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New 'secrets' emerge in PNB scam

By Somesh Jha
January 28, 2019 18:39 IST
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FinMin finally sacked executive directors K V Brahmaji Rao and Sanjiv Sharan on January 18. The bank’s board, however, had felt they had no criminal intent and it was a case of ‘casual oversight’

The government's order on sacking Punjab National Bank (PNB) executive directors K V Brahmaji Rao and Sanjiv Sharan came months after the bank’s board found no criminal intent, and a “casual oversight” on the part of these officials.


The facts emerged after a perusal of documents reviewed by Business Standard, almost a year after the country’s biggest banking fraud, worth over Rs 14,000 crore, was detected by the Delhi-based bank in January 2018.

On January 18, the finance ministry, in a rare move, issued an order to sack Rao and Sharan, who were about to complete their tenure as executive directors at PNB.

The action came six months after the ministry issued a show-cause notice to both the executives, along with former PNB managing director and chief executive officer Usha Ananthasubramanian, seeking their views on the possible lapses.

The ministry had earlier sacked Ananthasubramanian on her last day as chief executive at Allahabad Bank in August last year.

The finance ministry’s Department of Financial Services (DFS) had sought a response from the board of PNB last year, which had convened a meeting in July 2018, on its show-cause notice.

“Apparently, there is no substantial information by DFS which suggests any criminality or criminal intent by the two executive directors,” the minutes of the meeting, held on July 26 last year and chaired by managing director and chief executive officer Sunil Mehta, showed.

Both Rao and Sharan contested the government’s approval given to the Central Bureau of Investigation (CBI) for prosecuting them in a criminal case in the Delhi high court last year.

The board felt it was a case of “casual oversight” but added the two officials were “not fully careful and should have exercised greater control” of their roles.

“In the board’s judgement, to limit the investigation and the consequent responsibility to the two EDs who took charge during 2014 and 2016 may not be appropriate for prevailing systems, control, compliance or reporting lapses based on circumstantial information as made available by DFS to the board,” the minutes added.

In May last year, the board divested Rao and Sharan of functional responsibilities after the CBI had named them and Ananthasubramanian in its charge sheet submitted to a Mumbai court.

The CBI has filed two charge sheets, naming Rao, Sharan, Ananthasubramanian, among other officials of PNB, for allegedly facilitating the fraud “through their acts and omissions”.

The PNB board was reluctant to divest the powers of these executives as its chairman Sunil Mehta had inquired from the government nominee on the PNB board, AK Mittal, why the matter should not be directly dealt by the government because the two EDs were appointed by them, in its board meeting in May last year.

However, Mittal felt the “action being contemplated would be more respectful if communicated to them through the Board”, according to the documents reviewed.

“We are aware about the PNB board’s resolution. Our role was to consult the bank in accordance with the mandate of the law, which we did, and it is not necessary that the government agrees with the views of the bank,” a senior finance ministry official said.

"The government had based its argument on a response sent by the RBI to the finance ministry in March 2018.

"The response found “compliance lapses on the part of the bank”, “failure of the top management of PNB in exercising proper control over the functioning of the bank, which enabled the fraud to persist undetected for several years, snow-balling into a large amount”.

The PNB board, however, said “in hindsight, there could have been stronger operational internal controls and processes since 2010-11 which could have detected the fraud at its early stage”.

It said a stronger control and reconciliation system and effective reporting and compliance certification at the branch or zonal offices could have highlighted non-compliance with the RBI’s guidelines.

The board said the RBI’s circular in August 2016 should have led to a more in-depth review by the PNB management but blamed the “inappropriate” compliance certification by officials at the branch and zonal levels for fraud being undetected at the top level.

Ultimately, the board concluded that the bank may review “organisation structure, clarity on roles and responsibilities at all levels, reporting lines, systems, processes, controls, compliance certifications and regulatory reporting to avoid repetition of such frauds.”

“Further, the DFS may consider providing clarity on roles and responsibilities of whole-time directors on their appointment,” the minutes of the meeting, signed by the PNB chairman, said.

Loans of Rs 14,000 crore were fraudulently sanctioned, in connivance with the staff at the bank’s Brady House branch in Mumbai, through an instrument known as letter of undertaking, to a group of companies belonging to Nirav Modi and Mehul Choksi, both of whom have been declared fugitive economic offenders by the government.

Photograph: Rupak De Chowdhuri/Reuters

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Somesh Jha in New Delhi
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