Business Today

India's richest investment banks

By helping some of India's mega-corporations make global-size acquisitions and raise billions through public issues, deal makers are making hay. In the first half of 2007, the top 10 investment banks collected some $441 million in fees. The going can only get better.

By Mahesh Nayak | Print Edition: July 29, 2007


Manisha Girotra
Chairperson & MD-India, UBS
Fees collected in 2007
$109.2 million

Hemendra Kothari
Chairman, DSP Merrill Lynch
Fees collected in 2007
$46.4 million

Nimesh Kampani
Chairman & MD, JM Financial
Fees collected in 2007
$56.6 million

Take a good look at the three personalities on the cover of this magazine. Chances are you've seen them before (but never together). Chances are you'll see them again. And again. In the days, months, and years to come (but not together, for sure). Take Manisha Girotra, Chairperson & Managing Director-India, UBS, the lady who's seated in the forefront. The India head of the Swiss investment bank is a familiar face on Deal Street, but over the past six months she's become a veritable household name in the country. Reason? She's been at the helm of three billion-dollar merger & acquisition (M&A) deals-doubtless a feat of unimaginable proportions, considering billon-dollar transactions themselves are pretty much a novelty on the Indian deal-making landscape. It may also be a feat because here's a woman closing super-size deals in an industry that's globally perceived to be testosterone-driven.

Now take a look at the two gentlemen with Girotra. They're both dyed-in-the-wool bankers who've been around seemingly for ever, and who've been steady companions of the Indian capital market right from its fledgling days. Today, they're older, wiser-and very rich. In 2005, Hemendra Kothari, 61, Chairman, DSP Merrill Lynch, made the killing of his life when he sold 50 per cent of the 60 per cent he owned in the investment bank to his Wall Street partner for a cool Rs 2,250 crore. But Kothari hasn't taken the money and run to the Bahamas or some such place. Rather, he's still calling the shots at the firm, and has been anointed Vice Chairman of Merrill Lynch International, to boot. In the recent past, DSP Merrill Lynch has pulled off big m&a deals like Flextronics and Kohlberg Kravis Roberts (KKR) and Holcim and Gujarat Ambuja, and played a pivotal role in helping mega-corporations like ICICI Bank and DLF raise capital from Dalal Street. For its efforts, Kothari's firm has collected a little over $46 million in fees so far in 2007.

Nimesh Kampani, 60, Chairman, JM Financial, is another street veteran who's been there, done deals, and is still hungering for more. A recent split with Wall Street partner Morgan Stanley might have left him up the I-banking creek without a paddle, but he's got a handy life-jacket worth Rs 2,000 crore, courtesy that sell-out. On his own Kampani is now leveraging his decades-old relationships with the who's who of corporate India; and along with an ideas-churning team that's stuck with him through more of thick than thin, and his newly-acquired net worth, he's ready to play advisor-and partner-to an India Incorporated that's hungry, and willing to pay top dollar, for global assets.

How fees of India's I-bankers stack up since 2004 ($ million)


DSP Merrill Lynch
DSP Merrill Lynch
Kotak-Goldman Sachs
JM Morgan Stanley
JP Morgan
JP Morgan
JM Morgan Stanley
Barclays Capital
Kotak-Goldman Sachs
HSBC Holdings
Deutsche Bank AG
Deutsche Bank
ENAM Financial
till June 2007
JM Morgan Stanley
DSP Merrill Lynch
JM Financial
JP Morgan
DSP Merrill Lynch
Deutsche Bank AG
Goldman Sachs
Deutsche Bank AG
JP Morgan
HSBC Holdings
HSBC Holdings
Barclays Capital
Lehman Brothers
Note: Source for all data is Thomson Financial.
Figures include fees for M&A, IPOs and follow-ons, debt & convertibles and loans. Fees are for deal announced and not necessarily completed. Kotak and Goldman were partners till 2005 and JM Financial and Morgan Stanley were partners till 2006.


But this isn't another story on corporate India's insatiable desire to go global. Instead, it's about the role Indian investment banks are playing in this global march, in helping corporate India achieve size and scale, and also in helping them raise billions to satisfy their urge to be Indian multinationals. And it's a story on how Indian I-banks and the deal-makers at their helm are getting richer and richer in the process. Consider: The $109.2 million, or Rs 436.8 crore, that UBS India earned in fees in the first six months of 2007 would be adequate for the Swiss investment banking giant's domestic operations to buy chunky controlling stakes in mid-cap companies like Goldiam International and Maharashtra Scooters. And if the entire Indian investment banking industry were to get together, the $929 million they grossed till June by cutting 977 deals would be good enough to allow them to buy out 54 per cent of Reliance Industries-controlled IPCL, or pick up a 51 per cent stake in a company like Sesa Goa.

