Abu Dhabi, UAEWednesday 1 April 2020

India turns to auction houses in bid to recoup assets from fleeing businessmen

Asset seizures are part of an approach to get tougher on economic fugitives as bad loans mount at state-owned and private banks

Diamond jeweller Nirav Modi was well connected with celebrities like Chinese actress Zhang Ziyi and Naomi Watts. Imaginechina
Diamond jeweller Nirav Modi was well connected with celebrities like Chinese actress Zhang Ziyi and Naomi Watts. Imaginechina

“I will sell. No regrets.” bellowed the auctioneer to the wealthy collectors who had gathered at the Mumbai auction house. A hammer came down and a bid was closed at 134 million rupees, that is more than Dh6.6m.

The lot on offer was a painting by MF Husain – a revered artist often referred to as the Pablo Picasso of India. It had been a prized possession of the diamond jeweller Nirav Modi, the man accused of being behind the country's biggest ever bank fraud.

Fittingly, the painting, titled the Battle of Ganga and Jamuna, depicts the struggle between right and wrong.

This was a record price for the Hussain's work. It was one of 40 lots belonging to Modi that were being auctioned off for India's fraud investigation office, the Enforcement Directorate, in Mumbai last week. These ranged from rare pieces of artwork, including an Amrita Sher-Gil painting that went for above $2.2m (Dh8.1m), to custom-made Hermes handbags, one of which was sold for more than $20,000, a Girard-Perregaux watch fetched $136,000 and the jeweller's Rolls-Royce Ghost was picked for $250,000.

“It really exceeded everyone's expectations,” says Minal Vazirani, the president and co-founder of Saffronart, the Indian auction house that hosted the event. “It's rare to see such a collection come to market.”

The auction was held in an attempt to recover money from Modi's assets and is part of a wider government crackdown on fugitive economic offenders. The jeweller is accused of defrauding a single Mumbai branch of Punjab National Bank (PNB), one of India’s largest state-owned lenders, of $2 billion. The scam was unveiled in early 2018, and Modi, who was eventually cornered in the UK, is currently in a London prison as he fights against extradition to India.

Nirav Modi, who is not related to Indian Prime Minister Narendra Modi, is a Mumbai jeweller whose pieces have been worn by Hollywood stars and India’s elite. Allegedly, certain bank employees issued letters of undertaking, a form of guarantee, to other banks so that companies linked to Mr Modi could take out loans – which were essentially unsecured – from overseas branches. But as the scandal came to light and authorities raided the jeweller’s businesses, he was nowhere to be found. Modi had fled overseas.

The matter rattled the country's banking sector and caused a public outcry. This prompted the government to leap into action and stiffen procedures in a bid to prevent economic offenders from slipping through the net.

“The government has tightened the noose around these economic criminals who under the current dispensation find themselves unable to use their clout or means, and therefore have to flee the country,” says Rahul Agarwal, the director at Wealth Discovery, a financial services company in New Delhi. “There are several reasons as to why the government is actively cracking down on these economic fugitives –the biggest being that these criminals have caused immense damage to the public exchequer.”

India's public sector banks have been hit hard by fraud, which has added to their burden of bad debts and hampered efforts to clean up their balance sheets.

The country's public sector banks had bad loans totalling 7.27 trillion rupees as of the end of September 2019, compared to 8.96tn rupees at the end of March 2018, according to India's finance ministry.

It is not only public sector banks that are affected. The collapse of India’s fourth-biggest private lender Yes Bank last week once again brought into focus how India's banking industry has been hurt by risky lending practices in recent years, which have become more apparent as the economy starts to slow down. The Reserve Bank of India drafted a restructure plan on Friday which will see the country’s biggest state-owned lender, State Bank of India, stepping in to take a 49 per cent stake in Yes Bank.

Yes Bank’s founder, Rana Kapoor, was arrested on Sunday morning by Enforcement Directorate officials on money-laundering allegations.

Since the scandal involving Modi broke, lending procedures have been tightened and a new National Financial Reporting Authority was set up in 2018. A fugitive economic offenders’ law was also launched in the same year.

A Girard-Perregaux ‘Opera One’ Triple Bridge Tourbillon Wristwatch once owned by jeweller Nirav Modi, which sold for $136,000 as part of an auction held to sell off his seized assets. Courtesy of Saffronart  
A Girard-Perregaux ‘Opera One’ Triple Bridge Tourbillon Wristwatch once owned by jeweller Nirav Modi, which sold for $136,000 as part of an auction held to sell off his seized assets. Courtesy of Saffronart

One of the first people to be declared an economic fugitive under the law was Vijay Mallya, the flamboyant businessman of Kingfisher. He is charged with defaulting on loans worth 90bn rupees, although he had fled to the UK in 2016. Indian authorities have been trying to get him extradited since, and now the new law allows them to confiscate his assets held in India.

Both Modi and Mallya deny any wrongdoing, but there are more than 30 Indians who have fled overseas to try to avoid prosecution, according to the government.

“Instances like these bring a bad name to the overall corporate culture in the country and therefore by pursuing these criminals steadfastly the government of India is sending out a strong message,” says Mr Agarwal. “In addition, the current government has embarked on several big ticket populist schemes for which the government needs funds and any recoveries that can be made through this crackdown will help the cause.”

Hemant Sood, the managing director of Findoc, an online trading company in India, blames failings in the system for allowing economic crimes to occur in the first place.

“Due to the poor structuring of banks and financial institutions in India, Indian corporates took advantage of banks and sanctioned loans [worth] more than they had the capacity to pay off,” says Mr Sood.

It became “imperative to tighten the framework associated with the loans that banks lend”, he says.

He highlights other steps taken by New Delhi, including the government empowering immigration authorities to detain and prevent wilful defaulters from leaving India if a "lookout circular" has been issued against them. The bureau of immigration has opened more than 80 lookout circulars at the behest of banks, according to the government.

India is eager to bring Modi and Mallya back to India, with the ruling party accused of doing too little by the opposition to prevent economic offenders from leaving the country.

“Such steps are essential for ensuring good growth of the economy as it restores the confidence of the public in the banking system and in the power of contracts,” says VP Singh, professor of economics at Great Lakes Institute of Management, Gurgaon. “An economy where contracts are dishonoured can never have sustainable economic growth and development. Banking is core to the investment potential of a country.”

The Nirav Modi auction marked the first time a professional auction house was appointed by the Enforcement Directorate to conduct an auction of seized assets in India. It came a year after another auction of seized paintings belonging to Modi was conducted by Saffronart on behalf of India's Income Tax Department last March.

There may be many more to come, the auction house believes.

As the government recoups funds, “I would imagine that if there is an appropriate opportunity for them to use auctions as a means of monetising asset recovery, I think that they would explore that”, says Saffronart’s Ms Vazirani.

Thursday's auction, along with an online auction the previous day of some of Modi's assets, raised $7.65m, which is just a fraction of the alleged $2bn fraud.

“Auctioning of assets of such criminals is a must, though it does not help much in recovery of dues,” says Mr Singh. “It will be a deterrent and a kind of assurance to the public that due diligence has been done.”

Updated: March 8, 2020 06:06 PM



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