India’s latest financial scandal erupted when the state-controlled Punjab National Bank (PNB) disclosed that it had been hit by “fraudulent and unauthorised transactions” and named celebrity jeweller Nirav Modi as the prime suspect. This is a severe blow to a banking system that is reeling under a severe bad loan crisis, and a serious international embarrassment for Indian business. 

The National Company Law Tribunal (NCLT) has issued orders restraining Nirav Modi, Mehul Choksi and 60-dd entities including various individuals, companies and limited liability partnership firms, from selling their assets so that the government can recover funds siphoned off by them in the Rs 12,600 crore PNB fraud. The close links between government-owned banks and Indian business has been the bane of Indian industry for a long time. The government’s Chief Economic Advisor is among many commentators who have pointed to state ownership of banks as the fountainhead of India’s repeated bank scandals. Privatising these state-owned banks and freeing them from the clutches of government would certainly help by enabling them to function more efficiently and transparently. But, there is a more fundamental issue. There is clear evidence that Indian business people -private individuals not representatives of government institutions regularly run into trouble with the judicial authorities.

Corporate governance needs to be strengthened. Integrity and ethics have to be inculcated in the DNA of an organisation, related to its internal systems as also to its dealings with stakeholders, including customers, employees, investors, vendor partners, government and society. Third-party accountability has to be made integral to operations and internalised as a vital governance constituent. Early detection system of frauds as a part of fraud management, usage of digital technology and focus on cyber security, encouragement to whistle blowing, rigorous business approval processes and accountability, anti-bribery mechanisms, risk management, and strict vendor and customer governance are all aspects that need to be built into the system. The reason why many Indian businessmen blatantly default on loans is because they know that given India’s slow judicial system and their closeness to politicians, their chances of getting away with a loan default are very high.

If proven, the Nirav Modi case would expose just a small part of a much bigger and more significant picture for the country.



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