"New ideas are critical. As are relationships. The two, along with the ability to finance deals, make a perfect combination"
Nimesh Kampani
Chairman/ JM Financial
"We expect the (investment banking) industry to earn $1 billion in fees (just) through M&A"
Manisha Girotra
Chairperson & Managing Director-India/ UBS
"If India Inc. wants quality advice they'll have to pay more"
Hemendra Kothari
Chairman/ DSP Merrill Lynch
But, of course, investment banks aren't in the business of buying (or selling) businesses. They'd rather get buyers and sellers together, or help companies raise equity and debt, sometimes even help bankroll a buyout -and pocket a commission for their efforts. And, by the looks of it, India's deal makers aren't doing too badly for themselves at all. They've already earned a little over three-fourths of the fees that the industry earned in the whole of 2006-last year the country's I-bankers took home $1.23 billion from 2,060 deals. On the Asia-Pacific landscape, India now stacks up in fourth position, behind China, Japan and Australia, but not by much (last year India was perched at the #5 slot). What's more, the average fee per deal in 2007 has nudged up to $0.95 million, as against $0.59 million in 2006.

"If you have to service the top-tier segment of this country, arranging finance will become critical"
Sanjay Nayar
CEO-India & Area Head Bangladesh, Nepal & Sri Lanka/ Citi
Of course, the biggest contributor to I-banks' revenues has been fees accruing from M&A transactions. According to Thomson Financial, M&A deals worth $46 billion were announced between January and June 2007, which is almost a 50 per cent jump over the pervious year's corresponding figure of $31 billion. That would explain why nearly 58 per cent, or $538.4 million, of the total fees earned by Indian I-bankers were from M&A transactions. Most of those deals have been of the cross-border variety, with inbound M&A values rising over four-fold to $25.5 billion (from $5.6 billion in January-June 2006), and the value of outbound acquisitions doubling to $14.5 billion. By the time 2007 ends, deal makers will indeed be laughing all the way to the bank-or rather, all the way from it. "We expect the (investment banking) industry to earn $1 billion in fees (just) through M&A," gushes Girotra.

If the fees are bulging, it's because deal-sizes are expanding. For instance, over the past six months Aditya Birla group company Hindalco snapped up Novelis of us for $6 billion, Essar Global purchased Canadian steel maker Algoma Steel for $1.58 billion, Suzlon Energy bought repower for m1.35 billion and the UB Group took over Scotch maker Whyte & Mackay for $1.18 billion. UBS was an advisor to nine M&A transactions, including Hindalco-Novelis, Algoma Steel and Whyte & Mackay, enabling it to earn close to $100 million in the process, and grab 18.3 per cent of the fees pie. Says Sanjay Nayar, CEO-India & Area head Bangladesh, Nepal and Sri Lanka, Citibank: "Availability of capital-both private and public-at a cheaper cost and the thesis that Indians can run companies better, cheaper and faster can explain India Inc.'s global march."

Here's the money

Advice is welcome, but ready cash opens many doors.

Successful bankers these days are those that are also able to show the money. In a bid to win mandates in a crowded market, a number of investment banks are willing to risk their balance sheets by putting cash on the table. For instance, recently Goldman Sachs, which was responsible for managing the sale of shares of ICICI Bank's follow-on offering in the local and global markets, was also one of the investors in the issue. Similarly, DSP Merrill Lynch Capital Market lent funds to DLF, and also was the global co-ordinator & book running lead manager in its initial public offering. As on 31 March 2007, the loan was worth Rs 279 crore. Market grapevine also has it that JM Financial had written cheques in the issues of Cairn India and House of Pearl Fashions.

Says Frank Hancock, Managing Director, ABN AMRO Asia Corporate Finance: "With competition intensifying in capital market and M&A activities, I expect to see bankers increasingly investing their own money to improve their overall returns from transactions." Adds Sanjay Nayar, CEO India & Area Head Bangladesh, Nepal & Sri Lanka, Citi: "Financing will become critical, and going forward investment bankers in addition to providing good advice that can bring in their own capital and arrange finance from hedge funds or private equity or institutions will be able to add more value." Citibank, through its venture capital firm, Citibank Venture Capital (CVC) has been picking up stakes in listed and unlisted companies. Recently CVC picked up 20 per cent in broking firm Anand Rathi Securities. It also has stakes in listed companies like YES Bank, Centurion Bank of Punjab and GMR Infrastructure.

