Comments
The Punjab National Bank (PNB) scam has an uncanny similarity to the Ketan Parekh (KP) bank scam in 2001.
Nearly 18 years after KP, as Parekh is known in the stock markets, first used the modus operandi of discounting a pay-order deemed to be issued by one bank at another to raise money for trading in shares, it has come to light that a jewellery designer Nirav Modi used letter of undertaking (LoU) to the same effect.
To top it, Modi’s associate, Mehul Choksey, whose name has also cropped up in the scam, is known to trade in the stock market and has had a brush with the National Stock Exchange for margin payment-related issues linked to his company, Gitanjali Gems.
Circa 2001
When stock markets were booming ahead of the dotcom crash, the Madhavpura Mercantile Cooperative Bank (MMCB) of Gujarat issued pay orders in favour of KP entities from time to time even when there were no sufficient credit or securities to cover these loans/overdrafts.
The KP entities then would then discount these pay orders with Bank of India (BOI). The stock exchange branch of BOI in Mumbai would present these pay orders for realisation to the clearing house in the normal course of their business.
According to a 2002 Joint Parliamentary Report, on February 8, 2000 and March 9, 2001, MMCB issued pay orders totalling ₹137 crore favouring KP entities, which were immediately discounted with BOI and the proceeds received were utilised by KP.
But when BOI presented these pay orders to the clearing house for realisation, MMCB showed its inability to pay, since sufficient funds were not available with the bank. This led to the breaking out of the KP scam.
“The PNB fraud comes dangerously close to the KP scam as the modus operandi involves discounting of a bank-issued letter and more similarities could emerge as investigations progress,” said a promoter of one of the oldest brokerage houses in Mumbai.
Fraudulent issue
Akin to KP, Modi’s too has been the fraudulent issue of LoUs by PNB to the ace jewellery designer and his associates that were encashed with overseas branches of Indian private and public sector banks. The amount this time is a staggering ₹11,000 crore ($1.77 billion).
Similar to a pay order, an LoU is a contract to perform the promise, or discharge the liability, of a third person in case of his default. Based on these LoUs, foreign branches offered buyers credit.
Like MMCB, PNB refused to honour the LOUs and one of the banks that discounted it reported the matter to the Hong Kong monetary authority, which is the local regulator, and also the Reserve Bank of India.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.