PNB SCAM

In Feb 2018, Punjab National Bank revealed that it has been affected by a corporate fraud
running into ₹11,300 crore that benefited fashion jeweller Nirav Modi and Gitanjali Gems.
The PNB fraud, by far the most massive one ever detected by an Indian bank, comes to light
at a time when we realised that transparency in corporate governance is essential for the
growth, profitability and stability of any business.
At the centre of the scam are billionaire diamond jeweller Nirav Modi, his wife Ami, brother
Nishal and maternal Uncle Mehul Chinubhai Choksi. They are partners in Diamonds R US,
Solar Exports and Stellar Diamonds, which has shops in foreign locations such as Hong Kong,
Dubai, and New York. On the other end of the scam, PNB discovered that at least 2
individuals, deputy manager Gokulnath Shetty and clerk Manoj Kharat, from its Brady House
branch in Mumbai repeatedly issued Letters of Undertaking (An LoU is a guarantee by the
issuing bank to the receiving bank and the companies that it would undertake to pay a
certain amount of money on a specific date) to Nirav Modi's companies and their banks.
The two individuals did not secure cash reserve or collateral. Moreover, they did not even
record the transactions in the bank's core banking software, the system on which the bank's
financial transactions are run and recorded. PNB has stunned the country’s financial sector
with its discovery of fraudulent transactions, an example of bad corporate governance.
It is necessary to realise that a company that has good corporate governance has a much
higher level of confidence amongst the shareholders associated with that company. Active
and independent directors contribute towards a positive outlook of the company in the
financial market, positively influencing share prices. It is one of the important criteria for
foreign institutional investors to decide on which company to invest in.
Companies need to adhere to three key principles of corporate governance: Transparency,
Accountability, and Independence.
When we are talking about corporate governance, transparency implies an accurate,
adequate and timely disclosure of relevant information about the operating results of a
corporate enterprise to its stakeholders. Accountability indicates the responsibility of the
Chairman, the Board of Directors and the chief executive for the use of company’s resources
over which they have authority in the best interest of the company and its stakeholders.
Good corporate governance requires independence on the part of the top management of
the corporation which must be a strong non-partisan body.
Steps to strengthen due processes and professional management systems would help
improve the internal operations regarding credit decisions and money transfers for all banks
— public and private. Today, new technologies are available that can reduce human
interface with in-built security processes. Smart technologies such as blockchain, big data
analytics, and artificial intelligence should be encouraged, so that risk management is
facilitated.
Where human interventions are necessary, adequate checks and balances and staffing
solutions such as regular rotation of staff, double-checking of procedures, and appropriate
level of clearances must be instituted. Again, technology can be an enabler for scanning and
monitoring transactions or aggregating them into different risk levels for better monitoring.
Some banks are working on blockchain technologies that can strengthen the entire backend
system.
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.
To avoid scams like PNB in future, good corporate governance that safeguards not only the
management but the interests of the stakeholders as well should be practised. What is
necessary should be done in order to foster the economic progress of India in the roaring
economies of the world.