Days after Vallabh Bhansali decided that being part of a bigger establishment was key to ensuring that his investment banking business would continue to flourish came affirmation of that contention.

In London, a consortium of eight foreign banks wrote out a cheque on 19 November for $6 billion (Rs27,360 crore) to London-listed metal and mining company Vedanta Resources Plc to fund its proposed purchase of 51-60% of Cairn India Ltd, which entailed a total deal value of $9.6 billion.

Strategic move: Enam Securities promoter Vallabh Bhansali decided that being part of a bigger establishment was key to ensuring his investment banking business would continue to flourish. Saanskrut Kumar/Mint

Three days before Vedanta tied up funds, Bhansali, key promoter of Enam Securities Ltd, had agreed to merge the investment banking and brokerage business with Axis Securities Ltd, the investment bank of Axis Bank Ltd, India’s third largest private bank by assets. Bhansali says he was convinced by his friend and finance wiz Anil Singhvi about the way forward.

Enam had everything needed to transform itself into a top-rung I-bank—it had an army of experienced, loyal bankers, a decent client list and had just raised Rs2.7 trillion in six days as part of the government’s asset sale programme.

“We had two options—either get a banking licence, or be a part of the bank," says Bhansali. The lack of a balance sheet was what persuaded him.

“I look at what regulators say (rather) than my rivals," says Bhansali. “We are a conservative company, primarily a profit and loss account company."

Not everyone has the same view though. There are around 300 domestic merchant banks, and many of them are bulking up so that they can eventually convert themselves into a bank. Others prefer to survive on advisory fees even as retail brokerage margins shrink and overseas brokerages corner 80% of market share.

Also See | Top I-Banks (pdf)

“It’s tough to do investment banking without a (sizeable) balance sheet," says Hemendra Kothari, who sold majority control of DSP Merrill Lynch Ltd to the US-based partner in 2005, and exited the firm completely in 2009.

Survival strategy

Domestic I-banks, to survive, should preserve capital, shy away from riskier leveraged businesses and focus on the needs of small- and mid-cap companies to raise money for growth capital, which may not be profitable for bulge-bracket banks, Kothari says. Getting a banking licence is one of the options, he adds.

Among those following Kothari’s advice is Edelweiss Capital Markets Ltd, which recently picked up a 5% stake in Kerala-based Catholic Syrian Bank, expanded its retail network by acquiring rival Anagram Securities Pvt. Ltd, and is inching towards becoming a full-fledged financial services firm by offering home loans, debt syndication for small- and mid-cap companies and will soon raise an infrastructure fund.

“We only want to tread in the Rs100-1,000 crore deal space," says Edelweiss chairman and chief executive Rashesh Shah. He and his partner Venkat Ramaswamy reduced their stake to 38%. Reserve Bank of India guidelines stipulate that a single entity cannot own more than 10% of a bank.

The precedent was set by Uday Kotak, who set up a full-fledged I-bank—Kotak Mahindra Capital Co. Ltd (KMCC)—and turned it into a commercial bank a decade later. KMCC is an I-bank that was built “brick by brick", says Ranu Vohra, managing director and chief executive officer of Avendus Capital Pvt. Ltd, which started as a boutique bank 11 years ago, entered wealth management, and is now adding institutional sales.

“Unlike other I-banks, which are product-focused, we are domain-focused in consumer goods, information technology, pharma and healthcare, infrastructure and industrial goods," says Vohra. There is a market for only five-six bulge bracket banks, three-four good quality domestic banks and 290 boutique ones without equity capital market capability and a wide range of products.


The equity capital market will clearly be a differentiator as clients seek quality bankers, says Vohra, who sold a stake in Avendus to Eastgate Capital Group, a a private equity subsidiary of NCB Capital, the investment banking arm of National Commercial Bank of Saudi Arabia.

Another homegrown I-bank, Ambit Corporate Finance Pvt. Ltd, is focusing on the equity capital market (ECM) and enhancing its balance sheet. In February, Ambit partnered with Qatar-based QInvest Llc, which took a 25.01% stake.

“We face no constraint as our balance sheet has risen six timeRs300 crore after QInvest invested Rs250 crore," chief executive Ashok Wadhwa said in an earlier interview to Mint.

For him the challenge is in institutional brokerage, started in 1998, which still only has a 2.5% market share. Half the market is with larger players such as Goldman Sachs (India) Securities Pvt. Ltd, UBS Securities India Pvt. Ltd, Morgan Stanley India Co. Pvt. Ltd and Bank of America Merrill Lynch.

But both Vohra and Wadhwa will stay away from retail broking unlike Edelweiss.

“We do not adopt a ‘feet-on-the-street’ model and prefer to take the ‘top-of-the-pyramid’ approach," says Vohra of Avendus, which tripled its headcount to 135 in three years from 45 in 2007.

Automation and online trading have led to low fees for brokerages, says Gyan Mohan, head of investment banking at IDBI Capital Markets Ltd. “Fees, which used to be at 1% for equity sales, are now less than around 0.6%," he said. Shares of Indian broking firms are still languishing way below their peaks in early 2008.

