Posted: Tue, Feb 1 2011.

1:00 AM IST Published on page 7

Morgan Stanley open to banking subsidiary in India

Firm seeks a bank licence to create a balance sheet that will help investment banking business
The future of Morgan Stanley India Co. Pvt Ltds investment banking business hinges on the bank licence for which the firm has applied to the Reserve Bank of India (RBI). A full-fledged bank will give us a balance sheet to help get larger share of the growing investment banking pie in India, V.K. Bansal, chairman of the Indian arm of the US investment bank, said in a recent interview. Bansal emphasized on how a balance sheet helps the investment banking business. The bank licence is critical with the shift in the focus of investment banking in India from a pure advisory model to a combination of advisory service and funds, and without a bank, Morgan Stanley India loses out on this. In 2010, net revenue of Morgan Stanley globally was up at $31.6 billion (Rs.1.45 trillion today), against $23.4 billion a year ago. It has delivered strong investment banking results across advisory and underwriting businesses in 2010, with a $4.3 billion net revenue for the year. According to a Thomson Reuters survey, Morgan Stanley ranked No. 1 in global initial public offerings as well as global equity, and No. 2 in mergers and acquisitions (M&A) advising eight of the top 10 announced transactions of 2010. But its performance is muted in India compared with rivals. Morgan Stanley is willing to set up an India subsidiary for banking. This will strengthen our business in India and support our investment banking activities since lending to firms with strong balance sheet will be hugely positive, Bansal said. Other investment banks such as Nomura Financial Advisory and Securities (India) Pvt. Ltd and Goldman Sachs (India) Securities Pvt. Ltd are also planning to apply for banking licences in India. 1

As of 31 March 2010, the share of foreign banks in the total assets of the banking system stood at 7.65%, according to RBI data. Investment banking business in India is growing with many overseas firms looking at local companies and Indian promoters hungry to go global. As per Dealogic, a company that tracks M&A data, around 1,483 M&A deals worth $92.72 billion involving Indian companies were signed in 2010, an increase of 223.4% over a year ago. RBI wants all new overseas entrants in the banking space to locally incorporate themselves and existing firms, particularly the systemically important ones, are being encouraged to go in for local incorporation and act as subsidiaries of foreign parents. Systemically important banks are those whose assets are at least 0.25% of the total assets of all commercial banks. RBI has recently issued the guidelines and is awaiting response from the market participants. Existing banks do not seem to be excited about the subsidiary route and they are looking into the tax implications for local incorporation. According to Bansal, the size of deals is relatively small in India and there is huge competition for the investment banking business. Fee income is not attractive at all, Bansal said. Its important to have healthy competition, but banks should not do business at a fee which is below a minimum threshold level. Banks are undercutting fees to secure business and this is not sustainable on a long-term basis. He fears some of the banks will have to close operations in India or be sold or merged with larger firms. Till recently, the investment banking business was driven by innovative ideas and deal proposals, but underwriting capability is now emerging as critical for success. Seven investment banks recently used their balance sheets to underwrite Tata Steel Ltds Rs.3,477 crore follow-on public offer, which closed last week. The lack of a balance sheet has hurt Morgan Stanleys business. We have seen many cases where mandates are given by the clients based on lending support, Bansal said. I hope that firms will select advisers on the basis of their advisory competence and delink advisory services from lending capabilities. Morgan Stanley provides lending support to clients on a case-to-case basis.

We are conscious about our return on capital. We certainly have minimum fee threshold below which we may not like to secure business. We also keep a balance between government mandates and private sector business, he said. Both foreign and domestic investment banks have been managing equity offerings of state-owned firms for as low as zero fees to grab the league table. As per Dealogic data on fee league tables for 2010, Morgan Stanley stands at the eighth position with $43 million fee income, accounting for 4% of the market. Other investment and merchant banks leading the table are State Bank of India or SBI ($96 million fee income, 9% market share), JPMorgan India Pvt. Ltd ($59 million fee income, 5.5% market share), ICICI Bank Ltd ($58 million fee income, 5.5% market share), Deutsche Bank AG ($50 million fee income, 4.7% market share) and Citibank NA ($49 million fee income, 4.6% market share). The role of a balance sheet is beyond just equity capital market transactions. Banks such as SBI and ICICI Bank lead the debt capital market league tables because of the balance sheet they have, said Ruchin Goyal, principal at the Boston Consultancy Group India. In a merger and acquisition advisory, more credibility is brought to the table the moment the investment bank can help finance the transaction. According to Goyal, an increasing number of investment banking firms will apply for a bank licence to help create a balance sheet Source: http://www.livemint.com/2011/01/31210117/Morgan-Stanley-open-tobanking.html?atype=tp