Debt Marts Need To Be Reformed

Shanti Ekambaram, executive director of Kotak Mahindra Capital Company (KMCC), has been with the Kotak group for eight years. Her knowledge domain includes equities, fixed income, mergers and acquisitions, money markets and principal businesses.

Prior to joining the Kotak group, she was with Bank of Nova Scotia and handled corporate banking and treasury products. Shanti has been with KMCC since its inception and is its chief executive director for the past four-and-a-half years. Excerpts of her interview with Thomas

How do you view the evolution of investment banking in India?

Investment banking in the form in which it is in India has evolved in the past few years. The kick-start was provided after 1991-92 when the Securities and Exchange Board of India (Sebi) was formed, foreign institutional investor investments started picking up, and integration with the global markets started evolving.

 

Till then you really had what was called the CCI (Comptroller of Capital Issues) days, where the CCI had to clear mandates. Investment banking was more of a postman's job. In those days, issues were floated at a tremendous discount.

The kind of capital markets investors we see today happened after Sebi was formed and rules were formulated for different capital market segments, including merchant bankers. With the framing of regulations, one saw the emergence of greater scope for merchant bankers on the structuring and pricing fronts. Things got a further fillip when FIIs started investing in secondary markets.

The character of investment banking was completely altered around 1994 because of the sudden change on the pricing front. Everyone wanted to get in the market and experiment and so we had the boom and the bust cycle. Every equity market goes through this boom and bust cycle. It is an international phenomenon.

Then, we went through a flat scenario because, economically, the fundamentals were very weak. There was a recession and the equity markets were depressed. Subsequently, strategic management and corporate restructuring deals started to happen. In the last leg of the recent evolution, we see that technology has started coming to the fore.

..what is its current situation?

We are in the midst of a very volatile cycle. And though the size of the pie _ as far as investment banking is concerned _ is growing, it remains fiercely competitive as ever.

Besides, the equity issue front, mergers and acquisitions and fixed income segments also have an important role.

Equity at the primary markets follows very closely the secondary markets. The evolution of the primary markets has a little bit of the lead and the lag cycle when one looks at it in comparison with the secondary markets.

Then there is the debt market which was not in business till about 1995, because there were limitations on the routes corporates had to raise debt. The options available were primarily financial institutions and banks. The markets started evolving around 1995-96 and, if you see over the last few years, raising money by way of primary markets had really picked up.

In comparison to the speed of change in the equity markets, more changes on the debt front are required to widen the market.

Does the mergers and acquisitions business pick up during a downturn?

Looking at the global markets, last year saw the highest recorded quantum of mergers and acquisitions in the US. This was when the markets and the economy were at the peak.

What generally happens is that, during a downturn, people find it difficult to raise resources. If one has to survive, the logical question is where should one look at. It so happens that during a recessionary phase, even the large players in an industry become more conscious of their operational efficiencies. This also involves looking at options of increasing scale and efficiencies.

Mergers and acquisitions in the Indian context picked up in 1996-97 when some of the first deals were done by us _ for instance, the Godrej deal. The evolution and learning took off from there. In the last 12-16 months, we have seen some real mergers and acquisitions deals happening (for example, Lafarge).

In fact mergers and acquisitions is an activity you see in a down as well as boom market. It is linked more to business strategies, changing market scenarios and new opportunities coming up in the industry.

How do you handle the valuation issues?

Evaluation for a merger and acquisitions deal is not limited to evaluating the price-earnings (PE) ratios but is dependent on an enterprise value.

We have a high level of in-house expertise and, if the subject so demands, we could consult knowledge centres outside the organisation also. Valuation as such is a continuous learning process and as far as possible the element of subjectivity is sought to be minimised.

One could draw a parallel between the learning which we went through when we handled our first global depository receipts mandates. Our initial experience on the book-building front was also something to remember because it involved a change in mind set, about how the price needs to be arrived at. Subsequently, book-building as a means of arriving at a price has gained a high level of acceptability in Indian markets.

Tell us something about your organisation..

We have about 75 employees working on our franchisee and principal businesses. Besides, we are also a primary dealer.

In the franchisee business, it is really investment banking that has got 35 to 40-odd people. The balance comprises what we call the principal trading business which includes the equity and fixed income segments, primary dealership, treasury support etc.

On equity, we are slightly different in terms of structure in that the debt sales and trading is with KMCC while equity sales is handled by Kotak Securities which is the equity trading arm of KMFL (Kotak Mahindra Finance Co).