HDFC Bank crisis is exposing deeper cracks in India Inc's governance model

By Andy Mukherjee

 

India’s largest private-sector lender, HDFC Bank Ltd., is scrambling to respond to investors’ concerns that highlight the extent to which some of the country’s most esteemed firms have lost precious cachet — and, occasionally, the market’s faith.

 

Chairman Atanu Chakraborty resigned March 18, citing “certain happenings and practices” at the bank that are “not in congruence with my personal Values and Ethics.” He later told a TV interviewer that he didn’t depart due to wrongdoing at the lender.

 

HDFC Bank’s senior management, its board of directors and India’s central bank are all trying to reassure the markets. Still, some $17 billion of shareholder wealth evaporated in the three days following the non-executive chair’s exit — suggesting that investors have their own concerns, ranging from the bank’s managerial prowess as well as its handling of now-worthless bonds originally issued by Credit Suisse Group AG. 

   

Investors, including powerhouses like BlackRock Asset Management, grilled the lender’s leadership during a conference call it convened after Chakraborty’s resignation. “Look, if it is too early and you guys have no idea why it was happening, how can you say there’s nothing behind it?” a BlackRock portfolio manager, Prashant Periwal, asked on the call. 

 

I’m curious myself. Why would a former top bureaucrat — Chakraborty served as India’s economic affairs secretary prior to joining the bank — leave when markets are already on edge because of the Iran war?

 

The stock recouped some of its losses this week after the bank appointed external law firms to examine the circumstances surrounding Chakraborty’s abrupt resignation. Even so, this isn’t an isolated incident and investors remain skittish.

 

Many large Indian firms that once commanded premium valuations have had their records and reputations questioned over the past decade. ICICI Bank Ltd. managed to steady itself after first defending its star Chief Executive Officer Chanda Kochhar over a whistleblower’s 2016 allegation that she had lent money to a company from which her husband had received a quid pro quo. In January 2019, the bank terminated her services. Kochhar maintains that no credit decision was taken unilaterally, and there was no conflict of interest on her part. 

 

Infosys Ltd. lost some of its clout in the wake of a whistleblower's complaint of financial malfeasance against its CEO. Although a legal review concluded that there were no conflicts of interest or kickbacks involved in the outsourcing giant’s purchase of another tech firm, as the whistleblower had claimed, CEO Vishal Sikka resigned, he said, to get away from the “continuous drumbeat of distractions and negativity.” After his departure in 2017, the board said that its investigations “found no merit to the unsubstantiated and anonymous” accusations.

 

The Tata Group found itself in the middle of a bitter boardroom battle in 2016 that involved allegations of mismanagement. It is currently in the center of yet another power play. The board of Tata Sons, the group’s holding company, deferred a decision last month on granting a third term to Natarajan Chandrasekaran, the first non-heir executive chairman in the conglomerate’s 158-year history. “Nothing changes” for the leadership, Chandra, as he is known, said after the board meeting. His current term still has nearly a year left. Even so, the charitable trusts that control the $300 billion empire are asking tough questions about mounting losses in the conglomerate’s aviation and e-commerce units. They also want a swift settlement with the largest minority shareholder, the Shapoorji Pallonji Group, which wants the closely held Tata Sons to go public. 

 

Most of these major Indian firms have maintained listings in the US or Europe, underscoring the importance they have historically attached to wooing global capital with strong governance. A good example is HDFC. For years, foreigners dipping their toes into the Indian market bought the mortgage lender Housing Development Finance Corp., or HDFC, and its offspring, HDFC Bank, as proxies for India’s world-beating economic growth — minus the chaos of family control. In 2023, the nonbank financier was folded into the bank. Whatever convinced Chakraborty to resign took place in this post-merger era.

 

No single entity or family controls the lender. Global institutions owned nearly half of the shares in December. So accountability can be tricky when problems emerge. The Reserve Bank of India, the banking regulator, keeps a close eye on the behemoth because it rates the institution as systemically important domestically. The RBI tried to allay investors’ recent misgivings, stating the bank is well-capitalized and has “sound financials, a professionally run board and competent management.” 

 

For decades, the HDFC duo — the mortgage financier and the bank — boasted of charismatic leaders who lorded over their separate domains but who have since departed. Their shadows still loom large over the combined institution and its various factions. Following Chakraborty’s sudden exit, analysts are now questioning if CEO Sashidhar Jagdishan and his deputy, Kaizad Bharucha, are in sync.

 

On the call with investors last week, the CEO and Keki Mistry, the new interim chair, went to great lengths to portray a unified senior team. “I do not know what kind of stories are going around,” Jagdishan said, adding that his deputy’s reappointment to the board for another three years has been approved by the regulator. “He will only get more responsibilities as we move forward.”

 

That continuity is important because high-profile exits at the bank are becoming a trend: The chief human resources officer left in June, and Executive Director Bhavesh Zaveri — once a CEO contender — isn’t seeking a reappointment when his board term ends next month.

 

The regulator for the Dubai International Financial Center stopped HDFC Bank’s branch there from signing up new clients last year after receiving complaints that the lender’s employees had sold risky Credit Suisse bonds to high-net-worth individuals in the United Arab Emirates as “safe” investments, when they were anything but: These notes were written down to zero during the Zurich-based investment bank’s 2023 collapse. 

 

The lender has said there is no link between Chakraborty’s departure and problems with the Credit Suisse bonds. It also disputes allegations that the bonds were improperly marketed. There were documentation gaps in onboarding customers, but the sales were appropriate, it says. “The clients were well off and could take rational financial decisions,” Jagdishan told the Times of India. “But when they lost money, they tried to find technical loopholes and tried to pin blame on the distributor.” On the Monday following Chakraborty’s resignation the bank informed the stock exchange that it had conducted an internal investigation into the Dubai regulator’s order, and following that inquiry, it had decided to remove three employees from the services of the bank. 

 

Other problems have crept up at HDFC Bank. In December 2020, the RBI barred it from issuing fresh credit cards for eight months due to tech outages. New digital-product launches remained suspended for more than a year. It has also recently attracted bad publicity — alongside nearly every other Indian bank — for a “digital arrest” scam that’s duped ordinary account holders of billions of dollars of life savings.

 

Fixing a broken halo is tougher than correcting strategic missteps. India’s professionally run companies were popular with investors because they offered protection from tycoons taking advantage of minority shareholders — not to mention internecine family feuds that also destroyed value. HDFC Bank is the most recent example that professional managers and independent directors aren’t bulwarks against any number of possible corporate problems.

 

In 2018, when the Indian financial system was reeling under the world’s largest pile of bad loans, HDFC Bank shares commanded a price-to-book multiple of more than five times. That valuation has deflated to roughly two times after the recent selloff. And a chairman who departs without fully explaining himself only heightens the market’s fears. 

(Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper)