HDFC Bank CEO and MD, CFO get warning letters, ₹1 lakh penalty for ‘business overreach’ in MSRDC deposits

Mumbai: HDFC Bank’s board on Monday issued warning letters and levied a ₹1 lakh penalty on three top officials of the bank, after announcing the completion of an internal review for the Maharashtra State Road Development Corporation (MSRDC) issue.

These officials include managing director and chief executive officer Sashidhar Jagdishan, chief financial officer Srinivasan Vaidyanathan, and Arvind Vohra, group head for retail assets.

In a filing with the exchanges, the bank said it has also issued warning letters to other employees involved in the case.

The matter pertains to the bank’s arrangement with MSRDC for garnering deposits in 2017 and 2021, as reported by Indian Express on 27 May. The report alleged that HDFC Bank made payments of ₹45 crore to MSRDC — routed as marketing expenses — to effectively offer higher returns on its deposits with the bank.

The newspaper report had also claimed that internal records reviewed during the probe pointed to discussions involving senior management, including Jagdishan. The payments were allegedly structured as ‘differential interest’ linked to deposits from MSRDC, but were routed through the bank’s marketing department and shown as contributions towards a road safety awareness campaign involving local vendors, instead of being directly booked as interest payouts.

In a meeting on 23 July, the board concluded that the conduct of the employees involved constituted “business overreach” rather than any mala fide action, personal enrichment, or improper motive.

However, keeping in view “any potential divergence with the applicable RBI Directions and based on the recommendations of the Special Disciplinary Committee of Independent Directors”, it decided to issue warning letters and monetary penalty.

When the issue first came to light, HDFC Bank had said that it has robust internal oversight, audit and control processes and systems, and that full process is always followed before final determination post any internal review. It also rejected any assumptions of wrongdoing or culpability “based on selective material”.

“The only way to close these issues is to actually impose some level of penalty. This is not such a massive control breach, and nobody really has defaulted the bank or committed a fraud,” said Abizer Diwanji, Founder - NeoStrat Advisors LLP. “It was a commercial negotiation, which has been implemented in a rather crude manner.”

HDFC Bank notified the exchanges post market hours on Monday. Shares of the lender ended 0.4% lower at ₹739.55 on the NSE.

Expert views

The board’s decision appears to be an attempt to draw a line between commercial overreach and dishonest intent, said Soumya Singh, co-founding partner, Thistle&Law, adding that the absence of mala fide intent, however, does not automatically eliminate accountability from a governance perspective. 

“In regulated banking, even business overreach can be serious if it creates divergence from applicable RBI directions or weakens the integrity of internal controls,” Singh said.

Faraz Alam Sagar, partner, head dispute resolution & white collar crimes at CMS INDUSLAW, questioned whether the findings of the review will hold up with RBI now that the bank has acknowledged a potential divergence from regulatory expectations. “The real question is not whether the review is internal or external. The question is whether it is independent, credible and sufficiently rigorous.”

When the matter involves the conduct of people at the very top of the organisation, or has drawn attention from outside the country, the biggest weakness of a purely internal review is that people may doubt how independent it really is, said Tanmay Banthia, partner at TARAksh Lawyers and Consultants. “It would be quite reasonable for stakeholders to expect the internal review to be backed up, where needed, by an independent or external examination.”

The board’s decision comes even as the bank is being investigated by three US-based law firms. Earlier this month, Glancy Prongay & Rotter LLP, the Law Offices of Frank R. Cruz, and the Law Offices of Howard G. Smith launched investigations into whether HDFC Bank violated US federal securities laws by way of alleged irregular payments, and invited investors who suffered losses to contact them, Mint reported on 23 July.

While markets generally value closure, governance is ultimately judged not by the completion of reviews but by demonstrable improvements in oversight, culture and internal controls, said Shreevardhan Sinha, senior partner, ESG, Desai & Diwanji. “The announcements by the US law firms mean the governance narrative is unlikely to disappear immediately. Even if those investigations do not ultimately result in litigation or adverse findings, they can prolong investor attention and reputational risk.”

Rising scrutiny

The incident increased scrutiny around governance practices at the country’s largest private sector bank, following concerns surrounding the sudden exit of former chairman Atanu Chakraborty on 17 March, citing “certain happenings and practices within the bank”.

In the bank’s annual report for FY26, Jagdishan said that Chakraborty’s sudden exit was a “challenging event” that triggered tough questions about the bank’s corporate governance.

Following the exit, the board appointed US-based Wilson Sonsini Goodrich & Rosati and Indian firm Wadia Ghandy & Co. to conduct the independent inquiry, and firms Trilegal and Wadia Ghandy & Co. to examine the minutes of board meetings for any discrepancies that Chakraborty may have referred to.

On 26 June, the bank notified that the law firms had found “no basis” for Chakraborty’s statement, and that witness interviews did not support or substantiate his statements. On 29 June, former chief election commissioner (CEC) and financial services secretary Rajiv Kumar was appointed part-time chairman, to succeed interim chairman and group veteran Keki Mistry.

“The (MSRDC) issue was picked by internal controls and not something that came out of an inspection. So the bank has robust controls to prove this,” NeoStrat’s Diwanji said, adding that the issue demands less importance than what has been given to it now. “If the Atanu Chakraborty issue was not there, this would not have been an issue at all,” he said, adding that the bank however needs to strengthen the management bandwidth.

Jagdishan took over as the head of the bank effective 27 October 2020 following the retirement of former chief Aditya Puri. Jagdishan joined HDFC Bank in 1996 and was appointed the chief financial officer in 2008, prior to heading the bank.

CFO Vaidyanathan joined HDFC Bank from Citibank in the beginning of 2019, taking over from Jagdishan. Vohra, group head - retail assets, joined the bank in 2018 as group head of retail branch banking, trade and forex business before taking over his current position in September 2023.