RBI Is Not Yet Done With IndusInd Bank

On Friday, during the monetary policy committee press conference, Reserve Bank of India Governor Sanjay Malhotra said that the events at IndusInd Bank do not pose any serious systemic risk. RBI leadership also clarified that the bank’s managing director and chief executive officer had taken a moral stand and resigned after financial irregularities were described at the bank.

“The MD & CEO has resigned, and it says so for taking moral responsibility. So, I thought that should be good enough,” Malhotra said.

This led to a sharp positive move in the IndusInd Bank Ltd. stock, which closed 2.5% higher at Rs 823.20 a share.

People aware of the RBI’s thinking tell NDTV Profit that the IndusInd Bank issue is not yet closed. According to the people, the bank’s board is currently working on specific instructions of the banking regulator, even as RBI is yet to take a call on the culpability of the board.

The regulator has not gone through the Grant Thornton investigation report, the people said. If RBI finds evidence that the board knew of the events at the bank and did not act appropriately, it would take further action.

Currently the central bank is awaiting the outcome of the investigation by the Securities & Exchanges Board of India. The markets regulator said that it was investigating insider trading allegations at the bank, and five people responsible for such trades were already identified. Separately, NDTV Profit learns that SEBI is investigating other issues as well, other than the insider trading case.

On Friday SEBI issued a corrigendum in the IndusInd Bank interim report, where it had originally made a reference to a “board note” with respect to the appointment of KPMG to investigate derivative accounting in Feb 2024. This had led to confusion over the board’s role in and its knowledge of the issue.

SEBI’s corrigendum stated that the reference to the “board note” would be replaced with “engagement note”, which was signed by the bank’s CFO, its CEO and Deputy CEO.

The interim order also named Chief Administrative Officer Anil Rao as one of the five people who allegedly indulged in insider trades. Questions were raised about Rao’s eligibility to continue as one of the two executives who were currently running activities at the bank in the absence of a CEO.

While Rao is named in the order, the magnitude of the trades he undertook was very small, and he traded them much after CEO Sumant Kathpalia and Deputy CEO Arun Khurana, the people who quoted above said. The banking regulator therefore did not find him ineligible to manage affairs at the bank currently.

Questions were also raised about why RBI had not appointed an additional director on IndusInd Bank’s board while a new CEO was still being finalised.

Typically when a bank undergoes a contentious transition at the top, the regulator appoints an additional director on the board.

According to the people quoted above, RBI does not currently feel the need to appoint an additional director on IndusInd Bank’s board.

The regulator appoints additional directors only when it finds limited visibility in the board’s activities, the people quoted above said. In IndusInd Bank’s case, the board’s activities were fully being guided by the regulator, and therefore an additional director may not be necessary, the people said.

IndusInd Bank promoters Hinduja Group had issued a statement last month, reposing faith in the bank’s board. At the time, the Hinduja Group had also said that it was prepared to further infuse capital in the lender.

While promoter shareholding is limited to around 15%, Hinduja Group has received an in-principle approval to raise the stake to 26%. A final approval is not yet cleared by the regulator.

According to the people quoted above, the regulator had asked promoters to be completely hands-off in the IndusInd Bank situation since the accounting gaps came to light. While the regulators might be talking to potential investors to shore up its capital, any investment into the bank will need specific approvals. So far the promoters have not approached RBI for any such approvals, the people quoted above said.