To understand how India is becoming the new hunting ground for international investment banks, Jefferies is the best example.
The U.S. financial group previously had a smaller presence in the world’s most populous country and was better known for its research reporting rather than its trading prowess. But now it is poaching senior bankers from rivals and expanding its offices in a series of deals, including one involving Adani Group.
“Over the past three years, we have complemented our core investment banking capabilities alongside capital markets, which has positioned us for greater success,” said Aashish Agarwal, country head, Jefferies India. “India as a market and Asia as a geography are areas of great focus for us.”
Jefferies remains one of the smaller investment banks eyeing expansion in the Asian subcontinent as they build a new growth center in Asia and their once-lucrative investment banking business in China is drying up.
Agarwal said 50 transactions have been completed in the past three years. The “six to seven” was for Florida-based GQG Partners, including helping it buy large stakes in companies that are part of the Adani empire over the past year as the company faced pressure from short-seller Hindenburg. He recently hired two senior bankers from Barclays.
Strong economic growth and tensions between the United States and China have made India an expansion target for international companies, which can turn to investment banks to help them strike deals. “It is almost impossible for international banks to ignore India,” said Debasish Purohit, co-head of India investment banking at Bank of America.
For his part, Barclays’ India CEO Pramod Kumar said, “When you contrast that with the slowdown in China so far, India’s importance becomes even more pronounced.” “I think most banks will have relatively greater risk appetite for India compared to China.”
For some, India is not new territory. HSBC currently earns more than $1 billion in annual profits in the country. This year, Jefferies topped an equity capital markets ranking compiled by Refinitiv with a 14% market share, followed by local brokerage IIFL and US investment bank JPMorgan. But others are finding the trading business tough. UBS shut down its Indian investment banking business last year.
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Financiers warn that India is unlikely to replace China as global investment bank because its business is very different and far less profitable.
“I think we should be able to roughly double our revenue base in India, but that still won’t make up for the revenue reduction that I think we’re going to see in China over the next few years,” said Peter Guenthardt, Asia Pacific corporate and investment banking at Bank of America Director, based in Hong Kong.
“India has traditionally been a market that pays relatively low fees,” he added. “While we are seeing a slow but steady shift in willingness to pay for consultations, there is still a long way to go.”
“India has certain characteristics,” said Barclays’ Kumar. “The economy is very much domestically driven to a large extent.” In contrast, China’s investment banking profits are driven by international transactions, Kumar added.
“There are a lot of cross-border mergers and acquisitions, a lot of Chinese companies acquiring international companies. Many of them are listed in the U.S. [ . . . ] A lot of bond issuance has continued over the past seven years,” he said.
“Total Opportunities” Compared to China [in India] Relatively small,” said Peeyush Dalmia, a leader in McKinsey’s financial services practice in India. “Most of the very large deals don’t actually pay you much or pay you incredible marginal fees. “
U.S., European and Australian banks earned $342 million in investment banking revenue from Indian clients last year, compared with $689 million from Chinese clients, according to Dealogic. In 2021, India’s revenue was $580 million, while China’s revenue was $2.2 billion. In 2022, the total investment banking fees of these international banks in the Asia-Pacific region were US$5.7 billion, with revenue from India accounting for only 6%.
In India’s inward-looking market, international investment banks compete with local investment banks that are well versed in the country’s regulations and charge very low fees to arrange deals for companies with which they have long-standing banking relationships. Indian banks’ investment banking revenue last year was $267 million, 22% lower than foreign rivals, according to Dealogic.
Kumar compared helping a company go public in the United States, which would earn a bank about “6 to 7 percent” of revenue, to doing the same work in India, where “the fees would be 2 to 3 percent at best.”
But Bank of America’s Purohit said banks must make a “trade-off” between low fees and high growth. “It’s a low-fee market but it’s the fastest-growing market.” Given the growth, “you may find India attractive and profitable,” he said.
One of the hopes for investment banks betting on India is that international private equity firms are stepping up deals in the country.
“Some limited partners want [investors in private equity funds] Reduce your exposure to China,” said Dieter Turowski, chairman of Morgan Stanley’s Asia-Pacific investment banking business.
“If you have a private equity fund covering all of Asia and you want to scale down in China and invest in exciting, growth-oriented markets, India is obviously a good place to be.”
Jefferies’ Agarwal declined to comment on Jefferies’ expenses or profitability in India, but dismissed the idea that loans were the only way to make money.
“I would say it’s relatively easy to make money with money,” he said. “We believe in working with clients to help them raise capital in good times and help them integrate in bad times, whatever it takes. It’s more challenging intellectually.”
