HDFC faces scrutiny over alleged mis-selling of CS bonds

Mumbai: HDFC, India's most valuable bank, continues to be in a bit of a pickle in the Middle East ever since it ran into a controversy two years ago over alleged mis-selling of high-risk bonds floated by the disgraced Swiss lender Credit Suisse (CS). In the wake of the glare that HDFC faced amid complaints from bond investors, at least one UAE regulator is now examining the episode to determine if the bank had breached any of the licensing conditions while marketing the soured third-party products.

A key issue is how the bank conducted business with customers through legal entities based in different jurisdictions. A customer might have been served by relationship managers (RMs) of its UAE office, while receiving advisory from officials attached to its operations in a separate entity at the Dubai International Financial Centre (DIFC), even as the accounts got booked with HDFC's full-service branch in Bahrain. Investors opened accounts with the Bahrain office and funded the account to buy the bonds, which is a common enough practice.

DIFC, a financial free zone, functions as a separate jurisdiction under an independent legal system, different from general UAE laws. Financial services conducted in and from DIFC are regulated by Dubai Financial Services Authority (DFSA), an independent regulator.

"If officials advising clients belong to the bank's DIFC office, and the RMs are employees of the Dubai representative office, which is under the UAE Central Bank, but the clients are not onboarded by the DIFC office, it can raise eyebrows among regulators. So when some aggrieved investors of the Credit Suisse bonds approached DFSA, alleging that they were misled, it was found that they were not onboarded in the DIFC branch of HDFC. The practice came to light as the regulators looked into the matter following investor complaints," a person with knowledge of the situation said.

An HDFC Bank spokesperson did not respond to queries.

The know-your-customer rules, anti-money laundering regulations, and the risk assessment under the suitability rules all differ in DIFC. "Besides, DIFC banks focus on 'professional clients' who are typically categorised as those having a minimum liquid net worth of $1 million. We don't know whether some clients who did not meet the criteria were onboarded by the Dubai rep office but was advised by the DIFC outfit," said another person. In most banks, advisors come to the picture for high-valued clients as RMs often lack the skill.

The lender had extended leverage to some of the clients-offering loans to well-heeled non-resident Indians (NRIs) to invest in financial products. HNIs who had borrowed to invest were left fuming after a troubled Credit Suisse chose to write-down the AT1 bonds in 2023. "Even as their investments were wiped out, they faced margin calls from the lender as the bond prices dropped as CS' troubles intensified in the run-up to the write-down decision," said a finance professional in the region who had watched the episode closely.

Unlike regular bonds, AT1, or additional tier-one bonds, carry a higher risk and are issued by banks to shore up capital. "Both the UAE authorities as well as DFSA had sought explanation from the bank then and the examination in the matter is ongoing," said a third person familiar with the situation.

About 20 employees have quit HDFC UAE in recent months with the bank restricting bonuses and incentives, and going slow on the wealth management business in the UAE. This is understood to include a long-serving official. A number of them have joined a wealth advisory firm with roots in India.