A month ago, ‘Nirav Modi’ was jewellery only a very few could afford. Now it’s a brand no one wants to touch. Literally from diamonds to dust! Here’s a quick update on what’s happening:
What is the Nirav Modi scam?
Since 2011, Nirav Modi and his uncle, Mehul Choksi (owner of Gitanjali Jewels) have been using fake Letters of Understanding (LoUs) from Punjab National Bank, to be eligible for loans from foreign branches of Indian banks – Allahabad Bank, UBI, SBI and Axis Bank. In 2011, when Nirav Modi wasn’t able to repay his first loan worth Rs. 800 crores, PNB should have cracked down on this default. Instead, a PNB official, Gokulnath Shetty, who was a part of this fraud, issued more LoUs. PNB only realised that such a scam – worth Rs. 11,300 crores (and possibly much more!) – was happening right under their noses in January 2018. How? Because even after Shetty had retired, Nirav Modi’s staff asked PNB for more LoUs, assuming they’d get it!
What are the scam’s effects on the stock markets?
As this scam involved banks and diamonds, stocks in these industries are the worst hit. PNB has to pay the defaulted Rs. 11,300 crores to the other banks. Considering their stocks fell by 30%, from Rs. 161.65 to Rs. 113.55 in just 1 week, this will not be easy. Banks from which Nirav Modi took loans have taken a hit too. In fact, 34 of 39 bank stocks have been affected. Had Nirav Modi’s company been listed on the stock exchange, it’s value would have plummeted. Instead, co-conspirator Geetanjali Gems fell by over 20%. Jewellery stocks, in general, dropped by 3-5%. Stock markets are moody, read about what drives them.
Why do these scams mostly happen in PSB’s?
Public Sector Banks (PSBs) are banks in which the majority stakeholder is the Government. Unlike Private Banks, whose operations are thoroughly scrutinised, PSBs are pretty vulnerable to fraud and corruption because they’ve always got the government’s back.
They make these 5 mistakes over and over again:
1. They don’t check the credit-worthiness of big names like Nirav Modi and Vijay Mallya
2. In order to get stuff done quickly, they take really risky shortcuts
3. They aren’t run professionally or efficiently
4. They overlook warning signs like loan defaults and poor cash flow
5. They just don’t learn from past mistakes!
What are the takeaways from this scam?
1. Be wary of PSBs, they’re very likely to be managed poorly compared to a Private Bank.
2. However, a Public Sector Bank (e.g. Baroda Bank) is less risky than a Private Bank (e.g. Axis Bank), as the Government can’t let them go “bankrupt”.
3. Even if banks are in trouble, your deposits of up to Rs. 1 lakh are insured and guaranteed to be safe. Recovering any amount above this is up to sheer luck (and this new FRDI Bill)
4. Respond to trouble ASAP! If you’ve got stocks in failing companies (like Gitanjali Jewels), liquidate them. Repaying shareholders is last on their priority list.
5. When markets are low, you might want to invest in cheap stocks. Chat with your financial advisor about such an opportunity.
For further questions on this scam, comment below and let us know.