IndusInd Bank Faces SFIO Probe Over Accounting Irregularities

Introduction to the Investigation

The Ministry of Corporate Affairs (MCA) has directed the Serious Fraud Investigation Office (SFIO) to launch a formal investigation into IndusInd Bank. This move follows the flagging of significant accounting irregularities by the bank's statutory auditors and subsequent forensic reports. The probe, initiated under Section 212 of the Companies Act, 2013, centers on discrepancies amounting to over ₹2,000 crore and is deemed necessary in the public interest. IndusInd Bank confirmed in a regulatory filing that it received a letter from the SFIO on December 23, 2025, requesting information and documents pertinent to the investigation. The bank has assured full cooperation with the law enforcement agency.

The Core Accounting Discrepancies

The investigation stems from several accounting issues that were first identified during an internal review and later highlighted by auditors. The primary areas of concern span transactions from the financial year 2015-16 to 2023-24. One major issue relates to the accounting treatment of internal derivative trades, which led to the improper recognition of notional income over several years. Another significant problem was found in the microfinance portfolio, where interest income of ₹673.82 crore and fee income of ₹172.58 crore were incorrectly recognized. Furthermore, the bank identified and set off ₹595 crore in unsubstantiated balances under its "other assets" and "other liabilities" accounts, pointing to weaknesses in internal financial controls.

Financial Impact and Corrective Actions

These accounting lapses have had a substantial financial impact on IndusInd Bank. To rectify the errors, the bank undertook significant corrective measures, which were reflected in its fourth-quarter results for FY25. The bank reported a net loss of ₹2,329 crore for the January-March 2025 quarter after making large provisions and reversing the incorrectly booked income. Specifically, it wrote off ₹1,959.98 crore of accumulated notional profits from the derivatives portfolio. The reversal of improperly recognized microfinance income resulted in an adverse impact of ₹422.56 crore in the same quarter. The bank also had to provide ₹1,791 crore for certain microfinance loans that were misclassified as standard assets, leading to a total adverse impact of ₹1,969 crore on its profit and loss account as of March 31, 2025.

Summary of Financial Adjustments

Management Changes and Accountability

The discovery of these widespread accounting issues led to significant changes in the bank's top leadership. In April 2025, former Managing Director and CEO, Sumant Kathpalia, and former Deputy CEO, Arun Khurana, stepped down, taking responsibility for the losses, particularly the nearly ₹1,960 crore lapse in the derivatives portfolio. The current management has initiated steps to claw back bonuses paid to the two former executives. The roles of these former officials, along with former CFO Govind Jain, are now under the scrutiny of the SFIO. The investigation is also examining whether the accounting adjustments artificially inflated the bank's share price, potentially benefiting senior executives through alleged insider trading.

Contrasting Probes: SFIO and Mumbai EOW

An interesting aspect of this case is the parallel inquiry conducted by the Mumbai Police’s Economic Offences Wing (EOW). The EOW, which began its preliminary probe in August after the bank self-reported the issues, is reportedly preparing to close its case. The agency stated it found no evidence of fund siphoning or criminal diversion of funds that would warrant the filing of an FIR. However, before closing its file, the EOW has sought clarifications from the Reserve Bank of India (RBI) regarding the bank's hedging practices and whether the regulator was previously aware of the accounting issues. The MCA's decision to order a federal SFIO probe, despite the EOW's findings, underscores the gravity of the corporate governance and accounting concerns.

Scope of the SFIO Investigation

The SFIO's mandate is broad and comprehensive. The agency will examine all audit filings, forensic reports, internal audit documents, and submissions made to the RBI. The probe will investigate potential manipulation of account books, creation of fictitious accounts, misclassification of assets, and related-party transactions. A key objective for the SFIO is to unearth any diversion or routing of funds and to identify the ultimate beneficiaries of such activities. The investigation will also scrutinize an additional accounting entry of about ₹250 crore that has come to light.

Market Implications and Conclusion

The SFIO investigation places IndusInd Bank under intense regulatory and market scrutiny. While the bank has stated that its capital adequacy is sufficient to absorb the one-time financial hit, the probe raises serious questions about its internal controls and corporate governance practices over the past decade. Investors are likely to remain cautious, awaiting clarity from the SFIO's findings. The outcome of this high-profile investigation will be critical in determining the future course for the bank and will serve as a key test of regulatory oversight in India's banking sector.