AMITY UNIVERSITY, UTTAR PRADESH

AMITY LAW SCHOOL, NOIDA

FINANCIAL MARKET REGULATION REPORT

NIRAV MODI CASE ANALYSIS

SUBMITTED BY:
RAJAT PRATAP SINGH
JHANVI GREWAL
DHANANJAY DEVGUN
BHAVYA PANDEY
KIRTI MORE
 ACKNOWLEDGEMENT

We are using this opportunity to express our gratitude to everyone who supported us
throughout the course of this project. We are thankful for their inspiring guidance, invaluably
constructive criticism and friendly advice during the project work. We are sincerely grateful
to them for sharing their truthful and illuminating views on a number of issues related to the
project.

We express our warm thanks to Ms. MONICA SURI for her guidance for the completion of
this project as we believe it would not be possible without her support.

We would also like to thank our professors and all the people who provided us with the
facilities being required and conducive conditions for our financial market regulation project.
 TABLE OF CONTENTS

Introduction……
Facts of the case……
Judgement……
Group Analysis……
Details of the academic provisions……
INTRODUCTION:
In 2018 India’s biggest-ever banking scam shook the very core of the financial sector in India
and at the helm of this fiasco, sat none other than the diamond mogul billionaire, Nirav Modi.
The magnitude of the scam was a staggering Rs.11,400 crores (about 1.8 billion dollars) and
it mainly took place at a single branch in Mumbai of the Punjab National Bank (PNB), the
second-biggest public sector lender in India.
The Punjab National Bank scam relates to fraudulent letter of undertaking worth Rs 11,400
crore issued by the bank. The key accused in the case were jeweller and designer Nirav Modi,
his maternal uncle Mehul Choksi, and other relatives and some PNB employees. Nirav Modi
and his relatives escaped India in early 2018, days before the news of the scam became
public. PNB scam has been dubbed as the biggest fraud in India's banking history.

BACKGROUND OF THE COMPANY

Firestar Diamond International Private Limited is a Private incorporated on 09 September
2006. It is classified as non-govt company and is registered at Registrar of Companies,
Mumbai. Its authorized share capital is Rs. 750,000,000 and its paid-up capital is Rs.
262,497,360. It is involved in other wholesale [Includes specialized wholesale not covered in
any one of the previous categories and wholesale in a variety of goods without any particular
specialization.] Firestar Diamond International's operating revenues range is Over INR 500
crore for the financial year ending on 31 March, 2016. It's EBITDA has increased by 32.34
% over the previous year. At the same time, it's book net-worth has increased by 15.06%.
Firestar Diamond International Private Limited's Annual General Meeting (AGM) was last
held on 30 August 2017 and as per records from Ministry of Corporate Affairs (MCA), its
balance sheet was last filed on 31 March 2017. Directors of Firestar Diamond International
Private Limited are Haresh Vrajlal Shah and Nirav Deepak Modi.

FACTS OF THE CASE:

The scam which broke out in 2018 had begun way back in the year 2011. In order to pull off
the scam, Nirav Modi made use of a banking instrument known as LoU (letters of
undertakings). An LoU acts as a banking 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. 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. 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 Punjab
National Bank 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. 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 per
cent cash margins. Nirav Modi’s firms contested this requirement. They claimed that they
had availed LOUs without collateral before.

In February 2018, the Indian government’s Central Bureau of Investigation launched an

investigation of Modi, acting on a complaint from the Punjab National Bank alleging Modi
and his partners defrauded the bank of Rs.28000 crore by conspiring with bank officials to
fraudulently obtain Letters of Undertaking for making payments to overseas suppliers. While
Rs.28000 crore is the fraud that has been alleged to date, the potential loss to Punjab National
Bank is reported to be up to Rs.11000 crore. The Enforcement Directorate is looking into the
case of fraud that the CBI has registered against him.

A few of Modi’s stores initially remained open for business as usual, including the one at
Marina Bay Sands in Singapore, however these have gradually all closed. On 7 March 2018,
Modi’s firm Firestar Diamond Inc. applied for bankruptcy protection at a Manhattan
bankruptcy court, in order to protect its assets in the United States and their revolving credit
facility with Israel Discount Bank.

