Shares of IndusInd Bank Ltd soared 3% on 2 May after the Securities and Exchange Board of India (SEBI), the stock market regulator, found no wrongdoing of insider trading against the company’s executives. 

The markets regulator has also found all disclosures in place following the news that improper derivative trading accounting resulted in a deficit of nearly Rs 1,960 crore in the bank’s books.

Sebi sought information from IndusInd Bank on the trades made by CEO Sumant Kathpalia and deputy CEO and executive director Arun Khurana before they resigned. Given the price-sensitive information possessed by the two, Sebi found no illegality in the data supplied to them by the bank. The trades were completed after the couple vested their Employee Stock Ownership Plan (ESOP) and after making the necessary disclosures, according to the source.

According to market documents, Kathpalia sold almost 9,50,000 shares for over Rs 134 crore between May 2023 and June 2024, while Khurana sold 5,50,000 shares for Rs 82 crore.  According to the article, the shares were part of IndusInd Bank’s employee stock ownership scheme.

The ESOP transaction occurred in the context of a September 2023 RBI circular stating that all derivatives should be market-to-market (MTM), which requires valuing assets and liabilities at the current market rates. It became effective on 1 April 2024.

In an interview, Kathpalia stated that IndusInd Bank will no longer use differential accounting rules to hedge foreign currency borrowings beginning 1 April 2024. He stated that the bank discovered the accounting irregularities in October 2024 and conducted an external examination through PricewaterhouseCoopers.

An inquiry by accounting firm Grant Thornton revealed that Khurana had overlooked red flags and warning indicators regarding the erroneous accounting of derivatives, which resulted in significant losses for the bank.

Khurana, the deputy CEO, resigned two days after Grant Thornton’s damaging report was presented, and CEO Kathpalia quit a day later, accepting “moral responsibility” for the catastrophe in his departure letter.

As per an exchange filing, Khurana wrote in his resignation letter, “Considering the recent unfortunate developments, wherein the Bank determined an adverse accounting impact on P&L, on account of incorrect accounting for internal derivative trades, I having oversight of the Treasury Front office function, as the Whole Time Director, Deputy CEO and a part of senior management of the bank, hereby resign, effective immediately.”

In his resignation letter the day after, Kathpalia said, “I undertake moral responsibility, given the various acts of commission/omission that have been brought to my notice.”

At 11:49 am, the shares of IndusInd Bank were trading 1.29% higher at Rs 849.25 on NSE. 

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