Proceedings in the US bankruptcy court in the Southern District of New York are shining a tiny light on a tiny part of the ₹14,000-crore fraud played on Punjab National Bank (PNB). The fraud was caused by a handful of the bank’s officials issuing unauthorised Letters of Undertaking (LOUs) to firms connected to diamantaire Nirav Modi.

The actions of Firestar Diamond Inc., A Jaffe Inc. and Fantasy Inc, three entities related to Modi, have forced PNB to seek the appointment of a trustee by the court, to ensure that the Chapter 11 bankruptcy process is not tainted.

Unlike in India, where the new Insolvency and Bankruptcy Code puts the ‘creditor in possession’ of a debtor’s assets, under Chapter 11, the debtor continues to run the business. The three entities had initially asked the US court to approve an aggressive sales process to close the sale before a jewellery trade show in June. However, the court adjourned the auctions of Firestar and Fantasy’s assets indefinitely. No reasons were cited.

The auction of A Jaffe’s assets, including finished jewellery, loose diamonds and inventory, was held on May 3. Although the value of the assets had been appraised at $22.8 million, the auction saw them sold at a significant discount, with the highest bid at a mere $8 million.

And this is where things get interesting. The winning bid came from Parag Diamonds, a company run by diamond trader Panna Jain. In a subsequent declaration, he disclosed that Anurag Jain, a manager at his company, is married to the sister of Sumay Bhansali, the CEO of A Jaffe.

PNB, through its counsel, approached the court and raised concerns over the auction significantly undervaluing the company. It also drew the court’s attention to a number of disturbing facts about the debtors’ conduct during the sales process.

“According to the Debtors’ schedules, the total amount owed to certain suspect exporters and importers is approximately $6.5 million. In fact, A Jaffe’s two largest creditors, Pacific Diamonds FZE and Tri Color Gems, are named as the ‘exporter/beneficiary’ on LOUs already identified as fraudulent,” PNB argued in the recently filed motion. The motion to auction A Jaffe’s assets was subsequently withdrawn.

Modi ‘s maze

Just how complex the case is can be gauged by the ownership pattern of the three Modi entities. A Jaffe, Inc is 95 per cent owned by Synergies Corporation. Fantasy Inc is wholly owned by Firestar Diamond. Firestar Diamond is wholly owned by Firestar Group, which is wholly owned by Synergies Corporation, which is, in turn, wholly owned by Firestar Holdings Ltd, which is again wholly owned by Firestar International Ltd, based in India. And that’s where Nirav Modi comes in — he is the majority shareholder of Firestar International.

Appointment of trustee

The US Court had recently directed the appointment of an examiner to take a closer look at Nirav Modi’s ties to the US companies that filed for bankruptcy. The court documents seen by BusinessLine indicate that PNB has also sought the appointment of a Chapter 11 trustee, to oversee the sales process and ensure that it is not tainted.

“The latest Motion filed by PNB seeking appointment of a Chapter 11 Trustee, if granted, would clearly indicate there are serious concerns about the manner in which Nirav Modi’s companies, as ‘Debtors in Possession’, have conducted the Chapter 11 process and their capacity going forward,” says Seth R Freeman, Senior MD of GlassRatner Advisory and Capital, LLC, a global specialty financial advisory services firm based in San Francisco.

“Unlike the directors and senior management of a Debtor in Possession, a Chapter 11 Trustee is appointed by the Court and is deemed an officer of the Court. The Trustee takes control over the Debtors and the assets to ensure the Chapter 11 process is properly completed,” Freeman explained.

comment COMMENT NOW