Governance and perception are still the key business forces

TL;DR

Equitas Small Finance Bank posted its best-ever quarterly profit (₹218 crore) in the same week its founder-CEO, P N Vasudevan, resigned over a perceived conflict of interest: his daughter co-founded an unlisted NBFC, Unico Housing Finance. Vasudevan says the link was disclosed to the board and the RBI, and that the only dealing was one ₹25 crore, 89-day deposit in early 2024, repaid by March 2024. Investors had still raised the issue for about three years, and the stock fell roughly 27% in two sessions to a 52-week low. Brokerages split on the outlook, but the main worry is succession, since the bank has a thin internal bench and an RBI-approved external hire could take three to four months. This fits a 2026 pattern, including HDFC Bank’s chairman exit, Kotak’s CEO transition and IndusInd’s 2025 lapses. In banking, trust failures can cost more than technology failures, which is why governance eats tech for breakfast.

A small finance bank posted the best quarter in its history, and lost more than a quarter of its market value in two sessions because of a question about the CEO's family.

On Wednesday evening, Equitas Small Finance Bank's shares closed at ₹65.05. By Friday morning they were trading near ₹47, a 52-week low and about 27% below Wednesday's close. There was no bank run situation, only that its CEO had resigned, and he said the reason was a perception.

The best quarter

The resignation arrived alongside the bank's September-quarter results, the strongest it has reported. Profit after tax (PAT) reached a record ₹218 crore, against ₹24 crore a year earlier and 18% higher than the previous quarter. Total business crossed ₹1 trillion, and the bank had a five-year plan to March 2031 targeting growth of more than 20% a year in advances and deposits.

YET, none of that decided the week. In the results note, one brokerage said the sudden resignation of the MD and CEO had eclipsed the operational performance. On the earnings call, analysts focused heavily on the CEO transition, asset quality and margins. The transition came first and took all the spotlight.

The letter

P N Vasudevan founded Equitas as a microfinance institution in 2007 and led its conversion into a small finance bank in 2016. In a letter dated October 29, he resigned despite the fact that the board had extended his tenure until July 2029 only about three months earlier.

The cause was his daughter. Varshini Vasudevan Pathangi founded Unico Housing Finance, an unlisted NBFC, in 2023. In his letter Vasudevan said the arrangement was within the Banking Regulation Act and had been disclosed to the board and the RBI. He said the only transaction between the bank and the NBFC was a short-term deposit placed around two and a half years ago and repaid on maturity. He added that investors had raised the issue at meetings repeatedly over three years.

The CEO blamed the perception for this whole ordeal. His quote captured it: "Sometimes perceptions are stronger than reality." He said he wanted to remove the overhang on the stock. He also told BusinessLine that the regulator was not in the picture at all.

What the file shows

The bank had already told the exchanges about the deposit in August. It was ₹25 crore, placed by Unico on January 1, 2024 for 89 days. A separate report said it was fully repaid by March 30, 2024. The bank also said it had extended no loans to Unico and had no plans to.

That August clarification came after a Moneycontrol story headlined "RBI questions 'nexus' between Equitas SFB and Unico Housing Finance." Reports at the time said the RBI wanted to know whether the bank's leadership and board were aware of the connection when considering Vasudevan's reappointment, and wanted details of any related-party dealings. The bank rejected the word "nexus," said it was compliant, and said communication with the RBI is privileged and confidential.

Two things were true at once. On the record, no loan was made and one repaid deposit was disclosed. But a founder-CEO whose daughter runs a lender in a neighbouring corner of the market makes investors uneasy, and they had been saying so for three years. Despite multiple efforts on easing the issuing by saying "no rule was broken" did not settle the uneasiness of the investors or the market.

The market's verdict

The stock hit the lower circuit on Thursday (29-Oct) and closed more than 12% lower at ₹56.99. Friday's losses followed. The market's primary worry is succession as we've noticed in a few other cases like HDFC recently. Analysts said the bank has limited internal bench strength and will probably need an external candidate. The board's nomination committee will search internally and externally, and any appointment needs RBI approval. It's natural for the selection to take three to four months, till then Vasudevan stays as the CEO.

This is also not his first resignation. He resigned in May 2022 and withdrew in December 2022 at the board's request. Something similar might happen again. Or not.