In late March this year, Reliance Industries announced that it was forging a partnership with the DE Shaw Group to build a financial services business in India. A 50:50 joint venture has since been set up, with a six-member board comprising three members from each of the firms. Louis Salkind, MD and executive committee member, DE Shaw group, tells Shobhana Subramanian that the venture?s USP would be its technology both in wholesale and retail franchise. Salkind says that while a banking licence wouldn?t be sought initially, it would be considered when the opportunity presents itself.
Did you consider partnering with anyone else in India, someone with a presence in financial services?
No. There is an opportunity in India and we have had some experience investing here, but we felt we needed a domestic partner to be successful. Frankly, since we are experts in financial services, we will have a chance to design things in a certain way. Mukesh Ambani has served on our India advisory board for four years and that?s how this came about. Reliance Industries is as big as they come, they?re well capitalised and they?re looking to diversify away from their core businesses, and from their point of view also technology will become important in financial services. Reliance does business with hundreds of companies and has relationships with them.
Most of the big investment banks in India are not aligned with a business house. Do you think you would lose out on business from some big Indian corporates because of your partner?
Well, I think we have to earn the trust of clients. The reality is that there will always be just a handful of companies that would not want to do business with us, because Reliance is a 50:50 partner with us. But we will have to build our own reputation and I think we will do that. The positive side is that there would be many companies that would come to us because we have Reliance as our partner, we believe more than the number that would not want to deal with us.
DE Shaw is primarily into money management, so how do you propose to build a wholesale or retail financial services business in India?
Although the current focus of our business is asset management, we?ve had a long history as a technology developer. In the 1990s, we were the first to develop an Internet service that combined banking and brokerage services in the US; that platform was sold off to Merrill Lynch. So we have had some experience in the technology and Internet spaces, and we?re going to use it to innovate. Our initial focus will be on the institutional and corporate spaces, and we will follow the traditional investment banking model, but with a twist: we will use the technology and intellectual property that we have developed over the years to help clients analyse large amounts of data and execute accordingly. The first phase of our effort will be to build a traditional investment bank. So, we are going to start off with an institutional brokerage business and corporate finance advisory services.
How would you approach the retail consumer financial services business? Is leveraging Reliance?s retail franchise part of the strategy?
We will investigate the possibility of developing retail services, but that is something we will be working on in the coming years. If we do enter that market, that is a natural area for us to partner with Reliance. So again, we would explore areas like broking and asset management. Actually, over the next couple of years, we are going to research where the market opportunities are and, certainly, providing brokerage and a variety of consumer finance products is right in our sweet spot in terms of things we?ve done. But we want to position this in conjunction with Reliance and what makes the most sense.
The institutional brokerage in India has shrunk to half its size, in the last three years, in terms of the commissions. How do you expect to compete with established firms?
Volumes will, of course, be sensitive to market conditions. But we expect to see, over time, a secular trend where the entire financial sector will grow first because of the growth in the economy and second as a share of the GDP. We?re not doing this with a two-year view but with a horizon of a decade and there are challenges in the short term. Is it a tough business and a highly competitive one? Absolutely. But in the 1990s we became one of the largest institutional brokers of equity products in the US, probably the most mature market at the time, because we could leverage our risk management capabilities.
But broking and investment banking are relationship-driven businesses…
Obviously, you have to provide excellent services, but relationships are also earned over time by providing good products. We?ve found, over time, there is a growing trend that when people want to trade in the equities markets, they focus on quality execution. And by leveraging our own asset management capabilities, which crucially depend on us being able to transact in the market at low cost, and allowing our customers to tap into that platform, we provide a value-added service. We trade actively in our asset management business. These would be more alternative institutional asset management products, like equities futures, options and commodities. So, in some sense, it is proprietary trading, but we?re doing it on behalf of clients. You?re basically trying to trade in the marketplace earning very small profits, so it crucially depends on how effectively you can trade.
But you?re not doing this in India right now…
No we?re not. But that will be a part of this venture. We will be building the infrastructure and using the existing trading systems and risk management that we have in-house and we can offer that platform to clients. So, we can provide quality execution and we plan to become a market maker in various securities, whether it?s in equities, futures or options. Again, that?s a small market today but if you take a secular view, the options market has been growing at a compounded rate in excess of 50% for several years and we do expect the market to grow substantially, and we would like to be positioned for this. It does require risk management, especially if you?re holding inventory and positions. So these are value-added services because you?re providing liquidity to the marketplace.
Do you believe that it?s necessary to have a banking licence to build a retail financial services business in India?
We?ve done it before without a banking licence; several of the products, like broking, do not require a banking licence. So, initially we would not be seeking a banking licence. Obviously, as opportunities present themselves we would look at it again. We will follow the NBFC model and, to begin with, we?ve acquired an existing NBFC. There are no specific timelines that we have right now for starting the retail financial services business. The plan is that we launch the wholesale piece some time in the third quarter of 2011 and, going forward, we will get into retail, but not immediately. We hope to launch and scale up the institutional business in one-and-a-half years? time, get the people in place. By 2012, we hope to have 100 people focused on the various products, whether in the brokerage or corporate advisory.
Is there any kind of blueprint for the retail business?
This is a strategy we?re going to be developing over the next few years with Reliance and it is certainly the intention of the parties to leverage each other?s capabilities. They?re very aggressively pursuing retail strategies and we?re going to use our technology to build the back-end, rather than doing the client-interface part of it. We have no plans to do insurance. But our focus right now is NBFC.
Will it be easy to do business through an NBFC, given the way RBI is tightening the norms?
It?s difficult for me to give you an answer but, going by the current regulations, we should be able to do business. We will operate through two entities, one an NBFC and the other a brokerage, which we are in the process of acquiring. We are bringing in capital of $5 million each to start with but we expect this to become substantially higher. We will also launch an alternative assets management company, a separate entity which will follow as a fund structure. We will focus on private equity investments and would be looking to start a range of domestic products, in infrastructure, real estate and other asset classes.
