Red flags around Nirav Modi’s diamond empire were raised as early as in 2015


Mumbai: Red flags started going up around Nirav Modi’s diamond empire as early as 2015 when the billionaire first attempted to sell a large stake in his business, at least three people with knowledge of the discussions said.

The potential investor, a large foreign private equity fund, was approached by Modi’s Firestar group of companies engaged in diamond trading and jewellery manufacturing.

The fund began discussions and appointed a global forensic risk consulting firm to conduct a due diligence, people aware of the discussions said on condition of anonymity.

“By the end of the process, it was clear that Modi was having trouble raising fresh loans because most of his foreign lenders were refusing to lend him more funds. On the other hand, the few Indian banks that were lending to him had begun demanding fixed assets as collateral—an unusual practice in the diamond financing business, which largely relies on current assets such as trade receivables,” said the first person cited above.

“The business looked great on paper, but the due diligence threw up several unanswered questions about his operations. The report, which was based on interviews of former employees of Modi’s companies, revealed serious concerns around round-tripping and possible fraudulent transactions involving shell companies,” said the second person briefed on the matter.

Around the same time, Modi was being investigated by the Directorate of Revenue Intelligence (DRI) for allegedly diverting imported, duty-free, cut and polished diamonds and pearls to the domestic market.

DRI claimed to have found cut and polished diamonds worth Rs100 crore in stock at the factories, against a declared stock of Rs1,100 crore. Similarly, the total value of pearls in stock was worth Rs4 crore, instead of the declared stock of over Rs100 crore. “The evidence pointed to hugely inflated books of accounts, possibly to secure fresh loans on the basis of the dressed-up numbers,” said a second person, who was also part of the investigating team.

What also set the alarm bells ringing was why none of Nirav Modi’s firms were a “sight holder” on the De Beers Global Sightholder Sales’ list of authorized bulk purchasers of rough diamonds.

(Sight holders are subjected to audits by De Beers, including verification of inventory and its financial health and ensure the diamonds were acquired from legitimate sources.) This was a matter of concern since Modi’s was one of the largest home-grown diamond firms.

“Again, we could not find any satisfactory answers,” said the first person, adding “We also found that at a personal level, Modi continued to remain extremely close to his uncle Mehul Choksi of Gitanjali group.”

In 2013, the Securities and Exchange Board of India (Sebi) had launched an investigation into alleged market manipulation of Gitanjali Gems Ltd (GGL) and had subsequently banned Choksi and 24 other entities which had traded with GGL’s shares. GGL had also undergone corporate debt restructuring in 2015 after failing to service loans of Rs5,000 crore.

“Additionally, Mehul’s brother Chetan Choksi, promoter of the DIGICO Group, one of the largest vertically integrated diamond and jewellery companies in the world, had several disclosed transactions with GGL and we suspected it extended to Nirav Modi as well,” said the second person briefed with the matter.livemint