Consolidation among retail brokerages is definitely on the cards as investments required to build network and brand loyalty are steep, says Prithvi Haldea, chairman and managing director of Prime Database, a Delhi-based primary market tracker.

Under stress

Despite low fees, brokerage houses such as Motilal Oswal Securities Ltd believe they have another three-five years before thinking of an Enam-style solution. “Right now, considering the annual growth rate of around 30-35%, we will continue to offer the same set of services," said Ashutosh Maheshwari, chief executive officer at brokerage Motilal Oswal.

Still, firms such as Edelweiss and Motilal Oswal could look at similar deals such as Enam to augment the balance sheet as broking fees face pressure, said Sandeep Dhupia, executive director, transaction services, at consultancy firm KPMG.

Despite fairly healthy revenue growth, profitability of brokerages has been under stress for several quarters. Margins have contracted by 232 basis points (bps) quarter-on-quarter and 928 bps year-on-year. (A basis point is one hundredth of a percentage point).

Profit before tax (PBT) margins have been declining almost secularly for the past six-seven quarters due to rising employee and interest costs, wrote Apurva Shah and Umang Ghosh at brokerage Prabhudas Lilladher in a 3 November research note.

“Our market, which is not very big, is overbanked," says Udayan Bose, a veteran banker who sold off his stake to joint venture partner Lazard India in 2005 and echoes Vohra that there can only be two-four niche bankers. “Like a strategy to build, there is one to encash at the peak," Bose said on Bhansali’s deal with Axis Bank.

There is client pressure on the bankers to help them with advice and money in times of crisis. Clients are increasingly asking their bankers not only to supply ideas but also to commit and arrange capital in support of their advisory business, Frank Hancock, managing director (corporate finance) at Barclays Capital, the investment banking division of Barclays Plc, had said in an earlier interview to Mint.

Adding muscle

Homegrown Avendus and Ambit Capital are enhancing their capacities to fund large acquisitions.

Avendus has built up relationships with offshore banks and hedge funds to raise up to €1 billion to fund companies. “We have built relationships with many European banks to fund our clients to buy companies abroad," said Vohra of Avendus, adding that in any case, a lot of multinational companies (MNCs) which are coming to India already have the financial capability.

On the other hand, there are foreign banks such as NM Rothschild and Sons Ltd and Lazard Ltd that have stuck to pure advisory, a template that some domestic boutique firms such as Mape Advisory Group Pvt. Ltd and Equirus Capital Pvt. Ltd have followed.

“We’d rather be seen as good at what we do and focus on that rather than be seen to be average merchant bankers doing an IPO (initial public offering), being a small-time lender or small-time investor," said Sanjay Bhandarkar, managing director of Rothschild’s Indian unit. In the current M&A cycle, the company is, in fact, seeing more business from its global clients.

Financial consultants and bankers from global lenders differ with Bhandarkar.

“While an I-bank does not require capital if it contains itself to advisory, which explains the myriad new I-banks, the balance sheet is a necessary tool after a threshold, for survival," said Saurabh Tripathi, partner at consulting firm Boston Consulting Group.

Competition from foreign banks is increasing.

“Investment banks with balance-sheet capability have moved away from a pure advisory role," said Prahlad Shantigram, global head of M&A advisory at Standard Chartered Plc, in an earlier interaction. “Most of the larger players are those with balance sheet strength, such as ourselves. The pure investment banks are largely reliant on equity, with virtually no business in the debt capital markets."

Cross-border ties

The ability to raise large funds at short notice will become important in 8-10 years, says Vohra, as client needs increase.

In the US, there are about 80-100 mid-market banks, each with revenue in the range of $10-150 million.

The investment banking space has become more competitive and there is pressure on M&A deals, says Rajeev Suneja, partner at consultant Ernst and Young India Pvt. Ltd, which advises on financial services.

While big-ticket transactions are governed mostly by the likes of a Goldman Sachs or a Standard Chartered, E&Y explores the mid-market space, he says. “The global network works to our advantage," he adds.

“After you cross a certain size, it’s a high-risk, low-capital-intensive, high-return business," says Jacob Mathew, managing director at investment bank Mape.

Some boutique firms are joining hands with foreign stand alone investment banks to widen their network. Yes Bank Ltd, Equirus Capital and 03 Capital Advisory Pvt. Ltd have chosen this model. Equirus joined hands with Clarified Partners of Spain and 03 Capital became a member of the global network IMAP.

“By restricting oneself to advisory, one could potentially lose clients, and so we try to offer a comprehensive suite to move up the ladder in the mid-market space," says Deepesh Garg, managing director at 03.

The bank, which deals with small- and mid-cap companies, aims to underwrite public issues for clients, recruit 20 research analysts, advise companies on share sales as well as being co-book runners.

Yes Bank’s investment banking division has joined hands with Israel’s Poalim Capital Markets Ltd and South Korea’s Hana Financial Group Inc. Chennai-based boutique I-bank Pears Capital already has 25 cross-border partnerships with I-banks in the US, Australia, Europe, Malaysia, Dubai and Africa, and is now looking at China and Russia.

“The jury is still out," says Avendus’ Vohra, who believes that it is difficult to execute the alliance model.