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The Central Bureau of Investigation (CBI) is in a dilemma over determining the validity of letters of undertaking (LoUs) issued by Punjab National Bank (PNB) in the Rs 127-billion scam, allegedly involving the Nirav Modi and Mehul Choksi groups of companies. This, though, the Reserve Bank of India (RBI) has banned the issuance of such guarantees for importers. Finance Minister Arun Jaitley could not offer clarity to a query posed by Lok Sabha MPs on whether the tenure for LoUs issued for the gems and jewellery industry was valid for 90 days or 364 days — seen by bankers as a grey area in the RBI guidelines. “According to the RBI master direction on external commercial borrowings, trade credit, borrowing and lending in foreign currency by authorised dealers, et al, the maturity period of trade credit for non-capital goods is up to one year from the date of shipment or the operating cycle, whichever is less,” Jaitley said in a written reply to the Lok Sabha on March 9. The minister cited in the RBI master direction on import of goods and services, for import of gold in any form, including jewellery, precious metal or and studded with diamonds and semi-precious or precious stones the validity of LoUs should not exceed 90 days from the date of shipment. He highlighted the guidelines to say letters of credit opened for import of platinum, cut and polished diamonds, precious and semi-precious stones should not be more than 90 days. “As regards the issue of observance of tenure guidelines for encashment of LoUs for the gems and jewellery sector, according to CBI inputs, the matter is under investigation,” the finance minister said. The RBI guidelines on validity of LoUs for the gems and jewellery sector is a bone of contention for bankers involved in the Rs 127-billion scam reported by PNB. A few days earlier, PNB reportedly communicated to the other affected banks that it would pay up the liability on condition that if investigative agencies find lapses on the part of other banks as well, they will have to refund the money to PNB.
The Delhi-based bank has time and again emphasised that it will be liable to other banks for only genuine transactions. Two PNB employees at its Brady House branch in Mumbai fraudulently issued LoUs on behalf of the companies involved to foreign branches of Indian banks, including those of State Bank of India (SBI), Bank of India, UCO Bank, Canara Bank and Allahabad Bank, among others. The LoUs were allegedly issued to import pearls. PNB had told the CBI in its complaint that the foreign branches of other banks did not do the needed due-diligence before depositing money into PNB’s overseas accounts, which was then transferred to the suppliers of the Nirav Modi and Mehul Choksi groups. PNB had said the RBI prescribed credit for import of semi-precious and precious stones up to 90 days but the credit allowed in most cases was for 360 days. PNB categorised pearls as semi-precious and precious stones in presenting its case. “This should have evoked suspicion in the minds of overseas branches of Indian banks extending buyer credit. These banks never raised any alarm on violation of the RBI guidelines and continued to provide funding against the fraudulent LoUs,” said PNB’s complaint. However, the other banks argued that pearls fall under the non-capital goods category, for which LoUs can be issued for up to one year and that the LoUs issued by PNB executives in this case were according to RBI guidelines.