After Nirav Modi scam, PMO cracks whip; investigation agencies go into high gear, penetrate corporate-banking nexus

New Delhi: On 12 February, over a half dozen officers made their way through the quiet corridors of the Prime Minister’s Office (PMO) at Raisina Hills. Each was restive and carried a file for the hurriedly-called meeting at the top echelons of the government. The heads of investigative, intelligence and finance ministry had been summoned in the backdrop of massive banking scandal involving diamantaire Nirav Modi, Mehul Choksi and the government owned Punjab National Bank (PNB).

A senior PMO official said he was interested in hearing anyone who knew about the intricacies of the PNB scam. Finally he turned to finance ministry officials with two questions: How much did ministry officers know beforehand about the bad debts to diamond merchants? Also, were they aware of the impending crisis?

The babus, in their careful and polite way, pointed out they did no alarm bells were ringing in the days before the PNB complaint to the Central Bureau of Investigation (CBI) on 29 January. A senior officer later described the meeting as “super-heated” and said the instructions were clear: Do not spare anyone found guilty.

“Since NDA government came to power, the PMO’s instructions to ministries and enforcement agencies were very clear on taking immediate action against corruption”, the officer said. “The PMO asked officers to silently neutralise the bad elements in system. Credible complaints were forwarded for immediate investigation. The message was loud and clear from the day one: The government will not tolerate corruption and the officers were given complete freedom to identify, chase and bring the culprits to justice.”

“The government is facing intense criticism and it has been publicly attacked by the Opposition parties for lack of due diligence to check fraud and corruption. The directive was reiterated to the officers: Run a check and pursue all the genuine cases”, he added.

As sleuths from multiple agencies begin investigating the alleged Nirav Modi scandal, whistle-blowers flooded the PMO with complaints that were immediately forwarded to concerned authorities to sift through, in some cases backed by finer details enclosing documentary evidence.

The investigative agencies, which have always been on the receiving end, despite having conducted some of the most audacious probes, were extra cautious. A week later, CBI sleuths knocked on the door of Vikram Kothari, owner of Kanpur-based Potomac Global Private Limited after it received a complaint from the Bank of Baroda in connection with alleged loan default to the tune of Rs 3,695 crore.

It was alleged that Rotomac Global Private Limited was sanctioned non-fund based and fund-based limits under consortium of 7 banks: Bank of India, Oriental Bank of Commerce, Bank of Baroda, Allahabad Bank, Bank of Maharashtra, Union Bank of India and Indian Overseas bank. The bank told the CBI officers since Rotomac account is of the high value in Kothari’s alleged fraud case, they were apprehensive that he could flee country to avoid legal and criminal charges.

On 22 February, the CBI arrested Vikram Kothari and Rahul Kothari. The same day, the agency registered another case against Hapur-based Simbhaoli Sugars Limited and its directors for defrauding Oriental Bank of Commerce (OBC) to the tune of Rs 109 crore. The company, owned by Gurmit Singh Mann, was engaged in the business of manufacturing of refined sugars and had availed the loans under the scheme of financing farmers.

Later, Simbhaoli promoters allegedly diverted the loan amount for personal use. Subsequently, the Enforcement Directorate (ED) registered a case of money laundering and a lookout circular was issued against Simbhaoli directors. A day later, sleuths took swift action by booking Delhi-based jeweller Dwarka Das Seth International Private Limited and its promoter Sabhya Seth for allegedly defrauding the OBC to the tune of Rs 389 crore.

A whistle-blower tipped off the bank that deals by the Dwarka Das Seth International Private Limited were not fair and the owners had orchestrated an elaborate plan to dupe the bank. The modus operandi was using the bank’s Letter of Credit (LC) facilities to pay off other trade creditors against purchase of gold and other precious stones, transfer gold and funds outside the country using fictitious trade transactions and then pay off the LC liabilities from the gold and funds transferred.

The OBC told CBI investigators that the existence of certain entities which were counterparts to the LCs negotiated by borrowers with the bank could not verified, which raised apprehension that they were potentially fictitious. A whistle-blower also claimed that promoters misrepresented annual turnover in order to attract bankers. The agency had summoned Sabhya Seth but he escaped before the FIR was registered. Subsequently, INTERPOL was roped in.

