As Enam promoters bow out with one of their greatest trades ever, high-risk financial takeovers by banks a la Wall Street invades India
Axis Bank, which has so far stayed away from the stock-broking business and has had an insignificant presence in the investment banking business, is paying out Rs2,100 crore in shares to buy Enam Financial. The deal will catapult Axis into the highly competitive business of broking and investment banking, but what can Axis get out of Enam, a highly entrepreneurial and secretive boutique firm?
Enam will be a 100% subsidiary of Axis and, according to Axis, the entire talent pool of Enam will move into the Axis fold. The question is, will the talent pool stay? If not, what is the value of Enam, especially minus the top Enam team? Enam has worked all these years to develop extraordinary market insights, business relationships with scores of owners and their finance heads, as well as institutional investors. This network has proved invaluable in all aspects of its business—investment banking, portfolio management, proprietary trading and broking. The fact is, none of this will be available for Rs2,100 crores! Also, while it is too early to tell, banks usually make a hash of takeovers of boutique businesses.
The fact is that the core of Enam, which has been led by some of the finest brains in the Indian stock markets, will no longer be with the business after the Axis takeover. While Vallabh Bhansali will join the Enam board and Manish Chokhani will supposedly head the investment banking business, it is really a token post-retirement presence. It will obviously not be the same as when the entire Enam team of Nemish Shah, Vallabh Bhansali, Manish Chokhani, Jagdish Master and others were all together and driving the business.
Let’s step back and see what Enam is all about and why Axis will not be able to make much of its purchase. Enam was started as a stock-broking company by Nemish Shah, late Manek Bhansali (hence the name NM, or Enam) and Manek’s brother Vallabh Bhansali, a chartered accountant. The three managed a small and extremely innovative broking business, which took full advantage of the highly imperfect Indian stock markets driven by highly speculative waves, a thriving grey market, the absence of investment institutions and very poor market infrastructure.
In these days of dematerialised trading it is hard to imagine this, but powerful market players could easily make transfer forms of shares of companies disappear before the book closure and trap the bulls or the bears as the case might be. Enam exploited this imperfect system to the hilt, but this was just one part of the firm. On the positive side, Enam was probably the first broking firm in India that started systematic investment research, applying Western principles of equity valuation.
Most importantly, its owners steered clear of major scams and market meltdowns thanks to their superb market acumen. For instance, Enam owners were close buddies of Harshad Mehta, but they were neither carried away by their investment ideas like Harshad, nor caught up in any scam. Instead, Enam promoters, even as they were close to many Indian businessmen, were among the first to identify the potential of multinational companies like Indian Shaving, Castrol, Hindustan Lever, etc. Among their close friends, who shared a similar investment approach, were Radhakishan Damani and Rakesh Junjhunwala, both them highly successful and wealthy private investors and traders.
In the early ’90s, Enam was a powerful force in broking and portfolio management services. As a natural move, they entered the investment banking business, mainly advising promoters on the timing of fund raising and the right capital structure. They brought many high-quality unlisted Indian companies to the market, most notably Infosys. The Infosys IPO nearly failed, but Enam was so impressed with the company that the promoters personally took up a lot of shares and also encouraged clients to buy with the definite advice not to sell in a hurry. Apart rom their fund-raising ability, this keen understanding of the promoters' quality and their businesses also helped Enam establish a healthy long-term relationship with the owners of many fast-growing companies in the ’80s, like Bharat Forge, Thermax, Videocon, Supreme Industries as well as eventual behemoths like Infosys, Zee, Essar and Reliance.
Enam has also been extremely close to Marwari businessmen, especially the Aditya Birla group. In what is a uniquely Indian edge, Enam managed to develop close rapport with both the owner and the head of finance of many companies, sometimes even handling their personal portfolios which meant that both business and information came in freely, which in turn could be used to develop other relationships.
Another extremely important factor in Enam's success has been its very cautious expansion. They have neither launched a mutual fund company nor have they gone crazy expanding retail branch network - both of which would have strained their resources with no clear benefits. Can avoiding mistakes be valued in money terms? Most of the time, it even goes unnoticed.
So, Enam’s secret sauce was a sharp understanding of the quality of promoters and their business, long-term relationships, market operations bordering on insider trading (especially when there was no law against it), a fine sense of market direction and finally, avoiding serious setbacks. All these are intangible skills, which will last for only a few weeks after Enam ceases to exist as an independent company. Enam’s brilliant promoters have made many great trades so far. They end their innings with what will probably be the greatest trade of their lifetime - at the expense of Axis Bank's shareholders.
Brokerage says banks purchasing loan pools from MFIs under pressure
The Andhra Pradesh government's ordinance to curb the activities of microfinance institutions (MFIs) has resulted in a wave of apprehension in the industry which is suffering from an acute financial crisis following a steep drop in repayments. Many MFIs have approached banks for emergency funds amounting to Rs10,000 crores, admitting to suffering a severe liquidity crisis.
Some of these issues were discussed even at the ongoing India Economic Summit in New Delhi, where experts in the field expressed worry about the impact that the state government's ordinance could have on the industry and especially on banks. Banks are the key funds source for MFIs, contributing almost 80% of the money lent to poor customers.
According to a Morgan Stanley Asia Pacific report, dated 16 November, many Indian banks have exposures worth billions of rupees to MFIs. It says the banks that purchase loan pools from MFIs would be under pressure, as the method exposes them to the borrowers, and a drop in repayment rates will subsequently affect them. Following are some of the figures: Yes Bank - Rs4.5 crores, Axis Bank - Rs13 crores, IndusInd Bank - Rs3.6 crores, ICICI Bank - Rs20 crores, HDFC Bank - Rs9 crores, Kotak Mahindra Bank - Rs1.3 crores, Bank of Baroda - Rs1.3 crores, Bank of India - Rs2.8 crores, State Bank of India - Rs8 crores, Corporation Bank - Rs6 crores, Punjab National Bank - Rs9 crores, Union Bank - Rs2 crores and Canara Bank - Rs3 crores.
Andhra Pradesh accounts for about 40% of the MFI loans in the country and has witnessed an alarming number of suicides by some debtors, due to harassment from MFI agents over repayment. The ordinance passed last month bans weekly collections from debtors. As a result repayment rates have dropped sharply in Hyderabad and even in Mumbai. This has affected even a couple of the top MFIs like SKS Microfinance and Asmitha.
Experts point out that many MFIs have run into trouble because of aggressive lending due to the focus on fast growth. They say MFIs should be more cautious in distributing loans to the poor with more stress on financial advice on the proper utility of such loans and evaluation of the client's repayment capacity.
As the situation gets more difficult, experts suggest that this could stretch for some time. As some banks in some state have stopped lending to MFIs, many are getting worried that the crisis could deepen and threaten a collapse.
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