Investment Banking: Triad K: India's Financial Power House

It's the cabal that rules the roost in India corporate finance. A look at what makes the trio the envy of Mumbai's ivy league investment bankers.

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In Mumbai's high-powered financial markets, the KKK rules. No, we aren't suggesting that middle America's infamous white supremacist group, the Ku Klux Klan, is burning crosses on Dalal Street and Nariman Point. It's a different KKK, we're talking about. It's the Kothari-Kampani-Kotak cabal that rules the roost and walks the talk when it comes to corporate finance. Hemendra Kothari, 54, Nimesh Kampani, 54, and Uday Kotak, 41, may be the heads of three eminently successful Indian financial powerhouses-DSP Merrill Lynch, JM Morgan Stanley, and Kotak Mahindra Finance, respectively-but together the trio has a vice-like grip on the financial markets, and has emerged as India's bulge bracket. So, if it's the MGM (Morgan Stanley, Goldman Sachs, and Merrill Lynch) that rules on Wall Street, here it's the KKK.

Last July, when Hughes Telecom named Kotak Mahindra as the lead book runner for its Initial Public Offering (IPO), the telco confirmed what has for sometime now been the unwritten rule on the Dalal Street: if you want to make an IPO, never count out Kotak Mahindra. For the record, Hughes' CEO Deepak Dutt picked Kotak after all three did their customary beauty parades (made presentations). It was a good choice. The Hughes IPO was a thumping success, mopping up Rs 1,000 crore against a proposed issue size of Rs 746 crore.

For issuers of IPOs, Kotak Mahindra is always on the most-wanted list of merchant banks. The other two on that list-hey, no surprise-are JM and DSP. Last year, the three together hogged nearly all of the IPOs worth Rs 7,673.14 crore. Sometimes they vied with each other to get mandates, but in many instances, they joined hands to co-lead manage issues. Thus, while Kotak topped with mandates for 89.8 per cent of the total worth of IPOs, DSP bagged 86.4 per cent and JM cornered 84.5 per cent. Obviously, the three work closely together-something that is evident from the bonhomie that Kothari, Kampani and Kotak share.

The three firms are streets ahead of the competition and that holds good for most fee-based financial activity. In the first six months of 2000, of the total M&A deals valued at Rs 21,200 crore, the trio alone accounted for deals valued at Rs 7,029.20 crore. But unlike in IPOs, where Kotak tops its two rivals by a whisker, JM Morgan is the M&A ace among them. Between January and June 2000, JM bagged deals valued at Rs 30,009.08 crore, while DSP Merrill with Rs 2,556.78 crore and Kotak Rs 1,463 crore followed. Such numbers keep underscoring the three financial services firms' leadership. In public issues, Kotak Securities, the Kotak Mahindra Group's broking and distribution arm, leads with Rs 19,313.91 crore or 27.56 per cent of the total amount mobilised in 1999-2000.

It is no accident that global giants-Morgan, Goldman Sachs, and Merrill Lynch-have tied up with India's big three. Morgan Stanley has a 49 per cent stake in JM Morgan, Goldman owns 25 per cent in Kotak Mahindra Capital, and Merrill Lynch a 40 per cent stake in DSP Merrill. Says Hemendra Kothari, the fourth generation Kothari at what was earlier DS Parbhoodas & Sons, now chairman of DSP Merrill Lynch: ''It's a seamless organisation where you don't know where DSP begins and Merrill ends.'' But while Kothari and JM's Kampani have added the foreign monikers to their firms' names, Kotak has chosen to retain its individuality. Says he: ''Investment banking does need a global interface, but I am careful about foreclosing my option with a foreign brand name as a part of the firm's name."

In mature markets, investment banking tends to become a closed club, with the top three or four firms dominating every business. The MGM in the US is a prime example. Yet, the favourite pastime of investment bankers-when they're not striking deals, that is-is to split hairs about who's in or who's out of the so-called 'bulge bracket'. League tables can be sliced in any which way to show how banks dominate a niche. Thus, globally, Morgan Stanley and Goldman Sachs are perceived as M&A specialists because that's the business on the tables that they tend to dominate. Likewise, in India, while Kotak is, thanks to its dominance, perceived as an IPO specialist, rivals JM Morgan and DSP Merrill Lynch are viewed as being great deal-makers.

Success breeds envy. And in Mumbai's coterie of investment bankers, the three 'bulge bracket' players attract some flak. Other merchant bankers wonder whether where you are on the league tables matters at all. Says Vallabh Bhansali, Chairman, Enam Financial: ''This business is not about league tables but about being effective. Like a good doctor who heals his patients.'' Yet, Enam's is not a case of sour grapes. Last year, its retail arm, Enam Securities, ranked second after Kotak Securities on the public issue league tables.

