March 6, 2018
After the Kingfisher Airlines fraud and the request for extradition of its former owner Vijay Mallya by Indish authorities, corporate India is facing the next scandal on the grounds of inflated valuations of collateralized brands. The case centers around the luxury jewelry empire of Nirav Modi, Mehul Choksi and Gitanjali Gems. Nirav Modi is accused of defaulting on $1.8 billion worth of loans before leaving India last January.
While it is still unclear how the fraud could happen between 2011 and 2017, it seems that collateralized brands of Indian jewelry firm Gitanjali Gems play an important role. Gitanjali Gems is owned by Mehul Choksi who is an uncle of Nirav Modi. In 2009 and 2011, Gitanjali Gems have valued their Indian brand portfolio (including Gili, Nakshatra, Asmi, D’Damas, Maya and Shuddhi) by Brand Finance who found a brand value of Rs 55.84 billion (roughly $ 900 million). The extensive publicity surrounding these valuations back then did not augur well. Apparently, loans taken on these grounds vanished somewhere in the global expansion of Nirav Modi’s empire. Like in the Kingfisher Airline case, Indian banks will now face the hard reality check of these brand values when it comes to a liquidation of these collaterals.
Appraisers must ensure that a) their value conclusion is realistic and not inflated, and b) their valuation reports cannot be (fraudulently) misused for purposes that differ from the original valuation mandate. Lenders should never accept valuation reports which have not been prepared specifically for the purpose of a loan. Ideally, lenders should play an active role in commissioning and overseeing the valuation which will serve as a basis to grant the loan. As history shows, this applies in particular to brand-based loans.