IndusInd Bank has been at the centre of financial turmoil following the revelation of discrepancies in its derivative portfolio, leading to a 2.35% reduction in net worth. This triggered a sharp decline in its stock price on Tuesday. We have covered it
here. The stock has been falling for a while, down 50% since September 2024, erasing more than Rs14,000 crore in market-capitalisation. While the Bank reassured investors of its capital adequacy, deeper scrutiny of its financial dealings, insider trading patterns, and regulatory compliance raises concerns about its governance and risk management practices.
An unsettling detail in the unfolding crisis is the pattern of insider share sales over the past two years. As highlighted by a Vikas Vij in his tweet -
According to NSE (NAtional Stock Exchange) insider trading data—between May 2023 and June 2024, key executives at IndusInd Bank engaged in significant share sell-offs. Chief executive officer (CEO) Sumant Kathpalia reduced his shareholding from 0.09% to 0.01%, selling shares worth approximately Rs133 crore, while deputy CEO Arun Khurana sold shares worth Rs74 crore, reducing his stake from 0.06% to 0.01%. These transactions, occurring over multiple open market deals, indicate a continuous offloading pattern.
During the same period, foreign institutional investors (FIIs) aggressively reduced their stake from 40.3% in March 2024 to 24.7% in December 2024, potentially decreasing further in early 2025. This relentless offloading by foreign investors suggests a loss of confidence well before the recent derivative crisis came to light.
However, domestic institutional investors (DIIs) took the opposite approach, aggressively buying IndusInd Bank shares during the same period. DIIs increased their holdings from 28.6% to 42.8%, essentially absorbing the shares sold by FIIs. The question looms large: Did DIIs knowingly or unknowingly buy into a deteriorating financial story while FIIs and insiders cashed out?
Several prominent mutual funds hold significant stakes in IndusInd Bank, exposing retail investors to potential losses. A list of mutual funds which hold IndusInd Bank as of February 2025 is given below:
Source: ICRA MFI 360
Among the top-25 mutual funds, based on percentage of net asset under management, seven Quant Mutual Funds schemes have substantial exposure to Indusind. These significant holdings indicate that a considerable portion of retail investor funds are tied to IndusInd Bank, amplifying the impact of the stock's decline. Market values-wise, largest exposures include:
- HDFC Mid-Cap Opportunities Fund: Rs913.47 crore
- ICICI Prudential India Opportunities Fund: Rs856.23 crore
- HDFC Large Cap Fund: Rs611.69 crore
- Mirae Asset Large Cap Fund: Rs427.68 crore
- SBI Contra Fund: Rs415.84 crore.
The core issue behind the recent financial hit lies in IndusInd Bank’s handling of NRI (non-resident Indians) deposits and forex derivative trades. The Bank aggressively pursued NRI deposits which reached Rs58,600 crore by Q3FY24-25 growing 39% y-o-y. However, the bank’s hedging process, involving complex internal and external derivative trades, led to accounting mismatches, according to a post on twitter by Krishna Appala
A senior central banker speaking on condition of anonymity, told Moneylife “Derivative- synthetic ones with internal desk instead of hedging them in open market is a serious thing. Any one profit center within the balance sheet affects the whole bank as you have not outsourced the risk. This is RBI, s terrain. How inspectors have missed it is perflexing- lapse in supervision. Simple trading desk risk mitigation test would have brought it out. Cashing out ESOPs is SEBI& RBI domain.”
The Reserve Bank of India (RBI) issued a circular in September 2023, mandating discontinuation of internal derivative trades from April 2024. This triggered the discovery of discrepancies in IndusInd Bank’s books. Consequently, an external agency was engaged to independently assess the impact, with the final report pending.
In parallel, leadership concerns emerged RBI extended CEO Sumant Kathpalia’s term for only one year, instead of the three-year renewal sought by the Bank. While Mr Kathpalia acknowledged RBI’s awareness of the issue, he expressed uncertainty about the regulator’s reservations regarding his leadership.
The management confirmed that the Rs500 crore post-tax impact would be recorded as an extraordinary loss in the Q4FY24-25 profit & loss statement rather than adjusted against reserves. The uncertainty surrounding the full impact of the derivative discrepancies, along with ongoing external audits, has fuelled fears among investors.
Despite management’s reassurances that the Bank’s profitability and capital adequacy remain robust, questions linger. The Bank reported a capital adequacy ratio (CRAR) of 16.46% as of Q3FY24-25, well above RBI’s 11.5% requirement. However, if systemic issues extend beyond the reported Rs1,529 crore hit, further corrections could destabilise the financial outlook.
There are fears that IndusInd Bank’s crisis may not be an isolated incident. With RBI tightening regulatory oversight on derivatives and investment portfolios, other banks could face similar scrutiny. The reliance on complex hedging structures and internal derivative trades may expose more financial institutions to unforeseen risks. The episode also raises critical governance questions. The pattern of insider sales and foreign investor exits preceding the crisis suggests that key stakeholders were aware of underlying risks well before the public disclosure. Meanwhile, domestic institutional investors—primarily mutual funds—were left holding the bag, raising concerns about the due diligence conducted before accumulating large stakes in the Bank. The Bank is now awaiting an external review to assess the full extent of its derivative discrepancies. The management insists the issue is a one-time correction and does not impact the bank’s broader financial stability. However, investors remain skeptical, and regulatory scrutiny is expected to persist.
For depositors, there is little immediate risk. With a balance sheet size of Rs5.5 lakh crore, deposits of Rs4 lakh crore and ample liquidity reserves of Rs1.8 lakh crore in liquid assets, covering 45% of deposits, the Bank appears well-capitalised to absorb the impact. However, the long-term consequence, including reputational damage, has been severe.
the bank, nor the RBI nor SEBI nor DIIs. It is not an isolated case. As usual there will be a commission of enquiry and all the culprits will be given a clean chit. The entire loss will be borne by the foolish common man.