“DIAMANTAIRES ARE DIAMOND dealers. So they buy diamonds, polish and then sell the diamonds. It is a trading mentality,” Nirav Modi once told an interviewer. “Jewellery making is more about creation.”
To the hardy, no-nonsense diamond trading community in India, primarily Gujaratis in Mumbai and Surat, Nirav Modi—although one of their own kind, a Gujarati and someone who dealt in diamonds— was a somewhat haughty and supercilious figure, the type of person who liked to give the impression that he wasn’t just about money. That unlike them, he had culture. Some years ago, Nithin Khandelwal, a well-known jeweller and chairman of the All India Gem & Jewellery Trade Federation, went to a Nirav Modi store in Mumbai. He couldn’t get much further than the door. “[The staff] were asking too many questions. ‘Who are you?’ ‘What do you want?’ ‘Do you have an appointment?’ ‘Do you have a reference?’ I told them I wanted to see some of the jewellery, but they wouldn’t show me anything. So I just left,” he says. “He was just too high-end, I guess.”
When the magnitude of the Nirav Modi-Punjab National Bank scam came to reveal itself, Khandelwal, who is well acquainted with Mehul Choksi, Modi’s uncle and proprietor of the Gitanjali Group, also alleged to have been part of the scam, claims he was shocked. “We [diamond merchants] were all just really really surprised. By their names [Choksi and Modi], by the money involved. It is really really difficult to raise money [for the diamond business] from banks.”
Diamond merchants are a tough-as-nails community. With their business acumen, willingness to work hard, and the low labour wages prevalent in India, they have managed to convert India, mostly Surat and Mumbai, into an important destination in the global manufacture and trading of diamonds. “Ten out of 11 diamonds in the world today are either cut or polished in India,” says Khandelwal. The community of traders is a relatively small and intimate one—many of them are Jains who trace their ancestry to Palanpur in north Gujarat—where very often one knows the other.
Gujarati traders have travelled to Antwerp in Belgium, the soi-disant ‘diamond capital of the world’. They started off at the bottom of the chain, dealing with low-quality rough diamonds, which offered little profit and were thus not of much value to the established Jewish traders, before they began to work their way up, ultimately replacing Hasidic Jews as the premier diamond trading community in the city. Today, it is estimated that there are some 500 Gujarati families in the diamond trade business in Antwerp. “Seventy per cent of diamond traders in Antwerp are Gujaratis,” says Dinesh Navadiya, a Surat-based diamond trader and a former president of the Surat Diamond Association. “It is the hub of the diamond business. The government there is supportive. The banks are more helpful to diamond traders than anywhere else. That’s why a lot of people like doing business there.”
Modi’s was one such family that moved to Antwerp. His grandfather Keshavlal, a diamond trader from Surat, moved to Singapore where he set up his business in the 1940s. Modi’s father Deepak later moved to Antwerp. In past interviews, Modi has often spoken about how as a child, the dinner-table conversations in the household revolved around diamonds.
Gujarati traders sent the stones back to their families in Surat for cutting and polishing, where labour costs were a fraction of Antwerp’s. Navadiya points out another factor. “Trust. We are a business based on trust. It is the foundation of everything in our business. It is a trade anybody from an illiterate person with Rs 20,000 in their pocket to some big-shot with crores can enter. Everyone in the end has to trust one another. That’s why as a community we have done so well,” he says. “If there is no trust, everything falls apart.”
BUT TRUST HAS been in short supply in recent years. For all the news the current Modi case has generated, he is not the only jewellery dealer who has been accused of fraud. Mihir Mehta, another Antwerp-based trader and the promoter of Jayam NV, has been taken to a London court by ICICI Bank for default on loans totalling $8 million. Nilesh Parekh, head of the Kolkata- based Shree Ganesh Jewellery House, has been accused of cheating a consortium of 25 banks to the tune of Rs 2,223 crore. And before Modi’s case surfaced, the promoter of Winsome Diamonds, Jatin Mehta—who is alleged to have committed fraud worth Rs 6,800 crore, again involving PNB, which had the highest exposure of Rs 1,800 crore—was probably the jeweller accused of the largest wilful default. It is said Mehta acquired citizenship of St Kitts and Nevis, the island nation which India does not have an extradition treaty with, in 2013-14, right after the defaults began.
