PSBs eye M&A market but face talent, pay and regulatory hurdles ahead

Banks planning to enter this line of business need to prepare on several fronts, from raising payouts and hiring specialised talent to navigating potential governance challenges

Mint Road’s draft on “commercial banks: capital market exposure”, has set the stage for a high-stakes business opportunity — financing of mergers and acquisitions (M&As) by banks. Thus far restricted to collateral-backed lending, it will call for rewiring banks (once operational guidelines are issued) when they step into the trade. 

Now link this with another year-ender: The bonuses in the investment banking (i-banking) circuit in India. It is small compared with the many millions that dealmakers in the global capital markets take home, but Santa does come visiting out here too — payouts run into a few crores. 

The success of a business boils down to the people who drive and helm it — banks financing M&As will not be different. 

Just how will banks navigate the new turf, given the business models, and personnel needed — both the nuts-and-bolts variety and board-level hires for oversight? And on the business model: Is it to be housed within a bank or in a subsidiary, especially in the case of state-run banks, given pay limitations? 

The paypacket question 

Rohan Lakhaiyar, partner (financial services-risk) at Grant Thornton Bharat is categorical that state-run banks will face a much bigger remuneration shock – their pay structure is the most rigid, and the new business requires talent that is paid like i-bankers, not credit officers. 

“It may be that in the short-term (the first couple of years), these banks may constitute specialised teams from inside their corporate banking divisions and rely on structured and project finance officers, supplementing the talent bandwidth with 

selective lateral hiring within existing senior bands, without major compensation overhaul.” 

But to remain relevant and compete meaningfully with private players in the medium-to-long-term, the government (Department of Financial Services) “may need to approve a separate career band for M&A finance for state-run banks (in particular) to attract and retain the specialised talent needed for executing such transactions”. This is not to say their private bank and non-banking financial company peers will find the journey easy — but perhaps so only on a relative basis. 

But it will pinch state-run banks more, for it brings into sharp relief an observation made by the P J Nayak Committee, set up in 2014 to review governance of boards of banks. On the major compensation differentials at senior levels at banks, the committee noted, citing figures across bank groups for the times: “It is unsustainable for such differentials to continue without a major adverse impact on the recruitment and retention of talented managers” in state-run banks. In M&A financing by banks, nothing will move without a fat pay. 

Debadatta Chand, managing director and chief executive officer (CEO), Bank of Baroda (of which BoB Capital is a subsidiary) told Business Standard: “If need be, we can evaluate the scope for collaboration to augment the capacity for M&A advisory. It is potentially a good business to be in.” The past can inform the present: In the 90s, for instance, you had these joint ventures - between I-Sec and JP Morgan (I-Sec is a subsidiary of ICICI Bank); Kotak Mahindra Capital and Goldman Sachs (when Kotak Mahindra was not a bank), DSP and Merrill Lynch; and J M Financial and Morgan Stanley. 

Now beyond business models, there’s another maze: Regulatory changes to key Acts which have to be made, as Divyanshu Pandey, C B Pandey and Associates says – notably, to the Companies Act, 2013 and the Banking Regulation Act, 1949 (BR Act, 1949).

 

Take Section 67 of the former, which restricts public companies from providing financial assistance for the acquisition of their shares or shares of their holding companies. 

“This means a private limited target company could be deemed as a public company as directions stipulate that the acquirer has to be a listed entity, thus bringing any financial assistance by the target under strict regulatory scrutiny,” said Pandey. 

In typical acquisition financing, the assets of the target company are used as collateral; it’s crucial for the Ministry of Corporate Affairs to introduce safeguards — such as solvency tests, corporate benefit assessments, and shareholder approvals — to protect creditors and shareholders of the target company instead of a blanket restriction. 

Then you have Section 19 of the BR Act, 1949. It limits banks from holding more than 30 per cent of a company’s shares as a pledgee or owner, which directly conflicts with the RBI draft on M&A financing by banks that proposes holding shares of the target company as primary security. “Separately, while the proposed changes to external commercial borrowing norms will expand funding options for M&A activity, it will also intensify competition for domestic banks in this market,” Pandey adds. 

Experts needed 

All of these call for the hiring of personnel of a certain pedigree - those who understand regulations, the changes needed, and their impact on emerging business models. 

“In the initial phase, you may not necessarily need advisory talent. Because you will basically be funding. But as you move up the value chain and get to the knowledge part,  then you will need specialists. I look at the funding as the interest-income part and the advisory as the fee side,” said Samir Ojha, partner, investment banking advisory, EY India. 

“The point is we are just getting started on this journey (banks financing M&As). While issues regarding talent and board oversight remain, it is not that all banks will enter this area, said Mandeep Maitra, CEO, M-Suite Leadership Consulting LLP, and long-standing former HR boss at HDFC Bank. 

“Today, law firms are being seen as one of the big paymasters for those with this kind of expertise. Banks could possibly get round this difficulty by hiring suitable persons as consultants, but this will create significant dissonance within the organisation given the steep variance in payouts,” said Raghu Palat, managing director, Cortlandt Rand Consultancy. 

What of board talent and governance, particularly at financial conglomerates with multiple business lines and arms? (Do remember, M&A financing by banks segues lenders that have a collateral-backed legacy with the equities markets). As Reserve Bank of India deputy governor Swaminathan J noted earlier this month, most organisations often respond to governance questions by redrawing organisation charts, tweaking reporting lines, and updating committee charters. These fixes do help, but only up to a point. 

“Business models, technology, and vendor chains change faster than boxes on a slide. As firms expand, digitise, outsource, and integrate, two patterns keep showing up: Overlaps — two teams or two regulators asking for the same thing – and gaps (a new product, partner, or dataset sitting outside or at the perimeter of any policy),” he said. 

According to Sampath Kumar, partner (governance and compliance) at Trilegal, fundamentally, one can say that the new business line of acquisition financing should fall within the larger domain of banking and financial markets, many of which banks are already exposed to. 

However, exposure to the capital markets has its own nuances and inherent risk factors. “Boards need to ensure that the policy framework, related credit and risk assessments, monitoring and reporting mechanisms are in place specifically designed for such capital market exposures to ensure governance and compliances”. 

Banks planning to enter this line of business should therefore undertake a risk governance review specifically for this line of business, part of which should be up-skilling the directors on business and risk exposures and inducting individuals with specialised knowledge and domain experience who can advise or provide insights which will be crucial for board-level 

deliberations. 

As for navigation-talent on bank boards, “I don’t think bigger state-run banks will have problems attracting those with M&A expertise despite the lower payout. The attraction of being on the board of a major bank is in itself a factor also,” said Moitra. 

Ankit Bansal, founder and CEO at Sapphire Human Capital feels this is not all that material in the first place. “As for independent directors on bank boards who understand the subject, I feel there is no concern on this front. Boards have people who are aware of M&As and related issues.” That said, what he does see unfolding is that given that the investment banking talent pool is limited, “it will drive up demand leading to talent wars among the banks.” 

Whichever way you want to drill down, banks will be on a learning curve. 

Deal-making front

• Business model: Is it to be housed within a bank, in a subsidiary or in a joint venture?
• Talent scouting: State-run banks’ pay structures may need a relook when onboarding investment bankers 
• Human resources: There may be a need for a separate career band for M&A staff in state-run banks
• Governance: The P J Nayak committee report to review governance of boards of banks may have to be revisited. 
• Regulatory front: Changes required in key Acts, including the Companies Act, 2013, and the Banking Regulation Act, 1949