As the PNB Scam Drama Fades, How Difficult Will it be to Recover the Money and Prosecute Nirav Modi?

When the battle shifts to courts, as it will eventually, one can expect very stiff resistance.

Is it possible to view the ongoing revelations of the over Rs 12,000 crore fraud at India’s second largest public sector bank (Punjab National Bank) with a fair degree of equanimity?

Past experiences with mega scams suggest it won’t be easy. Yet it is necessary to consider the circumstances that led to what looks like one of biggest financial frauds in this country.

It is trite and cliche to say that no matter how comprehensive and well thought-out a bank’s systems may be, scamsters will always find a way to exploit loopholes. This is true throughout the world, including in advanced economies. Therefore, a post-mortem of any scam should lead to the absorption of correct lessons. This should start as soon as possible, in parallel with the other priority of recovering the lost money.

What is cliche is the nature of the scam itself. A government bank and its murky relationship with one of its top borrowers is the story of Indian banking. The modus operandi of the alleged scamster – siphoning off a bank’s money by colluding with a few junior officials – is not particularly novel. Neither is billionaire jeweller Nirav Modi’s dramatic exit from the country for that matter, as Vijay Mallya and others have shown us.

Ever since the fraud came to light just about three weeks ago, there has been a tendency to sensationalise every aspect of Modi’s alleged shenanigans.

Modi himself, obviously, is no ordinary crook. He had, according to reports, apparently earned the trust of not only his bankers but also of his highly discerning global clientele.

Tough questions, no easy answers

This is what is puzzling. If Modi was the toast of the diamond world, why would he throw away everything he had earned over a fairly long period of time? Especially because the business he thrived in survives on reputation. Modi’s clan, the Jains of Gujarat’s Palanpur, are known to support each other in times of crisis. However, so far, the entire community appears to be stunned by the revelation of the fraud.

These are tough questions for Indian law enforcement authorities, the answers to which will provide at least part of the understanding to the ever-expanding jigsaw puzzle. To what extent was Modi’s empire built on fraud?

As expected, a number of mid-level bankers have been arrested. A close relative of Modi, Mehul Choksi who runs a listed company (Gitanjali Gems) has also been charged.

The list of bankers and business associates of Modi who will implicated will only likely expand in days to come. How fruitful that exercise will be remains to be seen. Past efforts at bringing to book high-profile delinquents have not been easy. Especially when, like Mallya, Modi has moved out of the country and ostensibly has the wherewithal to fight possible extradition moves by Indian authorities.

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Also read

• How many scam-ridden billionaires will get away from India’s law enforcement authorities?

• Monobina Gupta writes on how the long arm of the law in India falls short when it comes to the rich and famous

• How was the Nirav Modi scam allowed to build up to its breaking point?

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In fact, laying hands on the ill-gotten wealth of scamsters is no easy task even assuming their locations can be identified. As everyone knows, salting away the money in one or more secret tax havens and offshore centres is child’s play .

So far, only a fraction of Modi’s estimated total assets has been identified. An even smaller number will be attached. And when the battle shifts to courts, as it will eventually, one can expect very stiff resistance. There is no doubt at all that some of India’s top lawyers will argue for the billionaire jeweller.

There is a very interesting parallel here with Sahara’s Subrata Roy. Over the last few six years, the Sahara group has been using all the top guns in the legal profession to stall the Securities and Exchange Board of India’s (SEBI) order to recover from investors money that it had raised illegally from the public.

Roy’s efforts in this regard have been so pervasive that while SEBI struggled to get a single lawyer of standing from the Supreme Court roster and had to bring in a senior counsel from Chennai, with seemingly unlimited resources, Sahara could sign up almost all senior lawyers in the Supreme Court!

Recovering the dues

This will prove to be even more difficult. Like most mega scamsters, Modi has already argued that the amount he owes is much less than what was been put out by the authorities. Another not-so-novel argument from his side has to do with the Punjab National Bank spoiling his reputation by making public the details of his fraud besides give an allegedly exaggerated picture that set off alarms. According to him, the actual amount he owes (Rs 5,000 crore) is  much less than what the bank has claimed.

Such an argument was also voiced by the spokespersons of the fraudulent ‘Big Bull’ Harshad Mehta.

And truth be told, there is likely in an element of truth in that. Mehta’s scam came to light after details of fraudulent transactions were leaked out by some influential insiders within the State Bank of India who wanted to give a ‘scoop’ to journalist Sucheta Dalal who was then with the Times of India.  Once in the public domain, the scam came out in its multifarious dimensions and could not be bottled up.

Äre there parallels between the Harshad Mehta scam and this one?

Like Mehta, Modi appears to have thrived on loopholes within the system. In the big bull’s case it was through BRs (bank receipts) and the inability of the systems in the Reserve Bank of India’s debt management office to reconcile them speedily, leading to the brokers enjoying a ‘free float’ .

Modi thrived on misuse of letters of undertaking (LoUs) which is a genuine instrument facilitating trade finance. They were issued by PNB without margins, not incorporating them in the secure reporting financial system and rolling them over. All this had the connivance of relatively junior staff at PNB.

It is well known that Harshad Mehta had assiduously cultivated junior officials of public sector State Bank of India and other major banks with large treasury operations.

At this juncture, it is clear that the PNB scam will roll on for a long time to come. After all, the Harshad Mehta scam, even 26 years after it surfaced, has not come to a satisfactory close.

C.R.L. Narasimhan is a senior financial journalist.