MUMBAI: The Enforcement Directorate is probing whether a part of the funds accessed by the Nirav Modi companies through guarantees issued by the Punjab National Bank (PNB) may have found its way back as foreign investment into Indian entities controlled by the troubled tycoon, people aware of the line of investigation told ET.

Nirav Modi paid off ‘suppliers’ by discounting PNB’s letters of credit (LCs), which were refinanced and rolled over with fresh loans raised against letters of undertakings (LoUs) issued by the state-owned bank.

The enforcement agency will check the bonafides of Modi’s offshore suppliers and the allegations of fund diversion. However, this could be time-consuming.

The LCs were refinanced by LoUs fraudulently issued in favour of overseas branches of other banks. Sources said LCs were first issued from PNB, favouring the overseas supplier’s bank. They were then discounted by overseas banks against trade documents. PNB was duty-bound to honour LCs in case Nirav Modi failed to pay up. Sources said these were honoured through the unauthorised issuance of LoUs by PNB staffers – with funds first flowing into PNB’s nostro dollar account and then paid to banks that had discounted the LCs.

“ED is examining FDI and the end use of funds,” said one of the sources. “It’s a case of alleged round-tripping of funds.” According to Moin Ladha, partner, Khaitan & Co, “While there is no express prohibition in the FEMA ODI (overseas direct investment) regulations on round-tripping, the position taken by the department on this issue impacts bonafide transactions involving investment by an operating overseas entity (having an Indian shareholder) - even if such an entity is engaged in bonafide business overseas and has a commercial justification for having an Indian presence.”