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Weekend
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P19 IN ASSOCIATION WITH THE INTERNATIONAL HERALD TRIBUNE SATURDAY SEPTEMBER 14, 2013 RAJESH ABRAHAM
Mumbai

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HIS day (September14) five years ago Lehman Brothers, a large US bank, filed for bankruptcy. At the time the Indian economy was chugging along nicely at over 9 per cent. India was one of the miracle economies (along other distinguished members in the BRIC bloc: Brazil, Russia and China). Many analysts and policymakers thought mistakenly, as it turned out that India was decoupled from the mortgage-led financial crisis rapidly unfolding in the US. Indian stock markets had already fallen from its peak hit in January that year, as foreign investors slowly began to exit India after the huge exposure of big Wall Street banks in risky mortgage-backed securities began to unravel. Indian investors hoped the worst was behind. They were wrong. The Lehman Brothers bankruptcy blew up in their face and the rest, as they say, is history. Have the five years since then changed anything in India? The end of 2008 seemed the end of the world, as jobs began to disappear and businesses of managing other peoples money itself became a dirty word. Thousands of jobs were lost the world over, including India; legions of Indian investment bankers, feted in the US and other financial centers of the world, began to return home. That was five years ago. Today, there is quiet optimism among those still in the finance business, though many of the big houses in the business have disappeared into the pages of history. Many had to start afresh and several individuals, victims of the shakeout started their own finance business. Given the circumstances, they are not doing too badly, thank you. Five years ago, there was fear everywhere, fear of the Great Depression revis-

THEREAFTER
NOTHING
REALLY HAS CHANGED AFTER THE WALL STREET COLLAPSE OF 2008

TRILLIONS OF DOLLAR LATER, WE ARE STILL RANGE BOUND

s a y s S H A N KA R S H A R M A S U N I L M E H TA o n
HOW AIGS MANY INDIA VENTURES SURVIVE TODAY

iting. Sensex, already down nearly 34 per cent (at 14,000) from its January 2008 peak, crashed a month after Lehman filed for bankruptcy. FIIs had already pulled out $6.8 billion in the first nine months of 2008 before Lehman. After Lehman the pullout gained momentum: $1.86billion in September itself and $2.96 billion in October. Sensex lost another 45 per cent to go as low as 7,697. The fall of Lehman Brothers and the near-death experience of other big Wall Street banks, including Citi, American International Group (AIG) and Merrill Lynch, sent shivers down the spine of hundreds of investment bankers/ broking/ back office staff in India; all these firms had large operations here. Several lost their jobs and the crisis led to massive restructuring or closure of many Wall Street firms, impacting India operations. Only a year before (in August 2007), Lehman Brothers had made a big- splash announcement of its India plans, buying the institutional equities business of Brics Securities, a local stockbroker. Five years down the line, Nomura, which bought Lehmans business in Asia including India, has just a fixed income and equity business. Its investment banking business is nearly shut, private equity plans are on the backburner and the back-office where the headcount was nearly 3,000 (under Lehman) has come down significantly. The period between 2006 and 2008 saw several Indians working in the US seeking to come back home and work here, said Tapan Gandhi, a former Lehman employee in India, who is now a principal with ASK Pravi, a Mumbaibased private equity fund.
Turn to P8 The pitfalls & pain in India P10 Did we win or did we lose? P11 We went whole hog on India until things crumbled in US P12

YOUR WEEK AHEAD

S M T W T F S
MATTER OF INTEREST Rajan-led RBI to review money policy on Friday
Experts believe the central bank will maintain status quo in the policy rates unless the US Fed defers QE3 tapering

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CAR MANIA
Frankfurt Auto Show
More than 1,000 exhibitors are showing off their latest vehicles and accessories at the annual auto show in Germany. The show opened to the public on September 12 and will be on till September 22

CINEFEST Ladakh International Film Festival

Director Aparna Sen, Paul Smaczny (Emmy winner) and Mathew Robbins (Palm dOr) will be part of the jury

US CUES All eyes of Fed move, economic data

Economic projections will indicate the health of the economy and the Fed may rely on it to decide on tapering

SUPERBIKING San Marino MotoGP

Being back to full health, champion Jorge Lorenzo will look to defend his title at this weekends San Marino MotoGP

CHINA SIGNAL China will disclose August FDI data

A poll on Bloomberg shows analysts expect FDI growth to come in at 12.50 per cent compared with 24.10 per cent in July

CINEMA John Day

Ahishor Solomons debut directorial venture is a broody thriller that pits Naseeruddin Shah against Randeep Hooda
AP

