Rapid growth fuels intense competition

IFR India Special Report 2010
11 min read

Investment banks are fighting it out to attract - and retain - top talent as competition in the Indian market becomes ever more intense.

The intense competition in India’s investment banking sector is both a cause and an effect of the rapid expansion of the country’s corporate market. Acquisitions galore are being more than matched with the furious competition among top banks that are falling over themselves to book Indian business, driving down fees to among the lowest in the emerging market universe.

Across the board, local investment banks are competing with their international counterparts: from the big commercial banks that bring their balance sheets to any deal to the investment banks that rely more on their advisory skills. A myriad of banks are bent on tapping the market’s huge potential as government-owned companies are being encouraged to expand abroad and an array of entities under the control of families or promoters often with sophisticated wealth management needs.

For example, in late August, state-owned exploration company Oil India mandated seven banks - including Citigroup, Morgan Stanley, Deutsche Bank, BNP Paribas, Nomura and Merrill Lynch - to explore overseas acquisitions of up to US$1bn as it looked to beef up the country’s energy security.

In a reversal of its policy in April last year when it put on hold plans to liberalise the operations of foreign banks, the Reserve Bank of India (RBI) is now processing applications from 18 foreign banks looking to set up branches and representative offices in the country. Their current combined bank branch total only just tops 300 - a figure that any international banker will find woefully inadequate for a country that boasts the second fastest-growing economy in the world in GDP terms last year. The appeal is obvious: the IMF expects India to be the world’s third largest economy, based on purchasing power parity, by 2012.

“As the economy continues its impressive growth path, corporates are hungry for capital to fund expansion,” said Mihir Doshi, CEO at Credit Suisse India. “Indian companies are also becoming increasingly acquisitive overseas and there is more inward investment in India, not to mention domestic consolidation. There is a vast capital market that is ever more popular with global investors and there are growing pools of private wealth.”

Credit Suisse is one of the most aggressive new entrants, although the firm’s Indian expansion marks a return after its regulatory ban over alleged stock price manipulation in 2001. In April, it poached two banking heavyweights from JP Morgan - Vedika Bhandarkar and Sandeep Pangal - to lead its investment banking operations in South Asia. These hires came on the back of the Swiss bank’s relaunch in India last year. In November, it named Rahul Chawla head of global markets solutions for India, where he helps originate equity and debt capital market transactions, among other things.

The hunt for key individuals able to secure lucrative mandates and run transactions successfully has intensified as new and returning entrants fight for market share. It is just as well, then, that few other countries can boast the level of expertise that already exists in the Indian investment banking market - or is returning from overseas.

In March, JP Morgan also lost the vice chairman of its India business, Kaku Nakhate, who quit to become country head for Bank of America Merrill Lynch. At the same time, Morgan Stanley named P Jayendra Nayak, the former chairman and CEO of Axis Bank, as its new chief executive and country head for India.

Also in March, Citigroup named Pramit Jhaveri, one of India’s best-known investment bankers, as its new South Asia chief executive, while Ravi Kapoor was appointed head of global banking in India. Citi also announced that Asit Bhatia, a veteran at Bank of America Merrill Lynch, was rejoining the firm as managing director for corporate and investment banking in India. In May, Goldman Sachs appointed Sonjoy Chatterjee as a managing director and co-chief executive officer of its India business to work with Brooks Entwistle.

These were just some of the latest hires - a sure sign that international firms are back and ready to spend.

Local competition

Still, not all the action is coming from the foreigners. Tarun Kataria, who was head of global banking and markets for India at HSBC joined Religare earlier this year, announcing that he wanted to build an Indian capital markets business that will form the basis of an emerging markets-focused global investment bank. The acquisitions of Hichens in the UK and Central Joint Enterprise in Hong Kong are likely to be followed up with further purchases in emerging markets, such as Indonesia, Sri Lanka and Russia.

“The Indian market is very competitive,” said Kataria at Religare, which is owned by brothers Malvinder and Shivinder Singh, controllers of an expanding healthcare franchise. “There are half a dozen strong domestic houses and as many global players. So, we will compete in our niche and be very credible through ideation, exceptional research, global distribution and quality execution.”

