How PNB is battling Nirav Modi and his companies in a US bankruptcy court

Proceedings in the US bankruptcy court in the Southern District of New York, involving three entities controlled by Nirav Modi, are shining a light on a tiny part of the ₹14,000 crore Letter of Undertaking (LoU) fraud perpetrated on Punjab National Bank (PNB).

Read more: US Justice Department arm may oversee Nirav Modi firms’ bankruptcy process

Firestar Diamond Inc., A Jaffe Inc. and Fantasy Inc, the three entities in question, had separately filed for Chapter 11 bankruptcy protection in the US. Under the Chapter 11 process, the debtor (in this case the three Nirav Modi companies), continues to operate the business (unlike in India, where the new Insolvency and Bankruptcy code puts creditors in possession of a debtor’s assets). However, PNB has found issues with the manner in which the process was being handled by the three companies and has sought the court's intervention.

Citing the debtors' misuse of the process, PNB, through its counsel, has asked the court to appoint a fiduciary, called a Chapter 11 Trustee, to oversee the entire bankruptcy process. The bank drew the court's attention to a number of disturbing facts about the debtors’ conduct during the auction of one entity's assets under Chapter 11, and sought the appointment of a Trustee to ensure there was no further taint.

“A Chapter 11 Trustee is appointed by the Court and is deemed an officer of the Court,” explains Seth R Freeman, Senior MD of GlassRatner Advisory and Capital, LLC, a global specialty financial advisory services firm based in San Francisco. When a Chapter 11 Trustee is appointed, they take control over the debtors and the assets to ensure the Chapter 11 process is properly completed.”

Rushed sale

The three Nirav Modi entities had initially asked the court to approve an aggressive sales process under Chapter 11, with the aim of completing it before a jewellery trade show in June 2018. The debtors had claimed that an expedited sale process was necessary to realise the maximum values of the assets, and to give the ultimate purchasers sufficient time to prepare for the industry trade show set to be held in early June.

PNB had objected to the truncated sales process that had been proposed, stating that it could severely limit the ability of interested parties to obtain the information necessary to fully participate in any sale of the assets, especially as questions regarding the debtors’ connections to the Modi fraud remain unanswered.

The bank had also raised concerns that the expedited process, conducted in consultation with existing and perhaps conflicted management, and without the full involvement of any other interested party, such as PNB, could lead to a fire sale of the debtors’ businesses.

Assets undervalued

The Court adjourned the auctions of the assets of Firestar and Fantasy indefinitely (without citing any specific reasons). The auction of A Jaffe’s assets, including finished jewellery, loose diamonds, inventory and accounts receivable, was held on May 3. Although the value of the assets had been appraised to be $22.8 million, the auction saw them sold at a significant discount, with the highest bid at a mere $8 million, raising red flags.

As it turned out, The winning bid came from Parag Diamonds, a company run by diamond trader Panna Jain. In a subsequent declaration, he disclosed that Anurag Jain, a manager at his company, is married to the sister of Sumay Bhansali, the CEO of A Jaffe.

PNB approached the court and raised concerns over the auction significantly undervaluing the company. It also drew the court’s attention to the debtors' questionable conduct. “According to the Debtors’ schedules, the total amount owed to certain suspect exporters and importers is approximately $6.5 million. In fact, A Jaffe’s two largest creditors, Pacific Diamonds FZE and Tri Color Gems, are named as the ‘exporter/beneficiary’ on LoUs already identified as fraudulent,” PNB argued in the recently filed motion. This strongly suggests that the debtors may have been involved in the Modi fraud. It also implies that concerns raised by PNB earlier, that the debtors may have acquired the assets using monies fraudulently obtained from PNB, were in fact justifiable. (The fraud on PNB was caused by a handful of the bank’s officials issuing unauthorised Letters of Undertaking (LOUs) to entities connected to Nirav Modi.)

The motion to auction A Jaffe’s assets was subsequently withdrawn.

Misuse of process

“The latest Motion filed by PNB seeking appointment of a Chapter 11 Trustee, if granted, would clearly indicate there are serious concerns about the manner in which Nirav Modi’s companies, as ‘Debtors in Possession’, have conducted the Chapter 11 process and their capacity going forward,” says Freeman.

Just how complex the case is can be gauged by the ownership pattern of the three entities. A Jaffe, Inc is 95 per cent owned by Synergies Corporation. Fantasy Inc is wholly owned by Firestar Diamond. Firestar Diamond is wholly owned by Firestar Group, which is wholly owned by Synergies Corporation, which is, in turn, wholly owned by Firestar Holdings Limited, which is again wholly owned by Firestar International Limited, based in India. And that’s where Nirav Modi comes in — he is the majority shareholder of Firestar International.