Investment banks from UBS AG (UBS:US) to Morgan Stanley spent half a decade building their operations in India, betting that a growing economy would trigger a boom in mergers and stock sales. They’ve spent the last three years reversing that expansion.
The number of investment-banking positions in India has dropped by about 30 percent since 2010 -- more than double the pace of global industry cutbacks in the same period -- according to the Indian unit of recruiter Randstad Holding NV. (RANJY:US) Some firms, including Bank of America Corp. (BAC:US), have made even steeper cuts.
The reductions reflect the falloff in deals and equity offerings involving Indian companies, down about 50 percent by value from 2010, as the country’s $1.8 trillion economy slows and corporate debt rises. Some banks have resorted to lowering fees as they chase work, further denting revenues. More job cuts may come as big mergers and stock offerings remain subdued, people familiar with the matter said.
“It is a bloodbath at investment banks focusing on deals above $100 million,” said Vikram Utamsingh, a Mumbai-based managing director at consulting firm Alvarez & Marsal Inc. “It’s extremely difficult at this point in time to get hired as an investment banker in India. I don’t know how any bank will grow in this market.”
Bank of America’s local unit, the second-ranked takeover adviser in India last year, has cut almost half of an investment-banking team that numbered 40 in 2010, said a person with knowledge of the matter, who asked not to be identified as the details are confidential. UBS has reduced investment-banking headcount to 10 from 16 during the same period, while Morgan Stanley’s local staff has fallen to about 22 from 35, people familiar with the banks’ operations said.
Spokesmen for the three banks declined to comment.
Not all foreign firms are retrenching. Moelis & Co., the investment bank founded by Ken Moelis, entered India in 2012 and now has nine bankers there, said Manisha Girotra, CEO of the New York-based firm’s local unit. Girotra said she plans to add staff in India, calling it a “long-term strategic market” for Moelis.
Some foreign banks have responded to India’s challenges by cutting senior positions there in favor of flying in bankers from offices like Hong Kong and Singapore when needed, according to executives who spoke on condition of anonymity.
Recent senior departures include Sughosh Moharikar, Deutsche Bank AG’s head of mergers advisory for India, people familiar with the matter said in January. Purvesh Shah, Barclays Plc’s local equity capital markets head, has left the firm, a person with knowledge of the matter said. Ravi Shankar, the last remaining managing director at UBS’s investment bank in India, left in September. Lazard Ltd.’s former country head K Balakrishnan departed in March.
Reductions at the global firms have brought investment-banking jobs in India down to a level last seen around the middle of last decade, said Moorthy K Uppaluri, chief executive officer of Randstad India.
The number of investment bankers worldwide at 10 major firms including Morgan Stanley (MS:US), UBS and Goldman Sachs Group Inc. fell 12.5 percent in the three years through Sept. 30, according to data from Coalition, a London-based analytics firm.
In India, the number of acquisitions tumbled last year to 746 from 900 in 2010, while the value fell 53 percent to $32.4 billion, according to data compiled by Bloomberg. Equity offerings dropped by a similar magnitude, to $8.6 billion, the data show.
Investment-banking fees have followed, shrinking to $547 million last year from $1.1 billion in 2010, according to data provided by Freeman Consulting, a New York-based research firm. China generated at least seven times more revenue for investment banks than India in 2013, Freeman estimates. In the U.S., deal fees climbed by 25 percent to $42.7 billion since 2010, while Western European bank fees dropped by 4 percent, Freeman said.
India’s slowing economy has weighed on dealmaking. Indiaâs economy expanded 4.5 percent in the year through March 31, the weakest pace since 2003, and the government forecasts a modest pickup this fiscal year. At the same time soaring debt levels have curtailed companies’ ability to make acquisitions overseas.
Total debt at non-financial companies on the S&P BSE200 index jumped 41 percent in the three years through March 31, data compiled by Bloomberg show.
Those aren’t the only barriers. Transactions are taking longer to complete, slowed by regulatory confusion and a lengthy approval process, said Gaurav Gupta, head of investment banking for India at Australia’s Macquarie Group Ltd.
“In India you need patience,” TV Raghunath, managing director and chief executive officer of Kotak Mahindra Capital Co., the investment-banking unit of Kotak Mahindra Bank Ltd, said in an interview. “Things are not going to click and fall into place unless you Indianize,” he said, using slang for adapting to local norms.
The banks have also been hammered by a reluctance of India’s largest companies to pay for advisory work. The average fee for working on a merger in India was 0.6 percent of the deal size last year, half the U.S. level, according to Freeman. The fee differential between the two countries has remained about the same since 2011, the Freeman data show.
“It’s always been a challenge to get fees from the Indian client, in good times and bad times,” said Zulfiqar Shivji, head of Indian transaction advisory services at U.K.-based boutique firm BDO Advisory Services.
The largest government-backed initial public offerings yield near-zero commissions for investment banks, in part because of a pitching system that encourages firms to compete for underwriting work by offering the lowest fees.
In last year’s largest Indian IPO, Just Dial Ltd., a search engine operator, paid 3.4 percent of the 9.3 billion-rupee proceeds as fees, data compiled by Bloomberg show. In the developed world banks typically are paid about 7 percent of the amount raised.
“In every pitch we went to, 15 banks came and everyone was undercutting each other,” Kaku Nakhate, the head of Bank of America’s Indian unit, said about IPOs. “We have walked out of a few deals. I don’t want to do business like that.”
Further eroding the advisory fee pool, some of India’s largest industrial groups, including Tata Sons Ltd. and Reliance Industries Ltd., have set up their own M&A teams in the past few years. In many cases, investment banks are used only to provide financing for a deal, said Macquarie’s Gupta.
Some local competitors are seeking to take advantage of foreign banks’ retreat.
ICICI Securities Ltd., the investment-banking unit of India’s second-largest lender, hired 10 bankers last year and plans to add two more by March 31, Chief Executive Officer Anup Bagchi said Jan. 23. Kotak Mahindra Capital hired eight investment bankers in the past 12 months.
“We are seeing lower competition from international banks,” Bagchi said. “They are not seen in the mid-market segment at all. We are taking advantage of this.”
ICICI Securities jumped to No. 20 in advising on M&A involving Indian companies last year from 49th in 2011, data compiled by Bloomberg show. Kotak Mahindra capital rose to 12th from 18th. Citigroup, Bank of America and UBS were the top three mergers advisers last year, the data show.
Local firms’ eagerness to challenge foreign competitors means the pressure on fees in India will remain.
“It’s a paradox that India is seen as a promising market, and thus it is hyper-competitive and the fee pool consequently shrinks,” said Brijesh Mehra, managing director and head of international banking for India and Southeast Asia at Royal Bank of Scotland Plc.
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