Weeks after IndusInd Bank disclosed accounting lapses and losses of nearly Rs 2,000 crore in its derivatives portfolio that triggered a rout in its shares, the bank’s Managing Director & CEO Sumant Kathpalia resigned with effect from Tuesday.
The board of the bank has sought the Reserve Bank of India’s approval to constitute a “Committee of Executives” to discharge the duties, roles and responsibilities of the CEO for an interim period until a permanent CEO is appointed by the bank, it said in an exchange filing.
“I undertake moral responsibility, given the various acts of commission/ omission that have been brought to my notice. I would request that my resignation be taken on record at close of working hours today,” Kathpalia said in his letter to the bank’s board.
On Monday, Bank announced the resignation of deputy CEO Arun Khurana.
While the bank initially sought to shift the blame to the Reserve Bank of India’s change in rules relating to the derivative portfolio and the loss from the derivative book remained unresolved for a long time, leading to the accumulation of losses, subsequent inspection by the central bank and external auditing firms found that the top brass did not act on time to limit the losses and clean up the mess. Two audit firms were involved in this task on separate occasions in 2024, sources ndicated, but they failed to generate a report citing inability to get critical information.
The RBI’s own team is then learnt to have stepped in in February. After it crystallised the findings, the Bank then had to go public with the issue.
Another external audit agency was then involved, which has been mandated with the accounting and forensic audits. The involvement of people within the bank has been bracketed into three categories — participants; witnesses who could have acted but did not act; and bystanders. Action against involved people is anticipated to be taken by the Board in the coming days.
Amid the derivative loss issue, the exit of the bank’s CFO Gobind Jain earlier and the decision of CEO Sumant Kathpalia and Deputy CEO Arun Khurana to sell shares worth Rs 157 crore in the last two years have come into the spotlight.
On March 10, IndusInd Bank disclosed that an internal review of its derivative portfolio revealed a on its net worth. This will have an approximate impact of Rs 2,000 crore on the bank, the management said.
As per RBI directives on investments issued in September 2023, banks are prohibited from conducting internal trades/ hedging and, accordingly, IndusInd Bank too ceased internal trades from April 1, 2024. However, during an internal review, the bank identified certain discrepancies where accounting of losses on forex derivatives/ swap transactions executed prior to April 2024 (over the past 5-7 years) to hedge forex deposits/ debt were not recognised through NII (net interest income), while the corresponding treasury gains were recognized in the P&L (profit and loss account). Derivatives are used by the treasury department to convert forex deposits/ borrowings into the rupee.
Did RBI prompt the bank for the disclosure?
According to banking sources, it is probable that the bank was aware of the scale of the issue long before they claimed to have discovered it, and that the disclosure was prompted by the RBI. The bank’s handling of internal trades and accrued interest differential has raised questions, as it appears that these transactions were not fully unwound on a daily basis. As a result, the loss accumulated over time instead of being adjusted gradually. This is a likely breach of accounting norms.
The fact that a significant gap in the balance sheet went unnoticed for an extended period is surprising, given that all foreign exchange trades and positions are fully recorded on a central system by the treasury and finance department. It is intriguing that the bank was unaware of holding a risky position at any given time, as this information is readily available on the central system.
Did IndusInd Bank’s CEO and Deputy CEO sell their stake?
IndusInd Bank’s CEO Sumant Kathpalia and Deputy CEO Arun Khurana sold shares worth Rs 157 crore in 2023 and 2024, according to data from the Bombay Stock Exchange (BSE). The data reveals that Kathpalia sold approximately 950,000 shares, valued at Rs 134 crore, between May 24, 2023, and June 25, 2024. During the same period, he purchased 396,000 shares worth Rs 34 crore. Similarly, Khurana sold 550,000 shares for Rs 82 crore over 2023-24, while acquiring 238,000 shares worth Rs 25 crore.
Why did the CFO quit in January and the CEO term was cut short?
The sudden departure of the bank’s CFO Gobind Jain on January 17, 2025 came ahead of the bank’s disclosure on the losses, raising questions about the serious lapses in its derivatives book. Jain put in his paper “to pursue other professional opportunities”, the bank said in an exchange filing.
On the other hand, IndusInd Bank received the Reserve Bank of India’s approval on March 7 – three days before the disclosure of the derivative losses — to reappoint Sumant Kathpalia as its MD and CEO for just one year, from March 24, 2025, to March 23, 2026. In September last year, IndusInd Bank’s board of directors had recommended a three-year term for its MD & CEO.
