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PNB Fraud To Narrow The Gems And Jewelry Sector By 16%

The sheer scale of operations of Mehul Choksi group and Nirav Modi group would mean that their closure would have far reaching implications for the gems and jewellery industry. The absence of these two companies is expected to shrink turnover of the industry by 16% and reduce diamond and jewellery trade by 5-6%. Worst of all, defaults (non-performing assets) in this segment would rise to 30%.

According to a report by Care Ratings chief economist Madan Sabnavis, Firestar Diamonds reported a stand-alone revenue of Rs 1,581 crore and Rs 1,945 crore in 2014-15 and 2015-16 respectively. Gitanjali Gems reported Rs 7,157 crore and Rs 10,750 crore during the same period. “With these two companies now being closed, the 2015-16 sales would be lower at Rs 66,237 crore, thus reducing the size by 16%,” the report said.

PNB fraud

The Other Side of PNB Fraud

There is also a human element to the loss. Being the largest jewellery retailers in the country, the two companies — Gitanjali and Nirav Modi — employed 648 and 2,200 employees respectively, according to filings in March 2017. A combined 3,000 persons would be rendered jobless and another 7,000-8,000 temporary workers and employees at franchisees are expected to be affected. “The sector employed 22,000 people, according to data available for 22 companies of this sample of 34 companies. The two companies constitute 12-15% of the total industry workforce excluding craftsmen and temporary employees,” the report said.

Bank loans to the gems and jewellery sector as of December 2017 is Rs 69,000 crore. This constitutes about 1% of Rs 73 lakh crore — which is gross bank credit. These two companies have borrowings of around Rs 16,000-17,000 crore. This does not include the Rs 13,000 crore of loans taken against letters of undertaking (LoUs). Taken together, the overall gross NPA ratio for this sector and stressed assets according to RBI data for September 2017 would work out to around 30%.

PNB fraud

The gems and jewellery retail market in India is estimated to be at Rs 3,90,000 crore, out of which 30% are formal retailers. Firestar Diamonds (or “Nirav Modi” — the brand) derived most of its revenue from its diamond cutting and polishing business. The company was also involved in designing and manufacturing of premium-end stone and diamond studded jewellery. Gitanjali Gems was present in both import-export of gold and studded jewellery, and retail jewellery business in 200 cities in India and top markets abroad.

The recent development is expected to impact the export-import in value terms. Gitanjali Gems and Firestar Diamonds together accounted for 5.8% of the diamond and jewellery trade in value terms in 2015-16. The shutdown of the two companies would have an impact of 5-6% on the diamond and jewellery foreign trade in value terms over the next year i.e. 2018-19.

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