Thursday, 13 December, 2018

After PNB scam, RBI discontinues LoUs and LoCs for trade credits

RBI Stops Letters of Undertaking For Overseas Credit After PNB Fraud Watchdog scraps PNB scam tool
Laurie Berry | 14 March, 2018, 10:46

Gokulnath Shetty, former PNB staffer, and Mehul Choksi, the absconding promoter of Gitanjali Gems, could be in prison for life if found guilty after a special court on Tuesday allowed CBI to incorporate Section 409 in the second FIR filed by the agency. Earlier, the Punjab National Bank had said that the group's fraud amounted to Rs 6,138 crore.

"It has been chose to discontinue the practice of issuance of LoUs/ LoCs (Letters of Comfort) for trade credits for imports into India by AD Category-I banks with immediate effect", the notification said.

The difference between these products is that LoUs and LoCs were issued by domestic banks at the behest of the importer. It will also put companies that have received credit based on LoUs in a spot, as they have to now repay their borrowings since there will no rollover of existing LoUs. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs.

Finance Minister Arun Jaitley told Parliament on Tuesday a total 1,213 fraudulent letters of undertaking were issued to Nirav Modi's companies between March 2011 and May 2017. "A LoU does not have these details and when it is not linked to the banking system it can not be traced, like it happened with PNB". The change in regulations may hit import dependent businesses and trade that are often reliant on LoUs to get bank guarantees. Solar Exports, Stellar Diamonds and Diamond R USA belonging to high-end jeweller Modi and Choksi-promoted Gitanjali Gems, Gili India and Nakshatra are alleged to have been involved in the scam.

A multi-agency probe, including by Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) has been launched into the PNB fraud.

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Both Modi and Choksi are overseas and have refused to return to face trial.

The RBI also banned with immediate effect issuance of letters of comfort which, like LoUs, are used by importers to fund their overseas purchases.

LoUs and LoCs are used widely in several industries including gems and jewellery, oil and gas, electronic goods, solar panels and metals.

Last month, Nirav Modi commented saying, that PNB had closed all doors of recovering dues for his brand by going public.

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