Lender fixes accountability: HDFC Bank clears path for CEO call

With the legal review and the MSRDC deposit issue now closed, HDFC Bank's board is expected to take up Managing Director and CEO Sashidhar Jagdishan's reappointment

HDFC Bank’s decision to impose a token penalty of ₹1 lakh on Managing Director (MD) and Chief Executive Officer (CEO) Sashidhar Jagdishan, along with two other senior executives, and issue warning letters was aimed at fixing accountability for the violation of a Reserve Bank of India (RBI) directive, as there are no norms or precedents for such action, sources said. 

According to analysts, it also clears the way for the Board to take a call on the CEO’s reappointment. 

According to a source aware of the development, RBI norms do not restrict banks from offering a particular interest rate on deposits but require them to offer the same rate to all depositors with a similar profile on a given day, irrespective of the size of the deposit. In this case, there was no corruption or mala fide intent, but there was a violation of an RBI requirement that warranted action. 

“Had there been mala fide intent or corruption, the consequences would have been far more severe and could have involved asking the executives concerned to leave. This was essentially a case of business overreach — an attempt to secure the deposit at any cost,” the source said. 

On Monday, HDFC Bank issued warning letters and imposed a monetary penalty of ₹1 lakh each on three senior executives: Jagdishan; Srinivasan Vaidyanathan, chief financial officer; and Arvind Vohra, group head, retail assets. The action followed an internal review by a special disciplinary committee of independent directors into the bank’s arrangements with the Maharashtra State Road Development Corporation (MSRDC) to garner deposits in 2017 and 2021. 

The board concluded that the lapse was not mala fide and amounted to business overreach rather than misconduct. The board formed a panel of independent directors to ensure an impartial assessment of the matter. The committee held 10-12 meetings, scrutinised a large volume of documents, considered legal opinions, examined witnesses, and reviewed other relevant material before arriving at its recommendations, sources said. 

A key consideration before the committee was whether executives at different levels of the hierarchy should face the same consequences. “The person who executed the transaction at a lower level could not necessarily be treated on a par with the senior executive who approved it. Accountability had to reflect seniority and responsibility,” the source said. 

Accordingly, senior executives were also subjected to a monetary penalty, which, while not material in the context of the bank’s size, was intended to serve as a punitive measure and reflect their higher level of responsibility. 

There is no regulatory prescription specifying whether such a violation must attract punishment or determining the nature or quantum of such action. The decision was therefore left to the board’s discretion. In this instance, the independent directors recommended the course of action, which was subsequently ratified by HDFC Bank’s board. 

According to Suresh Ganapathy, MD and head of financial services research at Macquarie Capital, HDFC Bank’s decision to impose penalties and issue warning letters to members of its senior management, including Jagdishan, is a first-of-its-kind in the sector. While the bank’s board concluded that the episode amounted to business overreach and did not involve any mala fide intent or personal gain, Ganapathy said the key question now is whether the action could have any bearing on the extension of Jagdishan’s tenure, which expires at the end of October 2026. 

“This distinction preserves a decent chance of Jagdishan securing a three-year extension from both the board and the RBI. Completion of the review removes a key pending issue and provides the relevant authorities with a definitive factual assessment. We thus expect the reappointment decision to progress over the coming weeks. The outcome depends on how the board and regulator weigh the breach against the absence of improper intent, but the review’s measured conclusions support a constructive interpretation, in our view,” Macquarie Research said in a report. 

Jagdishan, who was appointed in 2020 for three years, received an extension in 2023. His term ends in October.

 

According to a JP Morgan note, the action taken by HDFC Bank’s board should help bring closure to the MSRDC deposit arrangement matter, with the conduct characterised as “business overreach” rather than involving any improper intent.

 

The brokerage said the development increases the probability of the board recommending a fresh term for Jagdishan as MD and CEO. “However, investors are likely to remain focused on management continuity and the path towards reducing uncertainty around the bank’s leadership. Any renewal of the CEO’s term or reappointment remains subject to the board’s recommendation and approval from the RBI,” the note said.

 

Sources said two obstacles that could have stood in the way of the reappointment were the legal review into former part-time chairman Atanu Chakraborty’s allegations and the MSRDC issue. Both issues have now been formally closed, paving the way for the board to take up the CEO’s reappointment.

 

The MSRDC matter comes against the backdrop of governance-related scrutiny at the lender following the resignation of the then part-time chairman Chakraborty in mid-March. Chakraborty had alleged that certain “happenings and practices” at the bank were inconsistent with his values and ethics.