The unprecedented revelation of an accounting fluff by the fifth biggest private bank in the country is not a routine year-end journal entry to gloss over. Nor the niceties to be observed to await a full investigation report to air one's prima facie views!
Leaving aside many other alarming anomalies in the issue, the very nature of the communication quantifying the likely impact to be around 2.35% of the bank's net worth triggers a debate.
This is the strangest way to put across information of such import. Unless the bank knows the potential loss number, it cannot measure it against its net worth.
What is the mumbo jumbo to put out a meaningless number like 2.35% of the net worth, rather than stating the amount as Rs1,520 crore (Rs2,100 crore as per some estimates), which is indicated as the hit to the profit and loss (P&L) account?
It is like a doctor telling a patient that her BP is half of what the Indian cricket team scored in the Champions trophy final!
Getting to the brass tacks, the issue sounds alarming, to say the least. The bank gets some part of its funding through foreign currency borrowings that come at an outwardly cheaper cost compared to local currency liabilities.
These borrowings have to be repaid in the same currency and the exchange rate can either go favourably or adversely. Any such decision to borrow in forex always carries with it the cost of hedging the liability.
Even if the liability is not hedged, the potential loss or gain has to be measured periodically and plugged into the revenue statement. This has been the case since time immemorial, maybe not since Indus Valley Civilisation (IVC), but near about that period!
It appears that the liability department passed on its exposure to the treasury to hedge suitably. The treasury had its own outlook on how the rates may change and perhaps did not hedge adequately. This is a technical call and is not debated as part of the present discussion. Once the exchange rate differences are known it has to be shown as an expense or income in each reporting period.
It appears that the adverse exchange differences have been carried in the books as 'receivables' instead of being expensed out!
This is ruefully reminiscent of the transactions that brought down a bank that was founded in 1762, after 233 years of existence, in 1995!
Nick Leeson, subsequently nicknamed the rogue trader, was responsible single-handedly for bringing down a stellar institution of more than two centuries standing, in a matter of two years.
Mr Leeson was taking positions on currency derivatives with no matching hedges to maximise the outcome, hoping for the market to reverse and save his trades. It went exactly the opposite way! He kept accumulating positions hoping for a big jackpot, and stored the losses in receivables!
The IndusInd case seems on all fours to this.
When the losses had mounted to £827 million in 1995, the management in London realised its oversight failure, and the bank went irretrievably down the Thames!
It is difficult not to be coloured by past instances in evaluating the nature of the issue currently hogging the headlines.
Mr Raju's accounting in Satyam stands stigmatised as a fraud. How far away from the Satyam case is the present one of not booking known losses but holding them in receivables?
In all this, the big question is when did this dawn on the management, assuming that there is an alibi to show that this was a mistake committed down the line and no one in the senior management was aware!
When did the board of directors come to know of the issue?
When did the auditors, (internal, statutory, risk, RBI, and whatnot audits) come to know of this?
It has been clarified by the management that this is no happenstance that everyone was surprised to discover, but a practice in vogue for five, if not seven years!
However, the bank is attributing this discovery to some circular of the RBI issued in 2023 regarding the valuation of investments, etc., To the mind of an ordinary accountant this sounds not just hollow but, in fact, sinister!
What has any guideline issued by anyone got to do with accounting for forex losses? This practice is age-old. The income tax law, since 1966, has a rule of how to claim the losses on forex borrowings.
The bank has clarified that the practice was given up from 1 April 2024 and the losses pertain only to the past years.
If this be the case, the decision to change something so significant would not have been taken just on the midnight of 31 March 2024! It would have been deeply analysed, including the implications for the past; at least a couple of months earlier say from February 2024.
Is there a reason to assume that the RBI knew of this but did not wish to out it sooner? Was it by any chance linked to the change of guard that took place on 10 December 2024?
It is difficult to visualise the RBI not knowing this matter much earlier. There must have been many inspections in the last few years and hedging decisions must be a central issue for the regulator to check.
The media reports seem to suggest that RBI is looking at this issue from an angle of whether banks can have unhedged positions. This appears to be a ploy to divert from the core issue of failure to account correctly for the losses accrued in the books.
The CFO of the bank quit a few months earlier and this imbroglio quite logically is the prime cause, though the bank denies it.
There has been a terrible loss to the investors. A big chunk of the bank's shares are held by mutual funds and insurance companies. All these have funnelled the monies of millions of common investors.
If there had been a default in repaying the deposits, then the entire political establishment would have jumped into the controversy. Being a loss arising in the street, it is not hurting the political establishment.
It is important to fix responsibility on the management, board, auditors and the regulators. Though the promoter may not be directly on the scene, it is necessary to pin the responsibility on them, as well.
The primary responsibility is of the operating management and its lapses should be fully investigated. The CEO has received a year's extension of service from the RBI, while the board had recommended three years. Doesn't it sound weird that the CEO is being given an extension under such circumstances?
The bank has a stock option policy and has been allotting shares annually. All such allotments in the last seven years should be revisited and, in relevant cases, cancelled. Those who sold the shares and benefited should be made to disgorge the gains to the bank.
All shares sold by directors and executives since the issue first surfaced and in any case not later than 1 April 2024 should be treated as insider trading and all the gains should be disgorged to the company along with suitable fines.
Since the practice has been in vogue for seven years, it is necessary to catalogue the names of the directors and the auditors during this period.
There is a good case to evaluate the role of the board in this fiasco by an independent agency to assess how this issue so egregiously missed every committee's attention.
If so, then the scope of what the risk management and the audit committee actually did in the course of the last two or three years should be analysed.
If the board was aware and did not act, then it is a case of criminal negligence of the directors.
Audit failure looms large over this issue. Ironically, the detailed investigation is being carried out by Price Waterhouse (based on media reports), the firm that audited the accounts for 2017-18 when quite likely the practice started!
There have been five different auditors in the seven-year period. How come none of them checked the basic fact of how the forex exposure was accounted?
The auditors signed off not only FY23-24, but three more quarters in FY24-25, with no qualms. The discovery comes a little over a month after the FY2025 Q3 numbers were published!
NFRA should pitch in early to investigate this given the extent of the losses suffered due to the fall in the share price.
How the auditors have, year after year, certified the due functioning of the internal control over financial reporting is both a cause to wonder and shudder!
In the Barings case, the class action suits by the investors claimed over £1bn against the two auditors, Coopers and Lybrand and Deloitte and Touche. They finally settled by paying £100mn to the liquidators of the bank by taking shelter under the management's failures as the primary cause of the collapse.
In the Indian context, such suits have not happened. Only the auditors cough up a token fine that goes into the pocket of the government. The investors' losses are never the focus of any reparatory response.
Quite likely, this issue will be given a decent burial in due course and it will be business as usual!
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
