HDFC Bank has placed two senior executives on gardening leave amid an internal probe into the alleged mis-selling of Credit Suisse’s Additional Tier 1 (AT1) bonds according to Bloomberg. The move, confirmed by sources familiar with the matter, comes as the bank faces mounting scrutiny from regulators. While the bank has refrained from making public statements, insiders maintain that the decision to sideline the executives was precautionary.
On September 25, Dubai Financial Services Authority (DFSA) issued an order restraining HDFC Bank’s DIFC branch from onboarding new clients or promoting financial services. The DFSA cited lapses in the bank’s onboarding and advisory processes, though it stopped short of directly linking the action to the AT1 bond controversy. Sources within HDFC Bank acknowledge that the regulatory clampdown is a direct consequence of the Credit Suisse bond fallout. They stated that the bank is fully cooperating with the DFSA and has halted all new client acquisition, while continuing to service existing customers. “No one goes against the regulators, the bank remains committed to regulatory compliance, even as it navigates the reputational risks of being caught in the crossfire of a global financial fiasco,” said source close to the issue.
Senior manager resigns ahead of action
According to the DFSA website, a senior manager, money laundering reporting officer resigned few days before the regulatory order. The person was close to two years with the bank. Currently there are three authorised individuals –finance officer, compliance officer and a senior executive of the bank registered with authority.
Back in India, the issue has sparked a wave of complaints from high-net worth individuals who claim they were misled into investing in Credit Suisse’s AT1 bonds through HDFC Bank. Reports suggest that four investors including one from Coca-Cola has filed complaints with Economic Offences Wing (EoW), alleging that the bank has misused their deposits worth Rs 25-30 crore to invest in Credit Suisse AT1 bonds.
AT1 bonds, introduced globally after the 2008 financial crisis, are hybrid instruments designed to absorb losses and bolster a bank’s capital base. They offer attractive yields but rank lowest in the repayment hierarchy. Until recently, these bonds were considered relatively safe by many investors, especially those planning for retirement. The perception changed dramatically in 2023 when Swiss regulator FINMA wrote off Credit Suisse’s AT1 bonds worth over $20 billion as part of the bank’s emergency merger with UBS. The move stunned global markets and left many of investors empty-handed, triggering lawsuits and appeals across jurisdictions. Recently this month a Swiss court has since ruled that the write-off lacked legal basis, offering hope to aggrieved bondholders.
High returns keep investors hooked
In India, the AT1 bond saga is not unprecedented. The collapse of YES Bank in 2020 saw its AT1 bonds written down, leading to similar investor outrage and legal battles. Despite regulatory warnings, many investors continue to view AT1 bonds as a viable retirement instrument, drawn by their high returns and perceived stability. Financial advisors often market these bonds to investors with over Rs one crore in investable assets, effectively bars most retail investors.
Sources in HDFC Bank, for its part, insists that it has not mis-sold the Credit Suisse bonds. “We don’t advertise these products, but investors have been actively demandning them” said one source. The source explained that the bank simply facilitate access for those who qualify. The bank has also stated that it has not received any formal summons related to the complaints and continues to monitor the situation closely.
