On March 18, Atanu Chakraborty, the part-time non-executive Chairman and Independent director of HDFC Bank, resigned, stating that “certain happenings and practices within the bank, that I have observed over the last two years, are not in congruence with my personal values and ethics”. Chakraborty, a 1985-batch IAS officer who last served as Secretary in the Department of Economic Affairs, Union Finance Ministry (2019-20), and was appointed as part-time Chairman of HDFC Bank in May 2021, with his tenure lasting until May 4, 2027, did not cite any ‘personal reasons’ for his exit.
The HDFC Bank’s top management, including fellow board members, claimed that Chakraborty did not divulge any specific reasons for his resignation even after they were sought. This left the bank’s management, his board colleagues and even the investors and media at large baffled. However, the bank issued a statement stating that there are no governance or financial problems at the bank.
On March
19, the Reserve Bank of India (RBI), regulator of the banking system in the
country, issued a strong and reassuring statement about the bank: “Based on our
periodical assessment, there are no material concerns on record as regards its
conduct or governance. The bank remains well-capitalised, and the financial
position of the bank remains satisfactory with sufficient liquidity”. Simultaneously,
the RBI authorised a temporary leadership arrangement—Keki Mistry,
Non-Executive (non-independent) Director, was appointed as interim part-time
chairman for three months to ensure stability.
But the resignation of a bank’s chairman is never a routine matter, for it signals deeper organisational issues. Unsurprisingly, Chakraborty’s abrupt resignation with an enigmatic comment had already sent shock waves through the market. The result is: HDFC Bank’s market capitalisation plunged by 152,689 cr over three trading sessions between March 19-23. Over the said 12% loss in market cap, it also inflicted significant reputational damage.
That aside, HDFC Bank is recognised as a domestic systemically important bank, implying that any governance or risk-related issues with the bank could have a wider impact on the entire financial system. Secondly, the bank carries significant weight in the Nifty 50 as well as the Nifty Bank index. Intriguingly, Chakraborty, in a televised interview, later clarified that there was no wrongdoing and there were only ideological differences. A sense of a lack of transparency in the bank’s management became apparent, raising red flags about the corporate governance.
There are also reports indicating excessive involvement of the former chairman in operational decisions. Such involvement of the board at the proposal formulation stage is more likely to vitiate their independent judgment. It also causes management tensions. There are also reports indicating that three senior executives were asked to leave the bank over the mis-selling concerns of A1 bonds of Credit Suisse in Dubai.
All this cumulatively created a great amount of uncertainty about the bank—it indeed stirred a hornet’s nest. The bank was on conference calls with analysts, investors and the media, wherein its newly appointed interim Chairman, stressing that the bank operates with strong governance standards, said: “I would not have taken on this responsibility at the age of 71 if it did not align with my principles and the level of integrity that I would expect from the bank”. In a similar vein, its managing director, Sashidhar Jagdishan, tried to portray a bright picture of the bank. But by then, damage has already been done, for resigning from a high-profile non-executive role on ethical grounds is a rare phenomenon in the Indian corporate world.
The Companies Act requires the directors of any company to act in good faith to promote the objects of the company and in the best interests of all stakeholders. Thus, the former Chairman of HDFC Bank has a fiduciary responsibility to stakeholders to inform the board of his concerns about happenings in the bank and seek appropriate action to set things right. At the same time, the Board has the responsibility to take cognisance of such reports and resolve them. But from what reports indicate, it appears that Chakraborty had not put before the board any such ethical erosion happening in the bank. Nor are there any indications that the board ignored it. Against this backdrop, Chakraborty’s one-line resignation letter raised eyebrows, particularly in the context of a bank, since banks are known to be highly vulnerable to even rumours about their functioning, which can trigger rapid, catastrophic bank runs, as had happened with Silicon Valley Bank in March 2023, leading to its collapse in no time.
This
whole episode underscores the need for independent directors appointed to bank
boards to be attuned to market sensitivities and to observe communication
discipline to protect banks from such catastrophes. They indeed have a
fiduciary obligation towards all the stakeholders.
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