It has been three days since Punjab National Bank (PNB) disclosed that a fraud worth Rs 11,400 crore had allegedly been perpetrated by jeweller Nirav Modi and insiders at a Mumbai branch. The stock has been punished for a third straight session hitting a 52-week low.
While CNBC-TV18 learns that Nirav Modi may currently be in New York, the Ministry of External Affairs has suspended his passport along with that of Mehul Choksi for four weeks. The enforcement directorate (ED) has also turned on the heat.
The ED has issued summons for appearance to Nirav Modi and his Business Partner Mehul Choksi under the Prevention of Money Laundering Act (PMLA). The two have been given a week's time to depose.
A finance ministry official has also told CNBC-TV18 that they will start a probe on 36 firms linked to Gitanjali Gems post the PNB scam.
This even as the CBI has registered a fresh FIR against the Gitanjali Group of Companies. The fresh CBI FIR involves 143 letter of undertaking (LoU) and 224 foreign letters of credit. These are separate from the 150 LoUs relating to the FIR dated January 31 2018.
CBI sources are also telling Network18 that it may look into the role of Former RBI Deputy Governor, KC Chakrabarty. That after a Whistleblower's claims that he had written to KC Chakbrabarty in 2013, alerting the RBI about a loan to Gitanjali Jewellers, by Allahabad Bank in 2013. Dinesh Dubey who was then the government nominee director on the Allahabad Bank board, says he had dissented against that loan.
When CNBC-TV18 spoke to KC Chakrabarty he said, 'I do not recall anything related to PNB scam during my tenure.'
Meanwhile, banks have come out with details of their exposure to the scam. Bank of Baroda has told CNBC-TV18 that they don't think the exposure of the bank is above Rs 425-450 crore. State Bank of India (SBI) has disclosed it has an exposure of USD 212 million or around Rs 1,360 crore.
In an interview to CNBC-TV18, Rajeev Chandrasekhar, MP of Rajya Sabha, and Hari Prasad, the Whistleblower who wrote letter to the PMO of a possible scam at PNB in 2016 discussed the key developments of the scam.
Below is the verbatim transcript of the interview.
Q: You have been part of parliamentary committee and you have raised the issue of involvement of bank officials in fraud cases going all the way back to 2011 it was when you had raised that question in parliament. This is not about the UPA government, this is not about the NDA government, this is about what needs to be done now to address the situation. This is probably not the last time that we are going to have a conversation about bank frauds, what is the answer?
Chandrasekhar: I am an entrepreneur who has entered politics and I have some degree of understanding of the Indian banking system and how corrupt it can get. In 2012 and 2013 I repeatedly raised this question in parliament about what we are doing to tighten the systems and controls to prevent frauds and embezzlements, and I used the words frauds and embezzlements. I was given the answer on both occasions that we are tightening controls, we are bringing in new systems, etc.
If you just fast forward to now and actually step back and try and understand what has happened, a second largest public sector bank in the country that has invested thousands of crore in a sophisticated financial credit information technology system and that can be just bypassed by a low level manager and a deputy manager grade level person in a small branch in Mumbai.
Q: Do you buy that argument?
Chandrasekhar: I do not buy it at all. I do not think this can be left to some deputy manager who is bypassing a very sophisticated financial system and you have thousands of crore of export finance being given to companies. So, I think there is – this government when it came in 2014, was quite aware that the banking and the financial systems were messed up. You remember all those high visibility meetings that were held, Vinod Rai was made in-charge of the banking board.
Q: But where is Viond Rai, where is the Banks Board Bureau?
Chandrasekhar: I think we have managed to restructure and address the issue of the top management of the banks, and we have done some good stuff about separating the chairman and the CEO and improving the board level constitution of the banks, but I think somebody took their eyes off the real problem which is the operating level of these banks. There are many banks that are very good, very competent people, but at the same time there are many in these ones, especially in the public sector banks that are completely invested in this corrupt sort of a relationship driven transaction. I think that is the area we should be focusing on.
I tweeted this morning when people asked me why do you think this government took so long to react. I said I think the government underestimated the depth of the corruption that has crept into the financial system and probably overestimated the bureaucratic capabilities of the supervisors.
Q: On what basis, what was the evidence that you had, what was the reason that you decided to go to the Prime Minister’s Office (PMO) when you sent him that letter on July 26 2016?