For the 27-year-old JM Financial and the 136-year-old DS Parbhoodas & Sons, making it to the top was not as tough as it was for Kotak Mahindra. Set up in 1985, Kotak Mahindra quickly managed to close in on its peers and then, overtake them in book-building, IPOs, and distribution of public issues. Says Kotak, who refocused his somewhat general financial company to create an investment banking powerhouse: ''It's the quality and efficiency of service, which includes people, strategy, implementation, and a belief that you are not in a sprint but in a marathon (that makes the difference).''

The others sing in harmony. Adds Kothari of DSP Merrill Lynch: ''It's continuous innovation, ability to deliver, execution of capabilities and integrity of a firm that makes all the difference.'' Echoes Nimesh Kampani of JM Morgan Stanley: ''We are able to give a complete solution and the best option to the client, be it in the global market or the domestic market.''

Of course, the three have carved out niches. While Kotak is big in book-building and distribution of IPOs, so are JM and DSP Merrill. Yet, Kotak has been quicker in building expertise in emerging sectors. Says Kotak: ''TMT (technology, media, and telecom) is our forte. A big mindset shift happened in 1998 when one of our teams saw the imminent tech boom and spotted an opportunity to associate with unlisted companies.'' The result: when the tech boom happened, Kotak had an 80 per cent share of the technology transactions.

Likewise, although the big three lead in M&A, JM Morgan and DSP Merrill have an edge (See Acquisitions). Says James Winterbotham, 42, Partner, India Advisory Partners: ''The clear leaders are JM Morgan Stanley and DSP Merrill Lynch, who account for 26 per cent of the deals by value.'' The surprise is the speed with which they have taken the lead in M&A advisory services, dominated till recently by the corporate finance arms of large accountancy firms. Explains Ashok Wadhwa, 39, Partner, Ambit Corporate: ''In the last 12 months, as most deals have been large, corporates have preferred going to the big bulge rather than one firm for doing the deal and another for funding.''

Last year, JM Morgan pulled off stunning deals like the Birla AT&T-Tata and Gujarat Ambuja's Rs 455-crore deal to buy a 7.2 per cent stake in acc. It also represented Alcan, which sold its stake in Indal to Hindalco. DSP Merrill brokered Satyam Infoway's Rs 499 crore all-cash deal to buy Indiaworld-the first major Net transaction. Says R. Sankaran, 52, Chairman, Indglobal Financial: ''At the end of the day, it's about relationship with clients and research.'' He adds: ''While high-profile transactions get talked about, there are a number of small deals of Rs 5-10 crore that don't.''

Much of the two firms' M&A expertise is derived from their head honchos. Kampani and Kothari are veterans in Mumbai's financial markets, with excellent networks, particularly in old Indian business groups like the Tatas or Birlas and even transnationals. And, they have been grooming successors from within.

But talk to the brass at the three bulge bracket firms and they'll tell you how they're not specialists but full service investment bankers, offering a buffet of services under one roof. Says Amit Chandra, 32, Executive Vice-President, DSP Merrill Lynch: ''Today, every client wants a solution. A full service investment banker, like us, plays a key part in the corporate strategy and in the execution of the financial strategy of a company.''

It makes sense. In 1999, when ICICI wanted to raise capital, DSP Merrill did a Yankee bond issue. In the same year, DSP brought out six bond issues in India. Plus, it did monthly private placements and, later, DSP helped with an ADR issue. The bottomline: ICICI did not have to talk to five different investment bankers; just to one. Agrees P. Krishnamurthy, 52, Vice-Chairman, JM Morgan Stanley: ''We are a full service banker, with strong domain knowledge, distribution, and ability to innovate, which translates trends into transactions that create value.''

But the Indian bulge can't afford to sit back and relax. While most of the big US investment bankers are already here, bigger competition is nudging at its elbow. Citigroup's Salomon Smith Barney (SSB) has entered India, with a focus on institutional sales in equities, research, M&A advisory as well as global equity and fixed-income markets. Points out Sankaran, whose firm earlier represented SSB in India: ''SSB is a powerhouse and will be a challenge for the existing bankers.'' While SSB has done VSNL's ADR listing, the investment banking arm of Bank of America lead managed Infosys' ADR. Says Sunil Gulati, 39, Head (Investment Banking), BankAm: ''We have global capabilities and tech and telecom companies are aware of the strategic partnership that we offer.'' Naturally, the bulge bracket will broaden. Plus, although several thousand firms got wiped out in the first major shake-out, there are still 174 registered investment bankers, which could mean another round of consolidation.

While players like Kampani say they could acquire people from some of these firms, no one rules out fresh competition, which could come from anywhere at all. Says Shitin Desai, 52, Vice-Chairman and Managing Director, DSP Merrill Lynch: ''There could be competition from someone who puts up an investment bank on the Net! So, we can't be complacent.'' Going by their track record, they aren't.