Insider trading scandal: SEBI bars IndusInd Bank’s former top executives

Why Did SEBI Ban IndusInd Bank’s Former CEO and Executives?

In one of the most high-profile regulatory crackdowns in recent Indian banking history, the Securities and Exchange Board of India (SEBI) has barred former IndusInd Bank Chief Executive Officer Sumant Kathpalia and four senior officials from participating in the securities market. The move follows detailed findings that they engaged in insider trading by offloading shares based on non-public information related to a massive ₹2,362 crore loss from the bank’s derivatives portfolio. SEBI’s interim order not only prohibits these individuals from trading but also includes provisions for impounding the wrongful gains accrued through these transactions.

According to SEBI, IndusInd Bank’s senior management had knowledge of substantial mark-to-market losses tied to structured derivative contracts as early as December 2023. Internal estimates had pegged the total potential financial exposure at ₹1,572 crore at the time. By March 2024, the loss projections ballooned to ₹2,362 crore. Despite this, public disclosure only came on March 10, 2025—over a year after internal alerts were raised—allowing insiders to avoid massive personal losses by selling off shares ahead of the announcement.

How the Derivatives Mismanagement Unfolded

The roots of the crisis lie in a series of derivative contracts entered into with mid-sized corporate clients who lacked adequate forex risk management capabilities. The bank’s risk and compliance teams reportedly red-flagged these exposures multiple times, citing potential default and counterparty risks. Yet, the issues persisted internally without disclosure to shareholders or market regulators.

This silence was broken only after internal audit escalations and whistleblower inputs prompted board-level interventions in early 2025. By then, the delay had caused irreversible damage. When the bank finally admitted to the derivative loss in a stock exchange filing, it sent shockwaves across Dalal Street, resulting in a 27.6% intraday crash in IndusInd Bank’s share price and a net market cap erosion of over ₹22,000 crore.

Who Are the Executives Named in SEBI’s Order?

SEBI’s investigation identified a cluster of high-ranking officials at IndusInd Bank who allegedly misused unpublished price-sensitive information (UPSI) for personal benefit. These include former CEO Sumant Kathpalia, Deputy CEO Arun Khurana, Head of Treasury Operations Sushant Sourav, Head of Global Markets Operations Rohan Jathanna, and Chief Administrative Officer – Consumer Banking Operations Anil Marco Rao.

Their individual transactions, as per SEBI, cumulatively amounted to avoided losses of approximately ₹19.78 crore. Kathpalia alone is reported to have sold 125,000 shares between December 2023 and February 2025, thus avoiding a potential loss of over ₹5.2 crore. Arun Khurana’s transactions were even larger, involving over 340,000 shares with a notional avoided loss of ₹14.3 crore. These sales, executed while the public remained unaware of the impending financial hit, have formed the basis of SEBI’s harsh penal action.

What Was the Impact on IndusInd Bank’s Financials?

The eventual disclosure of the derivative losses severely impacted the bank’s bottom line. For the fourth quarter of FY25, IndusInd Bank reported a staggering net loss of ₹2,329 crore, marking its first quarterly loss in nearly two decades. The bank also disclosed that the non-performing asset (NPA) ratio worsened by 80 basis points to 3.74%, largely due to defaults on these derivative contracts.

This sudden reversal in financial performance sharply contrasts with the bank’s earlier bullish guidance and has prompted downgrades from at least two global rating agencies. Institutional investors, including several mutual funds and foreign portfolio investors (FPIs), reduced their holdings in the March 2025 quarter. According to exchange data, FPIs cut their exposure from 26.1% to 24.4%, while domestic mutual funds sold ₹1,078 crore worth of shares during the same period, reflecting a sharp dip in institutional sentiment.

How Has the Market Reacted Since the Ban?

Following SEBI’s announcement on May 28, 2025, IndusInd Bank shares remained under pressure. The stock closed at ₹1,127.80 on the National Stock Exchange, down 3.8% for the day and over 31% below its February highs. While volumes were elevated, indicating exit activity by retail investors, trading desks noted that block trades were largely being picked up by arbitrageurs and high-risk value funds, suggesting speculative bets on a medium-term rebound.

Sell-side analysts have downgraded the stock from ‘Buy’ to ‘Hold’ or ‘Underperform’, citing uncertainty over management restructuring, regulatory compliance costs, and the potential for more skeletons to emerge. Institutional sentiment remains weak, with few long-only funds stepping in. Analysts from Motilal Oswal Securities, in an indirect commentary, pointed to the possibility of promoter-led recapitalization as a short-term stabilizer, but maintained that governance overhauls would be needed to repair credibility.

How Has the Bank Responded Internally?

In the weeks following the initial disclosure in March, IndusInd Bank has made several strategic and operational changes. A temporary committee of directors has been formed to oversee compliance and ethics. The board has appointed PwC and KPMG for independent forensic reviews to trace lapses in controls and to recommend structural reforms. Interim CEO Shalini Dubey, formerly Chief Risk Officer, has been tasked with overhauling the bank’s treasury governance framework, particularly around structured finance and derivative product approval cycles.

The Hinduja Group, through IndusInd International Holdings Ltd.—the bank’s principal promoter—has reaffirmed its commitment to provide capital support if required. A statement from the group emphasized “full cooperation with regulatory agencies” and expressed confidence in “the bank’s core operational resilience.”

What Does This Scandal Mean for Corporate Governance in Indian Banking?

This episode may serve as a defining moment for India’s banking sector, particularly regarding the enforcement of corporate governance standards. SEBI’s action sets a strong precedent that delays in disclosing material financial risks will not be tolerated, especially when executives personally benefit by trading ahead of such disclosures.

In the broader context, the Indian banking industry has been under enhanced scrutiny from both the Reserve Bank of India and SEBI, particularly in the wake of past governance lapses at Yes Bank and ICICI Bank. With this new action, regulators are signalling a zero-tolerance approach to ethical violations, regardless of executive stature.

Institutional investors and proxy advisory firms are now likely to demand stronger safeguards, including real-time internal escalation mechanisms, periodic third-party audits, and executive trading pre-clearances under tighter thresholds.

What Comes Next for IndusInd Bank?

The road ahead for IndusInd Bank is paved with regulatory, operational, and reputational challenges. Analysts believe the bank’s immediate focus will likely be on minimizing customer attrition and stabilizing its retail deposit base, which has seen outflows post-disclosure. Loan growth is expected to remain subdued in the short term, especially in wholesale banking, while priority sector lending and retail segments might be repositioned as safer anchors.

Although no final penalties have been levied yet, SEBI’s interim order is expected to culminate in monetary fines and possibly further directions to overhaul governance mechanisms. If the forensic reviews confirm systemic lapses, it could also trigger Reserve Bank of India intervention, potentially requiring board-level reconstitution or conditional licensing requirements for specific verticals.

Nonetheless, with significant promoter backing, a still-healthy CASA ratio, and a diversified asset base, analysts remain divided on the long-term fate of IndusInd Bank. While some believe it will emerge leaner and more compliant, others warn that the reputational dent might take years to mend.