PNB Scam- A brief explanation.

PNB Scam- A brief explanation.

We all are worried today about the scam which involves one of the biggest banks of the country Punjab National Bank.  How can there be a scam of 11,400 crores without anybody noticing it? Well there are coming a lot of stories behind this & investigation is going on in full fledge, here we are making the readers aware of some key insights from the case:

PNB Scam

Normally Letter of Undertaking (LOU) are issued by banks to provide guarantee for borrowers that in case they fail to repay, the bank will pay on their behalf. Normally, the LOUs are issued for a period of 90 days, but for this particular scam, they were issued for a period of 365 days.

Before retiring, such LoUs were issued by Gokulnath K. Shetty last summer to the companies of a famous Diamond Merchant – Nirav Modi, who also happens to be the nephew of Mehul Choksi, head of Gitanjali Jewels.

The reason why it took so much time for this scam to be detected was due o the following reasons:

1. Involvement of staff – from bottom level officers to higher authorities, a lot of the lender’s people were said to be involved in this scam.
2. SWIFT, which is the international money transfer tool was not connected to the CBS (Core Banking Solution) of the Bank.
3. Failure on the part of Auditors to detect such a fraud. The Auditors are entrusted with the responsibility of keeping a full check on the transactions of the bank. Even they have failed in this case.
4. Public Sector Banks usually have requirements of routine position change of staff and compulsory transfer in 3 years. However, the same requirement seems not to be complied with otherwise it would have been easy to identify this scam earlier.

As a result of the Punjab National Bank issuing such LOUs, various other banks including Bank of India, Allahabad Bank and Union Bank have become a target of this scam. The liability of paying off these banks is coming over the shoulders of Punjab National Bank.

The PNB team is saying that it is also the responsibility of lending banks to do a cross check before lending money to borrowers simply over the LOU. However, the general principle is that credit can be extended to borrowers if they have a LOU from a Financing Institution.

Punjab National Bank is the second largest Government Bank. It is a shock to the entire economy as 11,400 crore of default is a huge blow.

The Central Bureau of Investigation (CBI) is looking into this issue actively and has charged Nirav Modi, his wife Ami, his brother Nishal & Uncle Mehul Choksi. However, they have not been arrested yet. Also, Mehul Choksi has denied any involvement in the said transaction.

The jeweler has his business not just in India, but also in Hong Kong and other countries through their agent.
The PNB officials have also said to the stock exchange that some of its own officials at a single branch in Mumbai had helped Nirav Modi and others get credit through LOU without proper documentations, guarantees and with complying with the rules. The bank will not take this irrational behavior of some of its officials lightly and will make sure that the offenders are punished and prosecuted.

Also, due to this scam, the shares of the Bank have plunged to a great extent. They are facing their 52 week low point as of now. The biggest mutual funds have invested in their shares and are facing negative returns due to this fall in the share price. However, long term investors are seeing this fall in their share price as a correction and are investing heavily in their shares to make gains in the Long Term.

The matter is being investigated seriously. However, no one has taken complete responsibility in this regard as of now. Approx 5600cr of jewelry(including Diamond, Gold, other precious stones) were seized.

CBI on Friday conducted raids at 26 locations across six cities in five different states in connection with the PNB scam case. ED too has searched 35 locations across 11 states in connection with the case and seized jewellery and diamonds worth Rs 549 crore. The searches were conducted at locations connected to Modi and Choksi. All premises searched by CBI are connected to companies owned by Mehul Choksi. The companies include Gitanjali Gems, Gili India and Nakshatra Brand.

CBI sources said these three companies have 36 subsidiaries in India and abroad. The agency has carried out searches at premises connected to 18 subsidiaries in India. Of these 17 are in Mumbai and one in Hyderabad.
The searches were conducted in Maharashtra (Mumbai and Pune), Gujarat (Surat), Rajasthan (Jaipur), Telangana (Hyderabad) & Tamil Nadu (Coimbatore).

Following the CBI FIR on Choksi, ED has also identified 29 immovable properties belonging to the accused. It has summoned Modi and Choksi to its Mumbai office on February 23. It has also got orders issued from Nirav Modi’s office that their subsidiaries and showrooms in Macau, Beijing, New York and London not make any further sales.
Meanwhile, prosecution in the case of Nirav Modi has been filed under Income Tax Act for which hearing has been fixed on February 27. The Government said that the 105 bank accounts of Modi and his family and group concerns have been attached by the Income Tax department.

The accused mentioned in the fresh FIR filed by CBI include Choksi (Managing Director Gitanjali Gems); Gokulnath Shetty (retired DGM of PNB); Manoj Kharat (then single window officer of PNB); and companies Gitanjali Gems Ltd , Gili India Ltd, Nakshatra Brand Ltd; directors of the companies Krishnan Sangameshwaran, Nazura Yash Ajaney, Dinesh Gopaldas Bhatia, Aniyath Shivraman Nair and Dhanesh Vrajlal Sheth, Jyoti Bharat Vora, Anil Umesh Haldipur, Chandrakant Kanu Karkare, Pankhuri Abhijeet Warange, Mihir Bhaskar Joshi and unidentified bank officials.