IndusInd Bank Shares Drop 3% After CEO Resigns; Emkay Downgrades to 'Reduce'

Introduction

IndusInd Bank, a leading private sector bank in India and part of the Hinduja Group, experienced a sharp decline in its share price on April 30, 2025, dropping 3.2% to an intraday low of ₹810.40 on the Bombay Stock Exchange (BSE). The sell-off was triggered by the sudden resignation of its Managing Director and Chief Executive Officer, Sumant Kathpalia, on April 29, 2025, amid a ₹1,959.98 crore accounting scandal involving the bank’s derivatives portfolio. Kathpalia’s exit, following the resignation of Deputy CEO Arun Khurana a day earlier, has sparked concerns about governance, leadership stability, and financial health. Compounding the negative sentiment, Emkay Global Financial Services downgraded IndusInd Bank’s stock to ‘Reduce’ from ‘Add,’ slashing its target price to ₹850, citing credibility issues and earnings uncertainty. This article explores the events leading to the stock’s decline, the reasons behind Kathpalia’s resignation, Emkay’s downgrade, and the broader implications for the bank and its investors.

The Resignation of Sumant Kathpalia: A Leadership Crisis

Sumant Kathpalia, who assumed the role of MD and CEO in March 2020, resigned with immediate effect on April 29, 2025, taking “moral responsibility” for significant accounting discrepancies in IndusInd Bank’s derivatives portfolio. In his resignation letter, Kathpalia stated, “I undertake moral responsibility, given the various acts of commission/omission that have been brought to my notice.” His departure came just one day after Deputy CEO Arun Khurana resigned on April 28, citing oversight lapses in the bank’s internal derivatives trades.

The resignations followed intense scrutiny from the Reserve Bank of India (RBI), which reportedly urged both executives to step down after an external audit by firms like Pwc and Grant Thornton uncovered irregularities. The audit, finalised on April 26, 2025, pegged the cumulative loss at ₹1,959.98 crore as of March 31, 2025, equating to a 2.27% adverse impact on the bank’s net worth. The RBI’s involvement, including its decision in March 2025 to grant Kathpalia only a one-year extension instead of the board’s proposed three years, signalled early concerns about leadership and governance.

The Derivatives Scandal: Root Cause of the Crisis

The accounting lapses at the heart of the scandal involved internal derivative trades, particularly in the bank’s asset-liability management and treasury operations. An independent investigation revealed that IndusInd Bank had used flawed accounting practices, such as accrual accounting for internal trades while marking external trades to market. This mismatch allowed the bank to defer losses internally while prematurely booking gains externally, overstating earnings for 6–7 years.

The issue came to light on March 10, 2025, when IndusInd Bank disclosed potential discrepancies in its derivatives portfolio, estimating a 2.35% impact on net worth. Subsequent audits refined the loss to ₹1,959.98 crore, with Grant Thornton’s forensic report identifying incorrect accounting of early-terminated trades as a primary cause. The RBI had banned internal derivatives trading by banks in April 2024, following its September 2023 directives, which IndusInd complied with, but the legacy issues persisted.

The financial impact is significant, with the loss expected to hit IndusInd’s profit and loss account for FY25, compounding existing pressures from its microfinance portfolio, which is also under review by Ernst & Young for potential concerns. The scandal has eroded investor confidence, raising questions about internal controls and risk management.

Stock Market Reaction: A 3% Plunge

IndusInd Bank’s shares faced immediate selling pressure on April 30, 2025, following the resignation announcements. The stock fell 3.2% to ₹810.40 during intraday trading on the BSE, after closing at ₹837.50 on April 29. The decline marked a continuation of the stock’s downward trend, with shares losing nearly 8% since March 10, when the derivatives issue was first disclosed. Year-to-date (YTD) in 2025, the stock has underperformed, gaining only 4% compared to the Nifty Bank index’s 12% rise.

The market’s reaction reflects investor concerns about leadership uncertainty, governance lapses, and the financial fallout from the derivatives scandal. Posts on X captured the bearish sentiment, with users like @manerhushi1 warning of a potential “crash” in bank stocks, comparing the situation to Yes Bank’s past troubles. Others, such as @Sharad9Dubey, noted the bank’s request for RBI approval to form a temporary “Committee of Executives” to manage CEO duties, highlighting the immediate leadership vacuum.

Emkay’s Downgrade: A Bearish Outlook

Emkay Global Financial Services downgraded IndusInd Bank’s stock to ‘Reduce’ from ‘Add’ on April 30, 2025, slashing its target price to ₹850 from a previous estimate of ₹1,200. The brokerage cited several concerns:

• Credibility Crisis: The accounting scandal and top-level resignations have damaged the bank’s reputation, undermining investor trust in its governance and financial reporting. Emkay noted that the “ongoing derivatives discussion” could lead to prolonged regulatory scrutiny.
• Earnings Uncertainty: The ₹1,959.98 crore loss will significantly impact FY25 profitability, with potential write-offs affecting capital adequacy. Emkay revised its earnings per share (EPS) estimates downward by 15–20% for FY25–26, reflecting lower profitability and higher credit costs.
• Valuation Concerns: Despite the stock’s correction, Emkay argued that IndusInd Bank’s valuation, trading at a price-to-book (P/B) ratio of 1.8x, remains unattractive given the risks. The brokerage sees limited upside until clarity emerges on leadership and financial recovery.
• Microfinance Portfolio Risks: Ongoing stress in the microfinance (MFI) segment, coupled with the derivatives loss, could further strain asset quality. Emkay flagged potential increases in non-performing assets (NPAS) as a key risk.

