IndusInd was on fire and the CEO was selling stock
Knowing things affects your general behaviour, including the business decisions you make
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The way I look at any financial fraud is that the original version is simple but there are layers and layers of complexity added to the original which makes the real world fraud unrecognisable. Take insider trading. In its simplest avatar, it’s when someone inside the company knows something that’s going to affect the company’s stock price, and trades the company’s stock based on that information. If you remove the company insider and bring in their father-in-law, things get a bit hazy. Or you remove the company itself and instead trade its competitor’s stock, things get hazier still.
Here’s another complexity. The insider remains and so does the company, but instead of trading the company’s stock right before an important announcement as is usually the case, the trades happen many many months before whatever sensitive information becomes public.
In March, IndusInd Bank disclosed that it was going to take a ₹1,577 crore hit to its profits because it goofed up the accounting of its forex derivatives. (I wrote about it here.) Apparently some of its executives at the time, including the top two guys, its CEO and deputy CEO, sold the company’s stock before this announcement. But not like right before. They sold the stock at least 8–15 months before the announcement which ultimately led to a massive fall in the bank’s stock price. IndusInd was investigating just how bad the accounting mess-up was, and these guys were investigating how to best time their stock trades.
This is stuff that SEBI figured out after an investigation and published in an interim order. (Link here.) There are some nuances that would be fun to look at.
That seemed… easy
There are three requirements to prove insider trading:
Some non-public information must exist. It must be price sensitive, which means that if this information is made public, it should impact the company’s stock price.
This information should be known by whosoever is being accused of insider trading.
The trades should’ve happened!
There obviously was (1). IndusInd disclosed that it messed up its accounting on March 10 and its stock price fell by 27% the next day.
There are 5 people in SEBI’s order, but the two main ones are IndusInd’s former CEO, Sumant Kathpalia, and the former deputy CEO, Arun Khurana.1 (They’ve both resigned from the bank now.) In a way, it’s obvious that the top two guys would know if IndusInd was at risk of discovering a ₹1,577 crore loss in its financials, but SEBI anyway retrieved a bunch of emails and got hard proof.
Here’s an email that Kathpalia sent on December 17, 2023:
“This is against what we have been talking to investors. It seems we need to go to Market early next year. This is very very serious. Pls have these calculations on derivatives again revalidated.”
There are a few other emails with similar stuff. These gave SEBI a precise date and time when Kathpalia, Khurana & Co (let’s call them KK & Co) knew not just that something was off but also that it was going to impact the company’s stock price.
Then all SEBI had to do was look for trades between September 2023 (when IndusInd became aware of the accounting goof-up) and March 2025 (when IndusInd went public with the accounting goof-up) and it would be insider trading.
Kathpalia, the former CEO, sold 1,25,500 shares at an average price of ₹1,533 per share.2 Khurana, former deputy CEO, sold the most shares—3,48,500—at an average price of ₹1,520. IndusInd’s share price today is hovering between ₹810–850.
Profit, yes, but how much
A tricky question to answer is, just how much money did the IndusInd executives make by selling the bank’s shares before its goof-up became public? Pre-disclosure IndusInd’s stock price was at around ₹900. Post-disclosure it fell by 27% to ₹655. KK and Co sold at around ₹1,500 on average. Today the price is around ₹840.
If KK & Co hadn’t sold IndusInd’s shares pre-disclosure, do we assume that they would have sold at ₹655? Or ₹850? Or another figure?
Since UPSI period is spread out, share price during that period is also influenced by other factors. Hence, it would not be appropriate to calculate likely disgorgement amount by subtracting closing share price on March 11, 2025 (₹655.95) with the price at which shares were sold during UPSI period.
…
For the purpose of calculation of loss avoided, it would be fair to assume that if these shares were sold with UPSI being public, price of the scrip would have been lower by 27.165%
Post-disclosure, IndusInd’s share price fell by 27%. The impact of this information on the bank’s stock price was 27%, so SEBI assumes KK & Co made 27% more than they would have without insider information.
