INDIA’S GEMS AND BULLION sector has a new scam king in the making: Rajesh Mehta, founder and chairman of the Bengaluru-based gold processor Rajesh Exports. At over ₹15 lakh crore, Mehta is in the market regulator’s crosshairs for pulling off a scam 100x larger than that of Nirav Modi, who is on the run for having defrauded the state-owned Punjab National Bank of over ₹14,000 crore.

The only thing standing between the 61-year-old founder and the dubious crown are the legalese terms: “interim order” and “prima facie”.

The Securities and Exchange Board of India (Sebi), in an interim order based on a shareholder complaint, has exposed a trail of transactions that doesn’t add up to revenues that the company has officially announced over the past five years, from FY21 to FY25. What began as a complaint over unpaid trade receivables, turned out to be the biggest financial sorcery following a forensic audit done by BDO India Services at the behest of Sebi.

What’s interesting is that this is arguably the first proactive step by the regulator to initiate a forensic audit in a major large-cap company, based on a shareholder complaint. While the 20-month probe has resulted in an interim order that unravels the financial jugglery, the final order is still in the making.

Anatomy of a scam

According to Sebi’s report, the gold refiner and jewellery major has overstated its consolidated revenue by ₹15.15 lakh crore over a five-year period. But what caught the regulator’s attention was that the bulk of these revenues was attributed to the company’s overseas subsidiaries, in particular the Switzerland-based Valcambi SA. But the discrepancy was that while Rajesh Exports’ consolidated accounts reflected high revenues coming from foreign entities (See: All that glitters overseas…), the audited standalone financial statements of Valcambi showed revenues were a fraction of the numbers published by the parent company.

In other words, the regulator has raised apprehension over the fact that investors may have been presented with an incorrect picture of the company’s financial health and scale of operations. The interim report states that there is a prima facie case suggesting misrepresentation of the company’s finances as the revenues could not be reconciled with the audited statements of the company’s overseas subsidiaries.

The company offered an explanation that Valcambi SA was accounting only for “processing revenues” or in other words “value addition,” while the consolidated accounts accounted for the gross value of gold along with the processing charges.

The only glitch, as Sebi found, the numbers weren’t adding across the subsidiary chain. “It is not clear as to how the consolidating entity changes the fundamentals of accounting by including market value of goods belonging to third party as its revenue, when the operating entity itself accounts for only value addition (as it does not claim to take ownership of goods belonging to someone else),” states the report.

Despite repeated reminders, Rajesh Exports failed to furnish any supporting documentary evidence or accounting opinions, no principal-agent assessments, no bullion ownership records, no inventory risk allocation details. The unaudited revenues disclosed by the company did not match the audited standalone statements of its subsidiaries, including those done by KPMG, the statutory auditor for Valcambi, nor in underlying transactional records. Not surprising that the report summed it up bluntly: “The consolidated revenue figures appear commercially implausible.”

Viewed cumulatively, the material available on record indicates that the consolidated financial statements of Rajesh Exports appear to have materially overstated and misrepresented the operational scale and financial performance of the group during FY21 to FY25.

The red flags in governance

The fact that fraud occurred in the gold and jewellery sector is no accident given the structural vulnerabilities that make it a perfect breeding ground for financial misconduct. Goods can be moved offshore, revenues can be inflated internationally, and regulatory oversight becomes fragmented. Companies such as Titan and the like, by contrast, command a “governance premium” precisely for this reason.

For those who invested in Rajesh Exports, the interim order was a bloodbath. Life Insurance Corp. (LIC), one of the company’s largest shareholders, saw the value of its 10.8% stake crater as the stock price collapsed following the disclosure.

Unlike the Nirav Modi case, where banks lost massive sums through fraudulent credit lines, the Rajesh Exports fraud did not involve substantial banking exposure. But that’s little comfort given that LIC and other retail shareholders, who believed the company’s financial disclosures, have seen their wealth erode.

Shriram Subramanian, founder and managing director of InGovern Research, a governance advisory firm, pointed to multiple red flags that investors should have spotted. “For a company of Rajesh Exports’ stature, there are so many red flags,” he tells Fortune India. “Analysts don’t cover the company. The company doesn’t have an active investor relations function. They don’t hold quarterly conference calls. They have no institutional investor holding except LIC. All these are indicators that established institutional investors and mutual funds have analysed and given a skip,” he explains.

While the Sebi probe began in late 2024 and culminated in an interim report this June, one of the country’s leading proxy advisory firms, Stakeholders Empowerment Services (SES), had been flagging governance concerns at Rajesh Exports since 2016.

While in 2016, SES had flagged incorrect classification of interest income under revenue from operations, violations of minimum wages law, and non-compliant auditor appointments, it was in 2023 that it highlighted a critical new concern: non-disclosure of subsidiary company financial statements, a direct violation of the Companies Act 2013 and Sebi Listing Obligations and Disclosure Requirements.

“This should have triggered regulatory action, but didn’t,” says Jitendra Gupta, founder and MD, SES. Gupta, who is also a former executive director of Sebi, mentions in a recent report on Rajesh Exports that governance concerns should not be viewed in isolation. “Weaknesses in governance practices often act as early warning signals of deeper issues that may subsequently come to light.”

For a decade, SES flagged that the company’s auditors were appointed in violation of proper procedures. Yet the statutory auditors — first V. Sivasankar & Co., then P.V. Ramana Reddy & Co., and currently B.S.D. & Co. — never raised a single qualification, adverse remark, or disclaimer about the financial statements. The company brazenly continued to report massive revenues without scrutiny. Subramanian believes it’s not surprising: “There are enough and more CAs and auditors who are just one-man companies, one-person shows and not really doing their job.”

Last line of defence?

To understand how such a massive fraud went undetected, one must understand the framework designed to prevent it. According to Shailesh Haribhakti, well-known chartered account and governance expert, there are five lines of defence against corporate fraud: First, management responsibility; second, the maker-checker concept within the organisation; third, internal audit; fourth, statutory audit; and the last, the audit committee. “Beyond these five lines of defence, we have regulators and the government. All of them must work in concert to make sure fraud is prevented,” Haribhakti tells Fortune India.

At Rajesh Exports, at the outset there were no lines of defence, leaving the founder to go on the offence.

Yet there’s a silver lining in this dark cloud. Haribhakti believes the solution lies not in changing laws, but in deploying technology more aggressively. “We don’t need to change the law or regulation to prevent fraud. We just need to deploy technology vigorously, continuously, and in an objective, independent manner. So even if managements don’t do it, at the regulatory end, you can catch the red flags,” says Haribhakti.

He points to the success of India’s tax information network as proof of concept: “AI can flag out-of-pattern anomalies. This is how our tax information network has delivered massive results — multiple increments in tax collection as a multiple of GDP. It’s already happening,” points out Haribhakti.

The implication is clear. If regulators had deployed AI to scan financial statements of companies, the discrepancies could be flagged off in real time. Sebi is still preparing its final report. Criminal investigations may follow. But the question is whether Mehta will face personal prosecution or merely regulatory sanctions. What is also appalling is the silence of the state-owned insurer which has deployed small investors’ money. But that’s a story for another day.

For now, Rajesh Exports’ case marks a turning point. Sebi’s proactive forensic audit, initiated based on a shareholder complaint, demonstrates that regulatory aggressiveness is increasing. The days of large corporations assuming they can perpetrate massive frauds indefinitely may be shrinking.

While the interim findings have exposed fraud, the final judgment will determine whether the system can actually punish it.