Podcast | A to Z of scams in India: From Harshad Mehta to PNB-Nirav Modi case

Scams. Financial frauds. If you’re a child of the 90s, or the noughties, or are a child even right now, you’re well acquainted with scams in India. You’re probably living one right now and don’t even know it. Someone somewhere is waiting for you…so he can f*ck you over and walk away with your money. Also, you must be one heck of a smart child if you’re listening to this podcast at age 18 or less.

2018 comes across as the worst year for financial fraud. But that would be a misnomer. 2018 is just the year that many fraudulent cases were revealed to the public. One IIM-Bangalore study estimated that public sector banks bore losses of approx. 227.43 billion dollars or Rs 22,743 crores thanks to fraudulent banking activities between 2012 and 2016. This data seems pretty authentic, given the source. The Electronics & Information-technology minister Ravi Shankar Prasad recently announced this on the floor of the Parliament, citing RBI data.

Alright, brace yourselves from some staggering numbers.  Mr Prasad shared that there have been over 25,600 cases of credit, debit and online banking fraud worth Rs 179 crores up to December 21 2017.  RBI data also shows that, for the first nine months of FY17, 455 cases of fraud transactions, each worth Rs 1,00,000 or more - were detected at ICICI Bank; 429 such instances at SBI, 244 at Standard Chartered Bank and 237 at HDFC Bank.

All this in just one year - 2017.
It’s too early to call 2018 but I’d wager that the biggest of the lot this year is the scam that refuses to step away from the spotlight of high-decibel prime time news- the PNB-Nirav Modi-Mehul Choksi case. 13,700 crores big. But more on that in a bit.

The main issue is the rot at the centre of our financial system. Because 2018 is no outlier. Some estimates state that between April and December 2016, upwards of 3500 fraudulent transactions involving Rs 177.50 billion were reported, facilitated by around 450 private and public sector employees.  This is a recurring pattern. If anything, the flurry of fraud cases seem to indicate that India’s banks are repeat offenders. Textbook recidivism, anyone?
As an article in a leading business news outlet noted,
What is going on in Indian banking?
Nothing New.

Bank frauds and crises have been a regular feature of India’s financial history. Some particularly cynical quarters hark all the way back to Keynes. John Maynard Keynes wrote in 1913 that ‘in a country as dangerous for banking as India, banking should be conducted on the safest possible principles.’ Sure, Mr Keynes was talking about pre-independence India and comes off a smidge too Churchillian in his attempt at prophecy but he’s not entirely inaccurate. Maybe the fundamentals weren’t in place?

One of the earliest instances of financial fraud in India as we know it was the one involving Presidency Bank of Bombay during the 1860s. The American civil war was on and Britain’s cotton supplies were hit hard. The empire decided to source cotton from Bombay’s cotton markets. Many cotton companies were established and, with the soaring appetite for capital, so were banks. PBB, one of the more established banks then, took to lending recklessly against shares of private organizations and on personal security. Not a great business model, no?
Soon, America’s civil war ended and the cotton boom went bust. And PBB, neck deep in bad loans handed out to real estate and phoney companies, imploded in 1868.

Maybe Keynes was on to something. Why does all this sound familiar?

Now let’s take a look at the biggest financial scams that India has seen.

• In 2011, the CBI revealed that executives Bank of Maharashtra, Oriental Bank of Commerce and IDBI had created close to 10,000 fictitious accounts, and 1500 crore rupees of loans were transferred top those accounts.
• In 2014, Mumbai Police filed nine FIRs against a multiple public sector banks related to a fixed deposit fraud worth Rs 700 crore.
• In 2014 again, Bipin Vohra, a Kolkata-based industrialist allegedly defrauded the Reseve Bank of India of 140 crores using forged documents.
• Another scam that unfolded in 2014 was the bribe-for-loan involving ex-CMD of Syndicate Bank, SK Jain, and his involvement in sanctioning loans worth Rs 8,000 crore.
• 2014 seems to qualify as Annus horribilis for banking scams. This was also the year Vijay Mallya was also declared a wilful defaulter by Union Bank of India, following which other banks such as SBI and PNB followed suit. He would escape to the UK in 2015.
• One of the biggest banking frauds in 2016 involved Syndicate Bank again. Nearly 380 accounts were opened by four people who stripped the bank of Rs 1000 crore using fake cheques, LoUs and LIC policies. Ah, LoUs, we hardly knew ye back then.
• Next is the big daddy of all scams, at least in public perception. This one is the bofors of financial fraud. The Harshad Mehta case. He made 4000 crores from artificially pushing up share prices with the help of money taken through fake bank receipts.
• Let’s not forget the Ketan Parekh case of 2001. Between 1998 and 2001, he manipulated the stock market, artificially rigged prices of certain securities like K-10 stocks, made 320 crores and crashed the market.
• The Satyam case. In 2009, the the chairman of Satyam, Ramalinga Raju, resigned after confessing that he had manipulated the accounts of Rs 14,162 crore in several forms.
• And finally, Subrata Roy of Sahara. I bet you forght this one. Remember the maudlin Sahara Parivar ads that did the rounds on TV? Turns out they were ripping investors off to the tune of 24000 crores.

