HDFC fires senior staff after probe into AT1 bond mis-selling to NRI clients via Dubai branch

HDFC Bank has terminated three employees, including senior executives, after an internal investigation found alleged mis-selling of high-risk AT1 bonds to NRI clients through its overseas operations. The action follows regulatory scrutiny and investor complaints related to transactions carried out through the bank’s Dubai branch.

The employees have been recognised as Sampath Kumar, group head of branch banking, along with two other senior executives -- Harsh Gupta (Executive Vice President, Middle East, Africa, and NRI onshore business) and Payal Mandhyan, (Senior Vice President), according to a report in CNBC TV18. The bank said the decision was taken after completing a detailed internal review into the sale of Credit Suisse Additional Tier-1 (AT1) bonds to non-resident Indian clients.

The episode dates back to January 2025 and has drawn attention to the risks associated with complex fixed-income instruments, particularly after the collapse of Credit Suisse, where AT1 bonds were written off during the UBS-led rescue, causing heavy losses to investors.

Most of the AT1 bond buyers, many of whom were non-resident Indians (NRIs), alleged that bank executives misled them into moving their foreign currency non-resident (FCNR) deposits from India to Bahrain in order to invest in the bonds. The AT1 bonds, worth about $20 billion, were originally written off during the Credit Suisse bailout, triggering losses for investors. However, the Swiss Federal Administrative Court later ruled that the write-off was unlawful, a decision that Switzerland’s regulator FINMA and UBS have challenged and are currently appealing before the Supreme Court.

According to allegations, staff in the bank’s Dubai and Bahrain branches persuaded NRI customers to shift FCNR deposits from India to Bahrain by presenting AT1 bonds as fixed-maturity products with assured returns. These instruments, however, are perpetual in nature and carry significantly higher risk than traditional deposits. Investors were reportedly asked to sign blank documents, and key disclosures about the risks and repayment structure of the bonds were allegedly not fully explained.

AT1 bonds are debt instruments with equity-like features and rank among the lowest in repayment priority during financial stress. While they offer higher yields, they can be written down or converted into equity if the issuing bank’s financial position weakens. In extreme cases, investors can lose their entire investment, as seen during the Credit Suisse crisis.

HDFC Bank said it had identified gaps in client onboarding and compliance procedures at its DIFC branch in the UAE and had taken remedial steps in line with internal policies. The bank added that personnel changes were made after the review and that it remains committed to following regulatory standards in all jurisdictions where it operates.

The investigation was conducted while the bank was under restrictions imposed by the Dubai Financial Services Authority (DFSA). The regulator had barred the bank from onboarding new clients in the emirate during the probe. The inquiry concluded on March 18, leading to the termination of the employees involved.

The issue has also raised concerns about the sale of complex financial products to retail and NRI investors without adequate disclosure. Market observers say the case highlights the need for stronger compliance controls in cross-border wealth management businesses, especially when dealing with structured products and high-yield instruments.

The bank may also face investor claims related to the losses, as affected clients examine legal options following the write-down of the bonds.