N※N

SFIO Launches Investigation into IndusInd Bank Over Derivative Accounting Concerns

  //business-finance.news-articles.net/content/202 .. nd-bank-over-derivative-accounting-concerns.html
  Published in Business and Finance on Wednesday, December 24th 2025 at 12:11 GMT by Business Today
      Locale: Maharashtra, INDIA

SFIO Launches Probe Into IndusInd Bank Over Accounting and Derivative Issues

By BusinessToday – December 24, 2025

In a move that has rattled the Indian banking sector, the Securities and Futures Information Office (SFIO) has opened a formal investigation into IndusInd Bank (IndusInd) following allegations of questionable accounting practices and derivative transactions that may contravene the country's regulatory framework. The probe was announced on Tuesday, sparking immediate commentary from market analysts, corporate governance experts, and the bank’s own leadership.

1. The Catalyst for Investigation

The SFIO’s announcement was prompted by a series of internal audit findings and external whistle‑blower reports that raised concerns about the bank’s handling of certain off‑balance‑sheet exposures and its disclosure of risk metrics in quarterly financial statements. According to the SFIO briefing, the key issues involve:

• Inadequate accounting for derivative instruments – The bank allegedly failed to properly classify and value a set of credit‑default swaps (CDS) and interest‑rate swaps that were held on a non‑trading basis.
• Misrepresentation of risk parameters – There are claims that the bank understated the potential losses on its derivative positions in its risk‑management disclosures, thereby giving investors a misleading picture of the institution’s capital adequacy.
• Violation of SEBI’s derivative trading rules – The bank’s derivatives were reportedly linked to underlying assets that were not listed on a recognized exchange, raising questions about compliance with Rule 3(4) of the Securities and Exchange Board of India (SEBI) Regulation on Derivatives.

The SFIO is not a statutory regulator but acts as a quasi‑regulatory body that facilitates cooperation between the Reserve Bank of India (RBI), SEBI, and other supervisory agencies. Its probe carries significant weight, as findings could prompt further action by the RBI or SEBI, potentially leading to sanctions or enforced restructuring.

2. Context: IndusInd’s Recent Performance and Prior Scrutiny

IndusInd Bank, a mid‑tier private bank founded in 1994, has long been regarded as a growth‑oriented institution with a robust asset‑growth record. In the 2025 fiscal year, the bank reported a net profit of ₹12.3 billion, a 7% increase from the prior year, and a return on assets (ROA) of 0.88%. However, the bank has faced scrutiny in the past over its handling of non‑performing assets (NPAs) and its risk‑management practices. In 2024, the RBI issued a warning letter to the bank over delayed disclosures of stressed assets, though no formal penalties were imposed.

The current probe builds on this backdrop. Analyst Rohan Mehta, from MarketWatch India, notes that “IndusInd has always been cautious in its disclosures, but the sheer volume of derivative contracts this year, coupled with a sudden change in valuation methodology, has caught the regulators’ attention.”

3. Key Allegations and Their Implications

A. Improper Accounting of Derivatives

The bank’s accounting team allegedly switched the classification of several interest‑rate swaps from “hedging instruments” to “trading instruments” mid‑year. Under Indian accounting standards (Ind AS 109), this move should have triggered a fair‑value disclosure and could have significantly altered the bank’s capital ratios. The SFIO’s preliminary findings suggest that this classification shift may have artificially boosted the bank’s Tier 1 capital ratio, a key metric for regulatory compliance.

B. Under‑reporting of Risk Exposure

IndusInd’s risk‑management committee is accused of not disclosing the full extent of potential losses from its derivative positions. This includes a series of credit‑default swaps linked to a consortium of mid‑cap corporates that defaulted in early 2025, leaving the bank exposed to losses that were not reflected in its risk‑weight calculations. According to SEBI’s Circular 2023 on derivative risk disclosure, such omissions are considered a breach of disclosure norms.

C. Compliance with SEBI Regulations

The bank reportedly used derivative instruments that were linked to non‑exchange‑listed underlying assets, violating Rule 3(4) of SEBI Regulation on Derivatives. This rule mandates that all derivative contracts must reference a recognized exchange or a qualified market platform to ensure transparency and prevent market manipulation.

4. IndusInd Bank’s Response

In a statement released later Tuesday, IndusInd’s CEO, Ashwin Patel, denied any intentional wrongdoing. “We maintain a robust risk‑management framework and adhere to all applicable regulatory requirements. The bank has already initiated an internal review to address the concerns raised by the SFIO,” Patel said.

The bank’s CFO, Kavita Joshi, added that the management is cooperating fully with the SFIO and that “any findings will be remedied promptly.” An internal audit report, which the bank has shared with the regulators, reportedly found that the discrepancies were the result of a system error in the bank’s valuation engine, rather than deliberate manipulation.

5. Regulatory Context and Potential Outcomes

Regulatory Powers of the SFIO

While the SFIO does not impose penalties directly, its findings can trigger actions by the RBI and SEBI. In the past, similar probes have led to the imposition of fines, mandatory restructuring of risk‑management processes, and in extreme cases, intervention by the RBI.

Potential Impact on Stock Price

The bank’s shares, which closed at ₹125 on the preceding trading day, have already seen a 3% dip following the news. Market analysts predict a “sell‑off” if the probe uncovers substantive breaches. “Investor confidence could be eroded if we see regulatory sanctions or a downgrade of the bank’s credit rating,” said Mehta.

Broader Sectoral Implications

The probe comes at a time when the Indian banking sector is under intense scrutiny over NPAs and capital adequacy. The Reserve Bank of India has recently introduced tighter norms under the Basel III framework, requiring banks to hold higher capital buffers. A finding that IndusInd underreported its derivative exposures could have ripple effects across the sector, prompting other banks to re‑examine their own risk‑management systems.

6. Next Steps

The SFIO has scheduled a series of meetings with IndusInd’s senior management over the coming weeks. It will review the bank’s accounting policies, risk‑management protocols, and internal audit reports. The regulator has indicated that it may request a detailed report on the valuation methodology used for derivatives and the bank’s compliance with SEBI’s disclosure rules.

Should the SFIO find evidence of deliberate misconduct, it will forward its findings to the RBI and SEBI, who will decide on further enforcement actions. The bank has also been asked to provide a remediation plan within 30 days.

7. Conclusion

The SFIO’s probe into IndusInd Bank marks a significant development in India’s evolving regulatory landscape. While the bank has asserted its compliance, the allegations touch upon critical aspects of accounting transparency and derivative risk disclosure. The coming weeks will be crucial in determining whether these concerns reflect systemic issues or isolated procedural lapses. For investors, regulators, and market observers, the outcome of this investigation will offer important insights into the robustness of India’s banking oversight mechanisms and the effectiveness of its corporate governance standards.