Nirav Modi, Mehul Choksi PNB scandal: Glossed over, auditors flagged loan default, forex violations

PNB fraud: Nirav Modi case: Government probing whether ‘sundry debtors’ route was used to mask financial position of flagship firm Gitanjali Gems.

Written by Sushant Singh , Sunny Verma | New Delhi | Updated: February 21, 2018 9:35:32 am
PNB fraud, PNB scam, Punjab National Bank, Nirav Modi, Nirav Modi scam, BJP, Congress, indian express news PNB scandal: For the year ending March 2017, Gitanjali Gems had a turnover of Rs 10,464.76 crore and sundry debtors of Rs 8,567.01 crore.

Gitanjali Gems Ltd, the company at the centre of an alleged loan fraud executed in collusion with staffers of Punjab National Bank, did not adhere to rules pertaining to the Foreign Exchange Management Act (FEMA) and also defaulted on timely repayments of loans taken from Life Insurance Corporation of India, ICICI Bank and IDBI Bank, according to the Secretarial Audit Report and Independent Audit Report conducted on the company’s accounts for 2016-17.

According to the government’s latest assessment of the PNB loan scandal, the investigating agencies are also probing “the genuineness of sundry debtor” — an indication that Gitanjali Gems is suspected to have been using this ploy to route funds to related parties.

For the year ending March 2017, Gitanjali Gems had a turnover of Rs 10,464.76 crore and sundry debtors of Rs 8,567.01 crore. The government is learnt to be probing the ‘sundry debtors’ route that is likely to have been used to mask the financial position of the company, sources aware of the development said.

READ | Nirav Modi denies involvement in PNB fraud, says beleaguered jeweller’s lawyer

During the financial year 2011-12, Gitanjali Gems raised external commercial borrowings (ECBs) worth $107.19 million from the IDBI Bank (Dubai) and ICICI Bank (Dubai), following which the RBI approved the company’s proposal to restructure these loans in November 2014 — it was allowed to repay the principal in 10 structured half-yearly instalments beginning September 30, 2015, and the last instalment due on March 31, 2020.

Sources said terms and conditions of restructuring of ECB loans will also be looked into and investigated. Further lending in the form of ECB post 2014 also needs to be examined in light of the recent loan defaults, the sources said.

The financial accounts of three other companies — Diamonds R Us, Solar Exports, Stellar Diamonds — named in the CBI FIR for causing wrongful loss of Rs 280.70 crore to the Punjab National Bank during 2017, also indicate that these companies reported very low profits, even as they took significant loans. Diamonds R USs for instance, recorded profits of Rs 4.90 crore while it took “unsecured loans” of Rs 2,197.70 crore during assessment year 2017-18 (financial year 2016-17), sources said.

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Stellar Diamonds made a profit of Rs 7.26 crore but took loans of Rs 1,713.90 crore during assessment year 2017-18. The company had a turnover of Rs 2654.90 crore and trade receivables of Rs 2665.10 crore. Similarly, Solar Exports too reported profits of Rs 2.07 crore but raised loans of Rs 981.23 crore during assessment year 2016-17, the latest year for which data was available. Solar Exports too, while reporting a turnover of Rs 1237.85 crore, had trade receivables (or debtors) of Rs 2691.54 crore.

Sources said investigation authorities are probing why these companies reported very high “trade receivables” or debtors — with the amounts involved higher than even their turnover. This indicates that the goods could have been “over invoiced” by these companies or sold to a related party to raise higher amount of loans through Letters of Undertaking from Punjab National Bank, potentially indicating ‘dummy sales’.

pnb fraud, pnb scam, nirav modi, enforcement directorate PNB fraud: An Enforcement Directorate team conducting search at a jewellery shop in Thane. (Express File Photo: Deepak Joshi)

Sources also pointed out that diamond merchant Nirav Modi owned very limited stakes in these three companies. More than 97 per cent of the shareholding were held by two individual shareholders in each of these three companies. Each of these two majority partners in the three companies had annual income ranging between Rs 2.26 lakh to Rs 3.15 lakh per in the assessment year 2016-17. Government agencies are looking into how these majority shareholders with limited income controlled these companies, and what undue benefits could have accrued through such a corporate structure, sources said.

EXPLAINED | Punjab National Bank fraud: How the system was gamed

pnb fraud, pnb scam, enforcement directorate, nirav modi

As for the flagship company Gitanjali Gems, headed by Mehul Choksi, auditors point out non-adherence to FEMA rules and untimely repayments of domestic and overseas loans.

According to the Secretarial Audit Report attached to the annual report of Gitanjali Gems for 2016-17, company secretaries Manish Ghia & Associates observed that Gitanjali Gems did not submit its annual performance report in respect of two of its overseas wholly-owned subsidiaries to the Reserve Bank of India within the stipulated time limit of December 31, 2016, as required under FEMA.

The company also did not file its annual return on foreign liabilities and assets as well as Form ECB-2 monthly return with the RBI on time.

pnb fraud, pnb scam, enforcement directorate, nirav modi Enforcement Directorate sleuths at one of Nirav Modi’s showroom in New Delhi. (Express File Photo: Tashi Tobgyal)

Apart from these red flags, the company’s independent auditors Ford Rhodes Parks and Co LLP also observed that Gitanjali Gems did not make timely repayments on loans taken from LIC and other lenders.

“Note No. 45 A (a) relating to 12% Non-Convertible Debenture issued to LIC where the company has not paid overdue principal and interest aggregating to Rs 348.94 Lakhs,” the auditors noted in their report. These non-convertible debentures were secured by first charge over immovable properties in Hyderabad belonging to Gitanjali Gems subsidiary Hyderabad Gems SEZ Limited.

The company has to repay a total of Rs 32.56 crore worth of principal amount on debentures in three years till 2019-20 to the LIC, for which the company could not create required resources. “Further, the company has not created liquid assets of Rs 148 Lakhs as required under Rule 18 (7) (c) of the company’s (Share capital & Debenture) Rule 2014 in respect of debentures instalments maturing during the following year,” the independent auditors noted.

pnb fraud, pnb scam, enforcement directorate, nirav modi The Punjab National Bank (PNB) branch where fraudulent transactions were detected. (Express Photo: Ganesh Shirsekar)

Gitanjali Gems is also required to repay $43.45 million (or Rs 281.74 crore) worth of ECBs in the current year. For 2016-17, the auditors noted that the company had principal and interest overdue of $9.72 million (or Rs 63.05 crore) towards ECBs raised from ICICI Bank. In respect of IDBI ECBs as on March 31, 2017, principal overdue is $0.73 million (or Rs 4.74 crore).

Queries sent to the Reserve Bank of India and LIC for comments did not elicit any response.

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