HDFC Bank's Involvement in AT1 Bond Scandal

HDFC Bank Launches Internal Investigation: New Developments in the Credit Suisse AT1 Bond Scandal

HDFC Bank in India has recently come under scrutiny, not for its growth rates or digital innovations, but due to a serious international regulatory issue. Two senior executives of the bank have been placed on gardening leave after the Dubai Financial Services Authority (DFSA) limited the operations of the bank's Dubai International Financial Centre (DIFC) branch. The reason: suspicious customer classifications and the improper sale of so-called AT1 bonds, particularly those issued by Credit Suisse.

What is Gardening Leave?

Gardening leave is a practice where an employee is officially serving their notice period but is not actively participating in work. It is usually used to prevent the employee from accessing sensitive information or taking business secrets to a competitor. In this case, HDFC's executives were placed on gardening leave pending an internal investigation related to the AT1 bond scandal.

How Does This Affect Dubai?

Dubai's financial sector has been working for years to strengthen its international credibility and regulatory transparency. One element of this effort is the DFSA's stringent oversight system. In September 2025, the DFSA barred HDFC's DIFC branch from accepting new clients after it identified systemic errors in customer documentation and risk ratings.

Investigations revealed that several investors, including UAE residents, purchased risky AT1 bonds to which they were not truly entitled. It is suspected that bank employees manipulated the Know Your Customer (KYC) data, such as artificially inflating net worth, to classify clients as "professional investors" – a status required for these types of bonds.

What Does AT1 Bond Mean?

Additional Tier-1 (AT1) bonds sit at the bottom of a bank's capital structure. These are high-yield but extremely risky assets. In the case of a bank failure or crisis, they can be wholly written off, meaning their value can plummet to zero. This happened in 2023 when Credit Suisse was rescued by UBS, and the value of the AT1 bonds virtually disappeared. The worldwide losses amounted to billions of dollars, and the United Arab Emirates was not exempt from these losses.

Customer Complaints in the UAE

Several Dubai residents and expats have reported buying AT1 bonds through HDFC without being aware of the product's risks. One of them, who claims to have lost 300,000 USD, stated that their KYC profile was manipulated: their actual net worth was 400,000 USD, but the documents showed 2.4 million. Another client, an Indian investor residing in the Philippines, claimed that an unauthorized leveraged loan was taken out in their name, with their risk tolerance profile falsely set high.

Internal Investigation and Indian Authorities

The bank is currently conducting an internal investigation, which is in its final stage. The aim is to determine which working groups or responsible executives gave instructions for the disputed bond sales. Meanwhile, regulatory investigations in India have ramped up: the Enforcement Directorate (ED) and the Economic Offences Wing (EOW) are also investigating the case, as similar complaints have been made to the authorities.

HDFC's Reaction

A spokesperson for HDFC told Bloomberg that the bank has not yet found evidence of "bad faith sales," but the investigation is ongoing. The spokesperson declined to comment on why the two executives were placed on leave.

The Role and Impact of DFSA

For Dubai's financial sector, such cases pose not just reputational risk but can also affect international trust. The DFSA's imposed restrictions aim to curb market abuses and protect retail customers from excessive risk-taking. That one of the most well-known Indian banks was also targeted underscores the seriousness of the regulations.

What to Expect Next?

If the internal investigation confirms the suspicion, it could lead to dismissals or even criminal proceedings. Furthermore, HDFC could face long-term consequences: it might lose its right to operate in the DIFC, incur fines, or face more stringent restrictions.

The future of the UAE, and particularly Dubai as a financial hub, will largely depend on whether similar cases are handled transparently, decisively, and swiftly. Retaining the trust of local and international clients is essential.

Conclusion

The latest chapter in the Credit Suisse AT1 bond scandal highlights the serious risks associated with the mis-targeted sale of financial products. HDFC Bank's situation serves as a warning to every market player: regulatory compliance is not optional; it is a basic expectation, especially in a highly regulated environment like Dubai's financial sector overseen by the DIFC and DFSA.

(Source: HDFC Bank announcement.)