What the Grant Thornton audit found at IndusInd Bank

Mumbai: Erstwhile deputy chief executive of IndusInd Bank Arun Khurana was well aware of the incorrect accounting of derivative trades that led to a ₹1,959 crore hole in its books, a forensic audit by accounting and consulting firm Grant Thornton found.

According to two people aware of the audit, during the probe, auditors found out that Khurana was aware of the fact that these trades were wrong. “The team went through email trails and saw that Khurana knew. There was an instance of him not paying heed to red flags raised by the finance department which found out about it,” one of the two people said on the condition of anonymity.

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The bank did not respond to an email seeking comments on the story. A call and a text message to Khurana remained unanswered as well. An email sent to Grant Thornton did not elicit a response.

Exit after report

Khurana, who had joined IndusInd Bank in November 2011 from the Royal Bank of Scotland, Singapore, resigned on 28 April, two days after Grant Thornton submitted its report.

The bank said on 20 March that it has appointed an independent professional firm to identify the root cause of the discrepancies, assess the correctness and impact of the accounting treatment of the derivative contracts, and establish accountability. Reuters reported three days later that IndusInd Bank had appointed Grant Thornton to conduct a forensic review into accounting lapses.

This report was submitted to the bank on 26 April. In an exchange filing on 27 April, the bank said that the report has pegged the cumulative adverse accounting impact at ₹1959.98 crore as on 31 March. It also said that the problem lay in “incorrect accounting of internal derivative trades” and that the report examined the roles and actions of key employees in this context.

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“When the audit team questioned some bankers at IndusInd Bank, their stories did not match. The team was trying to look for a rationale behind not accounting for the trades correctly and they were unable to answer,” said the person.

The findings of the audit team are in contrast to what Khurana told analysts on 10 March when the bank first disclosed these discrepancies. Answering a question about when these derivative transactions took place, Khurana said, “It's about a process that was put in place, which we realized now, based on this new framework that we had to adopt on 1 April”.

The framework referred to here refers to the norms issued in September 2023 under the RBI Master Direction - Classification, Valuation and Operation of Investment Portfolio of Commercial Banks (Directions). This came into force on 1 April, 2024.

“The Grant Thornton audit stops at finding out the hit on the bank and fixing accountability on people, while the rest is for the board to do,” the person said.

Fixing accountability

To be sure, the bank said on 27 April that the board is taking necessary steps to fix accountability for the persons responsible for these lapses and re-align the roles and responsibilities of senior management. After Khurana's exit on 28 April, chief executive Sumant Kathpalia resigned on Tuesday, stating he takes “moral responsibility."

Since 2013, IndusInd Bank has used a solution from global capital markets platform provider Calypso Technology for its derivatives trades. The bank had said in 2013 that it is looking to “fuel its ambitious growth plan by offering its customers sophisticated treasury products and providing them wider access to the markets.”

According to the person cited earlier, however, the internal hedges were not recorded by the lender, leading to a mismatch that blew up later.

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The Reserve Bank of India (RBI) on Wednesday allowed the IndusInd Bank board to constitute a committee of executives to run the bank after Kathpalia's exit.

Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital was surprised at the turn of events.

“The chairman is Sunil Mehta who, in fact, was appointed by the government on Yes Bank board when it became insolvent, in order to save and revive the bank. With such an illustrious pedigree of so many board members, it is surprising what has happened,” Ganapathy wrote to clients.

Others pointed to investor concerns. “We have observed growing investor concerns regarding near-term profitability and the strength of the balance sheet (assets and liabilities) amid these developments,” analysts at Kotak Institutional Equities wrote in a note to clients on Wednesday.

“However, it is important to note that similar situations have occurred in the recent past and many of these concerns have not materialized, except for a few instances (Yes Bank episode).”