CORPORATE FINANCE
GROUP ASSIGNMENT
ETHICS IN BUSINESS
SUBMITTED BY: SUBMITTED TO:
DHEEPRADA GUPTA DR.SANDEEP VARSHNEYA
GITANSH RAJWANI (PGFC2221)
ROHIT YADAV
YASHASWINI NISCHAL
SHLOK ARORA
MANDIRA
SUMMARY
The PNB scam or the Nirav Modi scandal—the fraud that he committed at a single PNB
branch in Mumbai, totaling 11,000 crores, shocked the whole country of India and the
country's financial industry. The PNB discovered that two of its employees from its Brady
House branch in Mumbai, Bank Clerk Manoj Kharat and Deputy Manager Gokulnath Shetty,
often gave Letters of Undertaking (LoU) to Nirav Modi's companies without following the
necessary procedures. The employees allegedly gave the LoUs without receiving cash
security or money savers, and they also failed to record the transactions on the bank's internal
software. According to sources, in order to obtain credit from the neighbouring branches of
Allahabad Bank, Bank of India, Axis Bank, and State Bank of India for clients, Nirav and his
businesses employed such LoUs in Hong Kong. Through the global money transfer
organization SWIFT (Society for Worldwide Interbank Financial Telecommunication), the
involved bank authorities distributed the LoUs and instructed these branches. Authorities at
the bank noticed PNB had not linked its SWIFT system with the bank's primary network.
They made the decision to leave these transactions out of the bank's internal financial system.
The scam was discovered when representatives from three jewellery companies asked the
PNB officials for bank credit so they could import rough stones from other countries. Since
there was no pre-authorized limit for these companies, the authority concerned in the bank
sought a 100% cash buffer when the three enterprises approached PNB in January 2018 for
bank credit through a Letter of Undertaking. The diamond stone companies challenged the
bank's claim and asserted that they have previously benefited this office as well. However, the
branch records failed to reveal any hints that any such office had been given to the
aforementioned companies. This set up a warning, prompting the bank to launch an internal
investigation into previous bank credits. The internal investigation revealed that two bank
officials had previously issued fake letters of understanding to the abovementioned firms
without handling them fairly. Credit was therefore extended to the abovementioned entities in
light of these fake LoUs, which were then spread across the SWIFT informing infrastructure.
ETHICAL ISSUES
1. Not complying with corporate governance standards: When examining PNB's corporate
governance and annual reports, it is clear that
Nobody with accounting or financial management expertise is in charge of the audit
committee. The government appointees are described as NEDs, which is against SEBI rules,
and none of the other members seem to be accountancy professionals. The audit committee is
a crucial part of corporate governance, and the PNB has compromised it as well.
2. Fairness: In this scam, this was the main problem. Justice, tolerance, and acceptance of
variety should all be priorities. That wasn't true with Nirav Modi.
3. A commitment to excellence among bank staff.
EFFECTS OF THE SCAM
The scandal had an impact; the price of Punjab National Bank (PNB) stocks dropped from
Rs. 160 to Rs. 95.5. The Reserve Bank of India (RBI) ordered that PNB pay the whole sum
owed to the other banks. Additionally, the Reserve Bank of India stopped allowing banks to
issue Letters of Undertaking (LOU). People were unable to trust PNB as a result of the Nirav
Modi fraud, and PNB lost its good reputation. The government has instructed the banks to
take serious actions against defaulters like these and to inform the investigating agencies, as
PNB did in this case when it informed the CBI. After the case's findings were made public,
the banking, jewellery, and insurance industries all suffered major losses. There were serious
concerns about the public sector banks' overall credibility, as well as whether authorities like
the RBI and SEBI were carrying out their responsibilities to the level required.
LEARNING
The market, banking institutions, and the liquidation process can all be significantly impacted
by these bank scams and other economic frauds. In addition to this, scams can weaken and
decrease public confidence in the banking system. It can overturn banks, weaken the
management function of the bank, and cause public unrest, political violence, etc. It might
also affect the ethics and strength of the economy. In order to stop scams like this from
happening in the near future, banks' technology has advanced significantly in recent years.
REFRENCE
https://m.economictimes.com/news/india/explainer-how-nirav-modi-cheated-pnb-of-rs-
14000-crore-through-fraudulent-lous/articleshow/95410291.cms
