The Surani-owned jb group case points to a corrupt system post-2008 global crisis, wherein Indian diamond merchants routed bank funds into shell companies and personal accounts.
By Vishwas Kumar
IN the 1990s and 2000s, ethnic, tribal and religious conflicts in Africa led to the booming trade in “blood diamonds”, which were extracted by militant groups in the continent and sold globally at cheap rates to finance the purchase of weapons. The global financial crisis of 2008 led to a new phenomenon, “paper diamonds”, which existed only on paper but were used by traders to get loans from banks. As the crisis deepened, the merchants found it difficult to repay the loans; some siphoned off the money through shell companies.
One of the biggest defaulters was JB Diamonds, once the largest Indian exporter. Owned by Jivrajbhai Surani, the group owes Rs. 800 crore to the State Bank of India and another Rs. 500 crore to Hong Kong-based banks. In fact, the Hong Kong authorities alleged that the Suranis had funneled the money out of the country to their personally-owned companies and bank accounts. When one of the group’s main offshoot in Hong Kong, Sugem, was declared bankrupt in 2010, the bankruptcy trustees could not recover the money and alleged that it was laundered to Dubai, where one of the family member lives.
An investigation by the bankruptcy administrator, which looked at the Suranis’ Hong Kong businesses and global linkages, revealed that lenders of Sugem suffered a loss of $68 million. This included the $30 million loan from the Antwerp Diamond Bank (ADB). The report concluded that “notional losses” from Suranis’ operations “could reach a maximum of $160 million”.
The investigators felt that the Suranis indulged in “well-planned fraudulent transactions and even money laundering activities”, which involved Sugem and dozens of firms, owned directly or indirectly by the family. Systemic schemes were designed to maintain the “maximum borrowing from ADB”, and business arrangements were made to “hideaway” and “ring-fence” Sugem’s andpersonal assets from the creditors.
Most transactions took place in the months before Sugem filed for bankruptcy. For example, in the second half of 2009, huge funds passed through its bank accounts, which were later red flagged by the bankruptcy administrator. The flow of funds through the accounts peaked at $80 million a month in September 2009, compared to the average monthly turnover of $10.6 million between 2007 and 2009. These, said the report, were signs of money laundering.
On a single day, December 10, 2009, deals worth $16.9 million were signed with six Dubai-based firms, which were possibly connected to the Suranis. The investigators felt these were “unusual transactions” aimed to divert Sugem’s assets “in anticipation of the appointment of the receivers by ADB”. Suspiciously, ever since Sugem was adjudged bankrupt, its owner, Bhupendra Jivrajbhai Surani, one of the two sons of Jivrajbhai Surani, frequently travelled to Dubai.
Most of the over $70 million of trade debts, i.e. receivables from firms to whom the diamonds were sold, and “other receivables” were not supported by “proper documents”. In fact, the investigators felt that the bulk of the “other receivables” seemed “commercially unjustified” and could be mere accounting entries to fool the receivers.
Between February 27 and December 29, 2009, Sugem inked suspicious deals with 11 Hong Kong-based vendors. The former employees and directors of the company signed the invoices on behalf of the latter entities, which supplied the diamonds. “Many of these vendors were apparently owned by the employees of Sugem with the same or similar contact details, and some of these vendors were operating from residential premises previously owned by (Bhupendra) Surani,” said the report.
One of Sugem’s rough diamond suppliers was the India-based JB Diamonds, owned by Bhupendra’s father. In the three months before Sugem’s receivership, the company sold diamonds worth $11.4 million back to JB Diamonds. Virak Exports, which received HK $19.9 million from Sugem on November 20, 2009, paid the amount three days later to Cosom, which was Sugem’s customer. Other transactions between Cosmo and Sugem resulted in the payment of $13.8 million by the former. Cosmo was owned and controlled by Sugem’s employee.
According to the investigators, these deals were devised to achieve several objectives. In some cases, like Cosmo-Sugem ones, the idea was “to achieve some form of circular cash flow movement from various ‘vendors’ back to Sugem for servicing bank loans”. In the Dubai and JB Diamonds transactions, money was siphoned off from Hong Kong. The agreements with local firms, owned by former employees and directors, were created to show higher revenues, which enabled Sugem to borrow more money from ADB and other creditors.
