Moneycontrol Pro Panorama | Wars: Battlefields to boardrooms

The market is now left with an uneasy feeling that it is unable to shake off.

Dear Reader,

High profile exits tend to cause alarm in the market, be it the killing of a nation’s leader or the resignation of a company’s chairman. Sure, both these events do not remotely compare with each other, but the underlying impact of these is invariably on stakeholders.  Because wars, be it on the battlefield or in the boardrooms, at best bring short-lived peace and at worst widespread discord. Without fail, these wars bring losses to those who invested their emotions, wealth and beliefs.

While it is hard to veer away from the havoc that the West Asia war is causing to economies, a focus on a different non-lethal battle is required. India’s banking sector got a rude shock this week from its most valuable and the largest private sector lender, HDFC Bank. The unceremonious exit of its part-time Chairman Atanu Chakraborty sent investors into panic mode. What caused the alarm was not the exit itself, but Chakraborty’s wording of his exit letter. The language of the letter seemed to suggest that something is amiss at the bank and that he wished not to be party to it. For a lender that commands a tenth of public deposits and a massive balance sheet size of Rs 40 trillion, even a suggestion of a slip-up in corporate governance is detrimental to its reputation and by extension, its business and valuation.

Here is what happened. Chakraborty tendered his resignation letter dated March 17 which the stock exchanges received on the next day from the bank. Between these two events was an emergency board meeting, a quick trip to the regulator by the bank’s top management to install an interim chairman, long-time loyalist Keki Mistry, and efforts to reconcile and talk to Chakraborty about his misgivings (as per the claims of the board members).

What followed in the market was a logical destruction of HDFC Bank’s valuation as the stock tanked 5 percent on Thursday and is further down today as we write this newsletter. But what has happened since then from the people at the bank, including Chakraborty, hasn't completely repaired the damage to investor confidence.

To be sure, Chakraborty himself came out to smoothen the sentiment and said there is nothing that he found questionable with the bank’s corporate governance. This is a backtrack from his strongly worded letter. Mistry and others have since sought to convince analysts, investors and everyone that HDFC Bank’s corporate governance is gold standard and there is nothing amiss.

Analysts seem to be convinced with the bank’s explanations, but the market is now left with an uneasy feeling that it is unable to shake off. Private sector lenders have not been able to keep up a clean image, especially their top management. Cases from ICICI Bank’s past chief executive Chanda Kochhar accused of fraudulent lending, Axis Bank’s past chief Shikha Sharma’s early exit due to questions about underreporting bad loans and the largescale accounting irregularities at IndusInd Bank have left investors with a bad taste.

The question now is whether the apparent clash between Chakraborty and HDFC Bank was just personal ego or is something not kosher at the bank. Hamsini Karthik explains, in her piece here, that personal disagreements and Chakraborty’s specific issue that the current chief executive Sashidhar Jagdishan should not be given a third term without a thorough performance review is what seems to have blown up into a boardroom drama.

So, what should we make of the imbroglio?

Neha Dave details that the bank’s business metrics and the potential growth ahead should give investors enough comfort. “While the chairman’s resignation, which in a normal course should be a non-material event, has led to the stock correction, it is unlikely to derail the bank’s upward journey,” she writes.

The banking regulator’s support and clarification, along with a pristine record, has kept HDFC Bank’s reputation intact. But the image of a process-driven clean growing machine has been besmirched. The market will reward the bank for its earnings every quarter, but the unease will remain.

Unlike this company-centric unsettling event, the West Asia war continues to create serious problems for the Indian economy. India’s crude oil basket cost has averaged above $100 for March so far, a far cry from sub-$80 levels in earlier months. The rupee has plummeted to new lows, notwithstanding an unprecedented intervention by the RBI. Outlooks for growth and inflation now stand at significant risk. Ananya Roy puts together how much of the market reaction is valid and how much is panic.

Boardroom wars tend to blow over fast, but those on the battlefield take a much bigger, and longer, toll.  

Investing insights from our research team Weekly Tactical Pick: A value buy amid tax, war shocks

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Aparna Iyer Moneycontrol Pro