Modi responded to the bank on 15/16 February 2018, stating that ‘In the anxiety to recover
your dues immediately, despite my offer your actions have destroyed my brand and the
business and have now restricted your ability to recover all the dues leaving a trail of unpaid
debts. Modi estimated his domestic business at around Rs.6500 crore, and said ‘this could
have helped reduce/discharge the debt to the banking system, ‘but claimed that this is now
impossible as all his bank accounts have been frozen and assets have been seized. Modi
bought a Rs.900 crore sea-facing property in Mumbai’s coveted Samudra Mahal properties
with his wife Ami Modi. His properties in India, including jewellery, paintings, and real
estate, worth about Rs.523 crore have been attached by the Enforcement Directorate.

The Enforcement Directorate attached four wind power plants, owned by Modi, in Rajasthan
with a total capacity of 9.6 megawatt. The plants earn up to Rs.5 crore a year due to share
purchase agreement with Rajasthan’s state electricity board. These wind power plants have
been operational since 2014-15. In March 2018, the ED had attached a 5.24MW solar power
plant spread over 135 acres in Karjat in Ahmednagar district worth Rs.60 crore. In May 2018,
the CBI and the ED had registered two FIRs each to probe the case. Both Modi and Mehul
Choksi are said to have left the country before criminal cases were lodged against them.

With the collapse of his brand, Modi’s fortune has collapsed. Forbes removed him from their
annual billionaires list, and on 9 March 2018, estimated his current wealth to be less than
$100 million. As a result of the fiasco, the RBI has stopped issuing LoUs and LoCs for
imports, which has limited the financial flexibility of importers. His company, A. JAFFE,
acquired through his synergies corporation, was auctioned in May 2018 and was purchased
by Parag Diamond. All the stores have been since closed.

In April 2018, it was alleged Modi had found safe haven in Hong Kong, but in June of that
year he has reported to be in the UK where he applied for asylum, claiming he was a victim
of ‘potential persecution’ and denying any wrongdoing. In March 2019, Modi was reported
have been sighted in the UK by the telegraph. T was said that he was living in an apartment
costing £8 million. Indian authorities responded to the report by saying that an extraction
request had been made to the UK. On 20 March 2019, he was arrested in London after a
warrant was issued against him. Later that month, Indian tax authorities raised $8 million by
auctioning some of his art collection. Modi applied for bail in the UK High Court on May 31,
a day after his remand was extended. All his requests for bail have been rejected as of
October 2020.
On 8 June 2020, the Prevention of Money Laundering Act court has ordered a confiscation of
nearly Rs.1400 crores worth of his property.

On 25 February 2021, a UK court allowed the Indian government’s request to have Modi
extradited to India as a key accused in the PNB fraud case. The UK Home Secretary signed
the extradition order on April 15, the next step in clearing the path for his deportation to
India. Modi then had 14 days to appeal the decision th the UK High Court, which he did on 1
May, claiming that he woukd not get fair trial in India. The extradition appeal could take
months; while Modi remains imprisoned at Wandsworth Prison in south-west London. On 23
June 2021, a UK high court rejected Modi’s application to appeal against his extradition to
India.

JUDGEMENT
A judgement was passed by the UK court- It said that it should serve as a reminder to all
fugitives, who have indulged in large value frauds, that they cannot escape the law merely by
changing their countries of residence. In a statement, the CBI said the court order vindicated
the painstaking probe carried out by the agency especially since Mr. Modi had raised various
issues on admissibility of evidence, fairness of investigation, trial, prison conditions,
availability of health facilities in India and extraneous consideration, with a view to divert
attention from his own acts. Earlier, the Westminster Magistrates’ Court in London accepted
the contention of the Indian government to extradite Mr. Modi saying that the evidence
against him is prima facie sufficient to order his extradition to India to face the charges. The
court also upheld the assurances of India and rejected the submissions of defence regarding
human rights violations, fair trial and prison conditions and decided to send Mr. Modi’s case
to the Secretary of the State, UK for final decision. The judgement is a significant
achievement in the context of CBI’s efforts to curb corruption and is a reminder that
fugitives, who have eluded the process of law after commission of large value frauds, cannot
consider themselves above the process merely because they have changed jurisdictions. The
CBI had registered the case on January 31, 2018 against the partner of three private firms and
others including then officials of Punjab National Bank on a complaint from Punjab National
Bank on the allegations that the accused had hatched a criminal conspiracy amongst
themselves to defraud the Punjab National Bank to the tune of Rs.6498 crore(approx.) by
fraudulently issuing letters of undertaking. During investigation, the CBI conducted searches
at 42 premises and arrested 15 people. Several witnesses were examined and voluminous
documents were collected. Investigation showed that the accused officials of the Punjab
National Bank, in conspiracy with said owners of the firms and others, had fraudulently
issued a large number of LoUs to overseas banks for obtaining buyer’s credit in favour of
said three firms without any sanctioned limit or cash margin and without making entries in
the CBS system of the bank.

