Focus: Indian diamond traders say fraud suspects Modi, Choksi didn't follow code

Gitanjali Gems

01/03/2018 14:10

By Rajendra Jadhav and Jessica Kuruthukulangara
    SURAT, India /BENGALURU, March 1 (Reuters) - Some diamond
merchants in India's biggest centre for trading the precious
gemstones say they had stopped dealing with Nirav Modi and his
uncle Mehul Choksi - two big-name jewellers accused of massive
bank fraud - because they were often slow to pay dues.
    The Indian financial sector was stunned when Punjab National
Bank  PNBK.NS  said in mid-February it was the victim of a $1.77
billion fraud - a figure that has since risen to nearly $2
billion. The second-largest state bank blamed Modi and Choksi,
accusing them of conspiring with bank employees to obtain
fraudulent credit overseas. Both deny any involvement.
    Modi, who runs eponymously branded high-end jewellery stores
that stretch from New York to Hong Kong, and Choksi, who heads
Gitanjali Gems  GTGM.NS  and operates stores under banners
including Gili, Nakshatra and Asmi, both belong to the Jain
community from the western state of Gujarat.
    The Jain and Patel communities dominate the diamond cutting
and polishing business centred on the Gujarati city of Surat.
Traders there who spoke to Reuters said the two jewellers had
acquired a reputation for not following the industry's unwritten
code of business ethics.
    "Nirav Modi and Gitanjali's business model wasn't convincing
to us," says Seventilal Shah, chairman of Venus Jewel, who said
he had stopped dealing with either business some years ago.
    "If they take goods on two months credit, and there is one
month's delay it is fine. But if it is regular episodes of
delays, then there is something wrong. That was the case with
these guys."
    Representatives for both Modi and Choksi did not respond to
multiple requests for comment. Indian authorities say both men
left the country in early January and their whereabouts are
unknown.
    In the tight-knit Jain and Patel gem trading fraternities,
where many struggle to get bank credit, most business is done
informally, with cash lent and goods advanced without collateral
or paperwork.
    "Mehul didn't understand the importance of trust," said one
Surat-based diamond exporter, who has been in the business for
nearly five decades and asked not to be named.
    "Once we sold him polished diamonds and we had to chase him
for payment almost every month for six months. Every time he
used to give some excuse, then we decided to stop doing business
with him altogether."
    Eight traders in Surat, where roughly 80 percent of the
world's diamonds are cut and polished, complained of similar
issues in their dealings with both Modi and Choksi.
    "That's why many merchants stopped dealing with Gitanjali or
Modi's company long back," said Dinesh Navadiya, former
president of Surat Diamond Association, who runs a small diamond
business in the city.
    Gitanjali, in a stock exchange filing, has denied any
involvement in the alleged fraud. Choksi, in an open letter to
employees on Feb. 23, protested his innocence but advised them
to look for other jobs, as his assets had been seized and he was
unable to pay their salaries.  urn:newsml:reuters.com:*:nL4N1QE0AR 
    In a letter to Punjab National Bank (PNB)  PNBK.NS , which
says it discovered the alleged fraud at one of its Mumbai
branches, Modi disputed the bank's allegations, arguing the sums
he owes PNB are far smaller than those outlined by the bank.
Modi's lawyer has also denied the allegations.  urn:newsml:reuters.com:*:nL4N1QA13A
    
    FRANCHISE MODEL
    Both men have had minor brushes with authorities in the
past.
    In 2015, Modi was fined 480 million rupees for exporting and
importing the same diamonds through Surat's Special Economic
Zone to inflate export numbers, an official with the Directorate
of Revenue Intelligence said.
    In July 2013 the Indian markets regulator, the Securities
and Exchange Board of India, barred Choksi from trading for six
months for manipulating Gitanjali's share price.
    Neither case drew much attention at the time and both men
continued to expand their businesses, tapping Bollywood stars to
promote their brands.     
    Choksi's Gitanjali adopted a franchise model to open new
retail stores, but two franchisees who spoke to Reuters said it
failed to deliver on promises made.
    Hari Prasad said he invested roughly 100 million rupees
($1.5 million) to set up a Gitanjali store in Bengaluru in 2012.
Gitanjali promised to manage operations including inventory,
staff recruitment, salaries, rent and electricity bills, he
said.
    But he alleges Gitanjali charged him inflated prices for old
or inferior stock he could not sell for a profit, and he closed
the store in 2014.
    Choksi and officials of Gitanjali Gems were not reachable
for comment.
    In 2016, Prasad and six other franchisees jointly wrote a
letter to Prime Minister Narendra Modi's office accusing Choksi
of fraud.
    The prime minister's office (PMO) forwarded his complaint to
the Registrar of Companies, which closed the case, said Prasad,
who showed Reuters copies of the correspondence.
    The PMO and the Registrar of Companies did not respond to
requests for comment.
    "I had to believe him (Choksi) as he was managing director
and chairman of such a big group, which is publicly-listed and
has a brand image," said Prasad. "If you go to do business with
such types of people, you will believe them."
($1 = 65.1850 Indian rupees)

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India's $1.77 billion bank fraud IMG    http://tmsnrt.rs/2C9xTKf
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 (Reporting by Rajendra Jadhav and Jessica Kuruthukulangara;
Additional reporting by Nidhi Verma and Rupam Jain in New Delhi
Editing by Alex Richardson)
 ((rajendra.jadhav@thomsonreuters.com; +91-22-6180-7153 ;
Reuters Messaging:
rajendra.jadhav.thomsonreuters.com@reuters.net))