Can IndusInd Bank regain investor trust after SEBI’s Rs 2,362cr derivatives shock?

IndusInd Bank (NSE: INDUSINDBK) has come under intense scrutiny from investors and regulators alike after the Securities and Exchange Board of India (SEBI) took decisive action against five senior executives, including former CEO Sumant Kathpalia and Deputy CEO Arun Khurana. The regulatory order, issued in late May 2025, alleges insider trading involving unpublished price-sensitive information (UPSI) linked to a massive ₹2,362 crore mark-to-market loss from the bank’s structured derivative exposure.

The impact on the stock was immediate. On March 10, 2025—the day IndusInd Bank disclosed the derivative losses—its shares plunged 27.2%, erasing nearly ₹22,000 crore in market capitalization. It was the steepest single-day decline in the bank’s trading history since the COVID-era sell-off of March 2020. The damage was not limited to price action. Institutional sentiment began to shift, sparking questions over the bank’s disclosure practices, internal controls, and ethical governance.

This scandal arrives amid growing regulatory vigilance over corporate governance in Indian financial institutions. Following past governance lapses at ICICI Bank and Yes Bank, the SEBI-RBI oversight architecture has tightened. IndusInd Bank’s current crisis thus becomes a litmus test for how investor trust can be rebuilt in a high-compliance environment.

How Are Institutional Investors Responding to the Crisis?

The post-disclosure data reveals a split in institutional investor behavior. Foreign Institutional Investors (FIIs) increased their holding in IndusInd Bank from 24.74% to 29.53% during the March 2025 quarter. This unexpected accumulation suggests that some foreign funds are betting on a long-term recovery, likely driven by attractive valuations and expectations of promoter-backed recapitalization.

In contrast, domestic mutual funds have adopted a more cautious stance. Their holding in the bank declined from 30.31% to 27.55%, according to the March 2025 shareholding pattern. This divergence hints at differing time horizons and risk appetite between domestic institutions, which tend to be more governance-sensitive, and global investors, who may be pricing in a contrarian rebound.

The bank’s promoter stake also saw marginal attrition—from 16.29% to 15.83%—with over 50% of those holdings pledged as collateral. The high level of pledging has emerged as a red flag among analysts, particularly in the wake of the SEBI order and possible capital requirement triggers. While the Hinduja Group, which controls IndusInd International Holdings, has publicly committed to providing equity support, the optics of pledged shares during a governance crisis have further rattled sentiment.

What Does the Latest Financial Data Say About IndusInd’s Health?

IndusInd Bank’s Q4 FY25 earnings underscored the severity of the derivatives mismanagement. The bank reported a net loss of ₹2,329 crore for the quarter ending March 2025—the first quarterly loss in nearly 19 years. The loss was directly attributed to the mark-to-market revaluation of foreign exchange derivative contracts that were previously under-reported.

For the full fiscal year, the bank’s net interest income fell to ₹19,031 crore, a decline of 7.7% from ₹20,616 crore in FY24. Operating profit also contracted sharply, with cost-to-income ratio expanding due to compliance and legal provisioning.

The microfinance portfolio saw a 21% year-on-year decline, reflecting a strategic retreat from high-risk unsecured lending amid rising delinquencies. The corporate loan book shrank 6%, further underlining credit disbursement caution. While the bank maintained a Gross NPA ratio of 2.43%, analysts warn that stress in structured corporate exposures could push slippage ratios higher in FY26.

IndusInd’s capital adequacy ratio under Basel III norms dropped from 17.23% in March 2024 to 16.24% in March 2025. While still above regulatory minimums, the decline reflects earnings drag and risk-weighted asset adjustments stemming from the derivative-linked provisioning.

What Is the Analyst Consensus on IndusInd Bank’s Stock Outlook?

Equity analysts are now divided on IndusInd Bank’s investment case. Some see a contrarian recovery opportunity, citing historically low price-to-book valuations and potential promoter-led stabilization. Others remain skeptical, highlighting red flags in earnings quality, audit transparency, and senior leadership accountability.

CLSA, for example, downgraded the stock to ‘Hold’ and slashed its price target to ₹780. The downgrade followed revelations in the audit report that ₹674 crore was prematurely recognized as interest income between April and December FY25, skewing the reported net interest margin by 17 basis points. The adjustment further compounded investor concerns around financial statement integrity.

Brokerages such as Motilal Oswal and Kotak Institutional Equities have adopted a wait-and-watch stance. They point to the upcoming quarterly results and independent audit findings by KPMG and PwC as pivotal to any re-rating. Meanwhile, Axis Securities, in a post-disclosure note, highlighted the stock’s deep correction but emphasized the need for a clean audit trail and visible board-level reforms before recommending re-entry.

How Is IndusInd Bank Trying to Rebuild Investor Confidence?

To stem the reputational fallout, IndusInd Bank has launched a multi-pronged damage control strategy. A forensic audit is underway, led jointly by PwC and KPMG, with a mandate to examine all structured derivative exposures and internal approval workflows. The audit scope includes reviewing whether the transactions had board-level visibility and whether losses were deliberately under-reported.

At the governance level, the bank has formed a special compliance committee under the board’s risk sub-committee to monitor disclosures and policy enforcement. Interim CEO Shalini Dubey, who previously served as Chief Risk Officer, has taken charge with an internal mandate to overhaul treasury operations, with particular focus on product-level risk approval and client suitability checks for exotic derivatives.

Promoter entity IndusInd International Holdings Ltd. has reiterated its support, publicly stating that it stands ready to inject capital if required. Analysts believe this capital buffer could be crucial, especially if additional provisioning is mandated after the forensic review. However, market observers also stress that recapitalization alone won’t restore trust—what’s needed is visible accountability and leadership renewal.

What’s the Road Ahead for IndusInd Bank in FY26?

As the fiscal year 2026 begins, the most pressing task for IndusInd Bank is to stabilize deposit outflows and reassure institutional stakeholders. Some recovery in CASA deposits has been noted post-March lows, but fixed deposit rollover rates remain under pressure. The bank is likely to reorient toward retail credit and priority sector lending in the near term to maintain balance sheet defensiveness.

On the regulatory front, the Reserve Bank of India has thus far refrained from direct intervention but is closely monitoring the governance review. There is growing speculation in industry circles that the RBI may ask for board restructuring or conditional supervisory guidance if the audit reveals material lapses.

Analysts also anticipate a broader market reaction, with proxy advisory firms recommending tighter executive compensation policies and stricter insider trading pre-clearance protocols—not just for IndusInd but across the Indian banking sector.

While the stock may witness near-term technical rebounds, a full investor sentiment recovery will hinge on how transparently the bank manages the fallout, how swiftly it restores governance confidence, and how decisively the leadership is refreshed.