The first charge sheet was filed on May 14, 2018 against 25 accused including Mr.Modi. The
second charge sheet was filed on December 20, 2019 against 30 accused people including the
25 earlier in repsect of 150 outstanding fraudulent LoUs which had resulted in wrongful loss
of Rs.6805 crore aprrox. To PNB.
It was also alleged that Mr. Modi in conspiracy with other accused had siphoned off the funds
obtained as buyer’s credit through dummy companies established by him in Dubai and Hong
Kong which were shown as exporter of Pearls to three Nirav Modi firms and importer of
Pearl studded jewellery from his firms.

Mr. Modi had escaped from India on January 1, 2018 before registration of case in CBI. A
non-bailable arrest warrant was issued by the trial court against him followed by a red corner
notice in June 2018 by Interpol. He was arrested by the UK Police in London in March 2019
and his repeated applications for bail, were rejected by the Westminster Magistrates’ court
and High Court, London.
After second charge sheet was filed, additional evidences were submitted to the court in
London for the total fraud amount of Mr. Modi Rs. 6805 crores approx. In addition, second
extradition request for the offences of intimidating the witnesses and destruction of evidence
was also submitted to the UK government. The extradition proceedings against Mr. Modi
were initiated before the Westminster Magistrate Court in London. In extradition requests,
CBI submitted voluminous oral and documentary evidence to substantiate the charges of
criminal conspiracy, cheating, criminal breach of trust, criminal misconduct by public
servants, destruction of evidence and criminal intimidation of evidence. The hearing of first
extradition request was held in Westminster Magistrates’ court, London during May, 2020
and the hearing of second extradition request was held during September, 2020.

GROUP ANALYSIS
The scam pushed forward the catalyst for a slew of major reforms in the Punjab National
bank. It has also seen a recent uprise in the bank’s performance across different indicators.
The PNB had a score of 78.4 out of 100 and was ranked first in the EASE (Enhanced Access
& Service Excellence) index, according to the report PNB displayed “strong performance” in
areas like customer responsiveness, responsible banking, credit off-take and financial
inclusion.
Stated below are some of the lessons learnt from the bank scam:
The first notable realization was that banks urgently needed to better manage their
operational risks, essentially in the realm of credit, market and operation risks.
Credit risk (CR) and market risk (MR) are primarily related to potential losses from lending
and investment activities respectively. Losses of this nature occur in a situation where there is
a loan default or wrong valuation value of an investment.
Then we have Operational risk (OR) which works to indicate a failure in any of the banking
systems, processes and also the people. OR covers a broad range of products and businesses,
in contrast to CR or MR, which are focused on specific transactions.
Also, we must look beyond the banks. It has to be understood that various agencies also need
to make changes to their existing behavioural patterns and attitudes in the field, they must
immediately sharpen and update their skills and knowledge of the banking business.
Furthermore Internal, as well as statutory, auditors must be capable and also willing to
highlight any inadequate processes or potential malpractices being followed by a banking
institution. Even if certain specific transactions may manage to slip away undetected, the
checking of the loan approval process and its issuance is a must which auditors have to take
accountability for.
Thirdly, there is something for the Reserve Bank of India to learn as well. It is undeniable
that The Reserve Bank of India (RBI) has been efficient in issuing all the requisite guidelines
pertaining to CR, MR and OR. However, it also needs to promote better discipline in OR as
so as to ensure better success in its supervisory duties. Moreover, the process of reporting
Red Flagged Accounts (RFA) needs to be tested to see whether the correct balance between
type-1and type-2 errors is being adopted by the banks in this process.
Finally, the Government of India, as a public policy leader and plan developer, should
evaluate the chinks in its armour that have to lead to mishaps such as these. Furthermore, it is
necessary that the Ministry of Corporate affairs (MCA) take time to carefully review various
factors like the disclosure standards of corporates, including banks. However, rather than
merely making increases in the number of compliances, the MCA must also carry out a wider
review of the disclosure and compliance process, to ensure that the process is as effective and
error-free as possible.

The PNB scam has left a more than a noticeable dent on India’s banking sector. A positive
outcome of this is that the government is more watchful and attuned to the banking sector and
its various happenings. The scam also gives both the government and the reserve bank the
opportunity to enact reforms. While the Fugitive Economic Offenders Act is certainly a good
start, it must not be the only legislation enacted in this regard. It is crucial that we continue to
push for reform in the banking sector, so as to prevent old and well-established banks like the
PNB from having their reputations soiled in the coming future.
We can also see that the PNB officials were part of the scam as they provided LOU’s to
Nirav Modi without any presence of collateral in the PNB bank. So, it is important for the
government to keep check on such corrupt officials.

DETAILS OF ACADEMIC PROVISIONS

The Nirav Modi PNB Scam shook the entire financial sector in India and what followed soon
after is as follows:
On March 13, 2018, about a month from the scam hitting headlines, RBI issued a notice
banning banks from issuing guarantees in the form of Letters of Undertaking (LOU) to
prevent any further misuse of this facility with immediate effect. Thus, the process of
issuance of LoUs for trade-related credits for imports in India got discontinued by
commercial banks with immediate effect as per the order of RBI. RBI also ordered the
linkage of the SWIFT system with the banks’ record-keeping system i.e., the Core Banking
System (CBS) within the stipulated deadline. Nirav Modi was charged with criminal
conspiracy, cheating, dishonesty, fraud, breach of trust and breach of contract. The banking
sector, jewellery sector, and insurance sector suffered from some serious negative flashbacks.
PNB was expected to clear about Rs. 11,400 crores (about 1.8 billion dollars) it owed in the
form of bank guarantees to overseas branches of Indian Banks like UCO Bank, Allahabad
Bank, Axis Bank, Union Bank of India, and SBI. Thus, the process of issuance of LoUs for
trade-related credits for imports in India got discontinued by commercial banks with
immediate effect as per the order of RBI. This banning of LoUs outright was later criticised
by experts as RBI’s knee-jerk reaction in panic.
RBI also ordered the integration of the SWIFT system with the banks’ record-keeping system
i.e. the Core Banking System (CBS) within stipulated deadlines. The integration of SWIFT
with CBS will prevent future scams along similar lines. Better Risk Management Framework
was put into place with an efficient system of checks and balances to optimise the risk
management system. RBI had also set up an expert committee headed by YH Malegam, a
former member of the Central Board of Directors of RBI, to investigate the reasons for high
divergence observed in asset classification, various incidents of fraud, breach of trust and
necessary interventions (also in terms of IT intervention) to prevent such frauds in future.
RBI also issued Prompt Corrective Action (PCA) framework to the banks like UCO Bank,
Dena Bank, IDBI Bank, Oriental Bank of Commerce, Indian Overseas Bank, Central Bank of
India, Corporation Bank, Bank of India, Bank of Maharashtra, Allahabad Bank and United
Bank of India to encourage them to abstain from riskier bank practices and stress on
conserving capital. The RBI also ordered the banks to tighten the use of the SWIFT
framework; a limit on foreign currency payment instructions where beneficiaries were
individuals; and an additional layer of security on transactions above a certain threshold was
told to be put in place.
To curb the menace of offenders escaping to foreign countries and avoiding prosecution, the
Indian Government enacted the Fugitive Economic Offenders Act (2018) w.e.f. 21st April,
2018. Any person who has committed offences like counterfeiting government stamps or
currency, cheque dishonour, money laundering, transactions defrauding creditors and other
offences under this Act amounting to Rs. 100 crores or more and has left India to avoid
prosecution and refuses to return can be declared as a fugitive economic offender. Moreover,
all his properties (including benami properties) can be confiscated by the central government
and all such rights and titles of the properties shall vest with the Indian government without
any encumbrances.