HDFC Bank Faces US Securities Law Probe Over Internal Payments Allegations

A US law firm has launched an investigation into whether HDFC Bank violated US federal securities laws following allegations related to internal payments and governance, according to a report by Mint. The development adds to the scrutiny the country's largest private sector lender has faced in recent months.

US-based Glancy Prongay & Rotter LLP said it is examining whether HDFC Bank made materially misleading disclosures to investors or otherwise violated US securities laws. The announcement was published on Business Wire on July 22 and invited investors who suffered losses to contact the firm.

HDFC Bank's American Depositary Shares (ADRs) are listed on the New York Stock Exchange under the ticker HDB, making the bank subject to US securities laws for disclosures made to investors.

Probe Linked to Internal Payments Allegations

According to Mint, citing the Business Wire release, the investigation stems from a report published by The Indian Express on May 27. The newspaper alleged that HDFC Bank conducted an internal vigilance probe into payments routed through its marketing department.

According to the release, The Indian Express reported that the bank allegedly disguised around ₹45 crore as marketing expenses to facilitate higher interest payments to the Maharashtra State Road Development Corporation (MSRDC). The report further alleged that the payments were shown as sponsorship expenses for road safety campaigns, even though they were meant to compensate the corporation through differential interest.

The newspaper also reported that the arrangement may have violated Reserve Bank of India (RBI) regulations, which prohibit banks from offering negotiated interest rates to individual depositors. HDFC Bank has rejected any suggestion of wrongdoing.

Following the publication of the report, HDFC Bank's ADRs fell about 5.1% to close at $74.10 on May 27

Governance Issues Remain Under Spotlight

The US investigation comes months after former HDFC Bank Chairman Atanu Chakraborty's resignation raised questions about the lender's governance practices.

In his resignation letter dated March 17, Chakraborty referred to "certain happenings and practices within the bank" that he said were not in line with his personal values and ethics, without providing further details.

Later, in an interview with CNBC-TV18 on March 30, he indicated that the alleged mis-selling of Credit Suisse's perpetual bonds had been one of the issues behind his differences with the bank's management.

HDFC Bank has maintained that Chakraborty did not specify any practices that conflicted with his values. Following the controversy, the lender appointed US law firm Wilson Sonsini Goodrich & Rosati and Indian law firm Wadia Ghandy & Co. to conduct an independent legal review. According to Mint, the review found no evidence to support Chakraborty's allegations.

Separately, the bank also appointed Trilegal and Wadia Ghandy & Co. to examine board meeting minutes for any discrepancies that Chakraborty may have been referring to, Mint reported.

RBI Backs Bank; Similar US Action Seen Earlier

RBI has also expressed confidence in the lender's governance. Following Chakraborty's resignation, the central bank said there were no material concerns on record regarding the bank's conduct or governance. RBI Deputy Governor Swaminathan J. also said in April that supervisory concerns, whenever they arise, are addressed on an ongoing basis.

This is not the first time HDFC Bank has faced legal scrutiny in the United States. According to an earlier Mint report, US-based Rosen Law Firm announced in 2020 that it was preparing a securities class action on behalf of investors who had purchased HDFC Bank securities.

The proposed action related to allegations concerning the bank's vehicle loan portfolio, internal controls and financial reporting. However, the allegations did not amount to any finding of wrongdoing against HDFC Bank.