This is how diamond traders bled banks

As the epic Rs 12,600-crore fraud tied to the diamond industry rippled through the country's banking sector, an India Today TV investigation has unearthed what appears to be a massive roundtripping of precious gems to secure credits fraudulently from state-run lenders. The investigation in the financial hub of Mumbai revealed how unscrupulous diamond merchants ship the same stocks back and forth to rip off government banks with inflated valuations in their books.

According to RBI estimates, Indian banks have a combined exposure of $11 billion (about Rs 72,000 crore) to the gems and jewellery industry. INDIA TODAY TV's probe discovered how a number of merchants were re-routing bank credits brazenly to riskier ventures like real estate and stocks. At the centre of the PNB scandal are diamond barons Nirav Modi and Mehul Choksi, who are accused of obtaining fraudulent bank guarantees to secure credit for working capital and to pay off older debts, charges they denied.

INDIA TODAY TV's investigation found many players in the industry are no stranger to the modus allegedly deployed by the uncle-nephew duo. Credit money and gems are round tripped rampantly, in what is called "Pudiya Ghumao" in industry jargon, to swell export figures for bigger loans, the probe discovered. In a frank conversation with INDIATODAY TV's investigative team, J Patel, a diamond merchant in Mumbai, explained how quite a few companies operate in cartels to move the same shipments over and over again in order to obtain bank credits in the name of working capital.

"Suppose it (the diamond consignment) is exported from here. You start getting payments (shipment loans) into your books once it's exported to US, Hong Kong, Bangkok, or anywhere abroad," he said. "The exported consignment is then smuggled back here. In his books, the merchant is then able to show the money his foreign clients owe to him. In reality, it's his company overseas." New loans, he said, are used to pay off the previous ones, and the remainder from over-invoicing conveniently pocketed. "Documents are presented to the banks about those exports and loans sought for working capital to clear the costs. The bank wouldn't come to know whether or not the money is used it to pay off the costs," Patel disclosed.

"In books, the turnover swells with import transactions that are then showed to the bank. It's all on paper. What all does a government bank employee see? It's only turnover in the books." According to the diamond merchant, a large amount of such loans is pumped into black market as informal lending on higher interests. At one of the world's largest diamond bourses in Mumbai's Bandra Kurla Complex, trader Rajesh Anavadia of Jewel Creation offered to broker a deal with the undercover journalists seeking bank credits through diamond round-tripping.

"Your actual amount is Rs 200 crore which includes showing Rs 100 crore as manufacturing cost. So it comes to Rs 200 crore overall. So you avail loans of Rs 200 crore from India, Hong Kong, Dubai and the USA," he said. "So, it's a total loan of Rs 800 crore for (material valued at) Rs 200 crore." In what sounded similar to the tactic allegedly used by Modi and Choksi in the PNB case, Anavadia revealed how the sham technique is used to blow up company valuations. "Inflate your turnover this way to Rs 20,000 crore. Pay the loan back where you want to live, pocket the rest,"he shrugged.

Anavadia then advised investing bank loans illegitimately in real estate and stock market. "You secured a bank loan (overseas) and then route it back home through hawala. You can then freely invest it in any business," he said. "Whatever estate you want to purchase you can with the money that you have routed back through hawala from Hong Kong. File bankruptcy when you don't want to repay the loan."

At a coffee outlet in south Mumbai, diamond merchant Gaurav Chaurasia came across as a one-stop source for fraudulent loans and their future investments. "At least 30 companies have to be registered under different names and PAN," he insisted. "Everything's on paper. You don't have original diamonds to show. RTGS and cash move in and out. We'll get you to show purchase for Rs 200 crore. I'll set up everything for you. I have my setting in the bank. We'll pay them five percent in commission."

(With inputs from Divyesh Singh in Mumbai)