Introduction

The conventional discourse in corporate governance often treats sectors as homogenous, yet the banking and financial services (BFS) sector requires a distinct analytical lens. This research adopts a sector-specific approach to examine Indian corporate scandals, focusing on how governance factors contributed to failures and the subsequent reforms. The authors identify two waves of scandals: the first, exemplified by the Satyam scandal in 2009, and a second wave over the last decade specific to BFS companies.

The BFS sector is unique due to the role of depositors, who lack control rights and suffer from information asymmetry regarding the quality of loan portfolios. Governance failures in systemically important financial institutions create significant externalities, passing risks to third parties and the broader economy. Furthermore, moral hazard problems affect managers, shareholders, and depositors alike, often leading to excessive risk-taking by ‘star’ CEOs or promoters within a dual regulatory regime involving the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Ministry of Corporate Affairs (MCA).

‘Star’ promoters and tunnelling – YES Bank financial scam

The YES Bank episode (2020) serves as a case study for the risks associated with dominant ‘star’ promoters who are founders, CEOs, and controlling shareholders. Rana Kapoor continued to exercise considerable influence over vital decisions by virtue of being the CEO despite a minority shareholding. Under his leadership, the bank followed aggressive lending practices, with its loan portfolio ballooning from approximately ₹98,210 crores in March 2016 to around ₹203,534 crores by March 2018. A 2015 Asset Quality Review (AQR) by the RBI revealed that NPAs were seven times higher than disclosed, standing at ₹4,925.68 crores in March 2016.

The scandal involved wealth tunnelling through related party transactions, including debentures subscribed in Dewan Housing Finance Limited (DHFL) worth more than ₹3,700 crores, some of which allegedly flowed through to Kapoor family-controlled firms. The resulting crisis saw YES Bank shares fall from a high of ₹400 in 2018 to an all-time low of ₹5 in 2020, representing a 95% fall. In response, the RBI enacted the BG–Master Directions in 2025, capping the tenure of promoters in MD or CEO positions to 12-15 years and expanding the definition of related parties to include relatives and major shareholders holding 10% or more.

Gatekeepers’ failure – the IBL derivative accounting ‘fraud’?

The IndusInd Bank (IBL) case (2025) highlights failures among internal and external gatekeepers, such as the board of directors, audit committees, and auditors. IBL disclosed improper accounting of derivative transactions, resulting in an adverse impact of ₹1,529.88 crores—roughly 2.35% of its net worth as of December 2024. Although the issue was detected internally in December 2023, it was not publicly disclosed until March 2025. Additionally, an internal audit in May 2025 found ₹172.58 crores was incorrectly recorded as fee income in the microfinance business.

This episode demonstrates how controlling shareholders can influence gatekeepers, leading to ineffective oversight. The National Financial Reporting Authority (NFRA) questioned the scope of auditing after reports that IBL’s auditors removed ‘derivative valuation’ from key audit matters just before the scandal came to light. Consequently, the RBI’s 2025 directions now mandate more prescriptive requirements for audit and risk management committees, including higher quorum requirements and specific qualifications for key managerial personnel such as the Chief Risk Officer and Chief Financial Officer.

Regulatory failure and turf wars – IL&FS: India’s Evergrande moment?

The IL&FS crisis (2018) epitomises systemic risk within complex financial conglomerates. IL&FS, an unlisted holding company with 24 direct and 135 indirect subsidiaries, had collected over ₹91,000 crores in debt instruments. The group’s subsidiaries defaulted on loan payments in 2018, causing a market crash and highlighting regulatory arbitrage. IL&FS operated as an infrastructure lending NBFC falling between the jurisdictions of the RBI, MCA, and SEBI, which led to a ‘regulatory turf war’ over oversight responsibilities.

The resolution process remains incomplete; as of March 2025, only ₹45,281 crores of the ₹61,000 crore debt resolution target has been resolved. The crisis underscores the need for a coordinated regulatory approach and a dedicated resolution framework for financial entities that are ‘too-big-to-fail’.

Reform agenda and conclusion

The authors argue that current reformative responses are often ‘knee-jerk’ reactions that address issues in isolation. A wholesale reconsideration of the corporate governance framework is required. This includes empowering the Financial Stability and Development Council (FSDC) with a dedicated sub-committee for enforcement and legal backing. Directors of BFS companies should be held to a higher standard of care, reflecting their status as ‘public servants’ under the Banking Regulation Act, 1949. This would ensure they effectively interrogate risk management frameworks rather than relying on the protection of the business judgement rule.