How the Nirav Modi scandal will affect diamantaires

Dinesh Navadiya, 58, knows Antwerp in Belgium very well. He says he is acquainted with almost all the 500-plus diamond trading families in the city. The diamond merchant from Surat visits Antwerp, 53 km from the capital Brussels, at least once a month. His first visit was in 1995 — as a buyer of rough diamonds. The jewel trade in Antwerp is centuries old and was traditionally dominated by the Jews.

Over the last few decades, families from northern Gujarat settled in Antwerp and have virtually taken over the diamond trade. Antwerp and Surat in Gujarat are like sister cities, linked through the trade in precious stones like diamonds, pearls and other gems. Medium and small-scale units of Surat find strong business and financial support from their Antwerp brethren.

A former president of the Surat Diamond Association, Navadiya has business relations with many in Antwerp and often finds it easier to raise funding from banks and institutions there than in India. Financiers in the Flemish city treat businessmen like him at par with locals and offer credit on good terms.

Around 29% of rough diamonds that come to India for cutting and polishing come via Antwerp. The relations between the two also have shades of grey. Nirav Modi, the high-flying jewellery designer now on the run from Indian law-enforcement agencies for defrauding Punjab National Bank, is also from Antwerp. Though Modi shifted base to India and then possibly to the US , his family is still based in the diamond city of Belgium. He is not the only person of Indian origin from Antwerp and in the diamond trade who is in trouble.


Take, for instance, the case of Jayam NV and its promoter Mihir Mehta, another Antwerp-based diamond trader. Last May, the ICICI Bank UK took Mehta to court in London for default on loans totalling $8 million, according to the bank’s lawyer Zaiwalla & Co. The case details reveal that Mehta was also part of a group trial of around 103 companies in Antwerp in 2015, on allegations of tax evasion. Mehta said in the London court that action by Belgian income-tax authorities was political in nature.

The allegations against these 100-odd companies, however, will sound familiar in India. It’s one of round tripping, arranging exports and imports to avoid paying taxes. There are more examples: an investigation was opened in 2011 against 170 diamond traders in Antwerp for stashing away money in Geneva.


Antwerp’s alter ego in India, the Mumbai-Surat stretch, has had as much if not more brushes with the law and trouble with the banks. One of India’s largest bank defaults, before the Modi-PNB case came to light, was the Rs 6,800 crore Winsome Diamonds promoted by Jatin Mehta (See Diamonds to Dust).

Industry insiders let on that there are many cases of default that do not make it to the headlines, but have bankers tearing their hair. Senior Supreme Court advocate MV Kini feels the trade in diamonds and other precious stones, by its nature, is susceptible to fraud. Kini, who had led PNB’s charge against Winsome in courts, and is on the legal panel of all public sector banks of India, says he sees plenty of cases of wilful defaults and fraud by diamond traders every year.

“Diamonds as a security are susceptible to fraud. It’s almost intangible. Bankers have no expertise in estimating the value of either rough stones or polished jewels and are not trained to differentiate between synthetic diamonds and natural ones either. As a moveable asset class, where lots of precious stones can look very similar, there is more chance of fraud and duplication,” he says.

Bankers Don’t Trust
No wonder then that bankers in India have learnt not to trust the diamond trade, notwithstanding how much money seems to have been lost because of Nirav Modi. A director in one of the premier gems and jewellery industry organisations in India lets on that many international banks do end up at its offices looking for details of Indian jewellers who have disappeared with money as well as other collaterals. Navadiya partly blames the banks.

“Whenever we borrow from banks, there is a stringent clause to meet certain turnover targets. These targets force some jewellers to show exports to their own companies abroad, which they later bring back as imports.”


Round-tripping can serve many other purposes. He laments that instead of losing money on one jeweller like Nirav Modi, if PNB had loaned the same amount to MSME operators, at least 1,000 of them could have availed loans of Rs 10 crore and prospered. Today the industry is worried. Be it Mavji Patel, managing director of the country’s largest diamond exporting company Kiran Gems, or Nitin Khandelwal, chairman, All India Gem & Jewellery Trade Federation (GJF), everybody is concerned that the NiravModi scam will put their business in trouble and tarnish the image of the industry.

Mavji Patel, whose Rs 10,000 crore operation gets only Rs 2,400 crore as working capital credit from banks, wonders how Nirav Modi’s exposure could go up to Rs 11,000 crore. He says the meteoric rise of Modi had perplexed many in the trade.

