IndusInd Bank Auditors Call for Forensic Investigation of Derivatives Portfolio
In a significant development that has sent ripples through India's banking sector, the joint auditors of IndusInd Bank have formally requested a forensic audit of the bank's derivatives portfolio. This comes after the discovery of serious discrepancies that could potentially impact the bank's net worth by 2.35% as of December 2024.
Auditors Push for Deeper Investigation
According to reliable sources within the bank, the joint auditors - MP Chitale & Co and MSKA & Associates - have written to the bank's board requesting a thorough forensic investigation of its derivatives operations. This development follows the bank's March 10 disclosure regarding certain irregularities in its derivatives portfolio.
In response to this request, the board has begun the process of selecting a top-tier firm to conduct the forensic audit. This comes at a critical time for the Hinduja Group-promoted private lender, which has already witnessed a staggering 50% market value erosion over the past six months.
Financial Impact and Market Response
The financial implications of these discrepancies are substantial. The bank has indicated that approximately ₹1,600 crore of the impact is likely to be reflected in its March quarter earnings. The market reaction was swift and severe, with the stock plummeting 27% on Tuesday following the disclosures - the largest single-day drop in the bank's history.
During an analyst call addressing these issues, IndusInd Bank's Managing Director and CEO Sumant Kathpalia confirmed that an external agency had been appointed to review the derivatives portfolio. The report from this review is expected by the end of the fourth quarter.
PwC's Ongoing Review
Sources indicate that PricewaterhouseCoopers (PwC) was appointed as the external agency to conduct an accounting review of the portfolio after the discovery of these issues. However, PwC's report has yet to be presented to the board.
According to management statements to investors, these discrepancies have persisted for the past five to seven years. "We began reviewing our internal trade book and noticed some discrepancies in our business, which were identified between September and October," Kathpalia explained to analysts following the disclosures to stock exchanges.
Leadership Changes Amid Crisis
In what appears to be related to these developments, the bank's Chief Financial Officer, Gobind Jain, resigned in January - just months after the discrepancies were first identified. While Jain cited plans to explore other opportunities, the timing has raised questions among market observers.
Following Jain's departure, Arun Khurana, the executive director in charge of global markets and transaction banking, was given additional responsibilities as CFO.
Audit History and Regulatory Oversight
Over recent years, multiple audit firms have reviewed IndusInd Bank's financial statements:
- Price Waterhouse (2015-16 to 2017-18)
- SR Batliboi & Co LLP (2018-19)
- Hari Bhakti & Co LLP (2019-20 to 2020-21)
- Hari Bhakti & MP Chitale (2021-22)
- MP Chitale and MSKA & Associates (2022-23 to present)
The Institute of Chartered Accountants of India (ICAI) is expected to review the bank's books after taking suo-motu cognizance of the accounting discrepancies. This adds another layer of scrutiny to the bank's financial practices.
Root Cause of Discrepancies
According to available information, the crisis stems from internal trades involving low-liquidity instruments, such as 3 to 6-year yen and 8 to 10-year dollar borrowings. Rather than directly hedging foreign currency borrowings and deposits with external counterparties, the bank utilized its internal desk for the hedging process.
While external trades were marked-to-market, the internal trades were valued using swap valuations. As a result, the two legs of the trade could fluctuate over the contract period but typically converge at maturity. This practice apparently prevented the bank from identifying the accounting errors for several years.
It was only after the Reserve Bank of India issued a new circular in September 2023 that the bank began a comprehensive review of its derivatives portfolio, which ultimately led to the identification of these discrepancies.
For retail investors holding IndusInd Bank shares, this development warrants close attention as the full financial impact and regulatory consequences continue to unfold.
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