HDFC Bank cracks down on executives in Credit Suisse AT-1 bonds mis-selling case

and regulatory adherence, the bank said.

HDFC Bank’s DIFC branch was caught in the Credit Suisse fiasco as investors claimed the lender mis-sold these bonds without providing a clear picture. HDFC Bank officials were accused of inflating income details of NRI clients to qualify them for AT-1 bond purchases, a product typically reserved for high-net-worth investors. In some cases, clients’ annual incomes were allegedly artificially raised, and they were promised returns of 12-13% without being informed of the high risks.

HDFC Bank informed the stock exchanges in September last year about an action taken by the Dubai Financial Services Authority (DFSA) barring its Dubai International Financial Centre (DIFC) branch from onboarding new clients. While the lender did not mention it, the action was linked to the alleged mis-selling of financial products, including AT-1 bonds linked to erstwhile Swiss lender Credit Suisse, that left several Middle East investors facing steep losses.

In its filing, HDFC Bank said the DFSA found violations at the DIFC branch, including offering financial services such as advising and arranging products or credit for customers not formally onboarded, as well as lapses in client onboarding procedures.

AT-1 bonds are a class of perpetual debt instruments issued by banks to bolster their capital base. While being inherently risky, AT-1 bonds offer higher interest rates compared to conventional bonds, making them attractive to investors seeking strong returns.

The AT-1 bonds issued by Credit Suisse, which was acquired by Swiss peer UBS in 2023, were written off in line with regulatory orders, leading to an uproar among investors.

Unlike regular bonds with fixed maturity, AT-1 bonds have no maturity date and can be written off or converted into equity if the bank faces financial stress. Banks may also skip interest payments in such situations. Investors receive regular coupon payouts as long as the bank is financially sound. But losses can be steep if its capital falls below regulatory thresholds.

In March 2023, Swiss regulator FINMA ordered the complete write-off of Credit Suisse’s AT-1 bonds worth about $17 billion as part of Swiss lender UBS’s takeover of its peer bank. The move wiped out bondholders while shareholders received UBS stock, sparking global outrage and lawsuits. Although AT-1 instruments are designed to absorb losses in times of stress, Credit Suisse had claimed it met capital and liquidity standards, raising doubts about the necessity of the wipe-off.

The write-down has triggered multiple legal challenges from investors in Japan, the Middle East, and elsewhere, who contend it violated treaty-based investment protections. Investors had lodged complaints with the Economic Offences Wing (EOW) in Nagpur, Chandigarh and Gurugram.