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hello everyone and welcome to smart karma's webinar wednesday i'm michael tegos today i'm pleased to welcome to the webinar hamindra hazari to discuss issues of transparency and corporate governance in indian banks and specifically yes bank access bank and hdfc bank amindra has been actively monitoring the space for several years now producing differentiated and hard-hitting analysis that has shed light on the sector as a whole and i encourage you to look up his work on the smart karma platform if you haven't already a few words about him indra he is a research analyst registered with the securities and exchange board of india with over 25 years of experience in the indian capital markets specializing in banking and economic research he has worked with prominent foreign and domestic capital market firms such as ubs associate theater general and hsbc and as a regular guest on business media channels respected for his non-consensus view on stocks and the market himendra thank you very much for being with us today and i'm really looking forward to hearing your view on this topic so please feel free to start whenever you're ready thank you michael greetings to all those who have logged in on this webinar and my thanks to smart karma for organizing this thing the topic of corporate governance and disclosures for this webinar is an issue much talked about today and every prominent listed company publicly discloses that they practice the highest standards of governance and disclosure it is left to analysts like myself to separate the fact from the fiction there is an overriding belief that the capital market will reward companies for superior governance and disclosures and penalize those for lapses in governance it was earlier hoped that once capital markets mature and foreign institutional investors increased their exposure better corporate governance would prevail my research on prominent banks and financial institutions in india indicate otherwise and one has seen that in a period of large foreign investments many shortcomings have taken place in corporate india this is despite regulation which companies regularly and publicly state they comply with and these companies are followed by an army of business journalists and sell side analysts who are supposed to highlight any shortfalls in governance at this webinar i will be discussing issues at three entities in india's financial system the downgrading of hdfc bank's chief risk officer the voluntary disclosures of 30 days past due loans by yes bank as compared with access bank and selling the capital market regulators settlement order with deepak parikh the iconic non-executive chairman of hdfc and widely regarded as a doyan of private capital in india coming to hdfc bank on december 14 2020 hdfc bank informed the exchanges that it had shifted jimmy tata is chief risk officer and group head to the newly created post of chief credit officer reporting only to the ceo at the same time it elevated san moy chakrabarty head risk management to the chief risk officer reporting to the risk management committee of the board with the dotted line to the ceo chakravarti however retains his designation as senior executive vice president and not group head on december 23rd 2020 an anonymous individual who tweets using the pseudonym dharya tweeted the screenshot of an email from hdfc bank's head of human resources informing the recipients on the reportes to the chief credit officer and the chief risk officer this email provided clarity on the future role and responsibilities of the chief risk officer and the chief credit officer the email revealed that the reporters to the chief credit officer were all those when earlier reported to the chief risk officer with the possible exception of the chief information security officer the reporters to the new chief risk officer did not include anyone dealing with core credit risk and underwriting from the reporters to the new chief risk officer it is apparent that henceforth the chief risk officer will only be managing market risk operational risk and secondary aspects of credit risk such as concentration risk stress testing determining limits for company group sector and geography and policy making the key part of evaluating credit risk where one can raise objections which could lead to the rejection of the credit proposal had been taken away and given to the chief credit officer in indian banks credit risk is the major risk and an hdfc bank like other indian banks credit risk assets constitute 83 of total risk-weighted assets in the organizational restructuring the chief risk officer will now be responsible for only 17 of the bank's total risk-weighted assets hdfc bank defended the need for the organizational restructuring by saying it expected significant credit growth in the future as consumer credit penetration in india is still low in its future credit expansion it wanted a separate vertical in the bank to evaluate the credit underwriting headed by a senior and experienced official who would be held responsible for proving credit proposals and given the importance the post would report directly to the chief executive officer in the htfc bank's discussions with me on this subject they had indicated that the new structure follows global practice however when citibank north america publicly posted a requirement for a chief risk officer it explicitly stated that the key responsibility of the post is to approve all citibank north american transactions affecting the bank's business operations since credit approval is a critical transaction for the bank it follows that it requires the city bank chief risk officers approval the issue with the new structure is that unlike the rest of the indian banking industry hdfc bank has not had a credit quality problem this demonstrates the stability and robustness of the existing system whereby the credit risk was within the cross function and the latter reported to the risk management committee of the board with a dotted line reporting the ceo furthermore when a bank is planning to step up its credit growth a dual reporting structure ensures that the growth is on a prudent and sound basis and it's extremely important for the risk management committee to be monitoring and overseeing the credit growth during a period of high credit growth a bank should be adding filters to tighten standards and not remove them additionally although a bank ceo is ultimately its super cheap risk officer he's also accountable for business growth and his and for remuneration and stock options based on performance by removing the protective layer of reporting to the risk management committee and reporting only to the ceo the chief credit officer could in future be vulnerable to pressure from the ceo the chief risk officer would be out of the loop and be responsible only for credit policy issues and the board would be in the dark till credit becomes non-performing by which time it may be too late in june 2020 the rbi released a discussion paper on corporate governance in which it stated quote the cro shall be a senior official in hierarchy with equivalence no less than those at one level below the whole time director stroh or the ceo in hdfc ban the profile of jimmy tata the earlier chief risk officer was on par with the rest of the senior management in terms of designation age experience and remuneration however in appointing sanmoy chakraborty the bank has retained his designation of senior executive vice president which is two levels below the executive director and not promoted him to group head indeed on all the parameters the new chief risk officer is the junior most in the senior management the fact that the chief risk officer heads a truncated team has considerably reduced the importance of this key post in 2015 basel introduced corporate governance principles wherein the primacy of the chief risk officer was highlighted two years later the rbi followed by issuing guidelines for the chief risk officer to be insulated from business and even pressure from the ceo to maintain the poor's independence by late 2020 two prominent private sector banks fully supported by the board of directors have effectively taken away the largest risk in access bank only corporate credit risk from the chief risk officer and passed it to the chief credit officer a role and position which is not mentioned in basel and rbi literature and made that position report only to the ceo and all this is done in the name of improving the credit risk monitoring and underwriting in the banks now mind you nobody till date has highlighted this issue although the tweet by the anonymous you know kind of whistleblower is very much in the public domain now we come to yes bend a commendable feature in yes bank's third quarter fy 2021 results declared on january 22nd 2021 was the continued level of transparency made available to investors on its asset quality despite reporting the inevitable huge increase in stress loads most importantly it also continued to disclose its 30 to 60 days and 61 to 90 days overdue loans first disclosed in its third quarter fy 2020 presentation and the capital market can take its call on providing estimates on the additional provisioning required it is indeed refreshing to note that the bank which this analyst had earlier highlighted for his dubious accounting lack of transparency in its asset quality and poor governance under the then leadership of rana kapoor has under a new management come clean on its asset quality with such disclosures analysts can make their own assumptions to estimate the bank's additional provisioning requirements and its adjusted book value in order to determine yes bank's valuation on the equity market in contrast access bank declined to voluntarily disclose its 30 plus days past 2 loans a critical indicator which the bank had disclosed in its second quarter fy 2021 results conference call even though 30 day plus day passed due is not a mandatory disclosure once the senior management of a bank takes a decision to voluntarily disclose the indicator in a certain quarter thereafter from a transparency perspective the bank would be well advised to continue to disclose the number by failing to voluntarily disclose the 30-plus day positive loans in the third quarter fy 2021 there would be a valid apprehension that the lack of disclosure is because of a sharp deterioration in the indicator which the bank was uncomfortable in revealing to the market as the data very clearly shows that some banks voluntarily disclose it while other banks do not now we come to the housing development finance corporation of india in short hdfc in a significant event deepak parrik the non-executive chairman of htfc agreed to settle with the securities and exchange board of india in connection with the latter's investigation of non-compliance with the erstwhile listing agreement settled the issue by paying a mere twelve thousand seven hundred and twenty seven u.s dollars to sebbing without admitting or denying the findings of fact and conclusions of law as per semi-settlement order the capital market regulator had conducted an investigation into an inter-corporate deposit of rupees 7.5 billion extended by hdfc to gliders bin form realtors a group company of pyramid reality in fy 2012. sometime in fy 2015 at the request of gliders com hdfc converted the inter-corporate deposit into a term law tarek was chairman of hdfc and was in the community which approved the loan at the same time he also belonged to the advisory board of the pyramid group including pyramid reality for which he received advisory fees for the calendar years 2011 to 2015 and for the financial years 2017 and financial year 2018. the order stated quote hdfc has adopted a code of conduct for all its directors and senior management personnel in terms of clause 49 1d of the erstwhile listing agreement however the applicant failed to comply with the code of conduct of htfc resulting in the violation of clause 49 1 d2 of the earthquake listing agreement what is surprising is that an individual of barack's stature and experience in a company which is a favorite of foreign investors and professors to maintain high standards of corporate governance and transparency could have committed such a violation normally board directors disclose their interests and recuse themselves from discussions where they may even be perceived conflicts of interest in this particular case paret was on the hdfc committee which approved the conversion of an inter-corporate deposit into a term loan for gliders bilcon while also accepting advisory fees from the pyramid group sebby's settlement order throws a spotlight on pardex advisory role to companies especially real estate from which he earns fees while simultaneously being on the important loan community of hdfc which extend loans to companies many of whom are engaged in real estate it is also disheartening that hdfc has neither publicly clarified this issue nor provided any explanation for the conduct of their non-executive chairman the business media apart from summarizing the semi settlement order has completely ignored this event by neither analyzing the implications nor providing additional information given the iconic stature of parakeet in india's financial system and the prominence of hdfc one expected the media and the sell side to further investigate and comment on this important development sadly the state of business journalism and sell side research is such that when it comes to prominent companies and iconic business leaders critical reporting and analysis are assumed the critical issue before hdfc from a corporate governance perspective is how the board of directors will view the payment by chairman in the settlement of an investigation by the capital markets regulator although the settlement order clearly states that the monetary payment does not imply admission of guilt or wrongdoing hdfc's own fit and proper criteria for his directors has a section on whether its directors quote have come to the adverse notice of regulators such as sid unquote as hdfc accepts deposits from the public has a foreign shareholding of 72 percent and is the parent of prominent companies in the financial system such as htfc bank hdfc asset management hdfc life insurance and hdfc ergo general response general insurance the conduct of its board directors and especially its chem must be pristine the role of independent of hdfc's independent directors and its nominations and remuneration committee in responding to forex payment settlement with sebby and his eligibility to continue as a director will be closely watched by the capital market and it may also set an example of how boards should respond when faced with such a situation so we have seen here in all these things which are specifically highlighted is that none of these instances are really given any prominence any and not highlighted by the business media and by sales side analysts now all these companies are tracked by sell side in excess of you know 30 analysts and there are numerous business media channels but you will find very little offset information or analysis comes out to the public or to the capital market when it has to be when it has regards anything critical on any prominent companies in india which are in fact heavily owned by foreign investors and other institutional investors so with this i really conclude my presentation and now i will be open to any questions thank you very much for this indra you have described what is a seems to be a very um complicated situation and i wonder with a lot of this information uh in the public domain as you mentioned isn't there any action being taken by regulators or attention from authorities in this regard see when it conserves corporate governance the lapses may not be a violation of law and therefore it really a lot depends on the conduct of the board of directors and by institutional shareholders in putting pressure on the senior management and therefore the conduct of the board is critical and in indeed it should be really what we call the independent directors who should be taking you know who should be leading the vanguard uh to take action against senior management where there is a short all now if then when the board does not take action then i would expect the business media and the sell side analysts who are well trained in this are you know to highlight these issues so they are brought to the notice of the capital market and which in turn adds pressure on the senior management but since and i've noticed this and this is you know practically a universal phenomenon that the corporatized business media and the sales side they're more concerned with having corporate access and indeed their revenue models are built on a close association with the companies they're supposed to cover so as a result the institutions like the independent directors the business media the south side which are supposedly are going to be the watchdogs forget biting they they refuse to bark and that is the major central issue that we are really dealing with and therefore all we have to depend on is the public commentary put out by these companies which should always tell you that they are following the highest standards of corporate governance and transparency i see have we seen a reaction from the market then uh in in terms of companies that are not so well behaved quote unquote uh actually seeing consequences in the market itself sadly my own experience the market is a very major disappointment because as i highlighted at the beginning of my talk one expected that as the capital markets develop and you have more foreign institutional participation and shareholders one would have expected that the shareholders would take up such issues or whether they found lapses would sell the shares but when it comes to dealing with very prominent companies i noticed that everything is put under the carpet many a time you know i realize that even institutional investors don't want to hear this type of commentary so only when you know a crisis suddenly comes about and then it is too public like you know the removal of the yes bank earlier ceo rana kapoor by the regulator you know then the everyone is forced to you know see what is going on but till that crisis publicly explodes you know nobody likes to highlight it the market also remains quiet so all the you know the safety mechanisms in a free market which is which are there to do their job have actually for whatever reason have been deactivated so there is no point in having a whole herd of journalists regulators analysts covering them you know when they feel that they deliberately fail to see the early warning signs since you mentioned yes bank what has been the reaction on the street from this move to be more transparent obviously i guess the the entire saga of rana kapoor which in fact you covered extensively on smart karma could be perhaps viewed as an incentive for the bank to to be more open and to sort of put its house in order but has it seen a positive reaction in this regard or is it basically perceived as a token action in a way i think one of the reasons this new management the new ceo has been so transparent is because he wants to reassure all the stakeholders that we are not the bank of the past that we are a new bank we are willing to disclose in everything even when the news is negative we are willing to give it out to the market and indeed you know the latest results the market was not very happy with what it saw so the market in fact penalized the bank because you know he showed and he revealed a much higher number of stress than what probably the market was expecting so in india or you know i don't know about the world markets but i really don't see better transparency you know improving valuation or less transparency not uh taking a negative on the stock market it all has to do i think more with the like a word like instinct that when the herd is positive on a stock uh they're not willing to listen to anything negative and when a herd is negative on a stock any positive move is not appreciated and today it is really the it is fundamentals are not playing such a role in the markets as they should it is really the liquidity flows which are ruling so in such a case you know fundamentals and events like better corporate governance really fail in comparison to the liquidity flows i say and that's indeed asks uh why is the regulator so lenient when it comes to strengthening corporate governance and um not levying sizable penalties on on those companies uh you mentioned that a lot of those companies don't are not actually in violation of of actual laws but should the regulator kind of try to be more strict in this regard most definitely because i find that when it comes to dealing with very large prominent companies or very important people you know it is a very a feather touch regulation that when it comes to dealing with smaller companies i find the regulators far more stringent and severe but it is in the large companies which has the maximum shareholders stakeholders which has you know large component of foreign ownership and it's in those companies where the regulator really has to crack down when they see you know any lapse and they're acting in injury and they should be even more stringent than they are really with smaller companies but what we have seen is the exact reverse and that is indeed unfortunate because sometimes in the cases that i've argued in the case of even portugal i you know there is a severe concern that what we are seeing is regulatory capture so these are very much the issues and then you know when the whole thing just blows up one day then people will start commenting that you know how lenient was the regulator so these are very much issues on the ground but of course the regulator will keep saying we always you know pointed it out and they you know point your attention to some circular issue the issue really is that you have to implement that circular you know stringently and you know it should apply to all entities big or small we have seen governance issues rise to the top in several countries in asia actually and in fact in some markets we are seeing uh activist investors really go into boards and uh trying to shake things up uh and demand better governance do you see something like this happening in india uh in these companies in the near future or is it kind of a different environment see when it comes to banks which are heavily regulated even to have a director on the board it will be an issue because the regulator has very stringent requirements and there's a maximum you know holding that one can have one on any bank so those type of investors you know first you know not only should they have a shareholding normally or below 10 but he should have be able to appoint a nominee director on the board now once you're on the board you can do certain things but in a lot of cases i've seen that even when private equity you should be concerned with long-term value and i've seen them on the board sadly i have not seen them being in a very active role so for some strange reason you know i find that uh you know the kind of impact that they should be making they have not now while it is true there'll be some you know activist investors who are having a positive role but some of these instances which have highlighted i really don't see that activist role comes from a lot of these foreign institutional investors which was you know originally this was envisaged that's the whole idea of opening up your capital markets to foreign investment that not only will you get more capital coming in but they'll also improve the general governance of corporate india but one has seen you know the kind of scandals one has seen in the financial sector which mind you a governance should be of top order because they highly leverage institution you know the kind of things have been shocking whether you look at the conduct of rana kapoor they see the state of isle fest of uh chanda kocha at icici bank or the conduct of shikha sharma now all these one could have really seen at a much earlier stage but neither did the board take an interest nor did the watchdogs including the regulator and the business media and the sensor perhaps as a closing maybe sum up do you expect moves like the one by yes bank to continue are you optimistic that uh it will inspire more transparency or do you think that it's kind of an isolated move you see the critical factor is does better corporate governance drive fair prices and you know his worst profit governance is going to call share prices to fall because that is the ultimate indicator that any investor will see and sadly i really don't see that correlation so i think yes bank share price will go up only when you know the market is convinced that uh they're going to report higher profitability uh and i said quality because in banks and financial institutions fine is that performance we may all talk of corporate governance but the sad reality is that the market is mainly concerned with seeing whether you can meet its profit number and its asset quality number the market in my view is not very much concerned whether that profit number has been fudged has it been got about by doing illegal and unethical and unethical uh business as long as you are reporting that it is okay only when it then things blow ups one fine day then everyone starts talking about it and then again it is forgotten because everyone in the end just wants to see whether that share price will fall or will go up you know based on performance uh i'll take one uh one last question from the attendees um besides everything we have talked about so the moves by the regulator rating agencies business media and sell side analysts are there any other steps that can be taken to strengthen corporate governance in these companies i think institutional investors definitely have a role to play here because uh not only at the annual general meetings but you know they have a lot of one-on-one conferences with the company which they've invested in and they should be severe although you know what transpires is not public i think they should you know take up these instances which have been documented and take it up actively with the senior management and you know they should really be a force in which can change their behavior i think that is our primary importance apart from when everyone else doing their job today the sad reality is nobody's really doing their job and i would like to see institutional investors also in their meetings with the management take these issues up very strongly and if the management does not listen then they should you know just help them sell the bank or sell the institution that's in the signal to the senior managers because today by and large the senior management you know rule their companies like their personal fiefdoms they are really not really because nobody dares you know say anything critical on them the whole system has become so compromised uh they believe that they can do what they want and therefore i think everybody you know some people have to really stand up and tell them show them the mirror to show what they are doing only then can you have some change but until then you know i they will continue to do what they want to they always we wanted to do well one person that we can always expect to be holding up that mirror to those companies is himendra hazari and i definitely encourage everyone to keep reading his work on the smart karma platform thank you very much hamindra for being with us today and thank you everyone for attending amindra is available for bespoke research requests so if you would like to engage him directly please contact your smartcom account manager and they will help you out in this regard and if you have any other questions please email us at research smartkarma.com himendra thank you very much once again thank you