Investors were left scratching their heads on Thursday after the abrupt resignation of HDFC Bank chairman Atanu Chakraborty the previous night, while shares of India’s largest private sector lender plunged 5%. Despite the strong words from the exiting chairman, analysts do not expect any material irregularities at the bank, while attention turns to the reappointment of chief executive Sashidhar Jagdishan.
An investor at the bank’s conference call on Thursday morning summed up the exasperation: “So far, whatever I have heard on this call doesn’t make me any wiser than I was an hour ago.” Late on Wednesday, HDFC Bank released Chakraborty’s resignation letter, in which he wrote of “happenings and practices within the bank” that were “not in congruence” with his personal values and ethics.
At the morning call, HDFC Bank executives and board members assured investors that there were no material issues with the bank, insisting the board was not aware of why Chakraborty said what he said. HDFC Bank’s interim chairman Keki Mistry, directors Sunita Maheshwari, Lily Vadera, Harsh Kumar Bhanwala, Renu Sud Karnad, and chief executive Jagdishan attended the call. Chief financial officer Srinivasan Vaidyanathan was also present.
group veteran Mistry seemingly borrowed words from Chakraborty’s statement to refute it. Mistry said he would not take on the responsibility of chairing the lender “if the systems, processes, governance practices in the bank did not align with my principles and my level of integrity.”
Mistry, 71, told reporters on a separate call that the bank management will speak to all major shareholders over the next one or two days to address their concerns. Jagdishan said every board member tried to persuade Chakraborty to stay back, or at least soften the language used in his resignation letter.
As investors struggled to figure out whether to trust the former chairman’s allegations or the new chairman’s assurance, corporate governance experts demanded more accountability.
“The board should constitute a committee of independent directors to look into the matter and put out a detailed statement to assuage investor concerns,” said Shriram Subramanian, founder of proxy advisory firm InGovern Research Services. By making certain allegations, has done more harm than good to the investors, he said. “He should have explained in much more detail. The onus is on Chakraborty, as instead of writing those one or two lines in his resignation letter, he could have substantiated his allegations.”
The market did not take it well. Shares of HDFC Bank touched an intraday low of ₹772 on the BSE, down 8.4%, before closing at 799.7 or 5.1% lower than Wednesday’s close. The broader market was down 3.26%, with Sensex closing at 74,207.24.
A couple of hours after the investor call, the Reserve Bank of India stepped in with reassurance. It said that on the basis of periodical assessments, there are no material concerns on record concerning HDFC Bank’s conduct or governance.
J.N. Gupta, managing director of proxy advisory firm Stakeholders Empowerment Services, said that if Chakraborty were a simple director, he could have said that the chairman was not listening to him, his dissent was not recorded. However, that was not the case.
“How can a chairman say that he was uncomfortable, but I did not record anything, did not do anything? You are the chairman, you are leading the board, you are signing the minutes, you are deciding the agenda, you are running the board meeting, and you say that for two years, I was having governance concerns, and I did not speak,” said Gupta, a former executive director at India’s market watchdog Securities and Exchange Board of India (). Gupta said other independent directors should issue a common statement clearing the mist.
Analysts, while flagging near-term uncertainty, said the regulatory response suggests no serious lapses.
“While the call was light on details and heavy on reassurances, we believe the current instance does not point to any material financial irregularities,” analysts at Bernstein said in a note on Thursday.
Suresh Ganapathy, managing director, head of financial services research, Macquarie Capital, said that near-term underperformance may persist. While fundamentals remain strong with good return on assets, at this point in time, governance concerns will weigh down heavily on the stock.
“Investors would want more comfort from the board. Also, now the uncertainty surrounding Sashi’s (CEO Sashidhar Jagdishan) reappointment will weigh down on the stock,” said Ganapathy, referring to Jagdishan’s term coming up for renewal later this year.
Non-executive director Karnad pointed out to investors that Chakraborty, who spoke of value systems in his letter, has said nothing about the regulatory aspects. “It was all sound, he agreed. In fact, we had repeatedly asked him to tell us why, what is the reason behind this, but he said there was nothing and that is a bit baffling,” said Karnad.
Others said there may have been differences of opinion between Chakraborty and executives.
Abizer Diwanji, founder of strategic advisory provider Neostrat Advisors said it seems to be an interpersonal issue between the non-executive chairman and the management. “People need to understand that board is (for) oversight in governance and management is (for) execution. But if the board wants to go nitty-gritty into execution, then there are conflicts,” said Diwanji.