A revealing section of the forensic report on the Nirav Modi Group is the comparative analysis of “peer group” companies done by the Belgian auditor, BDO, for Punjab National Bank (PNB).
As part of the exercise, which resulted in an exhaustive 329-page draft report, a comparative study of financials of Gitanjali Gems, PC Jewellers, and Tribhovandas Bhimji Zaveri has been done. The analysis reveals that while the three Nirav Modi partnership firms have shown negligible expenditure, the other market players have shown over 90 per cent of their revenues as expenditure.
The analysis also shows that while three major Nirav Modi partnership firms (Solar Exports, Stellar Diamonds and Diamonds R Us) recorded “nil” inventory and “nil” fixed assets, the inventory of the other three firms was valued between Rs 1,000 crore and Rs 4,000 crore.
The auditors concluded: “It was noted that personnel and total expenses incurred by the 3 partnership firms are not in proportion with the industry standards. Further, it (the comparative analysis) also indicates that the number of employees is not in proportion to the industry standards.”
This was because the Nirav Modi firms, according to the report, employed just 100 people each, while available figures for one of their competing firms showed it had 2,572 employees.
The forensic report was submitted to the PNB in August 2018. It was given by a whistleblower to the International Consortium of Investigative Journalists (ICIJ) which has partnered with The Indian Express on its findings.
Significant among them is fact that while Nirav Modi and his Group are recognised as diamond traders, a large volume (61.44%) of their imported goods — for which the Letters of Undertaking (LoUs) were issued — comprised pearls.
The remaining roughly 37% of the imports comprised cut and polished diamonds/rough diamonds. This also links to what is listed as the modus operandi of obtaining the fraudulent LoUs. The report notes, “Once the LoU funds were obtained, pearl purchases were recorded from the Nirav Modi controlled entity and jewellery was sold to the same entity during the years 2016-2018.’’
There is also a pattern of the imported pearls being “recycled” by the partnership firms. One of the companies, Auragems, for instance, “separated pearls in the necklaces received and sent the same pearls again as raw materials for making fresh necklaces’’, the report notes. “And that all the purchase and sale of pearls (80% of total) were made with entities from which LoUs had been taken with PNB.’’
To establish the pattern of at least 10 exporter entities being actually controlled by the Nirav Modi Group during the review period, the auditors have listed a large number of KMPs (key managerial personnel) employed with them, but who were receiving salaries from companies in the Group. All the exporter entities have been beneficiaries of the LoUs declared to be fraudulent, and the “common conflicting period” has been listed for each such employee.
The total payouts for persons who enjoyed such “dual employment” was Rs 4,847 crore, while the payout for past employees who were working with the exporter entities was Rs 16,339 crore. Several internal emails and phone chats have been cited to prove that Nirav Modi himself controlled large exporter entities.
A physical verification of several addresses linked to the exporters found that the details were either fake or, according to the auditors, the standard of establishments/residences was “not in proportion to the business done”. Photographs of these establishments have been annexed with the report.
Also revealed is the fact that just a year before PNB complained about the fraudulent LoUs, Income-Tax authorities had conducted search and seizure operations on the Nirav Modi Group, but no notices were issued to the company.
The raids were conducted in January 2017, and several invoices and bills were seized — however, “as of date, the company has not received any notice in this respect”, the auditors have noted.
The report also has details of a previous action taken by the Directorate of Revenue Intelligence (DRI). A show cause notice was issued to the Group for overvaluation of goods, but appeals were still being heard in the Tribunal when the current fraud was detected.