HDFC Bank fines CEO, CFO and retail head for business overreach; closes MSRDC case

HDFC Bank has concluded its internal review into the Maharashtra State Road Development Corporation (MSRDC) deposit arrangement, with the bank's board determining that the conduct of the employees involved amounted to business overreach rather than any mala fide action, personal enrichment or improper motive.

The review relates to deposit arrangements undertaken with MSRDC in 2017 and 2021. Acting on the recommendations of a Special Disciplinary Committee of Independent Directors, the board decided to issue warning letters and a monetary penalty of ₹1 lakh each to the bank's Managing Director & CEO, Chief Financial Officer and Group Head – Retail Assets. The remaining employees involved have been issued warning letters.

The bank said the board acknowledged that there could have been a potential divergence from applicable Reserve Bank of India (RBI) directions, which formed the basis for the disciplinary action.

At the same time, it emphasised that the internal review found no evidence of personal gain or any improper motive on the part of the employees concerned.

HDFC Bank also said the matter would be communicated to the Reserve Bank of India, in line with the board's directions. The disclosure follows an earlier intimation made by the lender in May and, according to the bank, has been made from a good governance perspective, even though it does not trigger a mandatory disclosure requirement under SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations.

Also Read: HDFC Bank US investigations FAQ: Why they started, what happens next and what it means for investors

Ahead of the development, shares of HDFC Bank closed at ₹740.25 on the NSE, down 0.34% for the day.

What legal and governance experts are saying

Abizer Diwanji, Founder, Neostrat Advisors, said accountability should logically extend to both the executives who were in charge when the arrangement was entered into and those who continued overseeing it while it remained in force.

"If this issue is a 2021 issue, then it would apply to whoever was in that executive position at that point in time I would think. I think it would go across because it would also go to the existing one, given that the arrangement was in force even till now, till the new CEO was there. So, I would think logically, if a fine is levied, then it has to be levied on both."

He added that the matter stemmed from the manner in which the negotiated deposit arrangement was implemented, rather than from the nature of the account itself.

"This is not an RBI violation of sorts because it pertained to a savings account. It did not pertain to a current account which would have been a violation. What's the violation really is that the negotiated rate first of all has to be applied to a particular level of deposit which MSRDC was not able to meet."

H.P. Ranina, Senior Supreme Court lawyer, said transparency and full disclosure would strengthen HDFC Bank's position if the matter were examined further, adding that "business overreach" alone would not be sufficient to establish wrongdoing.

"I don't think that at this point of time there is much to worry about, because so long as you are clear, you are transparent, you are making all the facts known... I think you can say that they have acted in a bona fide manner."

He added that any proceedings in US courts would hinge on proving mala fide intent.

"It all depends on the facts of the case... if there was any mala fide intent, then alone the prosecution can be launched. Otherwise, I don't think the American courts will even entertain such a petition."