In a major decision, the Reserve Bank of India (RBI) on Tuesday banned banks from issuing Letters of Undertaking (LoUs) - instruments used allegedly by diamantaire Nirav Modi and his uncle Mehul Choksi to defraud state-owned PNB of Rs almost 13,000 crore in connivance of bank officials. But these LoUs were rolled over beyond the expiry date and used to leverage one of the biggest frauds in Indian banking history.
Gokulnath Shetty, former PNB staffer, and Mehul Choksi, the absconding promoter of Gitanjali Gems, could be in prison for life if found guilty after a special court on Tuesday allowed CBI to incorporate Section 409 in the second FIR filed by the agency.
Tuesday's disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark.
PNB had previously pegged its exposure to the Gitanjali companies at Rs 6,138 crore.
State Bank of India and three other state-run banks, Union Bank of India, UCO Bank and Allahabad Bank, are among lenders who have extended credit based on the LoUs issued by PNB that were later found to be fraudulent. LOUs are issued only after a bank ensures that the customer has sufficient funds or assets to recover the amount of foreign exchange withdrawn overseas, and it comes with a credit limit and a charge is levied for the service.
In a notice posted on its website, the Reserve Bank of India said banks would have to stop issuing letters of undertaking and letters of comfort, with immediate effect. The money thus raised is used to make payment to offshore suppliers in for-eign currency.More news: Foreign lawyers, firms can not practice law in India
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Two more Delhi-based industrialists have duped Bank of Baroda of Rs.6000 crores, it has been reported. Such transactions went on for six years without detection.
The Central Bureau of Investigation (CBI) has registered two cases against Modi.
Both Modi and Choksi are overseas and have refused to return to face trial.
According to him, LoUs were generally used by large players in gems and jewellery sector.
Last month, Nirav Modi commented saying, that PNB had closed all doors of recovering dues for his brand by going public.