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India's Largest Private Bank Fined Its Own Chief Executive
MUMBAI — The board of HDFC Bank, India's largest private lender, fined its own chief executive this week over his handling of a state government deposit, a rare public rebuke that has deepened a run of governance…
Once viewed as one of India's top financial institutions, HDFC Bank has had a number of corporate governance missteps, bringing to the fore deep and structural governance problems in India's corporate sector.
MUMBAI — The board of HDFC Bank, India's largest private lender, fined its own chief executive this week over his handling of a state government deposit, a rare public rebuke that has deepened a run of governance controversies at a bank long considered the country's most disciplined.
A committee of independent directors fined the chief executive, Sashidhar Jagdishan, 100,000 rupees, about $1,150, along with the bank's chief financial officer, Srinivasan Vaidyanathan, and its head of retail assets, Arvind Vohra. The bank disclosed the penalties to stock exchanges on July 27, after the committee reviewed how the bank had courted deposits from the Maharashtra State Road Development Corporation, a state infrastructure agency, in 2017 and again in 2021.
The sum involved was not small.
The bank paid the agency roughly 450 million rupees, about $4.7 million, describing the payments internally as marketing expenses, according to reports that prompted the board's review. The board concluded the payments functioned as inducements to win and keep the deposits, an arrangement it said may have diverged from central bank directions. It stopped short of finding personal enrichment or bad faith, calling the conduct "business overreach" instead.
Chump Change
The fine itself is nominal against Mr. Jagdishan's compensation, which has run into the tens of millions of rupees annually. It is nonetheless the third governance episode to strike HDFC Bank in five months, after the resignation of its chairman in March and the dismissal of three executives over bond sales to overseas clients in Dubai. The bank's shares have fallen 27 percent from their 52-week high, to about 748 rupees, even as its lending business remains healthy by most conventional measures.
"None of this touches the balance sheet," analysts at Icarus Asia Research wrote in a note this week. Capital levels, asset quality and profitability, they said, remain intact by every metric the bank reports quarterly. What has come under strain is something harder to quantify: the premium investors have long paid for HDFC Bank's reputation.
Reputation is like Fine China
That reputation took shape over three decades.
Founded in 1994, in the first wave of private banking licenses issued after India opened its financial sector, HDFC Bank built a name for conservative lending and consistent execution. From January 2005 to June 2024, its shares returned roughly 30 times their value, against about four times for the NIFTY 50 index, according to academic studies of its performance. A 2023 merger with its former parent, the mortgage lender Housing Development Finance Corporation, was the largest corporate deal in Indian history and turned the bank into a universal lender spanning mortgages, insurance and retail banking.
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently. - Warren Buffett
The trouble began in Dubai.
HDFC Bank staff there sold Additional Tier-1 bonds issued by Credit Suisse to wealthy Indian clients abroad as fixed-maturity, capital-safe products, according to findings from an internal investigation.
The bonds carried no such guarantee.
They were designed to absorb losses first if Credit Suisse ran into trouble, which it did in 2023, when regulators wrote the bonds down to zero as part of the bank's rescue by UBS. The Dubai Financial Services Authority restricted new client onboarding while it investigated. By March, the bank had dismissed three senior executives, including Sampath Kumar, its group head of branch banking, and penalized about a dozen more employees by withholding pay increases and stock awards.
Weeks later, Atanu Chakraborty, the bank's part-time chairman, resigned with immediate effect. In his resignation letter, Mr. Chakraborty said certain practices at the bank over the previous two years were "not in congruence with" his personal values and ethics, without elaborating publicly. The bank's shares fell more than 5 percent on the news, and its market value dropped by more than 61,000 crore rupees, about $7.3 billion, over the following week.
The board hired two outside law firms, Wilson Sonsini Goodrich & Rosati and Wadia Ghandy & Co., to investigate what Mr. Chakraborty meant.
Their review, which lasted three months and included interviews and a review of board minutes, found no record of Mr. Chakraborty having raised the concerns his letter described, including what bank insiders had come to call "the Dubai matter." The firms said they tried repeatedly to interview Mr. Chakraborty but that he declined to participate. The Reserve Bank of India said separately that the bank remained "systemically important, financially sound, and professionally managed," with "no material concerns on record" regarding its governance, clearing the way for the central bank's pending approval of Mr. Jagdishan's reappointment.
Data security has been a problem too.
In early 2023, a hacker uploaded loan records for roughly 600,000 customers to a dark-web forum, data that traced back to a third-party processor used by the bank's non-bank finance arm. The bank initially said its own systems had not been breached; it later told Reuters that a service provider handling its customer data had, in fact, been compromised. A separate breach at HDFC Life Insurance, an affiliated but distinct company, followed in November 2024.
The Maharashtra deposit matter has drawn scrutiny in the United States, too.
American Shareholders Call for Accountability
HDFC Bank's American depositary receipts trade on the New York Stock Exchange.
When the Indian Express published a detailed account of the payments on May 27, reporting that Mr. Jagdishan knew of them, the depositary receipts fell 4.1 percent that day, to $23.78.
Four American law firms, including Levi & Korsinsky, LLP and the law offices of Glancy Prongay Wolke & Rotter LLP, The Law Offices of Howard G. Smith and Frank Cruz, have since opened investigations into potential violations of federal securities law and are soliciting shareholders who lost money. None had filed a class-action complaint as of this writing; announcing an investigation is a common precursor to litigation, not a guarantee one follows. HDFC Bank's depositary receipts faced a securities class action once before, in 2020, over unrelated vehicle-financing disclosures, in the United States District Court for the Eastern District of New York.
Taken individually, none of the episodes threatens HDFC Bank's solvency.
Taken together, they have reframed how investors price the bank, which for years was treated as a default holding for domestic and foreign portfolios alike. The past sixteen months have made governance, rather than credit quality, the central question hanging over India's largest private bank.
"The market's shift from assuming best-in-class governance to actively discounting potential lapses," the Icarus Asia analysts wrote, "suggests that future valuation will hinge as much on demonstrable improvements in culture and controls as on traditional bank performance metrics."
The market's shift from assuming best-in-class governance to actively discounting potential lapses suggests that future valuation will hinge as much on demonstrable improvements in culture and controls as on traditional bank performance metrics. - Icarus Asia Research
Reserve Bank of India (RBI), Dubai Financial Services Authority (DFSA) and Insurance Regulatory and Development Authority of India, India's insurance regulator, are each still weighing separate aspects of the bank's conduct, and any of the three could still impose restrictions beyond the sums involved so far.
HDFC Bank is maintaining a deafening silence. That doesn't augur too well for the flagbearer of India's financial sector.
The author is the Head of Research and Analysis at Icarus Asia, a Hong Kong-based risk and advisory consulting firm. He has covered India's financial sector as a journalist for close to two decades.
DISCLAIMER
This is strictly not investment advice. Readers are advised to consult with a registered financial advisor before taking any decisions.
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