The CBI has questioned several board members of the Punjab National Bank (PNB) over the last two months about the listed state-owned entity’s lending to Winsome Diamonds and Jewellery Ltd and its subsidiaries, which owe over Rs 6,800 crore to several banks.
The questioning marks a new turn in the government’s drive to address the huge pile of bad loans on the books of local lenders and to fix accountability. On Tuesday, the Supreme Court took suo motu cognizance of a report published on February 8 by The Indian Express that Rs 1.14 lakh crore of bad loans had been written off by state-owned banks between 2013 and 2015.
According to sources, members of the management committee of the PNB board and senior executives were called in by CBI officers for questioning on the due diligence done on the diamond company and whether they were aware of signs of deterioration in its operations and accounts.
They were also asked about whether the bank was aware of overseas developments that had impacted the company and the handling of the company’s account by another bank which had also lent a substantial amount to Winsome, sources said.
The nominee of the banking regulator on the board of the bank, too, was called in a rare instance as the agency sought to get answers from the directors on what went wrong in this case of lending.
“They wanted to know if the bank officials were aware of any early signs of deterioration in the account and about lending approvals “ said sources.
Winsome Diamonds owes Rs 4,680.04 crore to a consortium of lenders headed by Standard Chartered Bank. Winsome’s associate Forever Precious Diamonds and Jewellery Ltd owes another Rs 2,121.82 crore to a set of banks led by PNB.
Much of the action started after RBI Governor Raghuram Rajan wrote to the Prime Minister’s office (PMO) in April 2015 seeking “concerted” action against the top 10 bank loan defaulters. Apart from the CBI, Winsome Diamonds, one of India’s leading diamond firms at one time, is also being probed by the Enforcement Directorate (ED).
PNB, the lead banker of the consortium, has also filed cases with the CBI against Winsome Diamonds for recovery of Rs 900 crore and Forever Precious Diamonds and Jewellery Ltd which has defaulted on Rs 747 crore. Winsome has, however, claimed to have written to Rajan and the PMO justifying the reasons for loan default on May 13, 2015.
The CBI has the mandate to question government officials and officials of state-owned banks while probing cases of corruption, but bankers and officials said that it was rare that directors on the board of a bank have been questioned on lending decisions.
The agency did not respond to phone calls and mails seeking a comment on this issue. PNB officials also declined comment. An official spokesperson of Standard Chartered said the bank did not wish to comment on the Winsome case.
“Winsome is fully co-operating with the investigating authorities in India. We have met the authorities as and when we have been called upon to do so and we have been regularly updating them on the status of the legal steps being taken by Winsome for recovery of the outstanding amounts from the 13 defaulting customers,” said Harshad Udani, director of Winsome Diamonds.
According to Udani, the Sharjah Federal Court has passed orders against the 13 overseas defaulting customers after the company filed a case against them.
“Appeals have been filed by some of the 13 defaulting customers in the Sharjah Civil Appeal Court, challenging the decrees passed by the Sharjah Federal Court of First Instance. The said appeals are pending and are being defended by our lawyers on behalf of Winsome,” said Udani.
K C Chakrabarty, former Deputy Governor of RBI and a former chief of PNB, said that in most cases concerning banks it was difficult to establish in the court that the board of directors was negligent while approving a loan to a defaulter.
“How do you prove that the board members were negligent? The board members decide on the basis of information provided to them by the senior management of the bank. What if the information itself is poor? Having said that, I feel the general level of governance is very low in both private and public sector banks,” said Chakrabarty.
“Corruption is endemic in public sector banks. Under the new Companies Act, board of directors of any bank can be made liable if fraud/corruption is proven by court,” said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, a proxy advisory firm.
As reported by The Indian Express in December 2015, trouble started for Winsome Diamonds and Forever Precious in January 2013, when 13 of their UAE-based distributors controlled by a Jordanian national Haytham Ali Salman Abu Obidah, failed to pay Rs 4,760 crore to the company, according to the 2012-13 annual report of Winsome Diamonds.
Obidah, owner of Italian Gold FZE, the main distributor of Winsome Diamonds in the UAE, introduced the Indian company to several other distributors in 2012. All these companies were directly or indirectly connected to Obidah.
One of the audits conducted by the banks has alleged that the promoter of the company Jatin Mehta, who was responsible for bringing the customer on board, did not do adequate due diligence on the distributors before dealing with them, according to sources familiar with the findings of the report.