For an indication of how India has become a new hunting ground for international investment banks, look no further than Jefferies.
The US financial group previously had a minor presence in the world’s most populous country and was better known for its research notes than dealmaking prowess. But today it is building on a run of transactions — including deals involving the Adani group — to poach senior bankers away from rivals and bulk up its office.
“In the past three years we’ve supplemented the core investment banking capabilities alongside capital markets, and that has made us far more successful,” said Aashish Agarwal, Jefferies’ India country head. “India as a market, Asia as a geography, is something we are deeply focused on.”
Jefferies is still one of the smaller investment banks eyeing expansion on the subcontinent as they move to build a new centre of growth in Asia, with their once-lucrative investment banking business in China drying up.
Agarwal said it had done 50 transactions in the past three years. “Six to seven” were for Florida-based GQG Partners, including helping it buy large stakes in companies belonging to the Adani empire over the past year as it came under pressure from the short seller Hindenburg. He has recently hired two senior bankers from Barclays.
Robust economic growth, as well as tensions between the US and China, have made India a target for expansion for international companies, who can look to investment banks to help them make deals. “It’s almost impossible for an international bank to ignore India,” said Debasish Purohit, co-head of India investment banking at Bank of America.
In the case of Barclays, India’s significance “gets more accentuated when you contrast that with slower activity to date in China”, said Pramod Kumar, chief executive of the lender in India. “I would think most banks will show relatively greater risk appetite to exposure on India versus China.”
For some, India is hardly new territory. HSBC now makes more than $1bn in annual profits in the country. Jefferies tops the equity capital markets rankings compiled by Refinitiv this year, with a 14 per cent market share, followed by local broker IIFL and US investment bank JPMorgan. But others have found the transaction business to be tough. UBS closed its India investment banking business last year.
Financiers caution India is unlikely to replace China for global investment banks because the business in India is vastly different — and a lot less lucrative.
“I think our revenue base in India should be able to double or so, but that’s still not going to compensate for what I think in the next couple of years is the reduction we’re going to see in China,” said Peter Guenthardt, Bank of America’s head of Asia-Pacific corporate and investment banking, who is based in Hong Kong.
“India has traditionally been a market that has paid relatively lower fees,” he added. “While we are seeing a slow but steady mindset shift in willingness to pay for advice, there is a long way to go.”
“India has certain peculiarities,” said Kumar at Barclays. “The economy is essentially to a large extent domestic-driven.” In contrast, investment banking profits in China were driven by international deals, Kumar added.
“There was a lot of cross-border M&A, a lot of Chinese companies bought international companies. Many of them did US listings [ . . . ] and a very large number of bond offerings consistently over the past seven years,” he said.
Compared with China, the “total size of the opportunity [in India] is relatively much smaller”, said Peeyush Dalmia, who leads McKinsey’s financial services practice in India. “Most of the very large deals actually don’t pay you much or pay you incredibly marginal fees.”
Data from Dealogic shows US, European and Australian banks earned $342mn in investment banking revenues from Indian clients last year, compared with $689mn from Chinese ones. In 2021, $580mn was earned in India compared with $2.2bn in China. Revenues from India were just 6 per cent of the $5.7bn total investment banking fees that those international banks made in the Asia-Pacific region in 2022.
In India’s inwardly focused market, international investment banks compete with local ones that are experts in the country’s regulations and charge very low fees to arrange transactions for companies with whom they have longstanding banking relationships. Indian banks made investment banking revenues of $267mn last year, according to Dealogic — 22 per cent less than their foreign competitors.
Kumar compares helping a company list in the US, which would earn a bank about “6 to 7 per cent”, with the same job in India, where “fees tend to be 2 to 3 per cent at best”.
But banks must make a “trade-off” between low fees and high growth, said Bank of America’s Purohit. “It’s a low fee-paying market but the fastest-growing market.” Taking growth into account, “you’ll probably find India attractive and profitable”, he said.
One source of hope for investment banks betting on India is that international private equity firms are stepping up their dealmaking there.
“There’s a desire from some limited partners [investors in private equity funds] to reduce exposure to China,” said Dieter Turowski, chair of Morgan Stanley’s Asia-Pacific investment banking operation.
“If you’ve got an Asia-wide private equity fund and you’re trying to shrink China and invest in markets that are exciting and growth-oriented, India’s obviously a good place to do it.”
Jefferies’ Agarwal declined to comment on Jefferies’ fees or profitability in India but dismissed the idea that lending was the only way to profit.
“Making money from money is, I would say, relatively easy,” he said. “We believe in partnering with our clients, in good times helping them to raise money, in tough times consolidating, whatever it requires. And that’s more intellectually challenging.”