India is often seen as a losing proposition for foreign banks and advisers. It’s a market where global players need to have a presence, but fees are often low (or zero, in the case of government share sales) and competition is keen.
We sat down in Mumbai with Pramit Jhaveri, chief executive of Citi in India and a 26-year veteran at the bank, to talk about the challenges of investment banking in India, where the firm makes money and why India needs to develop its rupee bond market.
India is often described as a difficult place to make money. Is it?
I wouldn’t say that India is necessarily a difficult place to make money. But if you compare the wallet in India to China and other markets, it is smaller. However, when you look at the market and the underlying economic activity, there is a lot going on.
India tends to be a difficult place to make money for institutions that are one-dimensional in nature. If you only have a capital markets practice, or if you are primarily an M&A firm, you have more ups and downs. Deal flow is cyclical. In a bull year, everyone makes money, while during periods of low activity it tends to be difficult. A platform like ours is broad based and includes equity and debt, cross-border and domestic M&A and leverage finance.
Moreover, investment banking is only one of the many businesses we do. There is so much that we do with our corporate clients away from the episodic activity, be it cash and trade, foreign exchange or lending, which is annuity and flow in nature. When you put it all together, it is a very well rounded and powerful platform.
Is the Indian market overbanked?
If you talk about investment banking, I do believe it is overbanked and there are more players than the activity or wallet suggests. It is not difficult if you have a broad-based, multi-dimensional banking footprint. We have been fortunate to be among the market leaders in investment banking for several years, so we have a sense of the revenue pie. Globally, banks are looking to do more with less and capital is going to be scarce, so, logically, we should see banks exiting. Surprisingly, we rarely see that in India.
Citi is been described as an aggressive player in India. What is your appetite for underwriting deals?
Today if you look at us in India, our total balance sheet size is approximately $33-34 billion. As far as underwriting in capital markets goes, we are no more aggressive or less aggressive than anyone else. We are as aggressive as prudence demands to deliver to a client. We will not take big positions which do not make economic sense. We have been active for 15 years or so and in my experience, I cannot remember us having taken an underwriting position that we lived to regret. However, we are in the risk-taking business and in the business to provide solutions for our clients; so as long as we feel we can be economically rewarded for taking risk, we will do so.
Last year, where did you make most of your revenues?
In any market, typically ECM and M&A tend to be more lucrative than fixed income. If you look at last year, it was no different. Having said that, last year was a very strong year for G3 debt issuance. Issuance activity picked up thanks to the large differential between US dollar and Indian rupee interest rates, significant liquidity in the global system and investors’ propensity for India.
Historically, the G3 market for Indian companies has been dominated by financial institutions. However, for the first time, we are seeing borrowers outside of the financial sector. Reliance Industries has always been a very prolific issuer, but we have also seen other companies like Vedanta, NTPC and, more recently, Bharti Airtel issued bonds. Indian companies have historically been very dependent on the bank market. There is a very liquid bank market and the banking sector has been able to meet the needs of the India corporate sector. But companies now clearly want to and need to diversify their funding sources, so more companies are looking at the capital markets. The corporate rupee debt market is still very small. For a market of this size, we should have a much deeper rupee bond market.
Why hasn’t the rupee bond market developed?
There are a number of reasons for this. Much more needs to be done to develop the credit default swap [CDS] market and to allow deeper pools of savings to be allowed to invest in Indian rupee Bonds. At the moment, it is difficult for insurance and pension funds to invest in corporate bonds. The absence of a vibrant CDS market is impeding this progress. The Indian financial markets have seen an enormous amount of reform in the last 10 to 15 years. But if there is one thing I would like to see in the immediate future, it is the development of a much more active and robust Indian rupee bond market. When you look at any emerging or developed market, there are multiple sources of capital, so that the entire system does not just depend on the banking sector. In India, that has not quite happened, so there is an overdependence on bank lending. India is a high savings country, but we must find a more productive way to channel these savings into more productive capital formation.
Do you think more Indian companies will tap the offshore bond market with the changes in withholding tax?
The 20% withholding tax on offshore bonds is still pretty onerous if you are trying to raise money offshore. The government last year reduced withholding tax, but only for infrastructure companies. The government has a revenue-gathering responsibility, but we have requested the ministry to consider reducing withholding tax for manufacturing companies that issue bonds with longer tenors. We think it makes sense to have withholding tax exemptions for longer-term debt. For example, if you raise five-year money, you pay withholding tax, but if you issue seven- or 10-year bonds, you don’t. That is in the interest of our country to get long-term capital.
What is your outlook on Indian equities?
Since August 2012, India has been a favoured destination for global flows. India has received over $35 billion of institutional equity flows since August 2012, which is a record. However, we need to wait for the investment cycle to pick up again to see more issuance activity. Until such time, I think Indian equity-raising will be driven by the government’s divestment programme, block trades and sellers monetising or companies deleveraging.
