The stock prices of HDFC Bank, India’s largest private lender, dropped over 13% since the sudden resignation of part-time chairman and independent director, Atanu Chakraborty. They hit a 52-week low and are still on a downward spiral, closing at Rs 731 on Tuesday.

The bank has taken action against several employees over irregularities after Chakraborty’s resignation. It has also brought in independent law firms to review his resignation; it’s not likely to soothe the nerves of investors, even if it may be a step in the right direction.

“Hopefully, they will examine all issues and call out specific reasons for the resignation. The findings of the investigation must be shared with investors and must not remain only for the bank’s internal consumption,” Shriram Subramanian, founder of proxy advisory firm InGovern Research Services, told The Core.

At the heart of the issue is the governance standards of the bank, deemed Domestic Systemically Important Banks, which can be read as too big to fail. While it received a clean chit from India's central bank, the Reserve Bank of India (RBI), and has gotten external law firms — two domestic and one US-based — to oversee its governance standards, it may not be enough.

While the law firms may point out discrepancies and inspect if the regulation is followed to the letter, the grey lines could remain where they are. When it comes to ethics and values, can they be measured by law firms alone?

At least HDFC's investors don't think so. While the news of law firms improved the falling stock prices, it was only temporary.

“The appointment of a law firm is more of a compliance issue. What I mentioned in my resignation letter is a larger governance and ‘governance plus’ issue, which the board themselves must introspect. No external lawyer can do that except to point whether it did meet or did not meet an audit para,” Chakraborty said in an interview with CNBCTV18.

The AT-1 Bonds Issue

The haze over Chakraborty’s resignation continues to linger, even after recent interviews. However, he did point out that the bank’s delay in dealing with Credit Suisse AT-1 bond misselling in its Dubai branch to its NRI customers brings regulatory focus and reputational risk to the bank.

Additional Tier-1 (AT-1) bonds are perpetual debt instruments that banks issue to bolster their core capital. As perpetual securities, they have no fixed maturity date, meaning the issuer does not repay the principal but instead pays investors a regular coupon for as long as the bonds remain outstanding.

In practice, however, these instruments typically include a call option, allowing the issuing bank to redeem them, usually after a specified period. Many clients who were sold the products were not aware that they are high risk bonds, and their value was written off to zero after UBS took over Credit Suisse.

For Chakraborty, the action that the bank has taken by firing senior executives is just not enough. The move came recently and much after the Dubai regulator banned the bank from onboarding new clients and offering more financial services.

“They are a posteriori reactions. Something goes on for eight years, and suddenly we take action. People will say those concerns are addressed, go home, perhaps, and that's it,” said Chakraborty.

Lawyers who represent the customers of HDFC echo Chakraborty’s point. Firing executives may not make up for the crores lost by customers, they add.

According to Anuroop Omkar, founding partner at law firm AK & Partners, a bank must ensure that its customers, whether retail depositors or sophisticated investors, clearly understand the risks they are walking into.

“The moment that clarity breaks down, particularly in complex financial products, you have a gap. In large institutions, these gaps metastasise. They erode investor confidence. They distort how capital moves across markets. They inject uncertainty into a financial system that runs, fundamentally, on trust,” said Omkar.

Underperformance In Focus

The RBI tried to assuage concerns around HDFC Bank with its statement a day after the resignation. The Domestic Systemically Important Bank (D-SIB) has sound financials, a professionally run board and a competent management team.

“Basis our periodical assessment, there are no material concerns on record as regards its conduct or governance. The bank remains well-capitalized and the financial position of the bank remains satisfactory with sufficient liquidity,” the RBI statement said.

Terming the statement as an offshoot of data shared by the bank with the regulator, Chakraborty pointed out other issues like underperformance of share value, low current account savings account, and high cost-to-income ratio.

As per brokerages, operational challenges have deferred normalisation of return ratios after the mega merger of the bank with the parent. They have since been bullish on the bank as most of the downside appeared priced in, until governance issues came to the fore, which might extend the waiting period for normalisation.

“Long-term investors have already endured a prolonged post‑merger phase for business stabilisation, margin recovery and realisation of merger synergies that would justify a re‑rating toward industry‑leading multiples. The latest development materially challenges this investment thesis,” said a report by Kotak Institutional Equities.

It adds that a case for re-rating rests on flawless execution, but resignation‑related uncertainty creates asymmetric downside risks to confidence, credibility and long‑term franchise perception among institutional investors.

A Laundry List Of Troubles

In the last few years, HDFC Bank has been making headlines for the wrong reasons. One such case is that of Lilavati Hospital, where the trust that runs it alleged that former trustees misappropriated funds to the tune of Rs 1,500 crore.

Among other ghoulish allegations involving black magic, one of the trustees alleged that HDFC Bank MD and CEO Sashidhar Jagdishan accepted Rs 2.05 crore in bribes. The case went to the Supreme Court after the Bombay High Court recused itself.

Legal experts, however, downplay the impact of the case on the bank and its reputation. “Many of the issues in the Lilavati case were addressed with a detailed statement from the MD, its background and collateral purpose. It’s only when issues are vague and up in the air is when uncertainty steps in,” said Vaidyanathan.

The bank has been facing many operational hurdles as well. The regulator has asked the bank to halt launches of its upcoming digital business generating activities, as well as the sourcing of new credit card customers, after outages at its data centre in 2020. But the bank was later lifted between 2021 and 2022.

The bank’s mega merger journey is one of the toughest challenges it has undertaken, yet its other rising troubles may hold back its progress – possibly leading to value destruction for investors who were banking on the bank’s ability to execute it.

What Now?

Most experts believe that the vague references to ethics and values in Chakraborty’s resignation letter are not acceptable. It needs more details on whether they have a material impact on the bank, as it has a fiduciary responsibility towards the bank’s customers, depositors, and shareholders.

“He is not a whistleblower, and he is a part of the board, so he must have taken up these issues at the board,” comments corporate lawyer Ramesh Vaidyanathan, as the co-managing partner of law firm BTG Advaya.

As an independent director, Chakraborty should have flagged off these issues with the board, as per legal experts. “The law firm might review the minutes of the meetings of the board and committees and see if any grievances are raised; or if any ethical violations are recorded,” adds Vaidyanathan.

If made public, law firms’ findings can give a few answers to investors, as Chakraborty repeatedly refused to divulge any of his discussions with the board or the regulator in the interview. Others believe that law firms appointed by the bank are more likely to give a clean chit to HDFC Bank.

“What can the law firm find? It can flag off issues, but how far can it go when its fees are paid by the bank? A scapegoat will be made,” said another top corporate lawyer.