March 25, 2018

Nirav Modi case: India has no option but to act

Nirav Modi case: India has no option but to act

By ET CONTRIBUTORS | Mar 23, 2018, 06.38AM IST



In the aftermath of Nirav Modi and the 31 other debtors fleeing India, GoI passed the Fugitive Economic Offenders Bill (FEOB), which targets defaulters above Rs 100 crore.

By Satvik Varma

Shortly after Indian law enforcement authorities started investigating Nirav Modi, Firestar Diamond, a company owned by him in the US, along with its affiliates and subsidiaries, filed for bankruptcy in a New York court. The filing made under Chapter 11 of the Federal Bankruptcy Code (FBC) cites “liquidity issues and supply chain challenges” due to government actions in India as reasons for the filing.

By taking this strategic step, Modi has applied the ‘4Cs principle’ commonly followed in the diamond trade: displaying shrewd ‘clarity’ of thought and action; trying to ‘cut’ through the Indian legal process; showing his ‘colours’ that he’s unlikely to cooperate with Indian authorities; and making it fairly obvious that a lot of legal and diplomatic might will be needed to get this high ‘carat’ defaulter back home.


Chapter 11 filings seek reorganisation of a company under US bankruptcy laws. Among its features is the automatic stay granted against all concurrent proceedings. Consequently, it requires all creditors to cease collection attempts and makes many post-petition debt collection efforts void or voidable. In fact, during the pendency of such a filing, any attempts to recover a debt, or take other action against the debtor, can lead to penal action against the person initiating the process.

Unlike other filings, where liquidationproceedings can immediately be commenced, under Chapter 11, the debtor is given some time within which to propose a reorganisation plan, indicating how the company can be made profitable again. Notably, in Chapter 11 filings, the debtor remains in control of his business operations, as a ‘debtor in possession’. Hence, often such filings are made with the objective of prolonging the inevitable liquidation process, and keeping debtors at bay.


The documents publicly available and filed with the Chapter 11 petition acknowledge that the allegations of unauthorised loans granted by Punjab National Bank (PNB) to Nirav Modi led to the filing. However, the filings do not reflect PNB among Firestar’s creditors. In fact, an official statement said that the company is “not in any way involved with any of the alleged conduct [overseas]”. The bankruptcy filing states that the funds available with Modi’s companies would be sufficient for distribution to creditors, including to unsecured ones.

So, Indian investigative agencies have to first ascertain whether money raised from the loans issued by PNB has been transferred to these US companies. A special court recently permitted the Enforcement Directorate (ED) to issue letters rogatory to identify Modi’s assets overseas. But even if such assets have been purchased by transferring money borrowed from Indian banks, they now can’t be attached by Indian enforcement agencies until the Chapter 11 proceedings are underway.


Bank of India and Union Bank have approached the New York court seeking approval to participate in the proceedings and receive copies of the notices filed. This may be a preemptive step, as the court has convened a meeting of creditors on March 30. It may help these banks to demonstrate to the court that Modi’s Chapter 11 filing is nothing but an “extraordinary exercise of forum shopping”, something that found favour with the court in another diamond company bankruptcy filing.

These banks, along with the Indian authorities, may also ask the New York court to vacate the automatic stay because of extraordinary circumstances, and since recovery action has already begun in India. So, a stay on the attachment of the assets will be prejudicial to the recovery exercise underway by GoI authorities.

Notably, the automatic stay does not extend to criminal action against the debtor. So, Indian authorities need to act with deftness. They should also consider applying before the New York court to press for the immediate appointment of a ‘trustee’ for Modi’s companies to prevent any further diversion of assets.

In the aftermath of Nirav Modi and the 31 other debtors fleeing India, GoI passed the Fugitive Economic Offenders Bill (FEOB), which targets defaulters above Rs 100 crore. While the Bill does not apply retrospectively, an application can be made to declare the offender a fugitive. Under the proposed legislation, all assets — and not just proceeds of crime — can be confiscated, and the offender can’t pursue any civil disputes.

But will the FEOB help bring back Nirav Modi and others to book in India? We now have no option but to dirty our hands and act. Otherwise, we are likely to lose billions more, and much of India Inc’s lustre and sparkle.

The writer is a corporate attorney based in New Delhi

No comments: