Bears arrived at IndusInd months before the bad news broke
The trading patterns in IndusInd Bank’s active futures contract since October, and the sudden build-up in cash market volumes more recently, appear to suggest that segments of the market may have anticipated something amiss much before the exit of the bank’s chief financial officer in January, and the surfacing of accounting lapses this week. A day after the bank informed stock exchanges about discrepancies in the derivatives portfolio on Monday, the bank’s stock tumbled a steep 27%. Interestingly, CEO Sumant Kathpalia said on Monday that the bank had identified the discrepancies in September-October, after which it appointed an external agency.
Since IndusInd Bank is listed on the derivatives segments of both NSE and BSE, investors can hedge, and traders who don’t own the stock can take positional buy or sell trades if they feel the stock could rise or plunge. IndusInd Bank’s most active futures contract (or front-monthfutures contract) since October-end shows a sharp build-up in outstanding or open positions as its stock began falling, indicating bearish sentiment build-up.
Open positions
To be sure, markets have corrected sharply since October, but the sharp surge in open positions of IndusInd was not seen in peers like Kotak Mahindra Bank or ICICI Bank, as per Bloomberg data.
Average open positions of the bank’s front-month contracts, which stood at 35,000-60,000 between March and October last year, shot up to more than 90,000 from November2024 to March 2025, data showed. This coincided with the average price of the active futures contract falling steadily from ₹1,296 in October to ₹877 in the current front month, which began from 28 February through 13 March.
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A fall in price accompanied by a rise in open position signals bearish sentiment as traders and investors short the contracts at higher levels. If open positions rise and stock prices fall, sentiment is bearish; and if open positions rise and the price rises, sentiment is bullish. If open positions fall and prices rise, a stock is nearing a top; and if open positions fall and prices fall, it is bottoming out. In the case of IndusInd, the open positions began rising sharply since October-end, and the prices began falling, which signals excessive bearish sentiment.
Short build-up
“The surge in futures contract open positions, accompanied by a sharp fall in IndusInd’s share, hints that the short build-up could have happened from October-end in anticipation of some development that could affect the share price,” said Rajesh Palviya, senior vice-president (derivatives & technical research) at Axis Bank.
Palviya added that it was for the exchanges and the Securities and Exchange Board of India (Sebi) to detect “anomalies” in trading patterns. A query sent to Sebi on the matter went unanswered. However, a person familiar with the development said that if there had indeed been unusual activity, alerts would have been triggered to the regulator’s surveillance department.
Interestingly,cash market data shows that trading volumes spurted to 55.7 million shares and delivery to 28.6 million shares on 28 February when the latest leg of the price fall began. The significance of the spurt in volumes and delivery is evident when compared with the average trading volume of 5.3 million shares and delivery volume of 2.5 million shares over the year through 13 March.
Futures ban
Such has been the volatility in the past few days that IndusInd Bank remains in a ban period for futures trading, as aggregate open positions stood at 150 million shares against permissible marketwide limit of 120.8 million shares as of Wednesday. Also, NSE has increased the client margin to trade the IndusInd Bank stock from 19.96% to 38.46% as a short-term surveillance measure.
Separately, Mint has learnt that the National Financial Reporting Authority (NFRA), India’s audit watchdog, noted shortcomings in some processes of MSKA & Associates, one of the bank’s auditors.
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“For the period under inspection, the firm could not provide sufficient evidence about its governance and management structure to demonstrate compliance with element 1 of SQC 1 regarding leadership responsibilities for quality within the firm,” NFRA said in a 2 January 2025 report, seen by Mint. Standard on quality control or SQC is meant to put in place standards for a firm’s quality controls.
To be sure, NFRA’s audit quality inspection was not specific to audits of IndusInd Bank.
Audit watch
The NFRA also found that the firm maintained audit files electronically in an online application of BDO called APT. The APT application allows the preparer and reviewer to sign off on audit work papers and the application supports multiple sign-offs by different or the same people, it said.
“The application allows for audit work paper’s (AWP) modification after signing off of AWP by the reviewer without mandating the modifier to sign-off after such modification. This fundamental flaw in the integrity of the documentation also leaves a possibility of including even a blank AWP which can be filled up and/or audit evidence can be attached at a later date without affecting the earlier signing-off date,” it added.
The bank’s management told analysts on 10 March that its treasury department, as per norms, continues to undergo multiple concurrent audits on an ongoing basis. The current issue did not throw up any visible gaps till a few months back.
Also read | Derivatives debacle: IndusInd Bank stock crumbles, investors panic
Analysts have also raised the issue of audits not being able to find these gaps. Analysts at CLSA in a note on 13 March pointed out that the recent accounting discrepancy was not reported by either the bank’s auditors or the RBI over the past five-seven years. However, according to a report in the Business Standard, the bank might have appointed an external agency in November to look at its derivatives portfolio, which it said might have been a result of a regulatory nudge.
Risk control
Experts said that external auditors are supposed to look at such transactions; however, these seem to have been certain complex internal transactions that their internal audit systems should have tracked down.
“I would blame the internal risk control systems of the bank and statutory auditor comes at a much later stage. Also, I do not think auditors would close their eyes if they had found something like this happening at the bank,” said Vijay Kapur, former director, the Institute of Chartered Accountants of India (ICAI).
Kapur added that it remains the matter of investigation into the role performed by the management, board, auditors or RBI,the regulator.
MSKA & Associates is a member firm of BDO. Emails sent to MSKA & Associates and to IndusInd Bank remained unanswered.
And read | IndusInd Bank flags lapses worth ₹1,530 cr in derivatives portfolio; stock sinks to 4-year low
