The Mumbai branch of Punjab National Bank had issued as many as 1,213 letters of undertaking (LoUs) fraudulently for the group of companies belonging to Nirav Modi since March 2011, Finance Minister Arun Jaitley said in a written reply in the Rajya Sabha on Tuesday. Executives at PNB’s Brady House branch in Mumbai had started issuing LoUs to foreign branches of Indian banks from March 5, 2011, according to details of the alleged scam submitted by the bank, Jaitley said. The first few LoUs issued by branch employees, working in connivance with group of companies belonging to Nirav Modi’s firms, were genuine transactions. There were 53 genuine LoUs issued by PNB between March 2011 and October 2017, according to the bank. In this case, the first fraudulent transaction took place on March 10, 2011. The first fraudulent transaction of the 1,213 fake LoUs took place on March 10, 2011. PNB issued 43 fraudulent LoUs in 2011, 114 in 2012 and 237 in 2013. The Mumbai branch of PNB stopped issuing LoUs for eight months from November 2013. The aggressive commitment of loans by PNB to the accused firms continued from July 2014 with 125 fake LoUs issued in 2014, 190 in 2015 and 353 in 2016. While PNB has settled the liability to other Indian banks for LoUs issued till 2016, the Delhi-based bank is yet to clear the dues for LoUs issued after 2017. In 2017, PNB issued 150 fraudulent LoUs worth around Rs 65 billion for group companies belonging to Nirav Modi. Besides, there were six genuine LoUs worth Rs 1.2 billion in 2017.
A LoU is issued by a bank to an importer (in this case Modi). It works like a bank guarantee, which the importer can sell to other banks at a discount. The importer receives the money, or letter of credit, and pays his client. The issuer bank messages overseas branches of other banks through the SWIFT network, and that bank immediately pays the client against the LoU. The bank that holds the LoU then goes back to the issuer bank (PNB in this case) and recovers its dues. The issuer bank (PNB) recovers its dues against the LoU from its client. Since the LoUs are used for importing goods and involve foreign currency, a vostro account (client’s overseas account) is used to deposit the credit by the bank accepting the LoU. PNB received a report of suspicious unauthorised transactions from its Mumbai circle office on January 23 and the bank informed the Reserve Bank of India and lodged a complaint with the Central Bureau of Investigation on January 29.