29 May 2018 20:29 IST

The PNB-Modi saga: How proceedings in the US are unfolding

Nirav Modi’s companies used a multi-layered structure to move cash and assets to other jurisdictions

Ever since the ₹14,000-crore fraud at Punjab National Bank (PNB) — the country’s second largest state-owned bank — came to light, investigative agencies have been intensifying their crackdown on Nirav Modi, furiously seizing his assets and freezing his accounts in India. But in what would appear as a predictable move by companies with overseas assets, Modi’s US entities — Firestar Diamond Inc, A Jaffe Inc and Fantasy Inc — filed for bankruptcy in the US, making it difficult for Indian lenders to proceed against his assets there. Nonetheless, PNB, through its counsel in the US, has been thwarting his attempts to hastily dispose of his US assets.

Here is an interesting sequence of events that took place in the US which highlight not only the ingenious ways in which Indian companies, through their multi-layered structure, move cash and other assets to different jurisdictions, but also the need for a robust cross-border insolvency law framework in India.

Hasty Chapter 11 filings

Within a month of the PNB scam, Modi’s entities in the US filed for bankruptcy as a pre-emptive move to seek protection against lenders. That they filed under Chapter 11, without any resolution plan or creditor-induced schemes, indicated that it was a hasty filing done to safeguard assets and liabilities. Chapter 11 of the United States Bankruptcy Code allows debtors to reorganise their assets in order to keep their business alive and pay creditors over time. Once a company files for bankruptcy in the US, there is an automatic stay on certain collection and other actions against the debtor and the debtor’s property.

Unlike in India, where the Insolvency and Bankruptcy Code (IBC) puts creditors in possession of a debtor’s assets, the US follows the ‘debtor in possession’ principle, where debtors continue to manage their assets.

This had raised concerns of a possible fire sale of Modi’s businesses at a discounted price.

Complex structures

As the case evolves in the US, the intricate maze of companies set up by Modi shed light on the ₹14,000-crore Letter of Undertaking (LoU) fraud.

The complexity of the case can be gauged by the ownership pattern of the three entities mentioned above. A majority — 95 per cent — of A Jaffe Inc is owned by Synergies Corporation. Fantasy Inc is wholly owned by Firestar Diamond. Firestar Diamond is wholly owned by Firestar Group, which is wholly owned by Synergies Corporation. This, in turn, is wholly owned by Firestar Holdings Limited, wholly owned by Firestar International Ltd, based in India. Modi is the majority shareholder of Firestar International — the ultimate parent of Firestar Diamond Inc.

The statement of financial affairs of Firestar Diamond, which The Hindu BusinessLine accessed and analysed , reveals that under the ‘property held for another’ section, there are assets that Firestar Diamond holds on behalf of other entities. About 88 per cent of such inventory in value is held for Firestar International (in which Modi is the major shareholder), in the form of loose polished diamonds of over 5,000 carats valued at $3.8 million. The balance inventory, in the form of jewellery, is held for Nirav Modi Inc, a company registered in the US.

While the value of assets in question may appear minuscule in light of the $2-billion fraud at PNB, it brings to light the nifty ways in which these companies have been moving assets overseas.

The recent proceedings in the US also imply that debtors’ (the three entities in the US) assets may have been bought using monies fraudulently obtained from PNB. According to the debtors’ schedules, the total amount owed to certain suspect exporters and importers is approximately $6.5 million. In fact, A Jaffe’s two largest creditors — Pacific Diamonds FZE and Tri Color Gems — are named as the ‘exporter/beneficiary’ on LoUs already identified as fraudulent.

Making headway

PNB has hearteningly been making good headway in the US proceedings. Initially, the three Modi entities had asked the court to approve an aggressive sale process under Chapter 11, with the aim of completing it before a jewellery trade show in June 2018. But PNB raised objection to the truncated sale process, stating it would severely risk limiting the ability of interested parties to obtain the information necessary to fully participate in any sale, especially as questions regarding the entities’ connections to the Modi fraud remain unanswered.

As it turned out, the court adjourned auctions for the assets of Firestar and Fantasy indefinitely (without citing any specific reasons).

The auction of A Jaffe’s assets, however, went ahead, but raised several concerns. One, although the value of the assets had been appraised to be $22.8 million, the auction saw them sold at a significant discount, with the highest bid at a mere $8 million, raising red flags. Two, the winning bid came from Parag Diamonds, a company run by diamond trader Panna Jain. In a subsequent declaration, he disclosed that Anurag Jain, a manager at his company, is married to the sister of Sumay Bhansali, the CEO of A Jaffe.

PNB approached the court and raised concerns over the auction significantly undervaluing the company. It also drew the court’s attention to the debtors’ questionable conduct.

The motion to auction A Jaffe’s assets was subsequently withdrawn.

US Justice Department steps in

Recent events in the US, mostly the manner in which the bankruptcy cases of Modi’s companies have been evolving, have raised concerns in the United States Department of Justice. Only a day after PNB sought a motion seeking appointment of a Chapter 11 trustee, the US Trustee’s office also called for an independent fiduciary to preserve what remains of the entities’ operations and value.

A Chapter 11 trustee, if appointed, will take control over the assets and, among other things, can also bring potential actions against Modi, his entities, and Bhansali.

A robust cross-border insolvency framework

While these developments appear to be unfolding in favour of Indian lenders, they highlight the need for a robust cross-border insolvency law in India. The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency was issued by the secretariat of UNCITRAL in 1997, to assist countries regulating corporate insolvency and financial distress, involving companies that have assets or creditors in more than one country.

Currently, under India’s IBC, Sections 234 and 235 enable Indian lenders to tap defaulter’s assets overseas in similar cases. But, sadly, there has been little progress on this front. It’s time that the Centre and the Insolvency Board speed up measures to provide a comprehensive framework for cross-border insolvency matters.