According to the modus operandi of the PNB fraud, a junior bank employee issued LoUs on behalf of some Nirav Modi group companies without entering the same in the bank’s books. Photo: Pradeep Gaur/Mint
Mumbai: A day after Punjab National Bank (PNB) announced that it had unearthed fraudulent transactions worth Rs11,400 crore at one of its branches in Mumbai, the key question is who is liable to pay this amount.
While PNB has said it will honour its commitments, it did not clarify whether it will bear the entire liability, pointing out that the matter is under investigation. However, lawyers said that the liability to pay foreign branches of banks rests with PNB.
“Laws are very clear about the letter of undertaking (LoU) or letter of credit (LC),” said Jayesh H., founder and senior partner of law firm Juris Corp. “The beneficiaries of the LCs would succeed in an action for recovery unless the beneficiaries are proven to be parties to the fraud.”
According to the modus operandi which was described in a PNB caution notice to the chiefs of 30 Indian banks, a junior employee had issued letters of undertaking, essentially guarantees, on behalf of some Nirav Modi group companies without entering the same in the bank’s books.
“None of the overseas branches of India-based banks has shared with us any document/information made available to them by these Indian companies at the time of availing buyers’ credit from them,” PNB wrote in the caution notice. It also said that the overseas branches of Indian banks overlooked a Reserve Bank of India guideline, which stipulates that the total time period allowed for a LoU is 30 days from the date of shipment.
However, lenders have maintained that PNB has to pay up because they have released the money on the basis of the Delhi-based bank’s guarantees.
“The exposure of our bank is to PNB and not to Nirav Modi. The money has been credited to the nostro account of PNB,” said the chief executive officer of a public sector bank who did not want to be named. Nostro account here refers to PNB’s foreign currency account held in another bank overseas.
Other lawyers, too, said that given the current information available with the public, PNB is liable to pay.
“Presently, the information is still flowing in and many things are not very clear, but prima facie it appears that the amounts were released on the basis of PNB’s LoU or LC and hence PNB would have to honour the same. Basis this the amounts have been released, and it would appear that PNB will ordinarily have to reimburse the paying banks,” said Dina Wadia, joint managing partner at J. Sagar Associates. “As more details appear, things will become clearer.”
