The quantum of the Nirav Modi-Mehul Choksi (Gitanjali Gems) swindle increases every few days, it is rattling several skeletons in the cupboards of banking and capital market regulators. On 6th March, the Republic TV conducted a high-pitched debate about how the Reserve Bank of India (RBI), under its most high-profile governor, Raghuram Rajan, allegedly favoured the former finance minister by manipulating the 20:80 gold import scheme on 21st May 2014, just five days before the United Progressive Alliance (UPA) demitted office.
RBI introduced the 20:80 scheme in August 2013 to rein in the current account deficit by restricting gold imports to only a few domestic entities/ banks, with strict norms linking import for domestic sales to the export performance. However, its May 2014 amendment suddenly allowed 13 ‘star trading houses’ and ‘premier trading houses’, which included Gitanjali Gems, to import gold and sell 80% of it in the domestic market.
On 26 July 2014, the Indian Bullion and Jewellers’ Association wrote an extraordinarily explosive letter to RBI governor Raghuram Rajan to say that by amending the scheme on 21 May 2014 (to allow ‘star trading houses’ to import gold even if they did not cater to exporters at all), The amendment, they said, had 'made some vested interests more equal among equals'.
The Association openly alleged that several large players were indulging in ‘circular/fictitious export of gold jewellery’ which had been halted by its earlier circular; but insisted that genuine exporters were unaffected. Revealing the modus operandi of the export scam, the letter says: “India is an exporter of handcrafted gold jewellery which is (a) high labour- intensive industry. It takes anything between 15 to 90 days to process the jewellery before export. But those with different motives would procure gold, convert it into crude pendants or bangles or chains with the help of machines and export to Dubai the next day. In Dubai, it directly goes to refinery for converting into gold bars which are received and sold within 24 hours. The loss incurred in this operation is more than compensated by the trading in domestic gold.” The letter also alleged that certain private players indulging in this manipulation used to call the shots in the domestic bullion market and wanted the RBI governor to ‘make a prudent appraisal’ of its amendment in national interest.
RBI apparently did nothing, not in 2013-14, nor in the four years after. Then, the NiravModi-Mehul Choksi scam exposed how the manipulation was not restricted to only exports; the duo has systematically siphoned off nearly Rs20,000 crore from Indian banks through fraudulent letters of undertaking (LoUs). It is important to remember that Jatin Mehta, of Winsome Diamonds, was also defrauding banks of Rs6,800 crore at the same time. He was given three long years after the investigation began, to flee to St Kitts in the Caribbean Islands.
More importantly, Mehul Choksi was debarred by the stock exchange exactly at that time, after a stock market debacle, and had openly given an interview to The Economic Times, where he said his group always enjoyed large non-fund-based limits from banks and was on the lookout for Rs1,000 crore more after he was hit by RBI’s gold import restrictions!
With this evidence in the public domain, RBI’s exact role needs an investigation. Did it investigate Gitanjali and Winsome Diamonds at all? What happened to the investigation? Why was it buried? By whom? Republic TV tells us that CBI now plans to investigate the gold scheme, but will it start with why RBI failed to act?
There seems to be merit in Republic TV’s allegation about the UPA government link; but was there similar pressure on the Securities and Exchange Board of India (SEBI) not to investigate Gitanjali? There was a huge trading scandal on the NSE (National Stock Exchange) around that time and, yet, Gitanjali seems to have got away almost unscathed. Here are the details of that scam:
• It is assumed that only companies with substantial investor interest are selected by stock exchanges for derivatives trading. That Gitanjali Gems was inducted into this segment is the first mystery. There was rampant manipulation of the shares in the cash and derivatives segment, from July 2011 to January 2012, allegedly in collusion with Prime Securities, a brokerage firm that was declared defaulter in 2013 after the Gitanjali stock price collapsed.
A SEBI investigation, based on a market alert, reportedly revealed that nearly 90% of the trading in Gitanjali was by 20-odd companies funded and connected to it, in complete violation of position limits set by the regulator. SEBI found that disclosures to the stock exchange regarding shares pledged by the promoter group in the September-December 2011 period were at variance from the data obtained by SEBI from the share depositories.
• NSE’s investigation covered cash as well as the large volumes generated in derivatives trading. Mr Choksi had apparently pledged his own shareholding with Prime Securities which, in turn, pledged the shares as margin with the National Clearing Corporation (NCC). Interestingly,
Mr Choksi has publicly denied knowing the broker. It is a mystery how Gitanjali Gems’ shares were accepted as collateral in the first place. But when payment difficulties surfaced, the NCC ruthlessly liquidated the pledged shares triggering a downward spiral in the stock and a default estimated at Rs100 crore.
• The Prime Securities debacle led to a detailed investigation, following which 26 entities, including Mehul Choksi himself, were debarred from all three exchanges, with the approval of SEBI’s surveillance department.
• Even after NSE submitted its investigation reports into the Prime Securities episode, SEBI was apparently in no hurry to take the investigation any further. In fact, according to insiders, the surveillance department only transferred the case of manipulation in the cash segment to the investigation department, while bigger manipulation in the derivatives segment was not referred to the investigation team at all. Who was responsible for slowing down investigations at SEBI? Remember, similar allegations had been made about several high-profile investigations during SEBI chairman
UK Sinha’s long tenure. He was also given an extension by the NDA government. In any case, there was no action or investigation against Gitanjali from 2013 to 2017, although the company once enjoyed a market-capitalisation of over Rs50,000 crore and had caused huge losses to investors. Things began moving again in 2017, just 10 days after Ajay Tyagi took over as chairman.
• On 10 March 2017, S Raman, a whole-time member (WTM) of SEBI, passed a quasi-judicial order directing an investigation into Gitanjali for market manipulation as well as violation of takeover regulations in the process of manipulating stock prices. He wanted the investigation completed in six months. SEBI insiders find this surprising, since such directions are usually an administrative matter.
• Yet, in June 2017, despite a serious pending investigation, SEBI had all but cleared an initial public offering (IPO) of Nakshatra World, a subsidiary of Gitanjali Gems, subject to some disclosures. The IPO did not go ahead since the disclosures were not submitted, but it is strange that it even reached the final approval stage. Nirav Modi, too, had hoped to go public and raise funds to pay back Punjab National Bank (PNB) but got caught out. Had Nakshatra gone public, investors’ money would have helped continue the fraud for a lot longer.
Why did SEBI bury the investigation since 2012 and resurrect it internally in 2017? Was the SEBI top brass also taking instructions from the finance ministry or were there some other pressures?
The fact that both, RBI and SEBI, have been shockingly derelict in their duties with benefits to the same jeweller does not appear to be a mere coincidence. Nor the fact that Gitanjali Gems was included in the derivatives segment and its shares accepted as collateral by the National Securities Clearing Corporation. Was someone pulling the regulators’ strings from Delhi? Will the truth ever come out?