“When I hear about these cases, I realise that banks are easily offering big loans to only very large firms, not to those in the small and mid range who are seeking loans between Rs 5 crore and Rs 50 crore. Smaller players are asked for 100 per cent collateral and big cash margins while the bigger players are getting money for nothing at all. There is something wrong in all this,” Khandelwal says. “But you must remember this is a very small fraction of the entire industry. Like every industry, this is the 10 per cent that isn’t doing things the right way. The rest are all good, honest people.”
Others lay the blame elsewhere. A spokesperson for the Gems & Jewellery Export Promotion Council (GJEPC), put out a press statement saying that while GJEPC struggles to garner finance for gem and jewellery exporters, especially in the SME export sector, who are required to give high collateral for the limit sanctioned to them, one finds LoUs being provided by a bank without any safeguards: ‘...this speaks volumes of irregularities that need to be thoroughly investigated.’
Diamond merchants often rail against the banking system, about how they generate employment, contribute so much to the economy, and have only a tiny carbon footprint. Yet, when it comes to raising capital from banks, they face an arduous process. “We are a very capital intensive game. Instead of losing so much money on Nirav Modi, if the bank had just given the same money to a number of traders, these traders would have done well and the bank would not be in this state as it is today,” says Navadiya.
Khandelwal offers his own example. “Let me be frank,” he says. “For the last two years, I have been trying to raise Rs 10 crore from banks. I have the largest jewellery showroom in Maharashtra, a total of six storeys. And I have offered 80 per cent [of that value] in collateral. But it has still been rejected. They want 100 per cent... With this Nirav Modi case, everyone thinks banks are in connivance with [diamond] merchants, that we have it easy. Let me tell you, it is not so.”
As a result of this caution on the part of banks, apart from other dubious reasons, a lot of the diamond trade remains outside official channels. It is an intensively competitive industry and attracts its share of unscrupulous players. Evading taxes, cooking up books, over-valuing, under-valuing, these are routine practices within the industry. Another common practice is that of round-tripping; since banks have stipulations that traders who want to borrow money must meet strict financial conditions (on size of business and so on), jewellers show ‘exports’ to companies abroad that actually belong to or have a secret understanding with them. The consignment is later shown to be brought back as imports. This way, money is raised through dummy operations. “Traders are known to do it. It may not be strictly legal, but when getting loans becomes so difficult, how do we go about our business?”asks a Mumbai-based diamond trader.
One of the chief problems in the relationship between diamond merchants and banks is the acceptance of the stones themselves as collateral. Bankers have little expertise in estimating their value, let alone being able to tell the difference between genuine and lab- grown diamonds. Khandelwal says most of Modi’s jewellery was overpriced. “The investigating agencies are saying they have seized jewellery worth over Rs 5,000 crore from his showrooms. The value had been inflated,” he says. “I am sure it must be worth a lot less.”
While Modi’s fraud came as a shock to most, within the market his and Choksi’s name did not inspire much confidence to begin with. According to one Mumbai-based diamond trader who requests anonymity, whispers were doing the rounds that the duo weren’t doing well financially. “There was talk of delayed payments. And in this industry, however big a name you may be, once trust is lost and things become shaky, you know it will come down soon.”
The scandal unfolds at a particularly bad time for the diamond trading industry. After a few years of poor business—plagued by demonetisation and the implementation of the Goods and Service Tax, apart from other factors like the overproduction of polished diamonds, high price of rough diamonds and influx of synthetic diamonds—traders say things were just beginning to pick up. “There has been good business [of late]. Demand has been increasing, here in India and abroad. Everyone was happy,” says Navadiya.
Now there is a sense of fear that the industry is being looked at with suspicion and banks will make loans even more difficult to come by. Khandelwal doesn’t think the wider industry will be affected, though. “Banks cannot make lending any more difficult,” he says. “And when it comes to reputation, just look at godmen and politicians. So many of them are in jail. But we all know that their business continues to remain lucrative.”