Earlier, chief executive officer (CEO) Sumant Kathpalia got a one-year extension from the banking regulator instead of three, and he pointed to the derivatives issue as probable cause for not being given a three-year term.
On Monday, the Hinduja group-promoted bank said it has appointed an external agency to investigate the derivatives lapse while keeping the Reserve Bank of India (RBI) in the loop. The bank had said in its December quarter presentation that its treasury has the “best-in class risk management system”.
Ashok Hinduja, chairman of IndusInd International Holdings, told Mint over phone, “Let me provide some confidence as far as the promoter is concerned, and I have told the market and investors that our full support is there, like it always has been in the past.”
Analysts pulled no punches. “Trust is a crucial part of any investment thesis, and it may take some time to rebuild this trust and make the stock investable again,” analysts at Kotak Institutional Equities wrote in a note on 11 March. “While the financial impact of the discrepancy might be minimal, the issue has raised concerns about credibility.”
Data from Bloomberg showed that 16.7% of the analysts had a sell rating on the stock on Tuesday, up from 6.1% on 9 March, a day before the disclosure.
Analysts at Nuvama wrote in a note to clients on Tuesday that IndusInd Bank’s credibility and earnings are likely to be impacted. “The timeline is discomforting—the chief financial officer (CFO) resigned just before the Q3 earnings, the CEO recently got a one-year extension instead of three, and now a derivatives-induced dislocation,” the note said.
Also read | IndusInd Bank’s investors scream trust is not meant to be broken
A back-of-the-envelope calculation showed that the quantum of hit to the bank due to this discrepancy is ₹1,530 crore, while the market cap fall on Tuesday was significantly higher at ₹19,051 crore.
Interestingly, the fall in the lender’s share value saw bargain hunters also making merry, picking up the stock cheap for future pickings.
The discrepancy
The discrepancies pertain to derivatives used by the bank as a hedge against foreign currency deposits or borrowings on the balance sheet, which need to be converted to the Indian rupee.
The lapses stemmed from a mismatch as similar trades were being accounted for differently, which came to light while unwinding existing positions to comply with the revised RBI norms effective April 2024.
A former official of the State Bank of India (SBI) told Mint on condition of anonymity that the private sector lender might have taken a long-term foreign currency deposit and covered it through cheaper short-term swaps instead of the ideal longer-term swaps.
Read this | IndusInd Bank flags lapses worth ₹1,530 cr in derivatives portfolio; stock sinks to 4-year low
“If it is USD/JPY trade, the currencies have fallen significantly due to recent policies of US President Donald Trump. Now if they evaluate their book, they might have to book huge losses,” he said, adding that the main culprits are the auditors, and it is unknown on what basis they approved the transactions. “These are governance issues, but we don’t exactly know what will happen,” the former SBI official said.
The F&O angle
Meanwhile, the massive volumes of futures and options traded amid the negative sentiment pushed IndusInd Bank into a ban for derivatives trading across exchanges on Wednesday. Under this ban, no fresh derivatives positions can be created, and only existing positions can be squared off until the positions of participants fall.
Such was the sentiment among traders that outstanding trader positions hit 179.5 million shares against the market-wide limit of 120.8 million shares. Even in the cash market, the stock was the most traded, witnessing a volume of ₹6,987 crore.
The bargain hunters
Interestingly, as the share plunged by 27%, there were investors who bought the stock from sellers. Of a total 101.1 million shares traded on NSE on Tuesday, 319,000 resulted in delivery. Both traded and deliverable quantity were the highest in a year.
The value of the 670-strike put option on IndusInd rose a whopping 100,000% from 5 paise on Monday to a last traded price of ₹50.30. A put option is purchased by investors or traders who expect a stock to fall. This protects their portfolio or simply allows them to profit if a stock tanks.
The margin funding extended by brokers to investors who wanted to buy IndusInd stood at ₹330.58 crore as of Friday, per data from NSE. Several of these clients are likely to have faced margin calls from brokers. Margin funding is a facility wherein a client can put up 25% of stock’s value and get funding for the rest from a broker against interest payments.
Also read | IndusInd proposes new corp structure for RCap resolution plan, leaving lenders in the lurch
This allows the client to earn up to four times return on investment if the stock rises. If it falls beyond a point the broker calls for more margin from a client. If the latter can’t top it, the broker squares off the position. This can add to a fall in a stock already under pressure.
Shareholding details
Data from the BSE showed that the Hinduja family owns a 16.29% stake in the bank, but has 15.08% with voting rights. IndusInd International Holdings and IndusInd Ltd — promoters of the bank — have pledged 50.86% of this 15.08% stake in the bank, per exchange disclosure as of 3 January. The shares have been pledged to Barclays Bank and Deutsche Bank. The last pledge on 20 December was to top up security placed with the lenders for an existing loan facility.
Interestingly, the regulator had given an in-principle approval to the group to raise its stake to 26% in 2023. Ashok Hinduja, chairman of promoter entity IndusInd International Holdings, told CNBC TV18 on Tuesday that once RBI gives the final approval, “we will immediately increase our stake and inject capital as needed”.
And read | RBI may give final nod for stake increase in IndusInd Bank soon: Ashok Hinduja
IndusInd Bank has underperformed its peers and the Sensex in recent times. The bank’s shares are down 40% between 1 October 2022 and 11 March, while the Sensex has risen 30.5% in the same period.
Meanwhile, Route One Investment, a San Francisco-headquartered hedge fund, is one investor that has cut its holding. Route One Investment first picked 1.42% in July 2019. Its investment peaked in the quarter ended September 2022 when it owned 7.29%. At the end of December quarter, Route One’s holding in the bank was 1.78%.