A most exciting opportunity for the Indian financial sector has opened up through the government?s recently announced disinvestment programme. As the disinvestment department of the finance ministry taps the market for listed and unlisted companies, there will be a huge business opportunity for the financial sector, of the kind that has not happened at all in India.
This is going to be a fantastic learning curve for the investment banking business in financial institutions. Investment banking has been the engine that has driven the pace of developments in the financial sector, on Wall Street, London, and at Hong Kong. The government of India, it would seem, has set off the key changes in the financial sector in the most comprehensive way through this step. Sure, the ministry and RBI have to begin to clear up the rules for the bond, currency and derivatives markets, but those will only create the framework for the markets to operate. The demand to make the most of them will come from the disinvestment plan.
Just to put that in context, it was the disinvestment plan of the early 2000s that made all the capital market arms of the Indian banks come up. They were all born in that dawn and, of course, the reason was to take advantage of several business opportunities that the government was planning to hand out to them. Just as a couple of decades earlier, the government went in for large-scale public sector projects, the IDBI, IFCI and even the original ICICI were born to bring project appraisal technology into the banking business of India.
One of the top guns of the investment banking fraternity told me how big the experience from the disinvestment deals from the early part of this decade really was. One of the deals that netted the finance ministry a lot of money was the VSNL one. The Tata group has always felt they were charged a stiff price for the company, while none of the subsequent efforts of a combative Parliament to find holes in the disinvestment plan ever included VSNL. That meant the deal was one of the best executed ones.
Yet this deal almost fell through. At the time it was being navigated there was one investment banking arm of a global brokerage firm, which fell foul of the Indian government in the stock market scam of 2000. The firm actually walked out of the negotiations about a couple of days before the bids were to be opened. The lead Indian entity that was working with them on the deal was SBI.
The Indian government naturally asked it to fill in the breach. It wasn?t a vote of confidence, but just that there was no way to change horses midstream. SBI officials cranked their contacts through their offices overseas, did the calculations for the bid prices all over again as the foreign company had departed with their due diligence results in their pocket, and finally came up with the price that has stood, as I said, beyond scrutiny.
This is not a tale on good banks and bad banks or the merits of foreign and desi business practices. What the banker told me was the extent of the fast response that SBI had to undertake. He was sure this was one hell of a learning experience. Obviously, these have stood the bank in good stead in subsequent big-ticket deals like Vodafone or even Corus.
It had to happen this way. There is nothing surprising that this business?the life of the Wall Street?even if frayed now, never really came close to the boardrooms of the Indian financial sector. There was simply no big demand from the domestic market for it. As a result, when the big boys of the Indian manufacturing sector began to explore partners, do mergers or buyouts, they had to rely on the global players. Of course, there was also the issue of who had the ability to write the big cheques?the Indian banking sector did not have the ticket size to match.
But now is the opportunity. Here, it will also be necessary for the government to show a degree of confidence in the domestic community. Very few of the capital market arms from the crop of the nineties are now left standing since business dried out in the intervening years. It is easier now to select them as the leads in the syndicate, and in turn rely on them to repackage the risks to others. The government should clearly stop bringing favourites from the banking sector to join the party instead. Those will not be equipped to handle this business, whereas those who are, would be deprived of the scale that?s so critical in delivering on price and returns for the government, and both classes of investors, retail and institutional. It would thus be a terrific coming of age for some really solid investment bankers from the domestic industry. In turn, it would create the demand to use the new financial markets the government seems keen now to develop. Obviously a very useful combination.
?subhomoy.bhattacharjee@expressindia.com