Firestar Diamond, a company owned by Nirav Modi, the billionaire jeweller at the heart of a $2 billion fraud case in India, has filed for bankruptcy in a New York court, as investigators stepped up their investigation into a case that has stunned the country of India. Firestar Diamond, which on its website states that its operations span the US, Europe, the Middle East, the Far East and India, blamed liquidity and supply chain challenges. It listed up to $100 million in assets and debt, the court document said.
Modi, along with his uncle Mehul Choksi, owner of Gitanjali Gems Ltd, are suspected to have colluded with bank officials at Punjab National Bank (PNB) to obtain unauthorised loans over a six-year period. PNB late on Monday said the amount of those fraudulent transactions could rise by $204 million to nearly $2 billion, sending its shares reeling to a 20-month low. The jewellers and companies linked to them had allegedly colluded with PNB officers to obtain fake bank guarantees to get loans from overseas branches of Indian banks, including Allahabad Bank, Axis Bank and UCO Bank. The scale of the fraud has raised concerns about the potential for similar cases across India’s banking sector. The Finance Ministry on Tuesday set a 15-day deadline for state banks to take action to improve their oversight of operational and technological risks.
The ministry’s Department of Financial Services also ordered state-run lenders to comb through their bad loans of more than 500 million rupees ($7.71 million) for potential fraud. Among the actions lenders must take include identifying current oversight weaknesses and having banks’ boards “assign clear accountability” for implementation and compliance. Analysts said the government directive could hit banks in the short-term if more fraud was detected, though it would benefit the sector in the long-term. “The oversight in the banking system is obviously not good,” said Yuvraj Choudhary, an analyst at brokerage Anand Rathi. “This could lead to uncovering of more potential scams. We can expect bottom-lines to be hit in the coming quarters.”
Jewelry manufacturer A. Jaffe also filed for Chapter 11 bankruptcy protection in the Southern District of New York, writes Rob Bates of JCK. A Jaffe’s filing includes subsidiary companies Sandberg & Sikorski Corp., Firestar Fine Jewelry, and Preferred 105. Firestar Diamond’s separate filing, also commenced Feb. 26, includes subsidiary companies Firestone, and Next Diamond. Another affiliated company, Fantasy, Inc., also filed for Chapter 11. An A. Jaffe statement referred to the Modi scandal, saying that the manufacturer “want[s] to assure partners and customers that [it is] not in any way involved with any of the alleged conduct [overseas]. Bates quotes, “In order to preserve the operations here in the United States, our legal team has advised restructuring via a Chapter 11 in order to keep the separation clear,” the statement continued. “We regret that there may be some disruption in the next 30 days due to limitations with our manufacturing facilities globally and in New York City, but we can assure you nothing will change with our brand’s core team and our values in the long term", it continued. “The recent events will in no way harm the brand commercially.”
Bates writes, "It is expected that the company, a 126-year-old, well-respected industry name, will soon find a buyer." In a separate statement, Firestar Diamond and Fantasy Inc. also said that they hoped to be sold soon, possibly over the next week. The statement said the companies took the step of filing Chapter 11, “to provide stability for [their] operations and in order to engage in a quick sale process. The filings are a result of acute operational challenges that the companies experienced when their supply chain was significantly disrupted.”