Table of Contents
#Full media report
Nirav Modi and the $1.77-billion PNB fraud Punjab National Bank PNB), the country’s second-largest public sector lender, is now
in the middle of a ₹11,400 crore transaction fraud case.
- On Wednesday morning, PNB informed the Bombay Stock Exchange that it has detected some “fraudulent and unauthorised transactions” in one of its branches in Mumbai to the tune of
$1771.69 million (approx). - Following the announcement, the share price of the State-owned bank plunged 10%.
- Meanwhile, the Central Bureau of Investigation (CBI) received two complaints from PNB against billionaire diamantaire Nirav Modi and a jewellery company alleging fraudulent transactions worth about ₹11,400 crore, the Press Trust of India reported
- This is in addition to the ₹280 crore fraud case that he is already under investigation for, again filed by PNB.
Who is Nirav Modi?
Nirav Modi, the billionaire in the middle of this controversy, is a luxury diamond jewellery designer who was ranked #85 in the Forbes list of India’s billionaires in 2017
He is the founder and creative director of the Nirav Modi chain of diamond jewellery retail stores, and is the Chairman of Firestar International, the parent of the Nirav Modi chain, which has stores in key markets across the globe.
His designs have been worn to the Oscars by ‘Hidden Figures’ star Taraji P. Henson and to the Golden Globes by Dakota Johnson, among others. Actor Priyanka Chopra is the brand embassador.
The Modus Operandi??
In a statement issued to stock exchanges on Wednesday, PNB said that it has detected some “fraudulent and unauthorised transactions (messages)”
****A stock statement is a business statement that provides information on the value and quantity of stock related transactions. It details opening and closing balances for transacted items as well.
According to the complaint filed by PNB with the CBI on January 28, the fraudulent issuance of Letters of Undertakings (LOU) was detected at the Mid Corporate Branch, Brady House in Mumbai.
What are major the differences between an SME, mid-corporate and lar
SME branches focus on credit limit upto ₹5crore Mid Corporate branches give credit upto
₹50crore Large Corporate branches have large credit exposure of major corporate clients with credit limit of ₹50crore and more.
SME and Mid Corporate branches are headed by AGM, while Large Corporate branches are
headed by DGM and above, depending on Bank business.
Letter Of Undertaking??
A contract to perform the promise, or discharge the liability, of a third person in
case of his default
Inter-Bank
High Provisioning
High Charges to Customer
Buyer credit is a short term credit available to an importer (buyer) from overseas lenders such as banks and other financial institution for goods they are importing
A set of partnership firms — Diamond R US, Solar Exports and Stellar Diamonds — approached the bank on January 16 with a set of import documents and requested for Buyer’s Credit to make payments to overseas suppliers.
The firms have Nirav Modi, his brother Nishal Modi, Mr. Nirav’s wife Ami Nirav Modi, and Mehul Chinubhai Chokshi as partners.
Buyers Credit is, typically, a short-term loan facility extended to an importer by a
bank to finance goods and services.
It is a common mode of transaction in international trade where a bank extends credit to the importer and a finance agency based in the exporter’s country
guarantees the loan.
As there was no sanctioned limit in the name of the firms, the branch officials
requested the firms to furnish 110% cash margin for issuing the LOU for raising the
Buyer’s Credit.
At this, the firms contested that they have been availing this facility in the past; but
the branch records do not corroborate this.
On digging further, the bank officials discovered that two of its employees had
fraudulently issued LOUs in the past without following prescribed procedures and
approvals.
The employees had then transmitted SWIFT instructions to the overseas branches of
Indian banks for raising Buyer’s Credit without making entries in banking system
to avoid detection.
SWIFT code??
Society for Worldwide Interbank Financial Telecommunication code. An internationallyrecognized identification code for banks around the world,
SWIFT codes are most commonly used for international wire transfers and are
comprised of 8 or 11 alphanumeric characters,
The International Organization of Standardization (IOS) was the authoritative body that approved the creation of SWIFT codes
The complaint also said that the funds so raised for the payment of the Import Bills
have not been utilised for such purposes in many cases.
As per the FIR, five of the SWIFT messages (SWIFT is a messaging network used by
financial institutions to securely transmit instruction) were issued to Allahabad Bank
in Hong Kong and three to Axis Bank in Hong Kong.
What will happen now?
One of the worrying aspects of the scam is that in its statement, PNB says that based
on the fraudulent transactions, other banks appear to have advanced money to the
customers abroad.
It goes on to add that these transactions are contingent in nature and any liability
arising out of these on the bank will have to be decided based on the law and genuineness of underlying transactions.
What is a ‘Contingent Liability’
A contingent liability is a potential liability that may occur, depending on the outcome
of an uncertain future event.
A contingent liability is recorded in the accounting records if the contingency is
probable and the amount of the liability can be reasonably estimated.
If both of these conditions are not met, the liability may be disclosed in a footnote
to the financial statements or not reported at all.
Meanwhile, Joint Secretary in Department of Financial Services Lok Rajan said “I
don’t think this is out of control or too big a worry at this point. That is my broad sense.”
Department of Financial Services??
The Department of Financial Services covers Banks, Insurance and Financial
Services provided by various government agencies and private corporations.
It also covers pension reforms and Industrial Finance and Micro, Small and
Medium Enterprise. It started the Pradhan Mantri Jan Dhan Yojana.
PFRDA, Pension Fund Regulatory and Development Authority (PFRDA) is a
statutory body which also works under this department. Rajiv Kumar is the current Secretary of
this department.
However, the ₹11,400 crore scam comes at a time when the Central government is
attempting to provide a breather to ailing PSBs, having announced a ₹2.11 lakh crore
capital infusion to the sector in October 2017. For this year, PNB will receive Rs 5,473
crore as capital infusion from the government through a mix of recapitalisation bonds and direct infusion.
As of now, as Reuters(An international news agency founded in London in 1851
by Paul Julius Reuter (1816–99)) opined, the only good that could come out of the
affair would be some fresh consideration to implementing better practices in public
sector banking.
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