Nirav Modi Scam: The Stench of Sloth

S CAM! It is a perfect acronym for 'Swindler Carted Away Money'. Folklore has it that the phrase scam came into the urban lexicon after an FBI operation called ABSCAM to track and nail the nexus betwe

Published: 18th February 2018 04:00 AM  |   Last Updated: 09th November 2022 05:33 PM   |  A+A-

Model Coco Rocha, actress and model Nimrat Kaur, actress Naomi Watts and Bollywood star Lisa Haydon, left to right, join luxury jeweler Nirav Modi. (File | AP)

SCAM! It is a perfect acronym for 'Swindler Carted Away Money'.

Folklore has it that the phrase scam came into the urban lexicon after an FBI operation called ABSCAM to track and nail the nexus between mobsters, dealers in fake securities, corporate fraudsters and politicos—one of whom was caught on camera spouting, “larceny is in my blood”. It all sounds so familiar. In fact, everything about the Rs 11,000-crore-and-growing Nirav Modi scam fits pat into the acronym and the folklore. Here is a parvenu, or should that be an arriviste, who crafts an aura using diamonds as the commodity to pretend to own what is not his and yet acquire a spot on the Forbes Billionaires List.

What did Nirav Modi do? He got the Punjab National Bank to back him with letters of undertaking without any underlying asset or money to enter into a series of transactions, possibly incestuous, with related parties, and used the proceeds to build a giant bubble. And nobody was wiser – not PNB, not the counter-parties, not the auditors, not the Reserve Bank of India. Till this January, when the brazenness of an employee of his company encountered a conscientious bank executive.

Look at it again. What did Nirav Modi engineer? He systematically created a business model that was aligned between institutional incapacity, individual avarice, regulatory regression and patronage politics. Could all of this have been possible without influence and patronage? Shorn of technical details—the recording of LOUs, the linking of SWIFT to core banking, the reconciliation of commitments—Modi managed to corner public monies to fund private ambitions. And mind you this is the second largest public sector bank we are talking about.

In India’s financial sector, history is cursed to repeat itself. Scams are simply about someone creating artful money. The Haridas Mundhra formula of getting LIC to buy shares of dubious companies was repeated in the UTI scam in the 1990s. Harshad Mehta created and used unrecorded Bankers’ Receipts to fund the bull run of 1991-92. Nirav Modi used unrecorded LOUs to fund his bubble. Every episode is simply the old script with minor variations and with a new cast. 

This government promised hope and announced a series of initiatives to address governance in banking. There is the Gyan Sangam series launched in 2015, followed by the Indradhanush framework presented as the “most comprehensive reform effort undertaken since bank nationalisation”, and by the creation of the “autonomous” Bank Boards Bureau headed by former CAG Vinod Rai. The question is not what these initiatives have achieved, but what the banking system has failed to prevent. 

The Reserve Bank of India says, “The fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls.” It reflects an astonishing grasp of the obvious. Hello!!! Every scam is about leveraging of “operational risks” by “delinquents” and failure of “internal controls”. 

Audit and regulation are expected to prevent exactly this. By definition bankers must assess two kinds of risks—one is assessing business to know who to lend how much and when, and the second is to ensure that the systems within the bank are aligned to achieve minimisation of risk. The layers of oversight and audit are meant to ensure that the structure does not lead to institutional vulnerability and frauds by individuals.

On the face of it, banks are subject to levels of audit—the concurrent audit, the external auditor and then the supervisory audit by the Reserve Bank of India. Again, it is not just PNB but multiple banks’ audits that failed to spot the scam. The question that begs to be asked is did the activity simply escape all the audits? Or is it that there is no mechanism to spot this kind of, well, delinquency—and if so, that raises questions about the efficacy of the structure of supervision and regulation. It is time the government looked at the efficacy of banking regulation by the Reserve Bank of India. The question is must it do all that it does? 

The anger among the people is about the fact that the system was manipulated so easily by one individual to cart away crores. It is also about the inequity in the system. Imagine the angst and anger of farmers faced with depreciating incomes and mounting debt, the anger among small and medium enterprises facing seizure and auctions for default of smaller amounts, and that among people who receive messages on missed payments on housing or automobile loans.Typically, the Congress and the BJP are trading charges. The social media is awash with memes forwarded by believers, atheists and agnostics. One popular meme says, coming up soon, 'bank frauds cess'. Another has a band of robbers at the bank asking not for cash but for letters of undertaking. Of course there is an FIR, and of course the minor culprits are being arrested. The series of raids, the valuation of seizures are all being audited politically. 

The promise of bringing back the main culprit flails when tested against the track record of the government of India—whether it is Lalit Modi, Vijay Mallya or over 100 fugitives across countries with whom India has extradition treaties. Embedded in all the reactions is a sense of cynicism. The Harshad Mehta bank securities scandal happened in 1992. In 2018, the trials are still on. The Satyam scam happened in January 2009. It took nearly a decade after the Satyam scam for the auditor to be banned. That the stench of the scam first arose in 2011, went undetected and continued through until January 2018 is a reflection of the state of systemic sloth. The elephant in the room is government ownership and political management of banks.

Shankkar Aiyar is the author of Aadhaar: A Biometric History of India'ss 12-Digit Revolution, and Accidental India. He can be reached at


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  • SJ

    And what is the likeliness of a similar scam in the offing in either HDFC bank or ICICI ? Are they learning and ensuring sufficient governance and checks ?
    2 years ago reply
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