IIFL Finance Stock Plunges 18% After I-T Department Orders Special Audit

Introduction

Shares of IIFL Finance Ltd. experienced a significant downturn on January 22, 2026, plummeting by nearly 18% to a three-month low of Rs 511.15 during intraday trading. The sharp sell-off was triggered by the company's disclosure that it had received a directive from the Income Tax Department to conduct a special audit of its accounts. This development overshadowed an otherwise robust financial performance for the third quarter of fiscal year 2026, creating uncertainty among investors and leading to a closing price of Rs 528.25, down 15% for the day.

The Income Tax Directive

In a stock exchange filing, IIFL Finance confirmed the receipt of a communication dated January 21, 2026, from the Income Tax Department. The notice directs the company to get its accounts audited for a specific block period, spanning from the financial year 2019 to the financial year 2025. This action falls under Section 142(2A) of the Income Tax Act, 1961, which empowers tax authorities to order a special audit if they deem the accounts to be complex or have doubts about their accuracy. The department has also appointed a Special Auditor for this purpose.

Company's Official Stance

IIFL Finance has maintained that the audit order is a procedural step related to ongoing assessment proceedings. The company's filing emphasized, "There is no adjudication or determination against the Company under the said communication, and at this stage no financial impact can be ascertained." Management has assured stakeholders of its full cooperation with the appointed Special Auditor. IIFL Group founder Nirmal Jain addressed the market's reaction, calling the concerns a "complete misunderstanding." He explained that audits under Section 142 are typically initiated for accounts with complexities, such as inventory valuations, and are not inherently unusual.

Management Reassures Investors

Nirmal Jain further elaborated that the investigation is linked to a previous finding by the Reserve Bank of India concerning cash transactions. He stated that the company had provided all necessary data to the tax authorities during their search. "As a company, we are 100% confident that there's no extra, no further liability we expect on this account," Jain said, reinforcing his belief that the company's compliance is satisfactory. He also touched upon future plans, suggesting that the company's housing finance arm could be listed through a demerger, although no final decision has been made.

Strong Q3 Performance Overlooked

The market's negative reaction to the audit notice came despite IIFL Finance reporting exceptionally strong financial results for the quarter ended December 31, 2025. The non-banking financial company (NBFC) posted a consolidated net profit of Rs 501.4 crore, marking a staggering 513% increase from the Rs 81.71 crore reported in the same quarter of the previous year. Revenue from operations also grew by a healthy 40.3% year-on-year to Rs 3,427.5 crore.

Key Financial Highlights (Q3 FY26)

Asset Quality and Business Growth

The company's asset quality showed significant improvement during the quarter. The Gross Non-Performing Asset (GNPA) ratio improved sequentially by 54 basis points to 1.6%, while the Net Non-Performing Asset (NNPA) ratio improved by 27 basis points to 0.75%. The gold loan business was a standout performer, with its Assets Under Management (AUM) surging by 189% year-on-year. Other segments also showed steady growth, with home loan AUM up 5% and MSME loan AUM increasing by 17%. In line with its positive results, the company's board also declared an interim dividend of Rs 4 per equity share.

Market Reaction and Technical Outlook

The stock's sharp fall was accompanied by an exceptional surge in trading volume, which analysts suggest indicates aggressive long liquidation rather than routine profit-taking. Technical analysts noted that the stock's structure has weakened, with key moving averages now acting as resistance. Anshul Jain, Head of Research at Lakshmishree, pointed out that the price is heading towards a major support zone around the 50-week exponential moving average (EMA) near Rs 497. He suggested that unless the stock stabilizes at this level, the risk remains skewed to the downside.

Conclusion

The market has clearly prioritized regulatory risk over strong operational performance in the case of IIFL Finance. While the company's management has been vocal in downplaying the significance of the special audit, investors remain cautious. The outcome of the audit and any subsequent findings by the Income Tax Department will be critical in determining the stock's future trajectory. For now, the market will closely watch for further clarifications from the company to resolve the prevailing uncertainty.