PNB Rs 114 bn fraud: Nirav Modi's seized assets may only fetch a fraction

Enforcement Directorate personnel conduct raids at jewellery shops of Viviana Mall in Thane, Maharashtra. Photo: PTI
Assets the government’s central probe agencies claim to have seized assets from Nirav Modi’s warehouses and showrooms, which are worth around Rs 57 billion at book value, are likely to yield less than half the amount when they are disposed of.

The fraud is estimated at Rs 114 billion, but recovering even a fourth of this amount is unlikely, said probe agency sources.

So far, the Enforcement Directorate (ED), had conducted searches at over 200 premises of Modi as well as Gitanjali Gems and seized diamonds, gold and precious stones worth Rs 56.74 billion based on the book value. The income tax (I-T) department had seized 103 bank accounts and 40 properties of the Modi group of firms, but the value of this attachment is not available.

Typically, the central probe agencies tend to take the ‘book value’ of the jewellery to compute the value seized. The book value is the amount entered into the company’s accounts as cost upon which a mark-up is added before selling to the customer.

“The value is often done based on the tag or the book value of the assets, particularly gems and jewellery,” said a senior ED official. He said the value at the time of sale could be much lower than what was mentioned in the books as they suspect over-invoicing as well as passing off low-quality stones at a higher value.

He cited earlier investigations by the I-T department and the Directorate of Revenue Intelligence (DRI), which found discrepancies in stock searches conducted in 2016 and 2017.

There was a huge difference in the market value of the stock compared to the book value on which the Modi companies had claimed tax deduction, said the I-T investigation report in 2017.

According to the report, physical stock held in the special economic zone (SEZ) when valued, revealed a huge difference. “It is averred that the high quality imported diamond is diverted from the SEZ to the domestic market which is sold in cash and instead low quality diamond is exported to associated concerns at high value.”

The report further added “the difference in stock valuation of SEZ was to the tune of Rs 12.16 billion in 2016-17, which represents the unaccounted sale of imported diamonds diverted to the domestic market.”

Similarly, the DRI, which had first detected Customs duty evasion by Modi and three of his firms, had also established the same modus operandi. According to the DRI, all these entities had allegedly diverted imported, duty-free, high-value diamonds to the domestic market. The DRI then had put a stay on Modi’s export consignments to the UAE, US and Canada. Further, it had issued two show-cause notices to Modi and three of his firms and levied a penalty of Rs 371 million, over and above the duty evasion.

The agency had then found that cut polished diamonds worth Rs 1 billion were lying in stock against the declared stock of Rs 11 billion. Similarly, the entities declared pearl stock of Rs 1 billion against which the physical stock was only Rs 40 million.

“When an import is linked with export, the importer doesn’t have to pay any duty. So, for example, if someone imports $1 million worth of gold, with an aim to make $2 million worth of jewellery of it for the export market, the jeweller doesn’t have to pay import duty,” said a senior banker, requesting anonymity.

More often than not, what happens is that the gold, pearl or diamond is imported and sold in the local market, while low quality or fake jewellery is exported (to a shell company incorporated in a tax haven). While importing, the bill is inflated so that the export bill can be inflated too and money transferred through the hawala route. The gold/gems imported are sold in the local cash market, he explained.

The I-T department and the ED have found 200 shell firms in the PNB fraud case.

When an investigative agency, therefore, relies on the book value, there is a scope to get misled. Normally, final valuation would take 15-20 days’ time. 
The probe agency investigators said they found similar challenges in the valuation of Winsome Diamonds, and also Vijay Mallya’s assets, including the Kingfisher House, aircraft and so on.

For example, investigative agencies reportedly found that the seized stock of diamonds in the Winsome case was a fraction of that amount at the time of final valuation, said a banker.

Mallya’s Kingfisher House was initially valued at over Rs 1.50 billion, but was finally sold at Rs 720 million, and that too after multiple rounds of auctioning.

Besides, designer jewellers such as Modi will have a very different concept of book value than other jewellers. The book value in the company itself would be after a mark-up for brand and design, which would be added before the profit margin, said the bankers cited above.

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