On March 10, 2025, IndusInd Bank—a well-known private bank in India—made a shocking announcement. It had been quietly accumulating financial losses for years, and only now, under pressure from a new Reserve Bank of India (RBI) directive, was it telling the public. The total hit? Nearly Rs 1,960 crore in losses, and a significant fall in its net worth.
Following the disclosure the board appointed Grant Thornton to conduct a forensic audit of the accounting and compliance lapses linked to internal derivative trades. On April 26, 2025, Grant Thornton submitted its forensic audit report to the bank’s board, revealing a series of alarming findings.
The audit is reported to have uncovered serious accounting discrepancies in the bank’s internal derivatives portfolio. In addition, the audit report indicated that IndusInd Bank’s Managing Director and CEO, Sumant Kathpalia, and Deputy CEO, Arun Khurana, had sold large number of bank’s shares during periods when they were reportedly aware of the accounting irregularities, but prior to the public disclosure of this information – thereby raising concerns regarding potential violations of insider trading regulations.
In the aftermath of the audit findings, Arun Khurana resigned on April 28, 2025, with immediate effect. Just a day later, on April 29, Sumant Kathpalia also resigned, citing “moral responsibility” for the serious accounting and reporting lapses.
The above events are another instance of serious failure of corporate governance—the system by which companies are directed and controlled to ensure transparency, fairness, and accountability to shareholders, regulators, and the public.
What Exactly Happened?
IndusInd Bank was involved in derivatives trading—complex financial contracts that banks often use to manage risk. There were two kinds of these trades:
1. External trades – done with outside parties like other banks or market participants.
2. Internal trades – done between different departments within the bank.
Here’s where things went wrong:
1. External trades were accounted for using a method called mark-to-market (MTM). This means the bank updated its books daily to reflect the true market value—recording gains or losses in the profit and loss account right away.
2. Internal trades, however, were treated differently. Gains and Losses from these trades did not immediately show up in the bank’s profit-and-loss account. Instead, using accrual accounting, they were hidden in the balance sheet as assets like “receivables” or “intangibles”.
This gave investors and regulators the false impression that the bank was doing better than it really was as the gains on the external trades were recognized as profit while the losses on the internal trades stayed hidden in the balance sheet.
In September 2023, the RBI revised regulations – whereby it required all derivative trades—internal or external—to be marked to market starting April 1, 2024. That meant IndusInd Bank could no longer delay reporting the losses on its internal trades.
What is Insider Trading?
Insider trading occurs when someone uses confidential, market-sensitive information to buy or sell securities before the public becomes aware of that information. SEBI’s definition of an “insider” includes directors, employees, and anyone with direct or indirect access to Unpublished Price Sensitive Information (UPSI), that is, any non-public information relating to a company or its securities that, if disclosed, is likely to materially impact the price of those securities.
The Securities and Exchange Board of India (SEBI), under its Prohibition of Insider Trading (PIT) Regulations, 2015, strictly prohibits trading in securities by insiders who possess UPSI. Trades executed by such individuals while in possession of UPSI are presumed to be influenced by the information they hold.
Were the Episodes Governance Failure?
Corporate governance ensures that companies are run honestly, that investors are not misled, and that internal controls work properly. In IndusInd Bank’s case, several red flags suggest that the system broke down:
1. Inconsistent Accounting Rules: Different departments used different accounting methods—something that goes against best practices.
2. Delaying Bad News: Instead of disclosing the impact of the change in the regulation as early as possible—when the Bank reported its quarterly numbers—in June, September, or December 2024—the bank waited until March 10, 2025, to disclose the losses.
3. Weak Oversight: These issues went undetected (or unchallenged) for several years, suggesting that internal audit team, external auditors, and the Audit Committee of the Board were either unaware or accepted the practice.
4. Insider Trading: As reported the forensic audit concluded that the trading in the Bank’s shares by the CEO, and the Deputy CEO occurred while they were aware of the negative impact of the accounting irregularities on the Bank’s financials before disclosure to public.
Did the Board and Audit Committee Do Enough?
While the board’s decision to commission a forensic audit was a necessary and timely step, questions remain about its earlier oversight and the effectiveness of the Audit Committee. It’s possible the board was blindsided by management. However, to assess whether the Audit Committee fulfilled its responsibilities, a sequence of questions must be answered:
1. Did the management inform the Audit Committee about RBI’s 2023 changed regulation on accounting for internal derivatives trading?
If this information was withheld until late in the fourth quarter of FY 2024-25—shortly before the public disclosure on March 10, 2024—then the committee was deprived of vital regulatory context.
2. If the Committee was informed earlier, did it ask how the new RBI rule would affect the bank’s financial statements and disclosure obligations?
An informed and vigilant Audit Committee would be expected to evaluate regulatory impact proactively.
3. Did the Audit Committee seek the opinion of the statutory auditors on the implications of the new rule?
If it failed to do so, it raises concerns about insufficient vigilance. If it did consult them, then the next key issue is:
4. Did the auditors flag the financial implications of the new RBI regulation?
The absence of such a red flag would suggest a lapse not only at the management and board levels but also in the external assurance function.
5. How has the board responded to the potential insider trading by the CEO and the Deputy CEO identified by the forensic audit?
Action should be taken against the top executives despite their resignation from the Bank, if they are indeed guilty of trading in shares of the Bank while in possession of UPSI.
Establishing the answers to these questions is crucial in determining where the governance process failed and who bears responsibility—whether it lies solely with management or extends to the Audit Committee, the statutory auditors, and the board.
Conclusion: Why It Matters to All of Us
This isn’t just a story about one bank’s missteps. It highlights a deeper issue in India’s corporate landscape: governance structures that exist on paper but fail in practice.
For corporate governance to work:
1. Management must be transparent and share all relevant information and implications with the board.
2. Auditors must be diligent and ensure full and timely disclosures.
3. Boards must ask hard questions and not blindly trust the management and the auditors.
4. Regulators must act swiftly against the management, the board, and the auditors, if they are found either derelict in their duties or in violation of regulations.
The IndusInd Bank case is a wake-up call. When the system works, it builds trust. When it doesn’t, it hurts investors, erodes public confidence, and weakens the financial system. SEBI and RBI must investigate to determine what went wrong in the functioning of Indusind Bank and make the outcomes of their investigation public.
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