In fact, former banker and treasury expert Manoj Rane, who was part of IndusInd Bank’s founding team, too, pointed out a critical flaw in the bank’s structure in a LinkedIn post: “The asset-liability management and trading business at the bank were not separated and reported to the same person. If the hedges were appropriate, there was no reason for this loss to surface.”

The fallout of this fiasco is not just financial but reputational. Investors are wary, and history suggests that once confidence in a bank is shaken, it takes time to rebuild. Manoj Shenoy, co-founder & CEO of wealth advisory and asset management firm BugleRock Capital, tells Fortune India: “Whenever there’s an issue of integrity or trust, the stock gets a lower valuation for a while. Maybe it’ll come back in two years, but for now, people will be watching.”

Adding to the uncertainty, the Reserve Bank of India approved Sumant Kathpalia’s reappointment as MD & CEO for only one year instead of three. The shortened tenure signals a lack of full confidence.

A key question remains: Will the RBI allow the promoters to increase their stake to stabilise the bank? Shenoy thinks it’s likely. “The axe will fall on the CFO and CEO, but the promoters will be allowed to increase their stake as they are bringing in fresh capital,” he says.

The bank remains adequately capitalised, and depositors face no immediate risk. But the book was inflated, and now the earnings are undergoing a correction. This explains the stock price decline — down nearly 20% in the past few weeks. While the stock is now trading at a steep discount — 0.9x book value, and a 7x PE ratio, perception is everything. Right now, the market isn’t convinced that the worst is over. But IndusInd’s slide has coincided with a rise in Kotak Mahindra Bank’s share price, which is up over 11% YTD and 3% in five days. With financials enjoying a high weightage in the index, investors need exposure to the sector. They now have safer options.

If perception shapes reality, then in the world of investing, failing to see beyond what is known can be the greatest risk of all.

Book Value Sanctity

IndusInd Bank’s derivative debacle: When accounting leads to a credibility crisis