IndusInd Bank's CEO Resigns following a blunder in derivative account management
Here's the lowdown on the IndusInd Bank crisis:
Sumant Kathpalia, the MD and CEO of IndusInd Bank, has tendered his resignation, taking full responsibility for errors found in the bank's derivative portfolio that led to a substantial decrease in net worth. His exit follows that of the bank's Deputy CEO Arun Khurana and CFO Govind Jain, who departed earlier.
The bank's board is now seeking approval from the Reserve Bank of India (RBI) to establish an interim "Committee of Executives" to take over the CEO's duties until a permanent replacement is found.
The accounting error disclosed on March 10 has resulted in a loss of around Rs 2000 crore. The departures of key executives and the sale of shares worth Rs 157 crore by them in the past two years have come under the spotlight.
Amid the chaos, RBI reportedly advised Kathpalia and Khurana to step down after the accounting issue surfaced. The regulator allegedly raised concerns over lapses in oversight and internal controls within the bank's treasury operations.
It's worth noting that Kathpalia was appointed as MD and CEO in March 2020. He succeeded Romesh Sobti, who had led the bank for over a decade. Prior to this, Kathpalia had managed the bank's consumer banking division and had joined IndusInd in 2008, alongside Sobti and others.
An internal review conducted by the bank revealed discrepancies in the accounting of losses on forex derivatives/swap transactions executed over the past 5-7 years to hedge forex deposits/debt. These discrepancies, which were not recognized through NII (net interest income), have been identified as the root cause of the problem.
As per RBI directives on investments issued in September 2023, banks are prohibited from conducting internal trades/hedging. IndusInd Bank had ceased internal trades from April 1, 2024, however, lapses were found in the accounting of losses prior to this date.
Insights:- The discrepancies in IndusInd Bank's derivative portfolio were identified as early as December 2022, and the bank's senior management, including the CEO and Deputy CEO, were aware of them.- SEBI has barred five senior officials, including the former CEO, Deputy CEO, and three others, from buying, selling, or dealing in securities, and has frozen their gains pending further orders in light of insider trading allegations.- The bank's stock price plummeted by 27% following the disclosure, triggering a Securities and Exchange Board of India (SEBI) investigation.- The situation remains under regulatory scrutiny, with both the bank and SEBI striving to address accountability and restore investor confidence.
The ongoing crisis at IndusInd Bank is causing ripples in the banking-and-insurance industry, as authorities investigate claims of lapses in oversight and internal controls within the bank's treasury operations, potentially impacting the finance sector's reputation. With the RBI reportedly advising the resignation of key executives and ongoing scrutiny, it remains to be seen how this business debacle will affect IndusInd Bank's future operations and the broader industry's relationships with investors.
