used to obtain loans from other banks and abroad.

After detecting the scam and reporting it to the SEBI and the BSE, the PNB registered two complaints with the CBI. The agency is already probing Nirav for alleged cheating and fraud involving Rs 280 crore at a PNB branch. The ED has registered a money laundering case against Nirav in connection with the Rs 280-crore fraud on the basis of a CBI FIR.

Official sources said the ED filed the case under the Prevention of Money Laundering Act (PMLA) after going through a CBI FIR filed early this month.

In its filing at the BSE, the PNB said the bank had detected some fraudulent and unauthorised transactions in a Mumbai branch. “Based on these transactions other banks appear to have advanced money to these customers abroad,” it said, adding that the matter had been referred to law enforcement agencies to examine the case and book the culprits. The intimation did not say if these transactions were linked to Modi.

News agency PTI said that the transactions cited by the bank in its complaint were linked to Nirav Modi and a jewellery company. Major jewellers Gitanjali, Ginni and Nakshatra have also come under the scanner of various investigating agencies following PNB’s declaration of Rs 11,400 crore fraud.

“Four big jewellers — Gitanjali, Ginni, Nakshatra and Nirav Modi — are under the scanner. The CBI and ED is looking at their arrangements with various banks and end use of money,” a senior official said. On the possible involvement of Union Bank of India, Allahabad Bank and Axis Bank in the fraud, officials said, “These two public sector banks and a lone private bank are learnt to have offered credit based on letters of undertaking (LoUs) issued by PNB.”

An LoU is in effect a letter of comfort issued by one bank to branches of other banks, based on which foreign branches offer credit to buyers. Foreign branches of these banks, which had relationships with the outlets of a jewellery company, had taken significant exposures as well,” sources said. Shares of PNB took a big hit following the development intraday and its stocks plunged 10 per cent.

The investors of the bank lost over Rs 3,900 crore worth of wealth in a single day. The development is likely to have an impact on the bank’s March quarter profitability and/or income depending on the accounting loss and its capital strength which might look like a complete erosion of the capital it received from the Government.

According to a statement issued by the PNB, “The bank detected some fraudulent and unauthorised transactions, in one of its branches in Mumbai for the benefit of a few select account holders with their apparent connivance. Based on these transactions, other banks appear to have advanced money to these customers abroad. “In the bank these transactions are contingent in nature and liability arising out of these on the bank shall be decided based on the law and genuineness of underlying transactions. The quantum of such transactions is $1,771.69 million (approx) or over Rs 11,346 crore,” it said.

Since more than one lender is involved, all banks have been asked by the Department of Financial Services under the Finance Ministry to submit a status report soon on the fraud. “The LoU was issued fraudulently by PNB to billionaire diamond merchant Nirav Modi and associates and was encashed overseas by them from different banks, both private and public sector. All this was being carried out in connivance with officials as high as Deputy General Manager since 2011,” sources said.

“As a corrective measure, PNB has suspended 10 employees in connection with the fraud,” it added.

While filing its complaint to the investigating agencies, the bank also said that a deputy manager, Gokulnath Shetty, who was posted in the bank’s foreign exchange department in Mumbai since March 21, 2010, along with another official Manoj Kharat had fraudulently issued LoUs to these firms without following prescribed procedure and without making entries in the banking system, avoiding detection of transactions.

Meanwhile, Sebi is likely to probe possible disclosure lapses by banks and other listed companies, including several jewellery firms, that have come under the scanner in connection with the whopping Rs 11,000 crore fraud.

Besides, the watchdog and the stock exchanges would analyse trading data of these companies and their top officials, some of whom are already under the scanner for insider trade and other violations, officials said.