Smaller India banks flex muscles on Wall Street woes
"If DGCA gives a report that safety cannot be assured certainly we will take action. We can cancel their license," he said.
When Warburg Pincus sold a $150 million stake in Kotak Mahindra Bank last month, the U.S. buyout firm skipped past established investment banks such as Goldman Sachs and Morgan Stanley and chose a local house instead to handle the deal.
The selection of India Infoline as the lone bank on one of the few substantial equity deals this year in India is the most striking case yet of a trend that has seen smaller domestic investment banks edge out Wall Street rivals.
The rise of so-called boutique banks in India adds to the already stiff competition and shrinking fees facing the likes of Wall Street banks and European rivals such as Barclays and UBS.
Big foreign banks know that an Asia franchise needs to have a presence in India, even though revenues there are notoriously low, with multi-billion dollar equity deals of state-owned companies paying no fee at all.
The sluggish deal market for large and high-cost Western banks has forced some of them to scale back their Mumbai offices, keeping a tight leash on costs and headcount.
That, in turn, has opened the door for upstart local banks, which are scooping up rainmakers and are seeking to eat from Wall Street's table.
"We have the ability to survive and grow even if the market is down because we don't believe in the culture of excess - either in spending or hiring," said Jacob Mathew, a former Merrill Lynch banker who co-founded Mape Group.
Costs for Indian investment banks, the bulk of which are linked to staff compensation, are at least 30 percent lower than for their bigger foreign rivals, sources at investment banking and headhunting firms said.
Mape, which advised Indian detergent maker Jyothy Laboratories on a deal to buy 51 percent of German household products maker Henkel's local arm, last year hired well known Indian banker Sunil Mehra, who previously worked with Standard Chartered and Merrill Lynch.
Carlyle-backed India Infoline this month roped in Nipun Goel, former head of India investment banking at Nomura Holdings. Nomura has significantly shrunk its investment banking headcount in India as part of the Japanese bank's global plan to save costs.
While foreign banks often chase large transactions to boost their league table rankings, one key strategy for local firms such as Mape and Avendus Capital is to focus on small and mid-sized equity and M&A deals.
Such deals may do little for rankings, but they can bring in larger fees than those earned from a massive state-backed offering.
"The velocity of deals that defines the market in India is $25 million to $500 million and that market grew last year and is also growing this year," said Gaurav Deepak, a co-founder and managing director at Mumbai-based Avendus.
SMALL DEAL MARKET
Avendus was 18th in terms of deal volume last year but was ranked second on number of deals done, according to Thomson Reuters, ahead of big names such as Bank of America Merrill Lynch, Credit Suisse and JPMorgan.
The volume of deals in India is much lower than in other parts of Asia, in particular, Greater China, where Hong Kong alone saw nearly $100 billion in IPOs cumulatively in the last few years.
India's total M&A volume fell 50 per cent last year to $31 billion, according to Thomson Reuters data. In the equity market, there were just two deals worth more than $1 billion.
Such data show that India, at the end of the day, is a small deal market.
"I think 95 percent of the (M&A) market by volume will remain below $500 million," said Deepak.
Another home-grown firm, Edelweiss, walked away with "left lead" credit in the $132 million IPO by Multi Commodity Exchange last month.
Banks in that role do all the key paperwork and co-ordination with regulators, a prime position in a share sale mandate. Morgan Stanley and Citigroup were the other bookrunners on the deal.
Some local advisory firms are looking to step into the big league of cross-border M&A and managing larger equity issues, often by inking tie-ups with small overseas players.
Avendus, which also offers wealth management and research services, has set up offices in New York and London to execute cross-border transactions. Last year it hired Robert Davis, who was head of European M&A at Nomura, to head its Europe operations.
The investment banking arm of Kotak Mahindra Bank and New York-based Evercore Partners formed an exclusive pact in October for advisory services on cross-border deals between India, the United States, Britain and Mexico.
NOT A CAKE WALK
Some, however, doubt local firms' ability to execute large, sophisticated transactions in the absence of networks to sell chunky equity offerings in the overseas markets, and without the balance sheets to fund big buyouts.
"The competition has definitely gone up with the presence of so many local firms in this space but the big foreign banks will continue to have an edge because of their expertise and network," said the India M&A head at a large European bank.
Another local operation with big ambitions, Religare, has failed thus far to make a major splash despite stocking up on bankers from Wall Street firms. The company did not figure in the top 20 of India's M&A and ECM league tables last year.
The tide may also turn against the Indian houses if markets pick up and Wall Street giants resume hiring and lure bankers with fat paycheques, although few expect aggressive hiring in a market where advisory fees are abysmally low.
"I would be foolish to write off the foreign banks in India, but the idea of spending huge when you start the business and hope for the revenue to kick-in after three or four years is clearly not working for many of them," Mathew of Mape said.