Prime Minister Narendra Modi at the World Economic Forum in Davos with key accused Nirav Modi.
Prime Minister Narendra Modi at the World Economic Forum in Davos with key accused Nirav Modi.

A massive Rs 11o billion (US$ 1.7 billion) fraud case is threatening to undermine India’s banking system and proving to be an embarrassment for Prime Minister Narendra Modi’s government.

The case came to light after a Mumbai branch of the public sector Punjab National Bank (PNB) discovered allegedly fraudulent transfers taking place. According to the police complaint filed by the bank, two junior employees issued Letters of Undertaking (LoU) to various companies of the Nirav Modi group. The company’s largest partner, Nirav Modi, is a Gujarati businessman who ran a large jewelry business. The LoUs were issued without any security, enabling the companies to withdraw money from international branches of other Indian banks.

But while the complaint was filed by the bank in the last week of January this year, the Prime Minister’s Office was alerted to the alleged fraud nearly two years ago. The revelation has become a major embarrassment for the Prime Minister and the BJP government.

Accused meets Indian Prime Minister

Nirav Modi and a relative, Mehul Choksi, both stand accused of defrauding the bank with the connivance of officials. Before the complaint could be acted upon, Modi and his relatives fled India.

But what has come back to haunt the Prime Minister is a photograph of Nirav Modi participating in an official meeting of chief executive officers at the World Economic Forum in Davos, Switzerland, last month. Nirav is seen standing in the second line, behind the Prime Minister, just days before the official police complaint was filed by the bank. This picture was also tweeted by the spokesperson of India’s Ministry of External Affairs (MEA), soon after the meeting.

YouTube video

The scandal could have grave consequences for India’s already-stressed banking sector. PNB, which issued the LoUs, will now have to reimburse the banks that honored them, potentially causing severe stress to PNB’s balance sheets. If it fails to pay, the other exposed banks could suffer large losses. In the third quarter, some of these banks have already declared losses due to a rise in non-performing assets.

While the government desperately tried to explain the situation, a potentially more disturbing revelation has come to light.

‘PMO was alerted’

A businessman, Hari Prasad, had alerted the government to the alleged fraud nearly two years ago. Speaking to Asia Times over the phone, he detailed how he came to know of the supposed financial misconduct.

“I had entered into a business with Nirav Modi and Mehul Chokshi as a franchisee of their jewelry business in 2012. I invested about Rs 100 million and they were supposed to underwrite my investment with material worth Rs 250 million. However, for nearly a year I did not get anything,” he alleged, explaining that the diamonds and other gems he expected to receive as part of the agreement did not arrive.

Screen grab of an email sent by businessman and whistleblower Hari Prasad alerting the government to the alleged wrongdoing.

Prasad waited several months for the gems to arrive but to no avail. He tried to contact the accused but neither responded. He waited two years in hope of recovering his investment before he filed a complaint with Bengaluru police. When police failed to respond, he filed a second complaint that also did not produce results. After studying the company’s balance sheets, Prasad deduced that the company was involved in a massive ponzi scheme, he alleged to Asia Times.

Prasad sent complaints to the Central Bureau of Investigation (CBI), which, ironically, has now taken up the case following the complaint from the PNB. Since he did not get a response, he also wrote to the Prime Minister’s Office (PMO), which, for inexplicable reasons, forwarded the complaint to the Registrar of Companies (RoC). Incidentally, the Prime Minister is in charge of the Ministry of Personnel, Public Grievances and Training, which in turn has administrative control over the CBI. “The RoC closed the complaint without even asking me for any evidence,” Prasad said.

Weak Defense by Government

In an attempt to defend the Prime Minister’s meeting with Nirav Modi in Davos last month, his cabinet colleague and minister, Ravishankar Prasad held a press conference alleging that the fraud was initiated during the previous regime. It has now emerged, however, that Hari Prasad had indeed informed the current government and the Prime Minister’s Office about the allegedly fraudulent scheme.

At the press conference, it was stressed that the picture of Nirav Modi with the Prime Minister was a coincidence. However, two former diplomats Asia Times spoke to, rejected that claim. “As per protocol, it is impossible for anyone to participate in a photo-op with the Prime Minister without previous clearance and sanction,” a former Secretary-rank diplomat said on the condition of anonymity. “The picture was arranged and there are other pictures, which shows the chairs were lined up for this group picture. These other pictures also show the Prime Minister shaking hands with the CEOs, which makes it an official function. Under no circumstances could this have been a coincidence.”

A Press Trust of India report, issued by India’s largest press agency on January 14 states that the union finance minister, Arun Jaitley, was traveling to Davos for the WEF with a “100-strong Indian delegation” with prominent businessmen. Nirav Modi is named as one of them.

The case could also prove to be an embarrassment for India’s richest industrialist, Mukesh Ambani of Reliance Industries Limited. His sister’s daughter, Isheta, is married to Nirav Modi’s younger brother, Nishal Modi, who has also been named in the PNB case.

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