IndusInd's Forex Fiasco

Throughout the past week, IndusInd bank has been in the news for an accounting discrepancy to the tune of around Rs. 1600 crores (about 2.35% of its net worth). This new comes amidst other developments such as resignation of the CFO in January and RBI's approval for extension of the CEO's term for 1 year vis-à-vis the requested period of 3 years.  

1. The Accounting Discrepancy

In simple terms, the bank entered into two types of foreign exchange transactions, one being deposits from NRI's (external transaction) and the other being foreign currency swaps (internal transaction) to hedge the foreign currency risk of the first transaction. If done properly, the impact of forex variation in both these transactions should cancel out each other, except, in this case it didn't. The reason for this lapse and what went wrong would soon be in the public, as the Bank has already appointed PwC for an accounting review. This Financial Express article has explained in detail how this discrepancy might have occurred.

2. Company's statement

After the disclosures were made to the stock exchanges, MD & CEO Sumant Kathpalia in an address to analysts said, "We began reviewing our internal trade book and noticed some discrepancies in our business, which were identified between September and October". This discrepency will be accounted for in the quarter ending 31st March 2025 upon the findings of PwC on the exact quantum of losses to be booked.

Ashok Hinduja, group chairman and promoter of the Bank, stated that the bank's financial health is stable and highlighted his confidence on the bank's leadership. 

3. Auditor's requests

Economic Times has reported that the joint auditors of IndusInd Bank, M.P. Chitale & Co. and MSKA & Associates (member firm of BDO International) have requested the Board for a forensic audit of the derivatives portfolio. Forensic Auditing encompasses examining of individual or company financial records as an investigative measure that attempts to derive evidence suitable for use in litigation.

4. ICAI might review

The Institute of Chartered Accountants of India's Financial Reporting Review Board (FRRB) has an authority to carry out suo moto review in 'Cases where serious accounting irregularities in the financial statements are reported in media'. FRRB conducts the review of financial statements of companies to assess compliance with standards related to accounting, auditing and various regulations of the Companies Acts and laws relevant to the company. President of the ICAI, CA Charanjot Singh Nanda told PTI that the ICAI-FRRB may take a review of financial statements of IndusInd Bank.

5. Stock Performance

                                                  

The share has undergone a sharp decline following the filings with the exchanges. More than 35% decline in the share price has led NSE to put it under the short term additional surveillance measure  - Stage 1. Most brokerages have downgraded the stock and revised the target prices (resource).

6. Closing perspective

The banking sector in India has had it's fair share of irregularities, frauds and misstatements. IndusInd is yet another example of lack in corporate governance (evident in exit of CFO) and regulatory oversight. Although we can't deny that the very reason why this mistake was uncovered was due to the RBI's new rules to re-examine derivative transactions, it is also true that their conception have been a couple of years late. 

Furthermore, ICAI / NFRA's inspection might also highlight lapses in audit and there is an urgent need  that the regulatory landscape of our country continues progressing to evolve and protect the investor confidence and trust in the markets and the economy at large.

Naman B. Shah