Amlendu Bhushan Khan
Indian-born diamond jewellery designer Nirav Modi is the founder of the $2.3 billion Firestar Diamond and was ranked #57 in the Forbes list of India’s billionaires in 2017. Modi grew up in Belgium, dropped out of Wharton and moved to India where he got trained in the diamond trade under his uncle, according to Forbes.
When State-owned lender Punjab National Bank (PNB) is embroiled in a Rs 13,000 crore fraudulent transactions that are allegedly linked to designer and jeweler Nirav Modi. Three other big jewellers – Gitanjali Gems, Ginni and Nakshatra – are also under the scanner of various investigative agencies after PNB “detected some fraudulent and unauthorized transactions” at a branch in Mumbai. His pieces have adorned global icons such as Dakota Johnson, Andreea Diaconu, Rosie Huntington-Whiteley or even PeeCee, among others.
Without knowing the full system of Diamond business It is difficult to know the story of PNB scam.
Few years ago the Indian diamond industry has been in the throes of an unprecedented crisis. Exports began to shrink in the wake of the sharp decline in imports of rough-cut diamonds and a consequent fall in export of cut and polished diamonds. As a result, the diamond industry pushed the Commerce Ministry to come out with a status report by a task force to address issues affecting it. True, the task force has gone in depth over some of the issues, such as shrinking share in the US market, China’s dominance in global markets and its direct diamonds for commodities barter deals with Africa, and suggested remedial measures such as establishment of a special fund by the Reserve Bank.
All this sounds very good on paper. But let’s take a look at the murky side of diamond trade in India and assess if the diamond industry is really under-financed or over-financed. Is there is a case of diversion of finance from banks into other sectors than the diamond industry?
The industry has been plagued by the problem of round-tripping for some time. The government, in order to check this trend, introduced a 2 per cent subvention scheme by which import of polished diamonds attracted a duty. When it was first introduced, it led to a marked decline not in exports but in export value — falling from as high as $20 billion to $5.8 billion. Actual exports had not declined but the inflated value of exports had come down.
So there is a clear link between round-tripping and bank financing. The money that came in extra to the industry in the diamond pipeline did not actually go for betterment of diamond trade but into 1) speculative land deals in the realty sector 2) speculative buying of rough diamonds from unofficial sources. Both have plunged the diamond industry into a financial crunch, while hurting its image.
The Indian diamond industry’s liquidity crisis, claimed to be the worst in 50 years, is actually self-made as reportedly big and medium diamond firms have diverted $5.4 billion in bank finance meant for diamond operations into real estate. The funds problem is further compounded as a major part of this borrowing was based on ‘round-tripping’ — the repeated export and import of the same parcel of diamonds to boost turnover and export figures to get low interest finance from banks.
“Money is being pumped out from the diamond pipeline creating problems for the rest of the players,” says former Vice-Chairman of the Gem & Jewellery Export Promotion Council (GJEPC), Sanjay Kothari.
According to Kothari, India’s diamond export figures are false and manipulative. “The export of $28 billion worth of polished diamonds and the import of $20 billion worth of polished diamonds in 2010-11 was the classic example of round-tripping. India is a diamond exporter and there is no need for importing polished diamonds. This shows how the ‘black sheep’ tricked to misuse bank finance,”, he says.
As the diamond industry itself admits, several diamantaires have diverted at least Rs 30,000 crore ($ 5.45 billion) worth of working capital loans borrowed from the foreign, private and national banks into the real estate sector and speculative buying of rough diamonds since 2010.
The downturn in real estate and shortage in rough supply finds big players facing a crisis with their investments stuck up. How does one repay the loans taken from banks?
Measures taken by the Central government last year curbed round-tripping or repeated export and import of polished diamonds, by imposing 2 per cent import duty. Latest import-export statistics released by the Gems and Jewellery Export Promotion Council shows imports of polished diamonds dropped 59 per cent to $944.93 million by value, and 52 per cent to 1.966 million carats by volume in a single month in 2012 compared with the previous year.
round-tripping
How did the practice of round-tripping start? It all started as an unexpected offshoot of the diamond industry’s request to the government to change the way it was taxed. Instead of being taxed on profit, like most other industries, it sought to be taxed on turnover, like the diamond trade in Israel. So in May 2007, government scrapped the three present duties on polished imports. Round-tripping became an economical practice since then, a completely new way to make money from diamonds.
In 2011 fiscal end, India’s gross polished diamond export was $28.22 billion. The value of diamonds sold by retailers worldwide in 2010 was “only” $18.2 billion, according to a Tacy estimate. India imported $12 billion worth of rough in the same period. Contrary to popular belief, the industry did not double the value of rough. The export figure is clearly inflated, knowledgeable sources pointed out.
Net exports in the year were $7.41 billion. So it’s also inaccurate to assume that there’s $20 billion in annual round-tripping (gross exports less imports). Many traders show goods to clients, who buy some of them and return the rest.
The ratio of such returns is said to be 1:2. For instance, about 55.5 per cent of diamonds exports to the US, valued at $1.79 billion, remained there with 44.5 per cent by value returned. Of the $1.68 billion exported to Belgium, 46.4 per cent was returned to India and only 28.6 per cent of exports to Israel were shipped back.
Harsher measures
Where did the diamonds disappear? Dubai. The UAE, India’s top export destination, kept only 6.8 per cent of the massive $12.43 billion worth of polished diamonds it imported from India. Rest of the consignment went back and forth between India and the UAE, four to five times before they went down the pipeline.
Now let’s see the nexus between round-tripping and bank financing. If a parcel made four round trips for the sake of financing, it meant that for every $1 million worth of goods, the exporter got $4 million in financing. A good arrangement only as long as you could pay it back. Since this heavy financing is borrowed without matching collateral, the diamond-financing banks in India are jittery.
Viewed against this background, the task force should have come out harshly against this practice, instead of taking the easy way out by suggesting additional funding.
