HDFC Bank's $4.7M disguised interest scheme triggers US class action

HDFC Bank faces a US securities fraud class action over an alleged $4.7 million scheme to disguise above-market interest payments as marketing expenses, sending its shares down 4.1 percent.

"We're focused on whether HDFC's senior leadership concealed a covert scheme to funnel millions in disguised payments to induce state-firm deposits while publicly painting a picture of strong governance and compliance," said Reed Kathrein, partner at Hagens Berman, which is investigating the claims.

The complaint, filed by investor Jwalant Natvarlal Soneji on Aug. 13 in the US District Court for the Southern District of New York, covers investors who purchased HDFC securities between July 17, 2023 and May 26, 2026. The bank allegedly offered Maharashtra State Road Development Corporation a 6.01 percent interest rate — 2.51 percentage points above the standard 3.5 percent savings rate — routing the differential through the marketing department as sponsorship for a road safety campaign.

The lawsuit follows a 7.28 percent drop in HDFC's American depositary shares on March 18 when Chairman Atanu Chakraborty resigned citing practices "not in congruence with my personal Values and Ethics," and a further 4.1 percent decline on May 27 after The Indian Express exposed the scheme. Investors have until Oct. 13 to seek lead plaintiff appointment.

The Alleged Scheme

The complaint alleges that between 2023 and 2025, HDFC routed approximately Rs 45 crore ($4.7 million) in differential interest to MSRDC through third-party vendors, disguising the payments as sponsorship contributions for a road safety awareness initiative. An internal vigilance probe reportedly found more than ten senior officials responsible, including CEO Sashidhar Jagdishan, who allegedly verbally approved the arrangement during senior-level discussions.

The scheme violated the Reserve Bank of India's Master Directions on interest rates and the bank's own anti-bribery policies prohibiting improper inducements, according to the complaint. HDFC's Form 20-F annual reports for fiscal years 2024 and 2025 assured investors that "internal control over financial reporting was effective," which the plaintiffs argue was materially false given the hidden payments. By burying the interest markup in the marketing budget, the complaint alleges, HDFC overstated both its operating expenses and its net interest income — a metric closely watched by bank investors.

Governance Fallout and Market Impact

The case marks an escalation from earlier investigations by three US law firms — Glancy Prongay & Rotter LLP, the Law Offices of Frank R Cruz, and the Law Offices of Howard G Smith — into whether HDFC violated US securities laws. Kahn Swick & Foti, whose partners include former Louisiana Attorney General Charles C. Foti Jr., is also notifying investors of the Oct. 13 lead plaintiff deadline.

HDFC has denied wrongdoing, commissioning an independent legal review by Wilson Sonsini Goodrich & Rosati and Wadia Ghandy & Co. that concluded there was no evidence to substantiate Chakraborty's allegations. The bank said in a statement that the lawsuit is "without merit" and it intends to "vigorously defend itself."

The case, Soneji v. HDFC Bank Limited (No. 26-cv-06943), alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The plaintiffs seek class certification, unspecified compensatory damages, and a jury trial.

For India's largest private-sector lender, the legal exposure extends beyond the immediate case. A finding of securities fraud could trigger SEC scrutiny of foreign-listed banks' disclosure practices, potentially raising compliance costs across the sector. The reputational damage also comes at a time when Indian banks are competing for foreign institutional investment, and governance questions could weigh on valuation multiples for HDFC and its peers. The case also highlights the regulatory arbitrage risk for Indian banks listed on US exchanges, where disclosure standards under the Securities Exchange Act of 1934 carry different enforcement weight than domestic Indian regulations.

This article is for informational purposes only and does not constitute investment advice.