Prasad: Per se I did not have any investigative evidence. When I had a business deal with Choksi for two years, I have suffered because of his fraudulent activities. Then I started to study his modus operandi and the way he is managing his balance sheets where with a fictitious assets which we could understand by looking at their balance sheets over a period of time. Then I have given this information to various investigating agencies such as ED and CBI to look into the technicalities in more serious manner and to do the forensic audit so that these irregularities can come out in open.
Q: What was the response from the ED, Registrar of Companies (ROC), from any of the investigative agencies, from the PMO when you wrote and reached out to all of them?
Prasad: I did not get any response from either ED, Serious Frauds Investigation Office (SFIO), SEBI, or other agencies. So finally I had no choice but write a letter to PMO requesting PMO to do the necessary to investigate this matter in serious way.
Q: Did you get a response from the PMO?
Prasad: Yes, they have acknowledged. I think it is the system generated process, they have acknowledged my compliant and immediately they forwarded my compliant to ROC to look into the matter because my compliant was about irregularities in balance sheets and fictitious assets and all which were based on my understanding of the business structure. Then ROC did not take any action. So I do not know the reason why ROC did not take any action. So that is the reason that I was quite upset with it.
Q: In your letter, the compliant and the copy of the complaint that I have, it talks about Mehul Choksi, Gitanjali Gems, it does not talk about Nirav Modi, but there are close links between the two. Did you have any reason to believe that Nirav Modi may also have been involved in some form or fashion?
Prasad: No, I had no idea about Nirav Modi and I never had any business dealings with Nirav Modi. I only had business dealing with Gitanjali Group and Mehul Choksi.
Q: Today we have got a situation where Nirav Modi has clearly fled the country, he is most likely in New York, how does that make you feel, for somebody who has been reaching out to investigating agencies, to the government, to regulators for almost two years now. I would imagine you are beyond disappointed.
Prasad: That is true.
Q: I want to get your comments on what you just heard. There is systematic failure, it is not just an operational failure at the level of Punjab National Bank, there is a systematic failure here.
Chandrasekhar: I think we need to be a little clear about this. What the whistleblower, Hari Prasad is saying is that he alleged that there was something wrong with the Gitanjali Gems balance sheet. I am not aware if that is true or not, and I am assuming somebody should investigate into that, but where we are today is an issue of fake LoUs and fraudulently obtaining loan from a bank which is very different from what Hari Prasad just talked about.
Q: It is exactly the same, I am reading out to you from the annexures that have been sent by the complainant. He says in the compliant, this person has siphoned out thousands of crore out of India, list of 31 banks that have extended loans to this group, tax liabilities increasing by the year, the consolidated balance sheets say his tangible assets are very small, loans to the tune of Rs 9,700 crore, you can see that most of the Indian subsidiaries are in losses and foreign subsidiaries are in profit. I am reading out from compliant and the annexures that have been sent.
Chandrasekhar: I have not seen all those. I am just referring to the conversation he just had with you. So I do not have all the details. I am referring to what is clearly available to us in the public domain which is that Punjab National Bank has been ripped off Rs 11,400 crore or close to USD 2 billion through a process of fraudulent LoUs and that is clearly a breakdown of the banks own risk management, liability management, financial reporting system.
Everything about a bank is about is having checks and balances to manage risk, and if a deputy manager can go ahead and issue LoUs for USD 2 billion, then the entire concept of risk management in public sector bank needs to be assessed from ground up. This is the most bizarre and ridiculous situation that we find ourselves.
Q: You are absolutely right. To a lay person I do not understand for instance how this could have been pulled off by two junior branch officials.
Chandrasekhar: I do not believe that either.
Q: As I pointed at the start, we have been talking about fraudulent cases, embezzlement, corruption, crony capitalism, complicity, collusion, what is the answer, is privatisation the answer?
Chandrasekhar: I want to start by saying that this is giving the financial sector of India a big knock because we are just building back the credibility, we are talking about recapitalising banks that have been hammered through fraudulent or false decision making in the past. We are just getting to a point where we want to present a strengthened banking system so that the credit offtake can improve and on the back of that we are dealt with this blow. So I believe honestly that we need to start discussing this very openly.
Is it the case that government owned banks can never be run professionally and cleanly? If that is the case, then we should really actively start talking about bringing in strategic partners who can bring in the required management, oversight, risk management capabilities. I am not advocating disinvestment, but if come to this conclusion as people and as a country that taxpayers are not going to put more good money after bad, then we may want to start arguing that enough is enough and we need a new model where these banks are run much more professionally and better.
Also watch accompanying video of Leo Puri, MD at UTI Asset Management with his views on the PNB scam.