“We could not even gauge how he operated but we could see fancy stores under Nirav Modi brand name coming up,” he says. A spokesperson of Gems & Jewellery Export Promotion Council (GJEPC), says: “On the one hand GJEPC is struggling to garner financing to gem and jewellery exporters, especially in the SME export sector, who are required to give high collateral for the limit sanctioned to them, and on the other, one finds this kind of clear advances (LoU) being provided by a bank without any safeguards — this speaks volumes of irregularities that need to be thoroughly investigated.”

There is also a desire to distance the diamond trading industry from Nirav Modi. Vipul Shah, a former chairman of GJEPC, points out that Modi was neither a diamond trader nor was he involved in cutting and polishing diamonds; he was more a jewellery designer and retailer. Traditional traders of gems looked upon diamantaires like Nirav Modi and Mehul Choksi of Gitanjali with suspicion as they became brands, raised money through IPOs and charted a different course with a larger appetite for funding.

Khandelwal, who heads the retailers’ body GJF, agrees: “Even after submitting documents, the banks often turn down our credit demand. Our members ask for loans ranging between Rs 1 crore to Rs 20 crore but their demands are scrapped. Now PNB has given Rs 11,300 crore to Modi without checking any details. On the one hand, the government is vociferous about compliance, and on the other banks are lending money without checking any documents. What a dichotomy.”

This uneasy relationship with the banks means much (some say up to two-thirds) of the diamond trade remains outside official channels in India. Sanjay Kothari, a former chairman of the Gems & Jewellery Export Promotion Council, claims that large parts of the industry is well regulated and now under the goods and services tax and rarely operates through letters of credit but prefers direct shipment credits and invoicing. However, that does not prevent individuals from indulging in illegitimate practices. He says: “In this industry, if tomorrow you come with 50 rough gems from somewhere and want them polished, you will find takers.”

Disappearing Acts
There are disappearing acts in the local level too. Take a case from 2016 for example when the police circulated photographs of a woman, for buying diamonds from a number of traders in Malad, Mumbai, and Surat and doing a disappearing act, with payments pending. No names were disclosed, neither of the main protagonist nor of half a dozen women employees who worked much the same way — entice traders to hand over diamonds and then vanish.

The intensely competitive Indian diamond industry is a magnet for the unscrupulous, says Edahn Golan, Dallas-based diamond industry analyst and founder of Diamond Research & Data. Golan says the Indian industry has a drive to succeed internationally, a willingness to cooperate with local competitors to achieve goals, the ability to develop technology and knowledge and, of course, low labour costs that the West can’t compete against.

“But, most importantly, Indian diamond industry has a fierce and burning desire to succeed, which is quite impressive. Such a business environment also attracts people who are less than honest. It is the responsibility, of the diamond industry to flush these elements out and stop doing business with them. If the industry won’t take bold and necessary steps against scammers, it will hurt everyone and poison demand for diamond in consumer markets.” So, what happened to the lady who vanished after buying diamonds? Navadiya told ET Magazine that the case was solved.

The trading community found the lady. She blamed her husband for the problems. Whatever gems she had were handed back and the issue was sorted out. The police was not involved in the case any further. This is probably what Golan was warning against — especially since there seemed to be a record of such behaviour in her family in the past. Navadiya, however, insists that issues of the community must be sorted out within.

Clean Up
May be it is time to have more transparency. A decade back the gems and jewellery giant De Beers had forced some structure into the industry by insisting that procurement, polishing and marketing of precious stones be organised into separate entities, instead of all of it operating like a family business. Mavji Patel is worried that the Modi scam has opened up at the wrong time.

“It comes at a time when demand has started picking up in the US, Far East and India,” he says. The diamond industry was actually poised for a period of growth and higher prices, especially after a bad domestic year affected by demonetisation and GST implementation. Paul Zimnisky, independent diamond analyst based in New York, forecast a supply contraction of 4% and a simultaneous growth of 2-4%, boosted by US and Chinese demand.

He says, “I would argue that the fundamental picture is pointing towards one that will allow for higher diamond prices this year.” While efforts are on to get to the bottom of Nirav Modi’s operations and assets he may have in India, there are at least a couple of concrete suggestions that can help improve the future of borrowing in the diamond trade.

The GJEPC has suggested that banks make a greater use of its resources, especially a database that has the KYC details of 6,000 members. An official of GJEPC indicates that banks rarely make use of it.

“From GJEPC, we had raised questions when banks had reconstructed loans of Nirav Modiowned Firestar Diamond. But the banks never consulted us,” the official said. The other suggestion comes from advocate MV Kini who says that banks should now stop using diamonds as collateral and insist on other kinds of more tangible assets like real estate for loans to the industry.

The cleaning up of the Indian diamonds industry will be key because of another reason. Antwerp’s primacy as a global trading hub is under challenge. Dubai, especially, is challenging Antwerp’s dominance. Maybe it’s time India too put up its hand.