Japanese financial giant Nomura Holdings Inc. has launched an internal investigation into its India fixed-income operations, focusing on whether profits were artificially inflated in recent years, according to sources familiar with the matter.
Compliance Department Leads Probe
The bank's compliance department initiated the scrutiny approximately one month ago, targeting the valuation and accounting practices of Nomura's local primary dealership in India. Senior officials within the rates division are being questioned as part of the comprehensive review.
The investigation centers on how the firm valued trades in Strips, which stands for Separate Trading of Registered Interest and Principal of Securities. These specialized instruments are created by separating the principal and coupon payments of Indian sovereign securities.
Focus on Strips Market Practices
At the heart of the inquiry is whether Nomura's trading desk marked positions using theoretical prices that failed to accurately reflect actual market liquidity. This practice potentially allowed the bank to report higher gains than what market conditions would justify.
The timing of this investigation is significant given the explosive growth in India's Strips market. Trading volumes in Strips surged to 2.47 trillion rupees ($28 billion) in the year ended March 31, representing a more than six-fold increase compared to five years ago, according to clearing house data.
Market experts note that by splitting long-dated government bonds into separate principal and interest components, financial institutions can potentially record unrealized gains in illiquid securities, creating opportunities for accounting practices that may overstate reported profits.
Significance in India's Debt Market
Nomura's internal review carries substantial weight in financial circles because the bank is considered one of the key players in India's Strips market. This segment represents a niche but rapidly expanding component of India's massive $1.3 trillion sovereign debt market.
The investigation highlights growing concerns among regulators and market participants about the Strips segment, which has increasingly become a hotspot for accounting practices that potentially exaggerate reported gains.
Demand for Strips has seen remarkable growth, primarily driven by insurance companies that prefer zero-coupon securities to protect their cash flows from interest-rate fluctuations. These institutions have significantly ramped up their purchases of these instruments in recent years.
A representative for Nomura declined to comment on the ongoing investigation when approached for clarification. The people familiar with the matter requested anonymity because the information hasn't been made public.
