Simplifying Nirav Modi Scam and PNB Fraud: If you search Nirav Modi on google, you can find a lot of his pictures with Glamorous Actress from both Bollywood and Hollywood. However, behind all those gorgeous pics, there is a big fraudster hidden. Nirav Modi Scam or The Punjab National Bank (PNB) scam of  ₹11,356.84 crores is being dubbed as the biggest fraud in India’s banking history.

Today, we take a look at the what acutally happened in PNB Fraud or Nirav Modi Scam, the man behind it and how the diamond mogul was able to siphon billions from the country.

Who is Nirav Modi?

Nirav Modi is a luxury diamond jeweler and designer who featured on listed containing the diamond kings of India. He was also ranked 57th in the Forbes list of billionaires for 2017. Nirav Modi was born into the diamond business in Gujurat but was bought up in Belgium.

Modi attended the Wharton School at the University of Pennsylvania but dropped out and accompanied his father to join his uncle Mehul Choksi’s business at the age of 19. Mehul Choksi was the head of the Gitanjali Group. The Group-owned 4000 retail jewelry stores across the country. 

Under him, Modi learned the tricks of the trade in the diamond industry and eventually went on to found ‘Firestar’ in 1999 a diamond sourcing and trading company. The success of the business soon saw Modi acquiring other jewelry businesses. These included the likes of Frederick Goldman in 2005, and Sandberg & Sikorski and A.Jaffe in 2007 in the USA.

In 2010 he launched a diamond store that bore his own name which eventually grew to 16 stored in locations like Delhi, Mumbai, New York, Hong Kong, London, and Macau. Modi’s popularity grew after he designed the  “Golconda Lotus Necklace” with an old, 12-carat, pear-shaped diamond in 2010 and the Riviere of Perfection, featuring 36 flawless white diamonds weighing a total of 88.88 carats, being sold at Sotheby’s auction.

His store launch in New York included the likes of Donald Trump, actress Naomi Watts, and model Coco Rocha. The store sold luxury brands like Hermes, Chanel, Prada, and Gucci. Renting the store alone cost him $1.5 million for a year.

At the height of his successful business career, he was known as one of the Indian diamond kings and his jewelry was worn by Kate Winslet for the Oscars. All that was until the news of the scam broke out.

How did Nirav Modi pull off the Scam?

The scam which broke out in 2018 had begun way back in 2011. In order to pull off the scam, Nirav Modi made use of a banking instrument known as the LOU (Letters of Undertakings). An LoU acts as a bank guarantee where its customers can raise short term loans. These loans can be raised from Indian banks’ foreign branches established overseas.

As Nirav Modi imported diamonds from foreign countries it meant that he had to deal with foreign currencies. For this, he had to approach foreign branches of Indian banks for loans that were received at cheaper rates. But what collateral does he have here? This is where LOUs step in. Nirav Modi approached PNB for an LOU which was used as collateral for these short term loans.

These LOUs, however, are supposed to be given out only when the client has collateral in the domestic bank issuing the LOU. But PNB ignored these requirements and gave out the LOUs on Modi’s guarantee.

(Nirav Modi in talks with Prince Charles)

As these loans were for the short term on their due date Modi was asked to pay back the loan by the foreign branches. But this is where Modi extended the scam. He simply took another LOU from PNB of a higher amount. This was used to pay back the old loan and the additional amount was reinvested. Talk about a Ponzi scheme mechanism. By 2018 Nirav Modi had received 1,212 more such LOUs. 

His plan, however, was working! Modi had grown his business in a span of 5 years what would otherwise have taken 20 years. But how was he going to pay back all the debt? Modi had planned to eventually list his “successful” company, with securities being sold at a premium. These funds would then be used o pay off the billions in debt.

But unfortunately, in 2018 when the employees of his companies(Diamonds R Us, Solar Exports, and Stellar Diamonds) approached PNB once again for LOUs the bank employees demanded 100 percent cash margins. Nirav Modi’s firms contested this requirement. They claimed that they had availed LOUs without collateral before.

This led the PNB officials to finally take a closer look at their accounts after which they first found irregularities of Rs. 280.7 crores and immediately lodged an FIR with the CBI for fraudulent LOUs issued. As the officials dug deeper, by May 18, 2018, the scam had ballooned to over Rs 14,000 crore. 

Also read:

• Harshad Mehta Scam- How one man deceived entire Dalal Street?
• Ketan Parekh Scam – The Infamous Stock Market Fraud!
• Demystifying Vijay Mallya Scam | Vijay Mallya Case Study

The fallout after the news of the scam broke out?

The fallout after the scam broke out was unprecedented. This is because citizens just could not cope with the fact that businessmen could simply squander billions. This came outpost the Vijay Mallya scandal.

But by the time the news broke out Nirav Modi, his wife, younger brother and Mehul Chowksi had already fled the country. The brunt of the scam fell on the Indian banking sector as although the loans were taken in other countries they were taken from Indian banks. Eventually, the government had to once again step in to save the banking sector.

Several PNB officials were arrested. Top PNB officials claimed that the scam took place as few PNB employees were involved. They also stated that the scam was possible due to the irregularities in the banks’ SWIFT systems. But these charades were impossible to buy as billions could not simply disappear from the bank without top bank officials being involved.

(PNB Scam Whistleblower –Hari Prasad)

The most interesting turnaround in the case occurred when news broke out of the whistleblowing attempts that took place. These attempts were made by jeweler Hari Prasad. He had sent detailed letters of the scam taking place to the PM’s office back in 2016, highlighting PNB and urging action. These letters were simply acknowledged by the PMO and transferred to the Registrar of Companies.

The RoC simply disposed off the case. This led to the scam taking a political turn. The Opposition blamed the Modi government for being an accomplice. The Modi government, on the other hand, blamed the congress as the initial LOUs were issued when they were in power.

Closing Thoughts

Needless to say that no matter who commits the scam or who’s involved in the scam, the common public is always the victim. The same is the case with the Nirav Modi scam or PNB fraud. After all, it’s the people’s money saved in PNB bank. Nirav Modi, though has been accused of scam, still is comfortably living life abroad. We can only wait and hope that PNB fraud comes to justice.

Aron Almeida

Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.