Hemendra Kothari, who pioneered investment banking in India, has seen India’s financial sector evolve all the way from state control in the 1960s

Hemendra Kothari is one among the few in the Indian financial sector who has seen it all – from the earliest stages of state control in the late 1960s to free markets and the globally integrated eco-nomy of today. In between, he built the family brokerage business virtually from nothing to one of the best names in India. He soldiered through the frustrating 1970s, was one of the earliest to look abroad in the 1980s, stayed the course in the stagnant 1990s when many others fell by the wayside and was ready to reap the benefits once the Indian economy and markets took off after 2002. One of Kothari’s significant achievements has been to skilfully engage one of the largest financial firms in the world – Merrill Lynch – in a highly rewarding partnership in investment banking, broking and asset management. Now, it is his charities and the mission to save the tiger that are the new focus areas of his life
 

ML: We would like to start from the very beginning – you were born in Mumbai, weren’t you?

HK: Yes, born and brought up and also educated in Mumbai. I studied at Sydenham College. After my graduation my father advised me not to go to the stock exchange because it is not a very interesting place to be in.

ML: But wasn’t your family into stock-broking?

HK: Yes, my family has been in the stock exchange for nearly 140 years. In fact, when I entered the brokerage business, my family had been in it for over 100 years. My great grandfather was one of the founders of the Bombay Stock Exchange (BSE) and was involved in setting it up along with some others. It first started operating under a banyan tree and he was one of the first signatories to setting up the stock exchange association.

ML: What was his name?

HK: He was Purbhoodas Jeevandas Kothari. The stock exchange business wasn’t very attractive in 1967 when I completed my BCom. It was suggested that I must get trained for doing business. Textiles was big business those days. I had a friend called (late) Ashok Piramal whose family was in textiles. His father said, “Why don’t you come here and try your hand at this?” I joined Morarjee Mills and was there for a year. I went through the rut of going to work at 7.30am and learning spinning, weaving, processing and looking after sales. In less than a year, I was made assistant sales manager. Around then, the head of cotton purchase was appointed the CEO and the person who headed sales left for a better job. The CEO then asked me to takeover as the head of local sales, although I was relatively new to the business. I was only 22 then. But things went quite well. I used to work from 8am to 10pm. The job involved going to Mulji Jetha Market, learning what business was all about. It was a great experience and I thought if I am doing well in this, why can’t I do just as well in my own business in the stock market? So in 1969, I entered the stock market.

ML: Can we go back a little to your family background?

HK: Well, I was fortunate enough to come from a rich family; we always had money; but that doesn’t mean that the riches were liquid; they were in assets. My father was in the market, but he was never an active member. He usually operated on a no-profit no-loss basis. His income wasn’t generated from brokerage but from his personal investments. My father was a very liberal person and a philanthropist, like others in my family. My great grandfather started a boarding and lodging institution at Dadar (in central Mumbai) that allowed students from our native place to come to Mumbai for their college education. About 45 students could stay there and, apart from their food and accomodation, their tuition fees were taken care of. I won’t take names, but many famous people came out of that place. But now there is no need for such a place and we are looking at what to do next. My father also started a hospital in Mumbai.

ML: How many siblings do you have?

HK: We are two brothers and four sisters. My eldest sister is an art historian; she is a PhD and always got a first class first. The second one has passed away; my third sister is a doctor and settled in the US. My fourth sister is also a historian and a PhD, and then I; I was not as clever as them. My younger brother is an engineer and an MBA from the US. He worked in Germany, then came to India and, after spending a year or two in the stock market, started a chemical company called Alkyl Amines. I supported and helped in whatever way I could but he knew what he wanted to do; he didn’t want to be in the market. I studied at the New Era School in Mumbai.

ML: You were in Sydenham College and we believe you played cricket.