METAMARKET
FINANCIAL Chronicle Weekend September 14, 2013

From Lehmans shadow

Sudden exit and massive restructuring of foreign investment banks and brokerages allowed Indian financial firms to flex muscle and grow their businesses in last five years
From P1 Gandhi had worked for Booz Allen in the US and came to India when Lehman started operations here. He left Lehman immediately after Nomura acquired the US banks Asia operations, and started Forward Thinking, a consultancy for SMEs, before joining ASK Pravi in August 2010. Today, much fewer people on Wall Street want to return home. But the cycle has not turned yet, he said, meaning that people are not going back to the US. Among the US firms in India, the biggest shock was felt in AIG, which nearly died before the US governments bail-out. Under AIGs India boss Sunil Mehta the company was fast expanding, starting 10 businesses here: life and general insurance joint ventures with the Tatas, a software development company, a consumer finance firm, a home finance company, an aviation leasing business, a mutual fund business, private equity, etc. The group employed nearly 13,000 people in 300 towns and cities in India. Today, only Tata AIG Life Insurance survives. All the other businesses are under new owners after AIG of the US went in for global restructuring. I had full confidence that AIG will emerge out of the crisis. We had very little attrition from our businesses even though we were going through big restructuring, said Mehta, adding that India, which is now facing headwinds from the US on the expected withdrawal of the Fed Reserves easy money policy, will also emerge from the slump. He acknowledged the roles played by insurance regulator Irda and stock market regulator Sebi in calming the nerves of policyholders and mutual fund investors during those tumultuous days after September 2008. Other big names from Wall Street also had to undergo drastic changes in

READY, STEADY: Though many of the big houses have disappeared into the pages of history, there's quiet optimism among those still in the finance business. Given the circumstances, they are not doing too badly, thank you

The big mistake India made during the time was relying heavily on portfolio inflows It should have utilised the period to undertake reforms and open the FDI doors in more sectors But Irda and Sebi did calm the nerves of investors during those tumultuous days after September 2008

India. For instance, Citigroup exited its investments in India. It sold its captive BPO arm to TCS for $505 million in October 2008, sold its stakes in HDFC and the 45 per cent stake in Chennai-based Polaris Software. Pankaj Vaish, who was MD and head of equities with Nomura after it acquired Lehman, moved as head of markets of Citigroup, South Asia in 2010. Likewise, Merrill Lynch as part of its global strategy sold its wealth management division comprising about 300 people in India to Julius Baer. After Bank of America acquired the firm globally, Merrill Lynch surrendered its primary dealer licence in India. Hemendra Kothari, the

veteran dealmaker, who controlled the mutual fund business of DSP Merrill Lynch Fund Managers, renamed the business DSP BlackRock with the US partner picking up 40 per cent. People were obviously worried about their fate. A message was sent across to all our employees that if Bank of America is buying Merrill, it is for a strong business reason. That message gave some comfort to employees, said a former Merrill Lynch official. Morgan Stanley also went through global restructuring. But it only recently sold its Indian wealth management business to Standard Chartered. Andrew Holland who quit as MD of DSP Merrill

Lynchs strategic risk group to join Ambit Capital just before the global financial maelstrom, said India faced initial shocks but continued to grow, partly thanks to the quantitative easing programme of the Fed in the US. The big mistake India made during the time was relying heavily on portfolio inflows. India should have utilised the period to undertake structural reforms and open the doors to foreign direct investment in more sectors, Holland said. But all that pain yielded one spin-off. The sudden exit of and/ or massive restructuring in foreign investment banks and brokerages helped Indian financial services companies to establish and grow their businesses in last

five years, he said. While Ambit Capital itself has grown in size and pace over the past five years, another home-grown firm Edelweiss also expanded, perhaps at the expense of Wall Street peers. Rashesh Shah, founder and CEO of the Edelweiss group, said the profitability of his group was impacted in the past five years as the company was investing in new businesses. In 2007 we had 1,500 people; now the number is 4,300. Earlier we were in three businesses, now in eight, he added. Lehman Brothers had equity stake in Edelweiss NBFC, ECL Finance, which the US firm exited three years ago.
Continued on P9

METAMARKET
FINANCIAL Chronicle Weekend September 14, 2013

Lingering ghost laid to rest

Continued from P8 The slowdown which we are seeing in Indian economy especially in the last two years is mainly due to policy paralysis. The US is recovering and emerging markets have slowed down, which impacted our markets and currency, Shah, whose company is a strong contender for a banking licence, said. Radhika Gupta, left AQR Capital, a $20 billion hedge fund in the US to set up Forefront Capital Management in Mumbai in 2009. She said that despite the upturn in the US and the fall in Indias GDP , she has no regrets whatsoever about her decision to launch a business in India. She founded Forefront along with two other Wall Street friends, Nalin Moniz from Goldman Sachs and Anant Jatia, her then AQR colleague. Her firm manages Rs150 crore worth of assets through three PMS (portfolio management scheme) products. It plans to handle another $45 million through a Mauritius-based fund for foreign investors to be launched shortly. Things have gone well for us so far here, she said. Yet she still has an eye on whats happening in the US, no doubt, because what happens there has a bearing on the Indian markets. The impression she gets from conversations with friends in the US is that on the ground the situation is still not that rosy as is projected in media. Gupta admitted that India was going through a downturn, but added that most of the fears about the economy are exaggerated. Importantly, she said the expected tapering of the quantitative easing programme was yet to play out in the US markets. We need to see how this story is going to play out, she said. (The US stock markets are up nearly 19 per cent so far this year while India is trading flat.) Kiran Kumar Kavikondala left Goldman Sachs before the 2008 crisis. He said the firm was not too much impacted in India as it had limited operations here at the

