Investment banking ambitions of two business houses
October 9, 2009
Anil Dhirubhai Ambani Group (ADAG) promoted Reliance Capital plans to enter into investment banking by the current fiscal end while Religare has announced an ambitious plan to start an emerging-markets investment bank. Do these plans make sense? Will they be able to compete against the well-entrenched franchise of ICICI Securities, SBI Capital Markets, Kotak, JM Financial and foreign entities like Goldman Sachs, Morgan Stanley and Merrill Lynch?
Reliance Capital, the non-banking finance arm of ADAG, is set to foray into investment banking by end of March 2010. The company already has presence in asset management, retail broking and insurance businesses. Although entering the i-banking space has been on the agenda for Reliance Capital for a long time, the market downturn during 2008 forced the company to put its plans on the backburner. Now, with the markets enjoying a good run, the company is finally set to enter into the competitive space currently occupied by players like ICICI Securities, SBI Capital Markets, Kotak Investment Banking and so on. With this new venture, Reliance Capital aims to fill in the ‘missing link’ in its business, to become a full-fledged financial services provider.
However, Reliance Capital’s investment banking move raises concerns regarding the potential conflict of interest with ADAG’s current businesses. Being the large, diversified group it is, there might be many customers and suppliers in its various businesses who would be wary of sharing business details and vital information.
Religare’s vision of becoming a global-oriented investment bank is more suspect. Barely a few years into operations, it would be extremely difficult for Religare Capital Markets to step into such a relations-centric business overnight. The key thing in investment banking is generation of leads and closing the deal based on previous relationships with the client. With its focus initially towards emerging markets like Indonesia and Malaysia, Religare Capital hopes to tap the opportunities arising out of potential M&A activity in these countries. For that, however, it will have to put in place an effective system of generating business leads. Secondly, investment deals materialise from having solid, long-term relationships. This is something which has worked in favour of investment banking giants like SBI Capital Markets and ICICI Securities. SBI gets the cream of the customers through its efficient loan appraisal process. This gives them a better quality loan portfolio and better quality borrowers. The background and knowledge of SBI, apart from the comfort level, provides an edge to SBI Capital Markets. Similarly, investment banking behemoth Merrill Lynch’s India operations are driven by the fact that it is run by people with age-old client relationships. Kotak Investment Banking too has the experience of the last 25 years and has developed relationships that make it a seasoned player in this area. Enam Securities’s ability to provide good quality portfolio advice to top level management has given it a unique edge. Global investment banks like Goldman Sachs, Morgan Stanley, Credit Lyonnais derive their strength from robust research and global relationships. All these companies thus have distinct advantages in terms of long term connections, routes and pedigree. Compared to them, Religare Capital Markets is a small fish, with little connections even in India. How it would manage to attract clients globally on a sustained basis is an even bigger issue. It would be a long while before Reliance and Reliance make their mark.