PNB scam: Bank ignored warnings from Gitanjali Gems auditor in March 2017

Auditor warned Gitanjali defaulted to other banks too

The Indian lenders led by Punjab National Bank ignored warnings from the auditor of Gitanjali Gems in March 2017 that the latter has defaulted to loans of Life Insurance Corporation.  

According to Ford, Rhodes and Parks LLP, the auditor of BSE-listed Gitanjali Gems, the company defaulted to LIC for the year ending March 2017 and drew the attention of shareholders to 12 per cent Non convertible debentures issued to LIC where the company had not paid principal and interest dues of Rs 35 million.  “Further, the company has not created liquid assets of Rs 15 million as per rules,” the auditor pointed out.

Besides, there were overdues to be paid to ICICI Bank and IDBI Bank in foreign currency. Principal of $8.75 million (Rs 567.4 million)  and interest of $0.97 million (Rs 63.2 million) to ICICI ECB and principal of 0.73 million (Rs 47.7 million) and to IDBI ECB was overdue, as per the auditor report. The company had consolidated debt of Rs 82.5 billion as on March 2017.

Further, the auditor report pointed out that the company’s overdrawn position in the working capital borrowings aggregated to Rs 311.5 million as compared with its sanctioned limit. The audit report was signed by chartered accountant, AD Shenoy. When contacted, Shenoy did not comment on the issue but said all the relevant information is in public domain.

Gitanjali shares are down 62 per cent to Rs 22.45 as on Tuesday and have lost Rs 4.6 billion of value since the scam broke out.

On the other hand, Deloitte, the auditor of Nirav Modi owned Firestar International Pvt Ltd, had also raised flags in March 2016 but the audit report had failed to detect any large scale fraud in the company till March 2017. Deloitte was the auditor of two Modi companies that are currently under investigation by various government agencies.

Deloitte was auditor of FIPL for two years and signed off the accounts for fiscal ending March 2016 and fiscal ending March 2017. The firm continues to be the auditor to both Nirav Modi firms till date.  

Interestingly, the banks had also received a warning from the rating agency, Care Rating Firestar International Pvt Ltd in February 2016 after the company’s financial metrics deteriorated.  

In a statement on February 1, 2016, Care had warned clearly that FIPL was operating on stretched operating cycle till March 2015 which has led to working capital bank facilities fully utilized at a time its operational performance was on a decline. Care then downgraded the company’s debt instruments worth Rs 24.6 billion. Care also warned about Firestar Diamonds Ltd, a subsidiary based in Hong Kong, saying the company may not be able to repay its loans unless its parent company steps in as a guarantor. The American subsidiary of Modi, FIrestar Diamond has now filed for bankruptcy.