Nirav Modi’s flagship company, Firestar Diamond Inc., on Tuesday filed for bankruptcy in the United States in what sources said may be an attempt by the billionaire diamond merchant to ring-fence and protect his foreign assets from Indian investigators and banks and to keep them under his control.
News of the move coincided with Indian finance ministry’s direction to government-owned banks to probe all loan defaults over Rs 50 crore for possible fraud and report them to the CBI.
State-owned banks have also been asked to come up with a “pre-emptive” action plan within a fortnight to combat rising operational and technical risks, and assign clear accountability to senior functionaries.
The finance ministry’s direction came after Punjab National Bank (PNB), India’s second-largest government-owned lender, said that the fraud perpetuated by Mr Modi and his uncle Mehul Choksi, owner of Gitanjali Gems, could rise to Rs 12,700 crore against its earlier estimate of Rs 11,400 crore.
This makes India’s biggest bank fraud even bigger.
Firestar Diamond Inc. filed the Chapter 11 petition in a New York court and the case has been assigned to Judge Sean H. Lane.
Firestar Diamond, which has operations spread across the US, Europe, the Middle East, the Far East and India, blamed liquidity and supply chain challenges while requesting an “order for relief”.
Sources said that the move could be intended to blunt India’s efforts for recovery of funds from Mr Modi’s foreign firms and added that his other companies may also file for bankruptcy.
“Mr Modi has been trying to say for the last many days that Firestar Diamond is separate from his other companies involved in fraud in India. Indian agencies will try to recover money from Mr Modi’s companies in foreign countries where the money went. But if all these companies file for bankruptcy in foreign shores, it will become difficult to recover money,” said a senior advocate.
To recover the money that Mr Modi owes PNB and other banks, India will have to prove in foreign courts that the money was taken abroad fraudulently, making the entire process more complex and time consuming.
In Chapter 11, of the United States Bankruptcy Code, generally referred to as “reorganisation” bankruptcy, a debtor proposes a plan of reorganisation to keep the business alive and pay creditors over time. In most bankruptcy cases, the debtor (in this case Mr Modi) remains in control of business operations but is subject to the oversight and jurisdiction of the court. In some cases a trustee is appointed by the court.
In its petition, Firestar Diamond has said that “it is desirable and in the best interests of the company, its respective creditors, and other interested parties that a petition be filed by the company seeking relief under the provisions of Chapter 11 of Title 11 of the United States.” It estimates the numbers of creditors to be between 50 and 99.
Firestar Diamond Inc. has listed assets and liabilities in the range of $50 to $100 million.
The bankruptcy filing includes Firestar’s A. Jaffe Inc., wedding jewellery affiliate, and Fantasy Inc affiliate, and.
Meanwhile, financial services secretary Rajiv Kumar said state owned banks have been asked to involve Enforcement Directorate (ED) and Directorate of Revenue Intelligence (DRI) for cases of violations of PMLA, FEMA or export-import norms.
He said that chief vigilance officer of the bank concerned must vet complains and co-ordinate with CBI for frauds exceeding Rs 50 crore.
Executive directors and chief technology officers (CTOs) of public sector banks have been asked to prepare a blueprint to enhance preparedness for combating increasing risks.
PNB, meanwhile, said that it has appointed general manager A.K. Pradhan as “Group Chief Risk Officer”.