The local players like to emphasise the importance of trust over brand, and many have vast distribution networks that can ensure wider participation in initial public offerings (IPOs), whereas foreign banks still dominate global mergers and acquisitions.

“We realise this is a very competitive market and that it takes time to win clients’ confidence and build a franchise here. So, we have taken a long-term view on India and believe these investments will be the foundation of our long-term success,” said Credit Suisse’s Doshi. “But we’re also very ambitious and determined to grow our Indian business as fast as possible.”

Credit Suisse wants to be the leading client franchise in its core businesses - wealth management, investment banking and asset management. The scale of its investment so far, both in terms of infrastructure and people, shows the extent of its commitment to India. It acquired and capitalised a non-bank financial company (NBFC) and then successfully applied for a banking licence, while also hiring some of the leading talent in the industry. In August, it got its licence from the Reserve Bank of India to open a branch in Mumbai to take deposits and use its balance sheet to provide financing to clients. “The banking licence will be a catalyst for our development in India, enabling us to accelerate that process.”

US banking giant Goldman Sachs has also applied for a commercial bank licence in India, to go with the green light it has already received for its soon-to-be-launched asset management business in India, having struggled previously to make the plan work. Goldman Sachs has invested US$2bn in over 50 companies in India. Meanwhile, its erstwhile partner, Kotak, said it would expand into project finance and debt capital markets after a cash injection from SMBC.

Most of the established firms have disentangled themselves from their international joint ventures, further adding to the number of competitors. Merrill Lynch bought out the local partner in DSP Merrill Lynch in December 2005; Goldman Sachs and Kotak Mahindra Group went their separate independent ways shortly after; while JM Financial parted ompany with Morgan Stanley in June 2007.

Money to be made

Competition in the capital markets has driven down fees to the point that banks often agree to work for next to nothing on bond or equity mandates. The worst payer is the government, which is a big source of business this year – thanks to a planned slate of divestments through the IPO or share-placement route.

That is not to say, however, that there is no money to be made. “Nobody ever suggested India was a huge fee-paying market, but you can build a decent business by being there with ideas and executing them well,” said Kataria at Religare.

“We see tremendous growth potential in this country, both in helping domestic and international companies capture opportunities in India’s growing trade and investment flows with the world and in meeting the financial needs of its rising affluent consumer market,” said Naina Lal Kidwai, group general manager and country head at HSBC in India, who has been appointed to the board of the bank’s Asian unit..

HSBC acquired the Royal Bank of Scotland’s retail and commercial banking businesses in India at a cost of US$1.8bn in March, an indication of its confidence in the country’s banking market. The acquisition, which is subject to regulatory approvals and is expected to be completed in the first half of 2011, is HSBC’s third transaction in India in the last two years, following an insurance joint venture and retail brokerage.
“Given 8 or 9% GDP growth, double-digit growth in Indian financial services over the next decade is a distinct possibility. This includes primary issuance, secondary flows as well as cross border M&A,” said Kataria. “We want to use our Indian origins to be an emerging markets investment bank to our clients who are looking at inorganic growth opportunities in the emerging economies or indeed want to be in the secondary flow in and out of India as market capitalisation expands.”

Standard Chartered, meanwhile, took the credit as the first foreign company to list shares in India in May. The issue of Indian depository receipts (IDR) was designed to boost its profile in the market, while also giving Indian residents an opportunity to invest in the bank. It was well-timed, too, coming only a week after StanChart agreed to put up the lion’s share of a huge US$8.3bn acquisition loan for Bharti Airtel, India’s leading mobile phone company. StanChart also provides proof the market’s profitability, as CEO Peter Sands said this year: “India is one of our largest and fastest-growing markets and achieved over US$1bn in profits in 2009, while the Asia region accounted for over 75% of its US$5.15bn total profit before taxation for 2009.”

Another of the colonial banks, ANZ, has approval for a banking licence, but must wish it had not sold its Indian business (Grindlays) to StandChart 10 years ago.

Nick Parsons