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The Securities and Exchange Board of India (SEBI) has issued an interim order revealing that the management of IndusInd Bank was aware of discrepancies related to the accounting treatment of derivative contracts a significant 15 months before the information was disclosed to the exchanges. This revelation stems from SEBI's assessments, which pinpointed September 26, 2023, as the date when the bank's internal team first identified the incorrect accounting practices. The delay in disclosure has raised serious concerns regarding transparency and corporate governance within the bank, prompting regulatory scrutiny and potential repercussions for the involved parties. The investigation gained momentum after the bank, adhering to the Reserve Bank of India's (RBI) master direction, established an inter-department team to investigate the matter. The actual disclosure of the discrepancies finally occurred on March 10, 2025, a considerable time after the initial detection. This delay has led to a comprehensive inquiry by SEBI, focusing on potential insider trading activities and the dissemination of unpublished price-sensitive information (UPSI). As a result of their findings, SEBI has taken decisive action by barring several key individuals, including former MD & CEO Sumant Kathpalia, former Deputy CEO Arun Khurana, and three other individuals – Sushant Sourav, Rohan Jathanna, and Anil Marco Rao – from participating in the securities market. SEBI's interim order specifically prohibits these individuals from buying, selling, or dealing in securities, either directly or indirectly, until further notice. This action underscores the regulator's commitment to upholding market integrity and protecting the interests of investors.
SEBI's whole-time member, Kamlesh Chandra Varshney, emphasized the seriousness of the allegations in his interim order, stating that the restrictions imposed on the individuals are based on prima facie observations derived from the available records. The noticees have been granted a period of 21 days from the receipt of the order to file their replies or objections and to indicate whether they wish to avail themselves of an opportunity for a personal hearing. This procedural step ensures that the accused individuals have a fair chance to present their case and defend themselves against the charges. The investigation also delved into an email trail within the bank, which revealed that the then Chief Financial Officer (CFO), Arun Khurana, had informed the then CEO, Sumant Kathpalia, Head of Treasury Operations, Sushant Sourav, and Head of GMG Operations, Rohan Jathanna, about the discrepancies via email as early as November 2023. The email communications highlighted the CFO's concerns regarding the impact of derivative accounting on the bank's financial reporting. In one email, Khurana stated, "Enclosing my earlier email and yet to see the impact analysis of derivative accounting. Every six months we get big impact in proforma IndAS reporting." Another email from Khurana indicated that the bank had previously conducted an exercise with KPMG to assess the impact of IndAS on derivative accounting, further suggesting that the issue was not new and had been known within the bank for some time. This email evidence played a crucial role in SEBI's assessment of the timeline and the extent of awareness among the bank's senior management.
The preliminary examination conducted by SEBI also uncovered an email dated November 30, 2023, sent by the Head of Accounts to several employees, including Sushant Sourav, with a copy to Anil Marco Rao, Chief Administrative Officer (CAO)-Consumer Banking Operations. This email contained a figure of Rs 1749.98 crore, representing the impact of the discrepancy in account balances of the derivative portfolio. Given the date of the email and the preceding quarter ending September 2023, SEBI reasonably inferred that the figure pertained to the impact for that specific quarter. This finding further solidified the timeline of awareness and provided concrete evidence of the magnitude of the accounting issues. The investigation also focused on potential insider trading activities by the involved parties. SEBI's examination of emails shared by IndusInd Bank and KPMG revealed that Arun Khurana sold a total of 348,500 shares during the Unpublished Price Sensitive Information (UPSI) period while being in possession of the UPSI, without making any purchases during that period. Similarly, Sumant Kapthpalia sold 125,000 shares, Sushant Sourav sold 2,065 shares, Rohan Jathanna sold 2,000 shares, and Anil Marco Rao sold 1,000 shares. These transactions raised suspicions of insider trading, as the individuals appeared to have taken advantage of their knowledge of the undisclosed information to profit from the sale of their shares.
The impact of the delayed disclosure became evident when the information was finally made public on March 10, 2025. The share price of IndusInd Bank experienced a significant crash, plummeting by 27.165 percent from a closing price of Rs 900.60 on March 10, 2025, to a closing price of Rs 655.95 on March 11, 2025. This sharp decline in share price highlights the potential financial harm caused to investors who were unaware of the discrepancies and were holding the bank's stock. The value of Arun Khurana’s share sale amounted to Rs 52,98,58,371, Sumant Kathpalia’s share sale was worth Rs 19,17,03,566, Sushant Sourav's share sale totaled Rs 26,29,083, Rohan Jathanna’s share sale reached Rs 25,30,630, and Anil Rao's share sale was valued at Rs 14,50,826. The total loss avoided by these individuals through their share sales was estimated to be 27.165 percent, which translates to Rs 19,78,08,053. This figure represents the potential financial benefit gained by the individuals due to their alleged insider trading activities. SEBI's order emphasized that the insider trading conducted by the management, who possessed crucial price-sensitive information, resulted in notional losses for innocent investors who lacked equal access to the information. The regulator also highlighted that such actions can undermine the development of the securities market, as investors may lose confidence if such violations go unpunished. SEBI concluded that indulging in insider trading activities while being an insider and being in possession of UPSI amounts to committing fraud upon innocent investors and jeopardizing their interests, who did not have access to the material information. The regulator's actions serve as a strong deterrent against insider trading and underscore the importance of transparency and ethical conduct in the financial markets.
The SEBI investigation into IndusInd Bank's handling of derivative accounting discrepancies and the subsequent allegations of insider trading underscore the critical importance of timely and transparent disclosure in the financial sector. The regulator's decisive actions, including barring key individuals from the securities market and initiating further investigations, send a clear message that such misconduct will not be tolerated. The case also highlights the potential consequences of delayed disclosure, which can erode investor confidence and destabilize the market. The email trail uncovered during the investigation provides a detailed timeline of the events and reveals the extent to which the bank's senior management was aware of the discrepancies. This evidence played a crucial role in SEBI's assessment of the case and its decision to take action against the individuals involved. The financial impact of the delayed disclosure and the alleged insider trading is significant, with investors experiencing substantial losses and the individuals involved potentially benefiting from their actions. The case serves as a reminder of the need for robust internal controls and ethical conduct within financial institutions to prevent such incidents from occurring. SEBI's ongoing efforts to investigate and prosecute insider trading cases are essential for maintaining market integrity and protecting the interests of investors. The regulator's commitment to upholding transparency and accountability in the financial markets is crucial for fostering investor confidence and promoting sustainable economic growth. The IndusInd Bank case is likely to have a lasting impact on the bank's reputation and its relationship with investors and regulators. The bank will need to take significant steps to restore trust and demonstrate its commitment to ethical conduct and transparency. This may involve strengthening its internal controls, enhancing its disclosure practices, and implementing measures to prevent future incidents of insider trading. The case also serves as a cautionary tale for other financial institutions, highlighting the importance of prioritizing ethical conduct and ensuring that all disclosures are timely and accurate.
Source: IndusInd Bank management was aware of derivatives discrepancies 15 months before disclosure: SEBI