HDFC Bank faces potential securities lawsuit on allegations of breaching investor trust

Although, HDFC Bank holds a proven track record of good performance and has been able to hold steady even in times of economic and financial stress but the prominent private lender bank finds itself in the middle of a new controversy.

The bank may find it difficult to get out of the problem it is in now. A class-action lawsuit is being planned against the bank. The potential lawsuit is about probing the bank's irregularities in its auto loan vertical and its delays in sharing information with a credit bureau. 

Two US-based law firms, namely Rosen Law Firm and Schall Law Firm have announced that they are initiating separate investigations to build a securities fraud lawsuit against HDFC Bank. 

The investigation has been initiated on the basis of a securities claim on behalf of the shareholders of HDFC Bank. It is alleged that   the private lender may have been issuing materially misleading business information to the investing public. 

Rosen Law highlighted two major issues. The first glitch was that there were instances of improper lending practices at HDFC Bank’s vehicle loans vertical and the second was its delays in sharing information with credit bureau Experian PLC. 

The share price 

Class action suits most likely lead to investors losing trust. This is why HDFC Bank’s American Depository Receipts listed on NYSE fell 2.8% as soon as the news broke out. 

However, the story is different in India. HDFC Bank shares have hardly budged in the domestic market. Even in the past, class-action lawsuits against Indian companies have not witnessed any drastic negative outcome.

The bank's response 

HDFC Bank, in its  statement has said that the lawsuit appears to be frivolous although it is looking into the matter. Addressing  the first issue, the bank clarified that it has taken internal action to deal with lapses in its vehicle finance unit. In fact, last month , HDFC fired 6 employees in connection with irregularities in its auto loan business. 

The second issue points to delays in sharing information with credit bureaus. Taking credit bureau’s complaint to RBI into account, the bank’s lack of transparency is apparent. Reporting material financial information with credit bureau is a highly important corporate governance measure. This is why the bank's delay in this regard is a cause of concern. 

It remains to be seen what comes to light as a result of this investigation.