The U.S. bankruptcy filing by Firestar Diamond Inc comes as investigations by Indian authorities into the fraud case are becoming more aggressive, including a raid last week of Modi’s former law firm that lawyers described as unprecedented.
Modi, along with his uncle Mehul Choksi, owner of Gitanjali Gems Ltd, are suspected to have colluded with bank officials at Punjab National Bank (PNB) to obtain unauthorised loans over a six-year period.
PNB late on Monday said the amount of those fraudulent transactions could rise by $204 million to nearly $2 billion, sending its shares reeling to a 20-month low.
The scale of the fraud has raised concerns about the potential for similar cases across India’s banking sector. The Finance Ministry on Tuesday set a 15-day deadline for state banks to take action to improve their oversight of operational and technological risks.
The ministry’s Department of Financial Services also ordered state-run lenders to comb through their bad loans of more than 500 million rupees ($7.71 million) for potential fraud.
Among the actions lenders must take include identifying current oversight weaknesses and having banks’ boards “assign clear accountability” for implementation and compliance.
Analysts said the government directive could hit banks in the short-term if more fraud was detected, though it would benefit the sector in the long-term.
“The oversight in the banking system is obviously not good,” said Yuvraj Choudhary, an analyst at brokerage Anand Rathi. “This could lead to uncovering of more potential scams. We can expect bottom-lines to be hit in the coming quarters.”
Law Firm Raided
Firestar Diamond Inc listed $50 million to $100 million in assets and liabilities and noted it had 50 to 99 creditors, according to a court filing in the Southern District Of New York on late Monday.
The company is a unit of Firestar International, controlled by Modi, a jeweller who built his range of international diamond businesses in part by drawing a famous roster of clients such as actress Kate Winslet. His flagship Firestar International had $2.3 billion in sales as of March 2017, according to figures previously provided by the company.
Indian authorities have stepped up investigations into potential wrongdoing at PNB as well as companies tied to Modi and Choksi, although no charges have yet been filed.
An official at the Central Bureau of Investigation (CBI) said they had last week raided the offices of law firm Cyril Amarchand Mangaldas, which had represented Modi for a while, and taken away documents related to Modi. He did not give additional details.
Lawyers said they were unclear what legal basis the CBI had used to seize the documents.
Cyril Amarchand did not respond to a request for comment.
Meanwhile, the CBI source added current and former officials at PNB continued to be questioned, including former managing director Usha Ananthasubramanian, who now heads state-run Allahabad Bank, as well as officials from other lenders that lent to companies tied to Mehul Choksi and auditors.
Ananthasubramanian did not immediately respond to requests for comment.
At least a dozen people - six from the bank and six more from Modi’s and Choksi’s companies - have been arrested, while investigators have seized a number of properties from the two, including jewellery and luxury vehicles.
Both Modi and Choksi, whose whereabouts are unknown, have said they are innocent.
Banking Shares Reel
PNB’s disclosure it had detected additional fraudulent loans, on top of the $1.77 billion reported in a disclosure earlier this month, sent shares of state-run lenders sharply lower on Tuesday, reinforcing concerns about the escalating financial cost of the unauthorised loans steered towards the two jewellers.
The government’s orders for tougher supervision is also raising concerns that Indian lenders, already struggling to clean up a record $147 billion in bad debt, will face additional regulatory scrutiny and scepticism from investors about the scale of the fraud problems across the sector.
PNB shares slumped 12.2 percent, after earlier falling as much as 14.2 percent to its lowest since June 2016.
Since disclosing the fraud on Feb. 14, its stock has dropped 40 percent, wiping 153.3 billion rupees ($2.36 billion) off its market value.
A sub-index of state-run lenders, the PSU Bank index, was down 3.5 percent, while top-ranked State Bank of India was down 2.5 percent.
Worries about the lack of supervision in the banking sector have been compounded after state-run Oriental Bank of Commerce said on Sunday it had suffered losses of around $17 million over loans provided to a sugar company that the lender claims were fraudulently diverted.
Meanwhile, pen maker Rotomac Global is facing a police investigation over accusations it cheated a consortium of lenders, while private lender City Union Bank has said this month “cyber criminals” had hacked its systems and transferred nearly $2 million via the SWIFT financial platform.
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