The JB Diamonds Group, named after its two founders—the main partner Jivrajbhai Surani and Bhagwan Kukadia—was founded in 1965. Surani’s ancestors were farmers, who hailed from Bhavnagar’s Dharuka village in the Saurashtra district of Gujarat. Popularly known as Jivrajbhai Dharukawala, he migrated to Surat at the age of 17, and met Kukadia. Together, they pumped in Rs. 1,000 and established themselves in the diamond hub of Varachha, Surat.
By the 1990s, JB Diamonds was among the top diamond exporters in the world. In 1993, Jivrajbhai’s elder son, Jitender, moved to Hong Kong. Eight years later, his younger son, Bhupendra, joined his brother, and took over the businesses when Jitender decided to go to USA to set up an independent business.
At its peak, in 2007, the group’s valuation was $2-3 billion, its annual turnover was Rs. 10,000 crore, it employed 1,800 people, and was a member of the prestigious Diamond Trading Corporation, which regulates most of the global trade.
In the 2000s, Bhupendra dreamt of expanding the business to other sectors. He wanted to establish a global conglomerate with interests in real estate, hospitality, mining, and oil and gas, apart from diamonds. The group announced huge investments in the three emerging markets—India, China and the Middle East.
In 2006 and 2007, the group held press conferences in India, Dubai and Hong Kong, and announced grandiose plans—a 60-storey tower in Dubai, a land bank of over 20 million square feet for property development with a value of $440 million in India, and projects worth $20 million in Indonesia. The group said it would acquire land in Goa to erect India’s first Sofitel hotel. It purchased the 40-room Coconut Grove Hotel in the same state.
In 2007, Jatin Chutke, then the group’s vice president for corporate affairs, said that the Suranis would ink deals worth Rs. 10-15 billion in the mining and hospitality sectors in India. After he met the then minister of state for finance Pawan Bansal and finance secretary Vinod Rai, Chutke said: “We’re conducting due diligence for acquiring iron ore, bauxite and limestone mines in Karnataka, Rajasthan, Maharashtra, Gujarat and Goa and will also set up a five-star hotel at Goa. At a later stage, we will look at Jharkhand and Chhattisgarh for mining operations.”
He claimed that the group had acquired a coal mine in China, which gave it access to over 800 million tons of coal, on a 30-year lease. Further, it hoped to set up a coal-to-methanol refinery in China, which would be operational by late 2008. He added that the Suranis had mining rights for iron ore, coal, bauxite and gold in Indonesia, Angola and Tanzania, and were building office complexes and hotels in Dubai and Oman.
The first sign that the Suranis were spending beyond their means came in 2007. Bhupendra, flying high on his dreams, took a Citibank loan to buy a second-hand, 15-seater Gulfstream jet for Rs. 80 crore. “One of his advisors told him that if he wanted to do business in India, he had to flaunt his wealth to woo politicians and bureaucrats. So, he acquired the Gulfstream and spent an equivalent amount in repairs,” reminisces a former employee. The next year, the younger son purchased a limited-edition Maserati, an Italian car that cost Rs. 1-2 crore.
Ironically, the Gulfstream landed the Suranis in trouble. After the global financial crisis of 2008, Bhupendra was unable to repay the $12.8 million loan to Citibank; the bank filed a case in Hong Kong to recover the money. In September 2009, Sugem filed for bankruptcy; it was put under a receiver in January 2010. The bankruptcy led to many other murky disclosures.
Back in India, his father, Jivrajbhai, lost his financial and political clout. Years ago, he had entered politics and was close to former Gujarat chief minister Keshubhai Patel. He became Gujarat BJP’s vice-president in 1998. However, when Keshubhai was sidelined in 2001, Jivrajbhai was out of favor. In 2007, he joined Congress at the behest of his colleague, Shankarsinh Vaghela; but the Congress never came to power in the state.
Jivrajbhai admitted to a newspaper: “I haven’t seen such a hard time during my four decades in this business. There is hardly any demand and we have had to lay-off 50 percent of our staff.” The Indian income tax department raided the group in 2010. Now with both Indian and foreign banks after them, the Suranis may lose their diamonds, businesses and respect.
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