Economic slowdown
Indias GDP growth rate has fallen post-Lehman crisis
Lehman period At present

GDP growth rate WPI inflation

9.3* 10.78
D

5.0** 5.79
r

* FY08 over FY07 ** FY13 over FY12 D Sep '08 over Sep 07 r Jul '13 over Jul 12 Source: Bloomberg, Capitaline Macro Economics. Analysed by FCRB

Sectoral report
Defensives enjoyed higher return since the 2008 turmoil
Lehman period At present Chg (In %)

FMCG index

2,169.74
OPTIMISM TO THE FORE: With 1.3 billion people spending and consuming, India offers enough opportunities despite slowdown

6,556.34 202.17

Auto index

time. Goldman Sachs came late to India. They had separated from the joint venture with Kotak Mahindra. They were mostly doing proprietary business. They expanded the business in India may be in the last two or three years, he said. Kavikondala joined a small broking business, WealthRays. Shah of Edelweiss believes most of Indias current problems are internal, though the country benefited from the quantitative easing in the US. There were doomsday predictions after the Lehman bankruptcy. Looking back, I think the world has not collapsed, he said. The US is doing better, and if the emerging markets have fallen behind, its due to various internal issues. In India, it is due to policy paralysis, according to him. Mehta, who is now senior advisor to Actis Private Equity, pointed out that the US economy was on the rebound. If this is sustained, the US government can be expected to take a decision in its own interest on whether to continue to inject liquidity. Many emerging markets, including India, benefited from the excess liquidity in the US. The mistake many of our own policymakers made in 2008-09 was they felt India was decoupled. They felt the 2008 crisis was only the making of more developed

markets (and would stay there only), he said. Holland of Ambit Capital said two key factors mattered to the Indian markets and economy going forward. One is the US Fed decision on tapering of quantitative easing; the second is the general elections in India next year.

India benefited from the domestic consumption story, but did not address the growing current account deficit and other structural issues. We need to see how India, along with other emerging markets, deals with the withdrawal of quantitative easing in the US. India is not isolat-

Ruthless selling
2,000 0 -2,000 -4,000 -6,000 -8,000 -10,000 -12,000 -14,000 -16,000

2008 saw FIIs dumping domestic equities heavily. October was worst with outflows of a whopping Rs 15,347 crore
1,750.1 -130.4 Mar -1,211.7 Aug

-13,035.7

-10,095.8 June

-15,347.3 Oct Dec 08 Source: Bloomberg

49,515.79 52,921.33

Jan 08 Figures in Rs crore

5 years since US meltdown

1,8534.4 22,175.34

Sensex with 43% return fared better than its global counterparts
10,922.55 15,065.67

Dow TWSE FTSE Kospi Nikkei Hang RTSI Bovespa CAC Jones Seng At present Source: Bloomberg Chg (In %) Lehman period Lehman period: Sept 15-30, 2008 At present : Sept 1-12, 2013

38.51

DAX

37.93

37.22

35.63

35.18

19.68

19.64

10.36

6.88

-1.74

ed from this issue; other emerging markets also have their problems, he said. Holland said foreign investors planning big investments in India might choose to wait till after the elections. They would wait for clarity and direction on the policy front. India protected itself from big shock in the financial crisis due to capital controls and other steps, big FDI announcements will come only after the general elections next year, he said. According to Gandhi of ASK Pravi, India offers enough opportunities though the economic growth has slowed. If policies were more accommodative we would have grown much faster. Yet, if you look around, you see 1.3 billion people spending and consuming. There are enough traditional businesses in India which cater to this demand and generate cash in the process, he said. From those gloomy days that began in September of 2008, we are much better off today. Sensex is back at nearly 20,000, gaining 150 per cent up from the lowest point of 7,697 of 2008, but the January 2008 peak is still a distance away. The bad days of 2008 are forgotten. The ghost of Lehman is finally buried.
rajeshabraham @mydigitalfc.com

3,833.5 10,553.00 175.28

Healthcare index

3,846.13
IT index

9,143.39 137.73 7,966.49 133.06 5,738.57 4,461.36 80.44 63.60 62.31 43.18 39.11 26.87 -7.55

3,418.19
CD index

3,180.37 2,727.05
Bankex

TECk index

6,749.85 10,955.82
Sensex

13,419.52 19,214.32
Nifty

4,068.14 5,081.33 9,126.36 6,050.58 9,826.76

PSU index

5,659.28 6,446.83 8,437.65

BSE midcap index Oil & gas index BSE smallcap index 5,333.12 -11.86 8,191.32 -16.64 5,290.17 -17.74 7,426.98 -33.35 1,430.20 -40.53 1,217.79 -68.69
Source: Bloomberg, FCRB

Metal index

1,452.84 1,963.91 11,787.84 14,107.98

6,430.74
CG index

6,003.92 8,315.97

5,941.58 8,153.24

4,818.77 6,535.69

4,116.07 4,044.36

1,226.31 1,353.4

11,143.43 2,404.75 3,889.69

Power index Realty index