India: A shortage of talent
WHEN HE STARES out of his office window in Mumbai, Brooks Entwistle has a superb panoramic view of the Arabian Sea. The weather is inclement, with India’s monsoon season in full swing, but the peninsula is still a breathtaking sight. The CEO of Goldman Sachs’s India business is a lucky man. He had better not get too attached to the view, though, as he won’t have it for much longer.
Entwistle’s office is a suite on the 10th floor of a five-star hotel in Nariman Point in Mumbai’s financial district. His residence there is temporary. The US firm will move into bigger premises later this year. The move is symbolic of Goldman’s new start in India as it waits for the green light from the regulators to begin its banking operations in the country.
For 10 years Goldman Sachs had built its business in India through a joint venture with one of India’s leading financial services groups, Kotak Mahindra Bank. Goldman held a 25% stake in two of Kotak’s subsidiaries, Kotak Mahindra Capital Company and Kotak Securities. Now it wants to go it alone. In March, Goldman parted formal company with Kotak, when the Indian firm bought out Goldman’s stake for a combined Re3.33 billion ($70 million). The two companies remain on good terms and entered into a business cooperation agreement for one year.
For Entwistle the rationale behind his firm’s decision to sell is simple. “India is no longer a market where you can be a small investment banking boutique,” he says. “You need to be able to provide a comprehensive range of services.” As a statement of its intent Goldman Sachs has announced that it plans to invest about $1 billion in India over the medium term, largely in private equity investments. “People are waking up to the India opportunity,” adds Entwistle.
No longer ignored
The country’s successful economic story, the unprecedented growth of India’s corporates and their burgeoning need for advisory and funding services, the increase in global capital flows to India, and the gradual evolution of its capital markets allied with the lightening of government regulation means that India is fast becoming central to any investment bank’s strategy.
| ECM Listing on Indian Exchanges |
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“There are very few multinational companies where the CEO doesn’t have India on their radar screen. That also holds true for the financial services sector and especially the investment banking community,” says Pramit Jhaveri, head of investment banking in India at Citigroup. Just five years ago, he adds, the story was very different. For many of these banks India wasn’t as relevant. At Citigroup, investment banking in India accounted for less than 5% of the bank’s Asia ex-Japan IB platform. Today it’s about 15%.
“India cannot be ignored,” agrees Paul Calello, chief executive of Credit Suisse Asia Pacific, which is also seeking to build its operations in the country. Like Goldman and Citigroup, Credit Suisse is not new to India. It had a strong presence in the 1990s but in 2002 the firm was forced to shut its brokerage business after the country’s stock market regulator suspended it for two years after allegations that it violated rules on price manipulation. Now that suspension has passed, Credit Suisse is ramping up its operations again as it strives to fill the one missing piece in its Asia jigsaw. “We have a long history of strong capabilities in India,” says Calello, “and we’re looking to rebuild our franchise.” Earlier this year it hired Mihir Doshi from Morgan Stanley to spearhead its efforts.
Lehman Brothers has also announced its intention to expand its activities and is sending one of its senior executives, Tarun Jotwani, co-head of the firm’s fixed income businesses in Europe, to head its India efforts.
“This is the most exciting, competitive environment in Indian investment banking”
Hemendra Kothari, DSP Merrill Lynch |
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The rumour mill is also whirring with the possibility that RBS, Macquarie and GE Capital are applying for banking licences. If these institutions do arrive (which cannot be taken for granted as the central bank has not awarded a licence to a new bank in two years), they will enter one of the toughest investment banking markets in the developing world – one that not only includes the firms already mentioned but other foreign standalone businesses such as Barclays Capital, Deutsche Bank, HSBC, Rothschild and UBS among others; the tie-up banks JM Morgan Stanley and DSP Merrill Lynch; and independent local outfits such as Enam and ICICI, as well as Kotak.
“This is the most exciting, competitive environment in Indian investment banking,” says Hemendra Kothari, chairman of DSP Merrill Lynch.
“Any country that has evolved like India has is bound to have a dynamic landscape, but from an investment banking and securities point of view it has never been as dynamic,” agrees Jhaveri.
End of the JV era
One big change taking place is the diminishing importance of the joint venture. Three prominent partnerships dominated the Indian investment banking scene in the late 1990s/early 21st century: Goldman’s tie-up with Kotak, JM Financial’s venture with Morgan Stanley and DSP’s partnership with Merrill Lynch.
The model succeeded for a while but now seems too limiting to work in the long term. “If you go back to the mid-1990s, joint ventures had a certain rationale as India’s markets were evolving,” says S Ramesh, chief operating officer of the investment banking division at Kotak. “Over the past 10 years that has changed. The time has now come for local and global banks to chart their own history in India.”
“Joint ventures haven’t really provided much value to shareholders in terms of bottom-line profitability,” says Calello. “Margins are very tight. The demands of the joint venture partners are extremely high. The economics have traditionally favoured the local partners.”
Now that Goldman and Kotak have cut their cord and Merrill Lynch has increased its stake in its tie-up to 90% from 40%, only Morgan Stanley’s partnership with JM Financial can be considered a proper joint venture (in January SBI Capital Markets and CLSA entered an investment banking alliance but there has been no transfer of equity).