For the past one year, the financial sector in the country has reached an inflection point with the sector topping the M&A chart in value and numbers. The deals in the financial sector were well over $20 billion mark, going by the official estimates. This figure also includes the net of the value of the merger of State Bank of India, the country’s largest lender, and its subsidiaries.
Interestingly, this spate of M&As comes at a time when the sector has been dogged by the stressed-assets resolution issue as well as cleaning up commercial lenders’ balance-sheets while trying to minimise haircuts. Though M&As have become the order of the day for the financial services sector, one must wait and see to reach a definitive conclusion about their outcomes.
Shares of financial services companies have surged over the past one month amid rising investor interest, driven by value-unlocking deals by these firms and growing inflows into Indian equity markets.
Indians have largely stopped saving via gold and real estate, and of the $400 billion that went into physical assets, a lot—maybe three-quarters—is coming back into the financial system. The big banking and financial services industry opportunity is not in lending, it is in savings products—mutual funds, general insurance, life insurance, wealth management, broking.
Domestic institutional investors, largely insurance and mutual fund companies, invested more than `56,500 crore into the equity markets in the last financial year, a little higher than the foreign institutional investors. More than `70,000 crore flowed into equity-oriented mutual funds, making it the third successive year of net inflows.
However, it needs to be noted that the Indian capital market has been having the best of times since the past one decade with benchmark indices hitting record heights day in and day out, shrugging off valuation concerns and discounting the overheating theory.
Recent transactions signal increased investor interest in these businesses amid value-unlocking by the companies. Promoters Jaspal Bindra and Chandir Gidwani in December increased their holding in Centrum Capital; Fairfax Financial Holdings Ltd., via its Mauritius arm, increased its holding in IIFL Holdings Ltd.
Earlier, Edelweiss Financial Services applied for setting up a general insurance company, and this was accepted by IRDAI. Also, bad-loan resolution could boost Edelweiss Asset Reconstruction Company Ltd., the country’s largest bad loan buyer in terms of “assets under management”.
Shareholders of Grasim Industries Ltd. and Aditya Birla Nuvo Ltd. and Aditya Birla Financial Services approved the merger of AB Nuvo and Grasim Industries which would be followed by the demerger of the new entity’s financial service business.
Motilal Oswal Financial Services Ltd subsidiary Aspire Home Finance Corporation was also in talks with private equity investors to raise `500 crore, valuing the housing finance arm at `4,000 crore.
It can be safely said that the primer that changed the financial sector landscape stems from a singular factor: a firm resolve by the central bank and the government to clean up the commercial lenders’ balance-sheet while pegging haircuts they have to take to the minimum, as well as a spate of reforms to attract foreign capital into the Indian market.
In stark contrast to earlier efforts, the apex bank, along with other regulatory agencies, has worked out a multi-pronged approach with IBC taking the centrestage, flagging high-loan-value stressed assets to NCLT for fast-tracking their resolution. The attractive valuations come close on the heels of the financial firms’ resolve to grow in scale and scope—in terms of capital, balance-sheet size and value offerings. To a great extent, this has been facilitated by the tidal change in the regulatory framework such as easing of foreign investment norms. The new policy ecosystem on foreign capital inflows and investment is oriented more towards greater capital account convertibility and facilitating flow of foreign savings into the country in the form of investment—direct or otherwise.
This has opened the floodgates for foreign capital, with investment funds with larger cheque books eyeing big ticket investments in the financial services space with advice from professional dealmakers. If the results of these deals are anything to go by, the investments are followed by strengthening the leadership to expand the canvas and portfolio offering and recast the business models of the targets into multi-services financial services providers powered by future-proof technology and product innovation—necessary and sufficient conditions to win in the marathon as more and more players join the existing crowd with entry barriers gone.
It goes without saying that NBFCs have shown remarkable resilience and efficacy in resolving the stressed asset issue compared to commercial lenders. This has whetted the appetite of foreign funds in the booming non-banking finance company vertical, the new green shoots in Asia’s third largest economy
Besides, NBFCs’ bid to spread their wings into related verticals also added traction to the M&A action in the space—like Motilal scouting for PE funding to expand into housing finance, and Piramal to form JV with Bain Capital for stressed assets buy-outs to name a few. Buy-out funds have arrived a sweet spot in the stressed asset space with distressed asset investment funds and asset reconstruction companies such as Lonestar forging a JV with IL&FS, and Ambit teaming up with JC Flower et al.
The entry of masala bonds have spiced up the M&A narrative. Though these bonds have not yet gained currency among domestic corporates, they have all the trappings to become the most favoured dish in the platter since they can be issued outside the country denominated in Indian Rupees, rather than pegged against any foreign currency giving such instruments an in-built hedge against future currency fluctuations.
While the Indian financial market is still evolving, arriving at the global market place with necessary regulatory props and innovation, foreign funds looking for value investment, etc, means the latter are in no mood to waste time, watching from the sidelines.
Today, it is housing finance, tomorrow it could be equities or private wealth management and so on. It is high time India created its own Morgan Stanleys and Nomuras. I am pretty bullish on the prospects of financial services industry as Indians move away from physical assets. We now have a reasonably growing financial services sector in India. There are some financial services conglomerates, the local/domestic financial conglomerates. They are well-positioned to tap into growth opportunities that this trend might throw up.
Mahesh Singhi, Founder & MD, Singhi Advisors