The downgrade triggered additional selling, with Emkay’s bearish stance resonating with investors already rattled by the leadership shakeup. Other brokerages, such as Moody’s Ratings, also expressed concerns, warning on March 25, 2025, that the derivatives issue and retail loan stress could hurt profitability and capital, potentially leading to a downgrade of the bank’s Baseline Credit Assessment (BCA).

IndusInd Bank’s Response: Damage Control Measures

In response to the crisis, IndusInd Bank has taken several steps to stabilise operations and restore confidence:

1. Interim Leadership: The bank sought RBI approval to form a Committee of Executives to discharge CEO duties until a permanent replacement is appointed. This committee is expected to include senior executives, with a management transition and wider reshuffle anticipated in the coming weeks.
2. Strengthening Internal Controls: IndusInd is committed to enhancing its derivatives operations, aligning with RBI directives. The bank ceased internal derivatives trading from April 1, 2024, and is implementing recommendations from the Grant Thornton audit.
3. Accountability Measures: The board is taking steps to fix accountability for the lapses, including realigning senior management roles. The independent audit report, submitted on April 26, 2025, examined the actions of key employees, providing a basis for these changes.
4. Microfinance Review: The bank’s internal audit department, alongside Ernst & Young, is reviewing the microfinance portfolio to address concerns raised by management, aiming to mitigate further risks.

Despite these efforts, the bank faces an uphill battle to rebuild trust, with the RBI’s oversight likely to remain stringent.

Kathpalia’s Tenure and Legacy

Sumant Kathpalia joined IndusInd Bank in 2008 and played a pivotal role in building its consumer banking division before succeeding Romesh Sobti as CEO in 2020. During his tenure, the bank expanded its retail and digital banking offerings, achieving a balance sheet of $63 billion by March 2025, making it India’s fifth-largest private lender. However, his leadership was marred by the derivatives scandal and earlier controversies, including the sale of shares worth ₹134 crore by Kathpalia and ₹80 crore by Khurana between May 2023 and June 2024, which raised questions about insider confidence.

The RBI’s decision to grant only a one-year extension in March 2025, rather than the board’s proposed three years, reflected regulatory concerns about his leadership, particularly as the derivatives issue emerged. Kathpalia’s resignation, while framed as taking moral responsibility, was likely influenced by RBI pressure, underscoring the central bank’s commitment to governance in the banking sector.

Broader Implications for IndusInd Bank

The crisis has significant implications for IndusInd Bank’s operations, reputation, and market position:

1. Leadership Transition: The absence of a permanent CEO and deputy CEO creates uncertainty, potentially delaying strategic decisions. The interim committee will need to navigate regulatory scrutiny and investor scepticism while the bank searches for a new leader.
2. Financial Impact: The ₹1,959.98 crore loss will dent FY25 earnings, with analysts expecting a 15–20% reduction in profit forecasts. The hit to net worth (2.27%) and potential capital adequacy pressures could limit lending growth.
3. Regulatory Oversight: The RBI’s involvement, including its audits by PwC and EY in February 2025, signals heightened scrutiny. The bank may face stricter compliance requirements, increasing operational costs.
4. Investor Confidence: The stock’s 8% decline since March 10 and Emkay’s downgrade reflect eroded trust. High promoter pledge levels and governance concerns, as noted by The Economic Times, add further risk.
5. Competitive Position: IndusInd faces competition from peers like HDFC Bank and ICICI Bank, which have stronger governance frameworks. The scandal could weaken its market share in retail and SME lending.

Industry Context: A Challenging Environment

The derivatives scandal at IndusInd Bank comes at a time when India’s banking sector is navigating multiple challenges. Regulatory scrutiny has intensified, with the RBI cracking down on compliance lapses, as seen in recent actions against Kotak Mahindra Bank for IT deficiencies. Rising interest rates and geopolitical tensions, such as the Pahalgam terror attack, have fueled market volatility, with the Sensex plunging 800 points on April 25, 2025.

Private banks are also grappling with asset quality concerns in retail and microfinance portfolios, exacerbated by economic slowdown fears. IndusInd’s microfinance review, alongside the derivatives loss, highlights these pressures. However, the bank’s diversified portfolio and strong deposit base provide some resilience, positioning it to recover if governance issues are addressed.

Is It Time to Buy, Hold, or Sell?

Investors face a dilemma amid the stock’s decline:

• Buy: Long-term investors may see the 3.2% dip as a buying opportunity, given IndusInd’s strong fundamentals and potential for recovery post-leadership stabilisation. The stock’s P/B ratio of 1.8x is lower than peers like HDFC Bank (2.5x).
• Hold: Current shareholders may prefer to hold, awaiting clarity on the new CEO and Q4 FY25 results, expected in May 2025. The bank’s deposit growth (15% YoY in Q3 FY25) and retail focus offer some stability.
• Sell: Risk-averse investors may exit, given the governance crisis, earnings hit, and regulatory risks. Emkay’s ‘Reduce’ rating and Moody’s downgrade warning support a cautious stance.

Investors should consult financial advisors, as emphasised by Business Today, to align decisions with their risk profiles.

Conclusion

IndusInd Bank’s shares sank 3.2% on April 30, 2025, following the resignation of CEO Sumant Kathpalia and Deputy CEO Arun Khurana, driven by a ₹1,959.98 crore derivatives accounting scandal. Emkay’s downgrade to ‘Reduce’ with a ₹850 target reflects concerns about credibility, earnings, and governance. The RBI’s oversight, interim leadership measures, and ongoing audits signal a challenging road ahead. While the bank’s fundamentals remain solid, the leadership vacuum and financial hit have dented investor confidence. Long-term investors may find value in the dip, but near-term risks warrant caution. As IndusInd navigates this crisis, its ability to restore governance, appoint a credible CEO, and strengthen controls will determine its recovery trajectory in India’s competitive banking sector.