JATIN MEHTA SCAM


Did you know?

Diamonds and coal are both made from a form of compressed carbon. When pressure is applied to carbon-based life forms such as plants for millions of years, it turns into coal. Diamond too, is formed in exactly the same manner. The only difference is that the diamond contains pure carbon in a clear crystalline structure while coal contains carbon mixed with certain impurities.

Barring a few minor differences though, diamond and coal are made up of the same thing. This is also why coal is sometimes referred to as black diamonds. 

This fascinating fact can also be translated into human characteristics. 

Let me tell you the story of a diamond king who turned out to be an impostor, much like a piece of coal who tries to put on a shiny disguise.

This is the story of Jatin Mehta and the Rs. 7,000 crore fraud which shook the Indian economy.

Let us start at the beginning.

ENTRY INTO THE DIAMOND INDUSTRY

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Jatin Mehta entered into the diamond business in 1985, when he founded India’s first diamond public trading company Su-Raj Diamonds Limited. He used his stint in this company to build up a reputation as a stable presence in the diamond and jewellery making industry. He conducted his business with transparency and repaid all his loans when required. In fact, Mehta won several awards while at the helm of Su-Raj Diamonds, such as the Diamantaire of the Year, certificates of merit and recognition as the largest exporter of cut and polished diamonds in India.

After his success at Su-Raj Diamonds, Mehta expanded and created two more companies, Winsome Diamonds and Jewellery Limited, and Forever Diamonds. 

Our story starts in the early 2000s, when Mehta started using his company Winsome Diamonds to export to clients in the UAE. 

Let us understand how the diamond business worked back then. 

Jatin Mehta and his company would import uncut diamonds from abroad. They would then proceed to cut and polish the diamonds, make jewellery pieces with them, and then export the finished and final jewellery to their existing clients in the UAE.

Now, most businesses function on credit. They take loans from several banks to first buy the materials required. Then, after production is completed, and the process of value addition is fruitful, they sell those products to earn revenue. The bank debt is repaid from the incoming revenue stream.

For the jewellery business, Mehta bought gold on credit from several international bullion banks, such as the Bank of Nova Scotia, Standard Bank PLC London and Standard Chartered, among others. Bullion banks normally refers to those banks which are active in the precious metals markets. They deal in activities such as trading, clearing, physical metal distribution, intermediating between metal lenders and borrowers. 

In this case, the international bullion banks provided Mehta with the material required for his jewellery business.

However, when it comes to international banking transactions, there are several procedures in place to ensure that neither party is cheated and the contract is carried out to completion. For instance, if the bullion banks lend the gold to Jatin Mehta in good faith, and then Jatin Mehta refuses to repay the amount, the banks will be left at a disadvantage as it will not be possible for them to chase down a man in a foreign country. The reverse situation is also possible.

To ensure that these situations do not crop up, bullion banks require that the company asking for the gold loan submit a standby letter of credit from a domestic bank. This is a guarantee of sorts, where the domestic bank accepts responsibility for the loan. If the company defaults, it falls upon the domestic bank to repay the existing debt. It is an agreement to pay for the entire gold amount themselves.

Of course, banks do not give out standby letters of credit to just anyone off the road. There is a process of due diligence involved here too. Also, the company asking for the letter of credit has to keep a certain amount of collateral with the bank, depending upon the size of the transaction. 

Jatin Mehta obtained standby letters of credit from several Indian banks such as Bank of Maharashtra, Canara Bank, Union Bank and others. Here, his hard-earned reputation as a stable presence in the diamond industry paid off. Also, his Winsome group had created for themselves a good credit score and a flawless history of credit repayment.

Thus the trade commenced. 

THE STARTING OF THE SCAM

For years, this line of transactions proceeded smoothly. Mehta would obtain the gold on credit from the bullion banks. That gold would be converted into jewellery pieces by the Winsome Group. The finished products would then be exported to the existing group of 13 buyers in the UAE. 

In fact, the business was carried out so flawlessly that the banks deepened their trust in Jatin Mehta and kept increasing his line of credit. 

This is building up to be quite an ironic situation, is it not?

Indeed it is.

Until 2012, this arrangement functioned like a well-oiled machine. And then, suddenly, it broke down without any warning. 

In November 2012, Mehta defaulted on his payments. He claimed that his regular group of 13 buyers from the UAE, had run into unforeseen losses in the trading of derivatives and commodities. As a result, they had not been able to pay him for the supply of jewellery. With no incoming revenue, Mehta said he would be unable to pay for the gold that he had taken from the bullion banks.

This was disastrous for the group of Indian banks who had extended the standby letter of credit for Jatin Mehta. In the event that he defaults on his payments, the onus would fall upon this group of banks to clear all the dues.

As you can imagine, it wasn’t a small amount that Mehta had defaulted upon.

The Winsome group, which comprised of Winsome, Forever and Su-Raj, collectively owed an amount of about Rs. 7,000 crores. This was no easy amount to repay and would create a significant dent in the coffers of the Indian banks.

Repayment was not an option, of course. However, the group of Indian banks which were penalised for the default decided to conduct their own investigations into the matter. 

What they found was shocking.

THE INVESTIGATION

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Jatin Mehta had claimed that he had 13 individual buyers in the UAE. Investigation revealed that this was false. All 13 companies were controlled by one man, namely Haytham Ali Salman Abu Obaidah, a Jordanian national. This man had been associated with the Winsome Group for the last 8-9 years. Further, it was also revealed that out of the 13 companies, 10 had been created in 2012 itself. In fact, five of those companies were registered on the same day, June 25, 2012.

Once these facts were revealed, the banks realised that they had been duped. They realised that there were no buyers in the UAE. It was all an elaborate scheme created by Jatin Mehta in order to cheat the Indian economy out of a few thousand crores.

Why did they not do anything to stop Jatin Mehta?

Well, in order to understand that, we first have to accept the fact that proper legal proceedings such as these take years to manifest. It is not a matter of a few days. 

Suspicions grew about Jatin Mehta and his companies in 2013. The group of banks which were cheated out of Rs. 7,000 crores realised what a mastermind they were up against, and took the case to the Central Bureau of Investigations (CBI). 

For three years, investigations were carried out by CBI against Jatin Mehta. The Mumbai police got involved as well, and along with CBI, they raided Mehta’s office and properties. However, in spite of all their best efforts, they did not manage to build up the case against Mehta.

Before any major charges could be filed, Jatin Mehta and his entire family left India for good. They moved to Saint Kitts and Nevis, and settled there to start their new lives.

THE PROBE

In the meantime, CBI continued their investigation against Mehta. They launched FIRs against the other noteworthy members of the company, namely Ramesh Parekh and Ravichandran Ramaswami. Furthering the battle of CBI against Jatin Mehta, they declared him to be a wilful defaulter. This means, even though his company was not bankrupt and he had the money with him, Mehta had knowingly chosen to not repay the amount.

By 2017, the Enforcement Directorate (ED) got involved in the Jatin Mehta case. It so happened that the entire amount had been taken from government banks. That means, it was essentially the tax-payers’ money that Mehta had escaped with. Out of these, Punjab National Bank had suffered the biggest loss — an amount more than Rs. 1,700 crores. Among the others, Central Bank of India had lost Rs. 699 crores and IDBI Bank had lost Rs. 388 crores.

ED chose to not let go of this wilful fraud and mounted pressure to complete the investigation and gather the evidence against Mehta. After much effort, they managed to obtain evidence of the money laundering in the UAE. This took a large amount of skill and tact as such international matters are very sensitive and have to be broached with caution.

As it happens, fate has still not caught up with Mehta. He is living the good life away from India. In fact, he has even launched new companies in Montenegro as well as in the UK. This means, he is still operating in the diamond business and is still enjoying exile on the Indian taxpayers’ money.

Investigation later revealed that even some bank officials were in on the fraud. This is the only explanation for the fact that Mehta had only kept collateral worth Rs. 250 crores even though the line of credit was valued at Rs. 7,000 crores.

Together, ED and CBI are working to bring to justice this wilful defaulter. Only the future will tell whether their efforts are successful.

If you notice, there are certain distinct similarities between Jatin Mehta and Nirav Modi. Both are from Palanpur in Gujarat. Both operate in the diamond business and both cheated the Indian economy out of thousands of crores. In fact, we can take it one step further as Punjab National Bank is the primary victim in both cases. 

Let this be a lesson of caution, dear friends. Even though Jatin Mehta and Nirav Modi followed the same path, somewhere down the line, the wheel of fortune will turn for them. They may be living in luxury in exile at the moment. But life is unpredictable and the future is forever changing. The only thing we can do is stay true to our values and be good human beings.

Happy investing!

By Adrija