The Hush Post: A fraud of over Rs 11,300 crore involving a billionaire diamond merchant and jewellery designer, and a jewellery company has been detected by the Punjab National Bank at its Mumbai branch. The jewellery company acquired fraudulent letters of undertaking to secure overseas credit from other Indian banks. The disclosure of the embezzlement led to the share price tanking 9.8 per cent at the Bombay Stock Exchange. With the sharp fall, investors lost Rs 3,844 crore of wealth on single day. Meanwhile, the bank has suspended 10 officials and referred the matter to the CBI.
The bank has written letters to all major lenders informing them of the fraud. Banks, which have lent on the basis of the Letter of Understanding (LoUs) issued by PNB, have an exposure close to Rs 11,000 crore. LoUs are like a bank guarantee that undertake to pay lenders if borrowers default. Bankers says dozens of lenders have provided loans against the LoUs issued by PNB. Initial investigations suggest that Allahabad Bank, having the largest exposure, Axis Bank and Union Bank had funded close to Rs 7,000 crore on the strength of the LoUs. Foreign bank branches too are under investigation. The quantum of transactions is around USD 1,771.69 million.
“The bank has detected some fraudulent and unauthorised transactions (messages) in one of its branch 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,” the PNB said in its BSE filing.
The bank had lodged a complaint with the CBI on January 31 naming billionaire diamond merchant Nirav Modi and a few others in a Rs 280-crore fraud. On February 5, the CBI had booked Nirav, his wife Ami Modi, his brother Nishal Modi and his uncle Mehul Choksi, MD of Gitanjali Gems, a listed company. The Modis and Choksi are partners in three businesses — Diamonds R US, Solar Exports and Stellar Diamonds. Two PNB officials, Gokulnath Shetty and Manoj Kharat, were also named. In a matter of a few days, the scale of the fraud grew from Rs 280 crore to over Rs 11,300 crore.
The fraud is worth almost eight times the bank’s 2016-17 profit of Rs 1,324 crore and nearly a third of its market cap on Wednesday’s closing price. The fraudulent transaction amount is close to one-third of its total market capitalisation of Rs 36,000 crore, or 2.55 percent of total loan book of Rs 4.5 lakh crore (as of December 2017).
The irregularities started sometime in 2011 but went undetected until a few weeks ago. People in the PNB said the fraud came to light after a bank executive, named by CBI, retired last year ending the unsanctioned rollover of letters of undertaking, based on which the companies were raising funds overseas.