“Why these banks
issued the NOC to withdraw ratings at a time when the company was going downhill needs to be investigated,” an executive with the rating firm said, requesting not to be named.
Despite this early warning, Modi’s company received uninterrupted letters of undertaking (LoUs) from PNB, which were honoured by other banks until a few weeks ago.
According to data submitted by FIPL to the regulators, the company posted an operating income of Rs 41 billion and profit after tax (PAT) of Rs 990 million in the financial year ended March 2015. And for the first half of 2015-16, Modi’s company reported Rs 14.58 billion as income from operations and Rs 260 million PAT. It stopped issuing financial details thereafter.
In a statement on February 1, 2016, CARE warned that FIPL had been operating on a stretched operating cycle till March 2015, which had led to working capital bank facilities being fully utilised at a time its operational performance was on a decline. The agency then downgraded the company’s debt instruments worth Rs 24.6 billion. CARE also warned about Firestar Diamonds Ltd, a subsidiary based in Hong Kong, saying the company might not be able to repay its loans unless its parent company stepped in as a guarantor. It also issued a similar statement on Firestar Diamond International Pvt Ltd (FDIPL), another company set up by Modi in India.
Interestingly, Modi and other Firestar group companies were guarantors to the facilities of each other and had assured banks that they would make good any shortfall in the debt servicing obligation of FIPL on demand. FIPL had extended similar corporate guarantees to the bankers of FDIPL for timely servicing of bank facilities, resulting in a cross-guarantee structure.
In 2006, Modi set up FDIPL to focus on the group’s jewellery exports business operations and establish manufacturing units in Surat’s special economic zone and in Maharashtra Industrial Development Corporation (MIDC), Mumbai.
In 2014, it also set up two retail outlets in Mumbai and Delhi to sell jewellery brands like “Auctions” and “Nirav Modi Jewellery”. According to the available data, FDIPL posted sales of Rs 15.61 billion with a PAT margin of just 3.91 per cent in 2014-15. In the first half of 2015-16, FDIPL posted revenues of Rs 7.40 billion.
Jewellery industry sources said there were clear signs that the company was in financial distress and Modi was raising funds from every source possible. The company even toyed with the idea of raising funds via an initial public offer (IPO) in the middle of 2017 but the plan failed as its financial metrics deteriorated.
Modi’s flagship firm, Firestone International Pvt Ltd was incorporated in 1997 and was renamed FIPL on September 28, 2011. FIPL had two verticals: Studded jewellery, which formed 80 per cent of its revenues in 2014-15, and cut and polished diamonds.