The Investment Banking Pyramid

While this entire process of consolidation has just started in the manufacturing sector, the game has almost played itself out in the investment banking sector. Although some of it has been necessitated by regulatory restrictions which have forced NBFCs to become either investment banks or asset financiers.

Big players came to the fore during the last couple of weeks with the Foreign Investment Promotion Board (FIPB) clearing the proposal of JM Financial and Morgan Stanley to set up two joint ventures for investment banking and broking, with JM having a majority stake in the investment banking and Morgan Stanley in the broking arm.

 

This was followed by JP Morgans decision to quit its joint venture in India with ICICI as a part of its plan to get out of the equities business globally. This is strange considering I-Secs claim to fame has been its success as a primary dealer in government debt and not as an investment banker. It remains to be seen how active JP Morgan will be in India as a suitcase investment bank.

A precisely opposite rationale seems to have propelled JM and Morgan Stanley to come together. The joint venture marks a radical change in both the players strategies which emanates from the belief that to be a top dog among Indian investment banks, it is necessary to offer all manner of financial services to an Indian corporate, both in the domestic and international markets. Morgan Stanley probably realised that it would not be able to get just the GDR and international bonds business without offering alternatives like access to rupee finance; indeed, given the recent turmoil in the emerging market, it might have been left sitting idle if it didnt start working in the domestic markets. In the last few years, for instance, fewer deals than expected emerged from this US powerhouse. JM, on the flip side, probably felt it was losing out to its long-time rivals because its package, though powerful locally, was of little use if half its funding had to be raised in London or New York.

The joint venture also completes the pyramid of the Indian investment banking sector which has shrunk rapidly ever since the days underwriting was money for jam, and prospectuses listed more lead managers than risk factors. The process appears to be near completion. And it probably spells the demise of the equities issuing machine.

At the top of the this model are the Indo-US combines of DSP-Merill, Kotak-Goldman and now, JM-Morgan. Incidentally, this is a replica of the international scene where the three US bulge bracket firms dominate. Both SBI Caps (with Lehman Brothers) and ICICI (with JP Morgan) had attempted to step into this category but aborted their attempts to do so, settling instead for a low profile role. So it is this triumvirate which will fight it out for business from the cream of corporate India by virtue of its relationships and ability to structure any type of deal and sell it all over India at the retail level and also to international investors.

Ranking just below these are institutional-owned outfits like SBI Caps, I-Sec and IL&FS. These firms will play an important role because of their solid connection with state governments, public sector units and the state-owned institutions which remain big buyers of securities, as well as because of their long association with the private sector in one form or other. Indeed, Many PSUs prefer to deal with public sector investment banks because they tend to share a similar work culture.

Jostling with that pack will be players like Jardine Fleming, ANZ Investment Bank and HSBC which have specific strengths in both the markets, and other domestic firms like Enam which still have large distribution strengths locally and good contacts with corporate India. Filling the gaps will be the boutiques specialising in M&A advice, placing debt, acquiring targets and stakes in them.

Though the big three are likely to dominate the picture, it is not clear whether all other competition will be completely wiped out. Sometimes the conflict of client interests can mean that deals are more spread out among banks. Recently, DSP couldnt accept the job of advising Indal because Merill was working on an international deal for Sterlite.

There is fear in a section of corporate India that the close relationships being forged by Indo-US banks (or any other foreign joint venture bank for that matter) would make such firms less secure about revealing the full extent of their dirty laundry to them lest some powerful foreign predator gets hold of it. It is possible that these firms may be less than willing to indulge in underhand tricks, since promoters are accustomed to protecting their interests.