These are some of the biggest scams in India’s history. There are plenty of political scams of course, but we’re limiting ourselves to the sphere of finance today. I suspect we’re so far down the rabbit hole that I could list out a scam for every letter of the English alphabet.

But, for our purposes, let’s take a look at the best…err..the worst of the lot.

To start off Round 1, coming in at 13,700 crores is the mint condition, 2018-edition PNB scam.

Yes, ladies and gentlemen, the biggest hit this year might just be the big daddy of them all.  Hell, it involves diamonds. Lots of diamonds. Has to be big, right?

So let’s get to the details. Bear with me, this is a long one. Lots of jargon but a real good explanation.
In a case that could well turn out to be one of the largest corporate scams in India’s history, Delhi-based Punjab National Bank announced that it had been defrauded of about Rs 11400 crores by a jeweller named Nirav Modi, his uncle Mehul Chinubhai Choksi, and sundry other relatives through a bunch of companies they own.

On 29 January, a PNB official from Mumbai filed a criminal complaint with the CBI against three companies and four people, including billionaire jeweller Nirav Modi and Mehul Choksi, the managing director of Gitanjali Gems Ltd, claiming they had defrauded the bank and caused a loss of Rs280 crore or $43.8 million.

PNB is india’s second-largest public sector bank. PNB says that on 16 January the accused firms presented a set of import documents to the Mumbai branch and requested buyers’ credit to pay overseas suppliers. Since they had no pre-arranged credit limit, the branch official asked the companies to put down the full amount as collateral so the bank could issue LoUs to authorize the credit.

It claimed that two of its employees were involved in the scam. Who would have guessed, right?  To summarise, PNB’s core banking system was bypassed to raise payment notes to overseas branches of other Indian banks including Allahabad Bank, Axis Bank, and Union Bank of India, using the international financial communication system, SWIFT.

What is SWIFT? It is a messaging system that enables banks and financial institutions worldwide to send and receive information about financial transactions via encrypted codes making the transactions secure. SWIFT stands for Society for Worldwide Inter-bank Financial Telecommunications. This system was first used in 1974 when seven global financial institutions constituted a cooperative society for transferring financial messages securely. Before SWIFT, Telex was prevalent as well as lone means of message confirmation for foreign exchange. In the Nirav Modi case, the bank found that two junior employees had issued LoUs on the SWIFT system without entering the transactions on the bank’s own system. Such transactions went on for years without detection, PNB said.

PNB accused three firms —Solar Exports, Stellar Diamonds and Diamond R US—that it claimed belong to Nirav Modi, a jeweller worth $1.73 billion according to Forbes.
Modi’s companies colluded with the bank staff, PNB addded, and claimed it suspected officials at foreign branches of other Indian banks that extended credit were also involved. The bank also named Gitanjali Gems, Gili India and Nakshatra — companies promoted by another jeweller, Mehul Choksi, who is NIrav Modi’s uncle.

Currently, the govt is investigating the case and Nirav Modi, after some grandstanding and, is holed out somewhere in America. The amount of the scam ballooned from 11400 crores to 13700 crores and it is safe to assume, I’d think, that Nirav Modi will ever pay this back in full.

The Satyam computers case.

In 2009, the chairman of Satyam Computers Services, Ramalinga Raju, confessed that company’s accounts had been falsified. He admitted to SEBI and the stock exchanges that, in the company’s books, cash and bank balances were inflated. While the cash balance with the company at that time was Rs 4,000 crore, it was leveraged to raise another 15,000-20,000 crores.

The company inflated accounts by non-inclusion of certain receipts and expenditures and by including fake bills. During investigations, 7,561 fake bills were uncovered which led to an inflated value of the company Rs 4,783 crore over a period six years.

In 2015, Ramalinga Raju and ten others were convicted while the investigation into the role of its auditors continued till this 2018. On January 10 this year, SEBI found PricewaterhouseCoopers, the financial services network, guilty of fraudulent activities and barred them from issuing audit certificates to any listed company in India for two years.

• Sahara Parivar. This one was not unexpected. There had been whisper, rumblings even. How had he gotten away? Let’s take a look at the case. A complaint by a gentleman named Roshan Lal in 2010 alerted Sebi to what it termed various illegalities committed by the Sahara group in raising over Rs 24,000 crore from more than three crore investors.

The case quckly turned high profile, thanks to the plethora of ads that Sahara plastered across TV channels. Ironically, Sahara owns a news channel. I don’t remember if they covered this particular breaking news. Anyway, the high-profile case included the arrest of the group’s flamboyant chief Subrata Roy. You remember him….the guy who called himself Managing Worker of his business empire.

The case involves staggering numbers…yeah, I know I said staggering once before but this was 2010, these numbers were staggering back then…. The scam involved Rs 24,000 crore collected from three crore individuals; Sahara once sent 127 trucks containing 31,669 cartons filled with over three crore application forms and two crore redemption vouchers to Sebi’s office. Movie-like, isn’t it? This apparently resulted in a huge traffic jam near the outskirts of Mumbai, where SEBI’s HQ is located. See, you learnt something new today. Sebi’s HQ is in Mumbai.

The latest in the case is that Subrata Roy spent years in jail and been on parole since 2016. The parole was granted the to enable him to attend his mother’s funeral and has since been extended. Besides Roy, two other directors were arrested for failure of 2 Sahara companies — Sahara India Real Estate Corporation and Sahara Housing Investment Corp Ltd — to comply with the Supreme court’s 2012 order to return Rs 24,000 crore to their investors.

• Stepping back in time to 1998. The era of Backstreet Boys, Britney Spears and when FRIENDS was on TV. While we were wasting our youth watching television, an enterprising gent named Ketan Parekh went all Wall Street-Gordon Gecko in Mumbai. From 1998 to 2001, traders in the share markets followed his every action because all he touched turned to gold. Too good to be true, I know. But in a world where greed is good and Gordon Gecko would be worshipped, normal is too tedious. Fun fact: he was also known as the Pentafour Bull. Parekh kept a low profile, except when he threw a party that was attended by politicians, business magnates and film stars. Why don’t these celebs ever verify whose party they’re attending? Background checks guys, background checks. A CA by training, Parekh came from a family of brokers, which allegedly helped him create a trading ring of his own. During 1999 and 2000, the tech bubble engulfed the rest of the world, including India.

Investment firms, overseas corporate bodies, cooperative banks – everybody wqs willingly handing their money to Parekh. That “take my money” gif and meme that’s popular on twitter…. Parekh was living the real life version of that. He used it all to rig stock prices upwards by making his interest apparent. The result:  stocks like Visualsoft rose from 625 to  8448 per share and Sonata Software went from Rs 90 to Rs 2150.
The inflated stocks had to be dumped somewhere in the end, for which Parekh used financial institutions like the UTI.
Parekh’s joyride came to an abrupt end a day after the Budget was presented in 2001. A bear cartel disrupted Parekh's fun by hammering prices of the K-10 stocks, causing a payment crisis in Kolkata.

Enter SEBI. The agency investigated and found that bank and promoter funds were used to game the system. Parekh was arrested in March 2001.
In the aftermath of the scam, many loopholes in the market were plugged. The trading cycle was reduced from one week to one day. Forward trading was formally introduced in the form of exchange-traded derivatives to ensure a well-regulated futures market. Broker control over stock exchanges was demolished.
Thanks to the oddly named “Pentafour Bull”, India's stock markets are today considered safe. Well, safe as can be.

• And finally, the most popular name in frauds in India. Sorry, I don’t mean to sound congratulatory. It’s just that this is the most high profile case of them all.

Harshad Mehta was a registered broker who turned into the ‘Big Bull’ in the early 1990s. Mehta and his partners in crime were accused of manipulating the Bombay Stock Exchange in 1992 by taking advantage of loopholes in the banking system. He used Ready Forward or RF deal to insert money into the market. RF deals were short-term loans from one bank to another. The deals were generally made with help of brokers, who were paid commissions.

So what did Mehta do? He colluded with bank employees to get fake Bank Receipts issued. He used these BRs to get other banks to lend him money under the false impression that they were lending against government securities.

This amount was then put into the stock market to enhance share prices. How much? Up to a staggering 4400%. Yeah, staggering. What else do you call a 4000% jump in price? Harshad Mehta then sold these shares at a significant profit and the principal amount was then returned to the banks.
In this manner, Mehta defrauded banks of nearly Rs 4,000 crore that time. Once his MO in the stock market was discovered and exposed, banks realised that they were in possession of fake BRs holding no value.

The Harshad Mehta case caused a furore in the Parliament, leading to his arrest and sweeping changes in the stock market and tighter norms. He was convicted by both the  Bombay High Court and the Supreme Court. He was charged with 74 criminal offenses and these dragged on until 2001, when he passed away.

And there you have it. Five of the most outrageous cases of financial fraud in India.

What I always feel when I hear such stories is, will they ever stop? Another thought that comes to my mind is, I wonder what all those crores stacked up in cash look like.
So what do you think? Greed is good?