Did Nomura's Indian division report inflated profits?
What's the story
Investment banking giant Nomura Holdings has launched an internal investigation into its Indian fixed-income business, amid allegations of inflated profits in recent years. The probe, led by the bank's compliance department, is focused on how trades in Strips were valued. Strips or Separate Trading of Registered Interest and Principal of Securities are bonds created by separating the principal and coupon payments of Indian sovereign securities.
Market impact
Nomura's role in India's sovereign debt market
The investigation is particularly significant as Nomura is a major player in the Strips market, a niche but rapidly growing segment of India's $1.3 trillion sovereign debt market. The move comes amid rising concerns over this segment, which has been increasingly targeted by accounting practices that could potentially inflate reported gains.
Trading growth
Strips trading volumes surge amid market scrutiny
Trading volumes in Strips have surged to ₹2.47 lakh crore in the fiscal year ending March 31, over six times higher than five years ago. The spike is due to insurance companies buying more zero-coupon securities to protect their cash flows from interest-rate fluctuations. Nomura's compliance unit has been investigating the valuation and accounting practices of its local primary dealership for about a month now.
Probe details
Investigation into potential market liquidity misrepresentation
The ongoing inquiry by Nomura's compliance unit is looking into whether the trading desk marked positions to theoretical prices that didn't reflect actual market liquidity. This practice could have potentially inflated gains. By splitting long-dated Indian government bonds into separate principal and interest parts, institutions can record unrealized gains in illiquid securities.