Mumbai: Axis Bank Ltd will acquire the investment banking and broking units of Enam Securities Pvt. Ltd for Rs 2,070 crore, the two firms said on Wednesday.
The deal will take Axis Bank a step closer to becoming a universal bank while it marks the end of the road for one of the most successful homegrown investment banks in India.
As part of the all stock deal, Enam shareholders will get 5.7 shares of Axis Bank for every one Enam share they own, leaving them with a stake of 3.3% in Axis Bank’s expanded share capital. The Enam units and Axis Bank’s own fledgeling investment bank unit will be folded into a wholly owned subsidiary of India’s third largest lender in the private sector.
Key executives from Enam will move to Axis Bank, including Manish Chokhani, who will become chief executive officer (CEO) of the subsidiary.
Enam Securities chairman Vallabh Bhansali will be a director on the Axis Bank board.
Negotiations between the two parties began on 3 September and the deal was finally closed on Tuesday night at the south Mumbai office of Anil Singhvi, who advised Enam. The Macquarie Group was adviser to Axis Bank.
The senior Enam executives who will move to Axis Bank have agreed to stay on for at least two years, since their relationships and skills will be critical to build the new investment banking subsidiary. Axis Bank has also retained the right to use the Enam brand for two years. The two companies have also signed a five-year, non-compete agreement.
The sale is seen as part of a process of consolidation among domestic investment banks, who are being challenged by low brokerage fees and tough competition from global investment banks that can use their larger balance sheets to raise funds for Indian companies.
Enam ranks third this year in the India equity issuance league table, with an 8.9% market share, behind Citigroup and local rival Kotak Mahindra Bank Ltd, according to Thomson Reuters data.
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Overseas investment banks such as Credit Suisse Group and Goldman Sachs have crowded into India in recent years, taking on domestic players and adding to the downward pressure on fees that has seen banks earn next to nothing on several large share sales in government firms.
The heads of both companies stressed the advantages of the deal.
Axis Bank managing director and CEO Shikha Sharma said the purchase of the investment and broking units of Enam would help the bank plug a key product gap in its offering to corporate customers—equities capital market, or ECM, products.
The purchase also fits into Axis Bank’s growth strategy. Sharma has been trying to grow the bank’s fee-based business ever since she took charge in April 2009.
The bank’s fee-based income from mergers and acquisitions (M&A) and advisory services is low compared with peers such as HDFC Bank Ltd and ICICI Bank Ltd.
Axis Bank is already the biggest manager of debt sales in India. Sharma had earlier grown ICICI Bank’s investment banking business and has been trying to repeat her success at Axis Bank.
Sharma also pointed to the fit between the type of clients serviced by the two firms—large Indian companies as well as emerging companies.
Enam chairman Bhansali said his decision to sell the investment bank and broking units is based on global trends, where stand-alone investment banks are under pressure from better-funded competitors and regulators. US regulators have already encouraged investment banks to become commercial banks after the financial crisis.
“Balance sheet muscle has become a strategic tool in investment banking while we were a P&L business,” he explained. P&L is the acronym for profit and loss.
“We had two options—either we get a banking licence or be a part of the bank and we chose the second one,” he said, after signing the deal with Axis Bank.
“Investment banks with balance sheet capability have moved away from a pure advisory role and most of the larger players are those with balance sheet strength, such as ourselves,” Prahlad Shantigram, global head of M&A advisory at Standard Chartered Bank said in an earlier interview to Mint. The pure investment banks are largely reliant on equity, with virtually no business in debt capital markets, he had added.
Bankers say Bhansali sold cheap.
In 2005, veteran investment banker Hemendra Kothari sold his controlling stake in DSP Merrill Lynch Ltd to his partner Merrill Lynch at 26 times earnings. Enam Securities sold for 18 times profits.
“He was running out of opportunities and could not scale up his business,” says a banker who worked earlier with a global investment bank, referring to Bhansali.
Both Bhansali and Sharma shrugged off such criticism, saying that valuation is a matter of opinion. “It depends on how you look at it,” said Bhansali. Enam is privately held while Axis Bank is listed. Indian stock markets were closed for trading on Wednesday for a public holiday.
Nandita Bose of Reuters contributed to this story.