Nomura Probes India Bond Trades Amid Profit Concerns

Nomura Holdings Inc., a leading global investment bank, has launched a review of its India fixed-income business, focusing on how its trading desk handled a niche yet rapidly expanding segment of the country’s sovereign debt market. The probe, carried out by the bank’s compliance team, aims to determine whether reported profits were inflated in recent years.

The inquiry revolves around Strips — Separate Trading of Registered Interest and Principal of Securities — which are created by splitting long-term Indian government bonds into principal and interest components. By doing so, institutions can book gains on otherwise illiquid securities, a practice that has drawn scrutiny due to its potential to overstate earnings.

Trading in Strips has surged dramatically, reaching Rs 2.47 lakh crore ($28 billion) in the year ended March 31, more than six times higher than five years ago. The spike is largely driven by insurance companies seeking zero-coupon instruments to protect cash flows from interest-rate fluctuations.

Nomura’s compliance unit is examining whether the bank’s rates division marked these positions at theoretical prices that did not reflect actual market liquidity. Such valuation methods can artificially boost reported profits, particularly in a market that remains relatively small but growing fast.

The investigation highlights the increasing attention regulators and market participants are paying to the Strips segment, which, while offering unique hedging opportunities, also presents risks of aggressive accounting and profit inflation.

Trading insiders note that the Strips market, though lucrative, requires careful valuation due to its illiquid nature and sensitivity to interest-rate movements. As one source familiar with the matter explained, “The market has grown rapidly, but accurate pricing remains challenging. Banks need to ensure reported gains truly reflect market realities.”

With scrutiny intensifying, Nomura’s probe may set a precedent for how major players handle accounting in India’s evolving sovereign debt space, potentially influencing valuation practices across the industry.