Says Vedika Bhandarkar, Managing Director & Head of Investment Banking, JP Morgan: "More than the ability to write a cheque, arranging finance will become important. With more hedge funds and private equity players coming into the market we are seeing a change in capital raising activity with companies going in for private market." For instance, Carlyle recently bought a 5.6 per cent stake in HDFC, thereby helping the housing finance company save time and avoid the cost and hassle of raising capital from the market.

That may be precisely the reason for JM Financial starting a private equity fund. "With our net worth of Rs 2,000 crore, we will be in a position to finance small deals, which will be critical in acquiring business in the future," says Nimesh Kampani, Chairman, JM Financial. Clearly, advise is precious, but nothing it would appear is more valuable than ready cash itself.

"Fees are stable. There hasn't been any fee compression for the past 24 months"
Vedika Bhandarkar
Managing Director & Head of Investment Banking/ JP Morgan India
So how much exactly are promoters willing to fork out for I-banking advice and deal execution? Ravi Sardana, Vice President, I-Sec, the investment banking arm of the ICICI group, warns that when deal sizes increase, companies typically tend to opt for a fixed-fee format. Nobody's complaining. "In billion dollar deals the fees can vary from 0.10 per cent to 1.5-2 per cent," he offers. For instance, when a few months ago the promoters of Anchor Electricals sold an 80 per cent stake to Matsushita of Japan for Rs 2,000 crore, Kotak Mahindra Bank, which represented Anchor, pocketed a fee of Rs 25 crore, accounting for 1.25 per cent of the deal size (see Laughing All the Way from the Bank, to find out how much bankers are taking home). "Fees are stable. There hasn't been any fee compression for the past 24 months," says Vedika Bhandarkar, Managing Director & Head of Investment Banking, JP Morgan.

If the likes of UBS and Citi-which is second to UBS in fees earned in 2007, with $70 million-are hogging the M&a show, it's because they're players with a global platform, whose consolidated balance sheets can be leveraged during a buyout. For instance, in the Hindalco-Novelis deal, UBS (along with ANN AMRO & Bank of America) threw the Birla company a $2.8 billion debt lifeline. "With companies doing global M&A, financing becomes as important as advice," says Sardana. Pure investment banks like JM Financial for their part stress the value of advice, along with decades of relationship-building. Says Kampani: "New ideas are critical. As are relationships. The two, along with the ability to finance deals, make a perfect combination." Yet, leveraged buyouts are slowly but surely gaining ground, with I-bankers earning in fees $13.80 million from nine such deals in 2007 so far. The advantage of such buyouts: Debt can be less costly than servicing equity even as it provides tax breaks.

"The arrival of so many new entrants has intensified competition in the fee market, with new players resorting to baiting and switching"
Frank Hancock
MD/ABN AMRO Asia Corp. Finance
"I-banking has become institutionalised. From mom & pop single-person shops, you now have teams of professional entrepreneurs"
Uday Kotak
Vice Chairman & Managing Director/ Kotak Mahindra Bank
But if the global banks are beginning to put the domestic veterans in the shade in M&As, on the capital markets front it's another story. UBS, for instance, isn't a major player in capital raising, earning just $7.6 million from four transactions. Citibank, however, is collecting close to $20 million from initial public offerings and follow-on issues. The leader, though, is DSP Merrill Lynch, which has raked in fees of $28.3 million so far in the year. Morgan Stanley ($16.1 million), Kotak Mahindra Bank ($12.7 million) and ICICI Bank ($10.3 million) are the others who are strong in the primary market, aided in small measure by their strong retail reach. And the fees in this arena are relatively stable. Says Aditya Sanghi, Managing Director-Investment Banking, YES Bank: "Commissions in the IPO and follow-on market are 2-3 per cent."

YES Bank is just one of the newer I-banking players threatening the hegemony of the traditional giants. ABN AMRO and Standard Chartered are other commercial banks that have muscled their way into the Indian markets. Alongside, the Wall Street firms are also making their moves. Goldman Sachs, for instance, after breaking away from Kotak, is on the prowl; it earned close to $45 million in fees in the first half. Morgan Stanley, too, is gearing to get its act together after splitting with JM. Credit Suisse and Lehman Brothers are also in the fray. "We have a global platform and a team of global and local expertise, which will help both our local and global clients," L. Brooks Entwistle, Managing Director & CEO, Goldman Sachs (India), told Business Today recently. Adds Uday Kotak, Vice Chairman & Managing Director, Kotak Mahindra Bank: "Investment banking has become more institutionalised. From mom & pop single-person shops, you now have teams of more professional entrepreneurs."

