Indian police conduct searches in widening probe in bank fraud case

The CBI is conducting searches at 20 locations in six cities of the Gitanjali group of firms promoted by Mehul Choksi, the source said. PHOTO: FACEBOOK/GITANJALI JEWELS

NEW DELHI (REUTERS) - Indian state-run lender Punjab National Bank, hit by a US$1.77 billion (S$2.32 billion) fraud, promised investors on Friday it was putting in place "better checks and balances", as investigators widened the probe into the country's biggest-ever bank scam.

The country's financial crime agency, the Enforcement Directorate, said it had searched dozens of locations linked to Nirav Modi, the diamond billionaire at the centre of the investigation, over the last 48 hours, seizing diamonds, gold and jewellery worth 56.49 billion rupees (S$1.15 billion).

Raids were also carried out on Friday by the Central Bureau of Investigation (CBI) on the offices of jewellery retailer Gitanjali, whose chief executive has been accused along with Modi of colluding with PNB employees to fraudulently obtain advances for payments to overseas suppliers.

The Gitanjali group of firms is led by Modi's uncle, Mehul Choksi. PNB has said companies tied to both retailers, whose outlets stretch from New York to London to Beijing, were the recipients of loans from several other banks based on guarantees provided by it.

Meanwhile the Reserve Bank of India, in a statement late on Friday, said it "has already undertaken a supervisory assessment of control systems in PNB and will take appropriate supervisory action". Earlier PNB's Chief Executive Sunil Mehta, speaking on an investor conference call, said the bank was cooperating with the investigative agencies.

India's second-largest state-run lender was also running an audit of its systems to prevent a recurrence of such a fraud, but did not see a long-term hit to its operations, he said. "The amount is big. But we will have the capacities to bring it back to normalcy, maybe within six months," Mehta said.

But he ended the call abruptly after less than 15 minutes when he was made aware of the presence of a number of journalists on the line. Before hanging up, Mehta was heard admonishing his staff for allowing the media to listen in to the call, the schedule of which had been published in a stock exchange filing.

Separately, a bank source told Reuters the lender was considering raising cash by selling some of its properties, including a giant office space in New Delhi, worth an estimated 50 billion rupees. The bank, which has US$120 billion in total assets, saw its shares fall for a third straight day on Friday. It has lost more than a fifth of its market value since it disclosed the fraud earlier this week.


A police source said the CBI, in a new case, has accused the Gitanjali group of defrauding PNB of US$763 million.

India's foreign ministry said it had suspended the passports of Modi and Choksi for four weeks, and had given them one week to voice objections to its plan to revoke the documents. Neither has been charged with any offence.

TV Station NDTV reported Modi, whose high-end jewellery has been worn by Hollywood stars including Kate Winslet and Rosie Huntington-Whiteley, was at a suite in a hotel in New York, citing household staff who answered the door.

Meanwhile, searches were conducted at 20 locations in six cities linked to Gitanjali and its directors, including offices, factories and residences, the police source said.

Choksi, who is managing director of Gitanjali Gems Ltd , did not answer calls to his mobile phone. Shares in Gitanjali Gems, which also did not respond to a request for comment, fell 20 percent on Friday. Gitanjali has previously denied Choksi's involvement in the fraud and said he would take "necessary legal action" to get his name removed from the police case.

Modi has not spoken about the case so far. His flagship company Firestar Diamond says it has no involvement in the case.


PNB's Mehta said the bank had already made checks at almost all of its 7,000 branches and found no other incidents, calling the fraud at one of its Mumbai branches a standalone case.

The biggest bank fraud in India's history has raised fears about the scale of problems in the banking sector that is already saddled with US$147 billion of soured debt. It has also provided an opportunity for Prime Minister Narendra Modi's critics to target the government for the losses at the state lender.

Modi, the jeweller, had last month attended the World Economic Forum in Davos where the Indian prime minister, who is no relation, was a star guest. Indian media carried a group photograph with Prime Minister Modi in the foreground and Nirav Modi grinning between rows of Indian business leaders behind him.

Law minister Ravi Shankar Prasad said the government won't spare anyone and that law enforcement authorities had seized assets worth 13 billion rupees from Modi.


Analysts said the fraud case was likely to cast a long shadow over the banking sector, particularly state-run lenders, several of which had also provided loans under the assumption they were being backed by PNB. Union Bank of India, another state-run lender, said on Friday it has an exposure of US$300 million as a counter-party lender. Local media quoted top lender State Bank of India's chairman Rajnish Kumar saying they had a US$212 million exposure.

Axis Bank, a private sector lender, has said it has sold all its exposure related to the fraud. As investors fretted over the extent of its liability the RBI, in its statement on Friday, denied a report in the Economic Times newspaper that it had directed PNB to pay the entire amount to counterparties.

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