“In the first week of March, several rounds of meetings were held in finance ministry. The state-owned banks were advised to keep a watch on the borrowers who had availed loans of more than Rs 50 crore. They were also directed to obtain passport details of the borrowers to avoid another Nirav Modi episode. The ED was also working simultaneously and had executed Letter of Request (LR) to 13 countries seeking details of Nirav and Mehul’s properties, bank accounts of linked companies. The probe into all these scams could take years”, an official from investigative agency said.

On 27 February, Department of Financial Services, through Office Memorandum (4/5/2014-Vig-Part-III) issued an instruction to the heads of state-owned banks that all accounts exceeding Rs 50 crore, if classified as non-performing assets, should be examined by banks for potential fraud. As per data provided by the Reserve Bank of India (RBI) on global operations, the gross non-performing assets of state owned banks as of September 2017 was Rs 7.33 lakh crore. The details provided by the banks revealed the total number of 9025 willful defaulters to the tune of Rs 1.1 lakh crore.

Agencies go into high-gear

In the first week of March, agencies launched another volley after the PMO received a complaint about Vadodara-based Diamond Power Infrastructure Limited (DPIL) promoted by SN Bhatnagar and his two sons, Amit Bhatnagar and Sumit Bhatnagar. The complainant had prepared a detailed account of alleged fraud by the DPIL, providing enough arsenal for preliminary investigation.

At the direction of PMO, the CBI, ED and the Income Tax Department launched a joint probe and initial findings were shared with the finance ministry. The government, as early as in second week of March, asked agencies to coordinate and share inputs to deliver a watertight case.

When it was found—after working through well-established procedure—that DPIL allegedly cheated a consortium of 11 banks to the tune of Rs 2,654 crore, the agency registered a case on 26 March against DPIL, its promoters and unknown officers of various banks. In the company’s annual report for 2016-17, Amit Bhatnagar told shareholders 2016-17 was a cloudy year and its financial performance bore the brunt of high debt accumulated on account of capacity expansion as well as inorganic growth initiatives undertaken. He was right.

The clouds loomed large on the horizon and CBI findings revealed that DPIL and its promoters fraudulently availed credit facilities from the consortium of 11 banks including public and private sector since 2008, leaving behind an outstanding debt of Rs 2,654 crores. The agency said, “DPIL and its directors managed to get the term loans and credit facilities in spite of the fact that they were already appearing in the RBI’s defaulters list and ECGC caution list at the time of initial sanction of Credit Limits by the consortium".

The CBI alleged that DPIL, with the connivance of officials of various banks, obtained enhancement in credit facilities. In 2011, when DPIL projected a turnover of Rs 2,197 crores (actual turnover was Rs 1,267 crore) and the company got credit facilities enhanced from Rs 285 crore to Rs 480 crore.

CBI said: “In spite of consistent failure to achieve the inflated figures of estimates, the Bank of India officials, while conducting the credit review, did not decrease the cash credit limit, but kept it unchanged at Rs 480 crore even though such figures were based on grossly exaggerated sales figures”.

The initial probe revealed that DPIL allegedly utilised the cash credit limits for obtaining large number of LCs, many of which could not be honoured by the company, and were thus forcibly charged on the credit limit. It was learnt that since 2008, about 1,000 such LCs issued by Bank of India alone devolved, which included at least 16 LCs amounting to Rs 110.79 crore issued in the name of Ruby Cables, a sister concern of DPIL.

“It is also alleged that DGGSTI, Vadodara, issued a show cause notice to DPIL and its group companies, which fraudulently availed Central Value Added Tax (CENVAT) credit, of which such claims of DPIL itself are to the tune of Rs 100.80 crore till 2013, by submitting bogus purchase invoices against which no material was received. This shows fictitious purchase figures of about Rs 500 crores were used to avail these CENVAT credits as well as huge working capital facilities from banks", the CBI said, exposing the rot because of the nexus between corporations and bank officials.

The government has directed the banks to promptly report any potential frauds to investigative agencies and also initiate proceedings against bank officials who are involved: All to fix accountability. The results of some new measures put in place by the government to prevent and detect banking fraud and to bring swindlers to justice are showing. Agencies have begun to penetrate the iron curtain.