PNB A case of Information Asymmetry and Poor Disclosures

Mcom Sem IV

PUNJAB NATIONAL BANK . Commenced its

operation in India in April 1985

Founded in May, 1894 in Lahore

Presently over 10 Crore customers in India

Once it was Considered one of the best psu banks

in India after SBI

Regulated by RBI

Reserve Bank of India Act,

1934

Banking Regulation Act, 1949

SEBI Act,1992

Awards in Its kity….OF PNB

2013 • Vigilance Excellence Award

• FICCI Corporate Social Responsibility Award

2014

• MSME Banking Excellence Award

• Award For Cssr Activity

• Golden Peacock Award

2015 • Assocham Social Banking Exellence Award

2016 • Golden Peacock National Training Award

2019 • EASE Reforms Excellency Award

• Governance Now BFSI Awards

PNB after the Nirav Modi Heist’s

WHAT WENT WRONG WITH PNB?

• After 2011…

• Mr.Mehul Choksi arranged a meeting between Debajyoti Dutta of Rishika Financials and Mr. Gokulnath Shetty, deputy manager ofthe Brady Branch of Punjab National Bank on behalf of Mr. Nirav Modi.

Nirav Modi’s Firestar Diamond being involved in International trade used to take buyers credit from foreign banks to ensure safe imports and exports.

Buyers credit is issued by foreign banks if and only if Purchaser provides guarantee to foreign bank branch through its local bank (Nirav Modi’s local bank was PNB)

STANDARD PROCEDURE TO GET BUYER’S CREDIT NOT FOLLOWED

There should have been a proper due diligence check in Nirav Modi’s case before

issuing Buyer’s Credit (through LoU) to him.

Nirav Modi should have given the security deposit/ collateral for the amount of LoU he wanted to get issued by

PNB.

BUT

Nirav Modi allegedly bribed the deputy manager and few other officials to obtain Letter of Undertaking for foreign banks without any collateral for LoU.

Hence, in similar way….after 2011 PNB issued multiple LoUs without any collateral and gave instruction through swift to Axis and Allahabad Bank of Hong Kong branch to issue buyer credit to Mr. Nirav Modi !

In January 2018, When Nirav Modi again asked for LoU, Mr. Shetty (earlier deputy manager) had retired. The new deputy manager asked Firestar Diamonds for collateral to which they replied that “They never gave any collateral for LoUs earlier”

And then the Deputy Manager of PNB started enquiry in January,2018 …

They couldn’t find any record of Lou in PNB’s CBS system

Generally, Bank’s core banking solution (CBS) is linked with SWIFT but in the case of PNB these 2 were not linked!

• The two employees took undue advantage of this and kept issuing multiple LoUs without its record in Bank’s core system…

• THIS NON LINKAGE OF CBS AND SWIFT MADE IF DIFFICULT EVEN FOR AUDITORS TO ASSESS THE SITUATION

• Detailed enquiry found that Nirav Modi never paid back the amount to PNB against LoUs issued by it to foreign banks and now whole burden was on pnb to clear foreign bank’s money as it was the guarantor of Mr.Nirav Modi.

Later, PNB filed a case along with CBI against the owners of Firestar Diamond- Mr.Nirav Modi, Mr. Nishal Modi, Mrs. Ami Modi and Mr.Mehul Choksi.

• But certain things still lies a mystery…

1. How come in 7 years this matter never came to picture?

2. Why not even once swift account was reconciled?

3. Why Nostro Account was never checked?

(Nostro a/c is the account which is held by a foreign bank with a domestic bank in domestic currency. For example, if Citibank maintains an account with SBI in India in INR, it will be a vostro account for SBI. Notice that an account which is Nostro for one bank is Vostro for another.

Apart from these questions there are some serious Governance issues…

GOVERNANCE FLAWS NOTICED IN PNB SCAM…

1. Questionable Board of directors- before the discovery of the

Nirav Modi-led scam, PNB had substantial exposure to risk of

fraud. Many in this list of “wilful defaulters” were diamond or

jewellery companies. In spite of that PNB didn’t take caution. How

come PNB kept honouring fake LouS.

2. Poor Risk Management – A data of CIBIL reveals that amount of

wilful defaulters in September,2017 stood at approx 93k Crore in

Indian banking system. This data was enough to make any bank

proactive in matters like default in payments.

Role of the CEO: Reserve Bank of India (RBI) had raised red flags over

the lack of adequate security protocols in SWIFT transfers. The central

bank’s warning bells were allegedly ignored by Usha Anantha

subramanian, CEO of PNB between August 2015 and May 2017, when

the fraud was in full swing.

Questionable Role of Audit Committee- The members in the audit

Committee of PNB were quite passive as they didn’t bother to check the

SWIFT statements and Nostro Account statements of Punjab National

Bank.

Dubious Role of Auditors- if the auditors would have checked the SWIFT

account or Nostro Account then this fraud would have come into

picture within seconds, but they didn’t do it. There are only two

possibilities that either auditors too helped the culprits or they were

too ignorant in their work.

• Source:

• https://economictimes.indiatimes.com/industry/banking/finance/banking/pnb-will-honour-

commitments-to-banks-in-lou-case/articleshow/63497672.cms

• ii https://www.thehindubusinessline.com/money-and-banking/police-arrest-3-people-in-pnb-fraud-case-source/article22782873.ece

• Kamna S, 2019, PNB A corporate Governance Failure, Paper presented at the 1st International Conference on CGCCC, on 7-8, Sep, 2019, organised by GRFCG, IIC, New Delhi

• Sharma, J. P. (2013). Corporate Governance, Business Ethics and CSR: (with Case Studies and Major Corporate Scandals). Ane Books Pvt