Lucky break! Between September 2023 and March 2025 pre-disclosure, IndusInd’s stock price fell by almost 40%. This was over a span of a year-and-half, so SEBI’s interpretation is that this 40% was totally regular market movement. It could very well have gone up by 40%.
Here’s the thing. Before the 27% fall post-disclosure, there was another sudden 20% fall last October. For me, this ties back to the incentives born because of knowing that a fall was coming.
A surprise
Banks are in the business of predicting the future. If you’re a bank, you collect some numbers about your potential borrower and feed them into a computer. If the computer spits out “safe!” you give them the money they want. If the computer spits out “unsafe!” you don’t give them the money. (Yeah, it’s a lot like the Sorting Hat. I miss HP.)
But the business of predicting doesn’t end once the money is given out. You must also constantly evaluate the likelihood of you getting your money back. If you feel that your borrower is going to default on their loan, you have to then, by regulation, put some money into a vault and promise not to touch it. This money gets a fancy name (provisions) and sits there as security to effectively cancel out the bad loan you just made.
If you’re cautious, you might keep more money aside than you absolutely need to during a good year, so that there’s some breathing space in a not-so-good year. If you’re adventurous, you might live on the edge. Any money you put into the vault comes from your profits. The more bad loans you make, the more money you keep aside, the lower your profit.
This subjectivity gives banks some short-term control over their financials. They can choose to keep their profit growth nice and stable, or they can go big every time and risk getting drastic hits on their financials at once.
In October 2024, IndusInd’s stock price fell by 20% in a single day. The reason was that the bank’s quarterly financials showed a 40% drop in profit in comparison to the year prior. The reason for the drop in profit was because IndusInd decided to keep more money in the vault than was expected.
Here’s then-CEO Kathpalia from a call with analysts:
[…] We just created it and set it aside. There is no specific reason for creating in this quarter. Only rationale for creating in this quarter was that we believe that the stress in the operating environment is building up.
Analysts questioned him about why the provisions had to come this quarter, and he said that there was really no specific reason for it.
Here’s another analyst asking the same question again (emphasis mine):
The issue is you could have done that previous quarter or quarter earlier because typically, contingent provisions are made in a quarter where you believe you have some excess profitability to provide for. Would it make sense to crash the financials and make a contingent provision because that's what has happened in a very tough quarter already you have gone ahead and made contingent provisions? So, maybe the timing is something which is curious to all of us. That's the only thing.
Kathpalia’s response was the same nothingburger again. It’s unusual for analysts to quiz the CEO of a company twice about the same thing. No one likes pissing off the management of a company and risking them not letting you talk to the CEO again.
Anyway so here’s where we’re at:
Around September 2023, KK & Co got to know about a big accounting goof-up that was almost definitely going to result in a major fall in IndusInd’s stock price.
December 2023 onward, right up to June 2024, KK & Co sold IndusInd stock.
All this while, the bank’s profits were stable and growing. The share price was above ₹1,500 right up till June.
Come October 2024, IndusInd decided to announce provisions that took everyone by surprise and crashed its stock price. It fell to close to ₹1,000.
KK & Co didn’t sell any more stock after June.
SEBI, when it calculated just how much illegal profit KK & Co made by selling stock, did not consider the incentives that were warped just because of their intention to sell. Until they sold their stock, the bank showed record profits. The second they were done, the bank had to suddenly set money aside to cover bad loans. Pleasant coincidence.
SEBI has asked KK & Co to deposit ₹19.8 crore ($2.3 million) and restricted them from buying or selling any stock. For now. There’ll be more to come.
Cover Photo by Mr Alex Photography/Pexels
The others were Sushant Sourav (Head - Treasury Operations), Rohan Jathanna (Head - GMG Operations) and Anil Marco Rao (Chief Administrative Officer - Consumer Banking).
These are the numbers from SEBI’s order BUT Trendlyne shows that Kathpalia actually had a lot more trades. I don’t know why SEBI hasn’t included them. SEBI says Kathpalia sold 125k shares but I see about 235k shares more. Unless I’m getting something wrong, it would make Kathpalia’s profit nearly 3X SEBI’s estimate. (I’ve cleaned up the numbers here if this interests you.)
Great article as usual