An internal report on Standard Chartered's merchant banking division in Bombay, written in 1990, said it had 'aggressively pursued business for the group's benefit and deliberately or mistakenly circumvented proper avenues of control'.
'This may lead to short-term profit . . . but it is probably a recipe for eventual loss and possibly action that could affect the bank as a whole, and not just the merchant bank,' the report said.
But Barry Northrop, the bank's special representative for India, said its senior managers believed the problems had been put right after an internal investigation.
Mr Northrop said the report was given confidentially to a parliamentary committee probing the scandal involving at least four foreign banks in Bombay, Indian brokers and commercial banks.
At least 30 Indian brokers, bankers and businessmen have been arrested, accused of helping to siphon off money from the inter-bank securities market to invest in the stock market and pump up share prices artificially in India's worst financial scandal.
Mr Northrop said Standard Chartered, which has made provisions of pounds 100m for possible losses from the affair, had done 'nothing which other banks in the market were not doing'. While some activities may have breached central bank guidelines 'nothing illegal has been done'.
Following the internal investigation the bank had acted to tighten up its procedures to operate within the guidelines of the Reserve Bank, Mr Northrop said, although it was now apparent that this had not worked. He said the bank was co-operating with those investigating the scandal 'very openly and honestly'.