Nirav Modi’s lawyer Vijay Aggarwal is trying to best portray his client as a victim and not the perpetrator of the fraud. His statement that “After CBI charge sheet comes out, of course, one will face it. The fate of the case is ‘khoda paahad, nikali chuiya’”needs to be evaluated in detail.
First – a little recap of what is known in the public domain.
1. The scam came to light after the Bank refused to provide alleged companies with Letter Of Intent for their business with collateral and the companies in question pointed to the bank that they are a ‘preferred’ customer and have been getting LoI earlier without guarantees.
2. The alleged fraud went undetected for over seven years from a host of internal and external audits and no flags were raised by anyone
Let’s understand how LoI based transaction worked in this case-
Step 1. Modi’s companies in India were to get LoI issued from PNB in India without giving any collateral.
Step 2. This LoI will be provided to foreign branches of Indian banks in East Asia as a security i.e. if Modi’s commitment to those banks failed, PNB will provide for Modi’s commitment.
1. To make LoI available for international bank (in case of default), PNB will transfer the promised amount to its own bank account in the same country called Nostro
2. This Nostro amount will be transferred only after a corresponding amount is deducted from PNB’s account in India (called Vostro)
Step3. The foreign branches will then issue Letter of Credit to Modi’s companies for his business transactions. Letter of Credit is like bank issued instrument which will be encashed by the said bank to Modi’s business partner (his vendor/client etc to whoever he pays with LC) of the expiry of credit time.
So there is a possibility that while PNB’s illegal exposure might have been that of 1.7 Billion dollars not all of would be fraudulent money.
Since LoI was just a guarantee instrument and if that was never cashed by the foreign banks, no fraud ever happened. The possibility was that these LoI were used as a short term credit facilities without providing for any collateral is where the crux of charges rest.
In case Nirrav Modi was diligent enough to use the money from LCs for the stated purpose, all that was wrong in the transactions was the fact that PNB lacked due diligence. Further as hinted by Vijay Agarwal, PNB took its commission for issuing the said LoI.
Now that would indicate why no audit ever found anything wrong with the transaction. Since LoI were not getting cashed (Hence no Vostro transaction which may have triggered CBS accounting alert) so no one looked into them being a problem in the first place. Also the process was generating revenue for PNB hence another reason why would someone question that.
Unless CBI proves that Nirav Modi or his associates entered into a criminal conspiracy with PNB officials, Modi’s lawyers will be right. Nirav’s business in fact may have been shut down by the bank there by trigerring demand from LoIs which the bank simply cant cover from the business.
Lets wait for the CBI charge sheet, however we would be surprised if that can happen in another six to eight months.