Laughing all the way from the bank

There's a pot of gold at the end of every deal-or at least those that are cut.

A leading Mumbai-based investment bank ended the FY 2007 with revenues of Rs 250 crore, which incidentally are two and half times the previous year's top line. A tenth of those revenues, or Rs 25 crore, accrued as fees from one M&A transaction. The banker at the Executive Director level responsible for that deal took home a bonus of Rs 2.5 crore for that deal alone, based on his 10 per cent contribution to total revenues. Assuming this banker was at the helm of 4-5 other deals (albeit smaller ones), his take-home via just bonuses would tot up to at least Rs 5 crore. And then there are the salaries, which at a large-size investment bank start at Rs 10-15 lakh at the associate levels, nudge up to Rs 40-45 lakh at the Vice President level and go up to Rs 70-75 lakh at the ED level. Annual bonuses would be in line with the firm's growth, which would mean an average of 250 per cent. Says S. Ramesh, COO, Kotak Mahindra Capital Company: "The going has been good and we expect the bonuses to be in the range of 100-300 per cent of the annual salary this year."

At some banks, it isn't quite that clear-cut. "Factors like the year end P&L of the company and country-wise performance determines salary and bonuses of an individual," says Manisha Girotra, Chairperson & MD-India, UBS. "With the going being good in India, this year too bonuses will be lucrative, but there are times when despite decent performances, we in India haven't received any bonus. Everything is not judged on success, failing to clinch a deal also affects one's performance."

The spoils are broadly shared between two teams. One is the originator group, which is responsible for delivering new ideas to clients, and the other is the execution group, which has to conclude the deal. Ideas clearly matter more, which may explain why the group conceiving those ideas takes home a chunk of the booty. However, as Ramesh points out: "Usually the amount is shared equally, but can be disproportionate depending on the nature of the deal."

There's plenty of business going around, but there's also plenty of competition, given the number of players in the fray, right from the big commercial banks to smaller boutique firms. What this means is that promoters have little choice but to dish out more in terms of incentives, and retention bonuses. Investment banking is after all a people's business.

"We have a global platform and a team of global and local expertise, which will help both our local and global clients"
L. Brooks Entwistle
Managing Director & CEO/ Goldman Sachs (India)
There have been two fallouts of such professionalism: One, banks are willing to work with emerging mid-cap companies that promise to metamorphose into mega-caps in the years ahead; and two, rather than live from mandate to mandate, these banks are trying to build enduring relationships with these potential super-corporations of tomorrow. For instance, banks like YES Bank are trying to position themselves as providers of growth capital, which can take different hues: It could be private equity, or a pre-IPO placement, or might even involve holding the company's hand when it raises money from the public (and part-subscribing to that issue). As Sanghi says: "Our aim is to stay with the customer and grow with him from his initial stage of growth, such that in future the client approaches you before he thinks about others." YES Bank has done exactly that with Suzlon Energy, managing its IPO, raising capital for growth, and advising it during its acquisitions, the most recent one being the m1.35 billion purchase of repower.

There's little doubt that India is witnessing an M&A and capital raising spree-with both dovetailing into each other pretty spectacularly-on a scale that's unprecedented. But the question that needs to be asked is whether there's space for all players-global I-banks, global commercial banks, Indian I-banks, and boutique firms, both global and Indian. "With the market being good, there is sufficient business for everyone," says Bhandarkar. Adds Prahlad Shantigram, Managing Director-Corporate Finance & Advisory, Standard Chartered Bank. "When there is a period of supernatural growth, there is ample room for lot many players to participate. The challenge is when there is a slowdown or a de-growth. And I would not rule it out. There are possibilities of a slowdown."

"The going has been good and we expect the bonuses to be in the range of 100-300 per cent of the annual salary this year."
S. Ramesh
COO/Kotak Mahindra Capital Company


Already, there are signs of pressure in the market. Says Frank Hancock, Managing Director, ABN AMRO Asia Corporate Finance: "The arrival of so many new entrants has intensified competition in the fee market, with new players resorting to baiting and switching."

The new players initially acquire deals by bidding at suicidal rates and then change the terms later. In such a situation, says Citi's Nayar: "Dominance becomes the key differentiator." It won't be long before the market gets segmentised with players focusing on what they do best; in fact, that's already beginning to happen.

But as Nayar adds: "If you have to service the top-tier segment of this country, arranging finance will become critical. Anyone who brings in a combination of solution with optimal cost and right financing will score over his counterparts." However, ultimately it all boils down to the idea, and the ability to provide value that extends beyond commoditised services.

As Kothari puts it: "If India Inc. wants quality advice they will have to pay more."

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