HK: Yes, I represented my college, made a lot of friends; I enjoyed cricket, although I wasn’t a great player. I was also the secretary of the students’ union. The objective then was to be active and be allowed to bunk classes. Deepak Parekh was my senior in college, but I knew him since my school days through a cousin of his. Nimesh Kampani (chairman of JM Financial) was in the cricket team, Shitin Desai (executive vice-chairman DSP Merrill Lynch – DSPML) was also there; Jimmy Billimoria, who went to Hindustan Ciba-Geigy (now Novartis), was also there. There were many others – some of whom I am in touch with. Apart from cricket, we played bridge, right until a fortnight before our exams. But the main thing that I remember about college is the long-lasting friendships that I made – many of them are not in business or industry but we still meet and remain good friends.

ML: Why did you get into textiles instead of getting into stock trading directly?

HK: Well, I was told that it didn’t have such a bright future. After I completed my BCom, I didn’t want to study further and wanted to get into business. At that time, somebody told my father, “Why don’t you partner us in a ball bearing company by investing a few lakh of rupees?” My father was willing to invest the money and asked me to take a look at the factory. But you know how much a fresh BCom graduate understands about factories; it looked exciting. I then met Gopikisan Piramal. He said, “Hemendra, you have only done your BCom but you seem to have a great deal of experience.” I said, “No, Sir, I have only just graduated.” Then he said, “But they are willing to take you as a partner; which means that whatever money you have will also go away.” That got into my head and I realised that they may be good people, but they wanted me only for the money. I had neither the experience nor the technical knowledge and was yet to prove myself. Mr Piramal then said, “Why don’t you come to the mill tomorrow and go to the spinning department?” So I started by spending half a day in the cotton mixing department and half a day in purchase; after a couple of months, it got very boring and I asked to be shifted to sales.

ML: When you were with Morarjee Mills and going through different departments, what was in your mind? What was your objective?

HK: I was a novice, but just by using common sense, one could make a lot of improvements; people generally have a mindset of their own and are reluctant to change. If you are enthusiastic and take the initiative, you can make a difference. I did that and I used to go and tell the chief executive about changes that we could and ought to make. He was very happy about what I was doing; I even argued with him about things. He encouraged me to do so and I have to thank him for that. After about six months, he asked, “What is happening? You are not telling me what is wrong anymore.” I said, “Well, everything is fine.” He said, “No, things are not fine, you have just got used to the bad things.” One has to work continuously at improving things – this is one of the lessons about doing business that I learnt there and never forgot.

ML: Then, in 1969, you came back and joined the firm?

HK: Yes, I joined stock-broking in 1969. One of the first things that happened then was that the government imposed a ban on forward trading. The traders went on strike and there was a lot of turmoil. There were very good people like Maganlal T Vora, Champaklal Devidas Dalal, Hasmukhlal Shah and Vasant Dalal who helped me learn the trading process. Our firm was among the 12 brokers empanelled by the Reserve Bank of India (RBI), but since nobody had visited them for over a decade, they had removed us from the list. So I had to work hard at getting more outside business and persuade them to re-empanel us. That happened after three years of hard work and it was very important for us in order to get any part of the government securities business, especially for switch deals where RBI was directly involved, or to buy securities from the central bank. An understanding of fixed-income securities, debentures and bonds was important to the business. I never took too much risk because my capital was limited. So I did a lot of agency business. In 1970, I started the equity brokerage segment for institutional business.

ML: Who was actually in charge of the firm at that time?

HK: In 1969, when I joined DSP (DS Purbhoodas), I was not a partner. My father was the proprietor. Until I joined, he ran the firm on a no-profit-no-loss basis. After I came in, the profit jumped to Rs1.5 lakh annually; he was so excited about it that he made me a 50% partner. At that time, it was difficult to attract even a BCom to this business, forget about chartered accountants or management graduates. So from 1969-71, I had a tough time finding the right people – that was the time when banks were nationalised, forward trading was banned. It was a period of great upheaval in the market, but was also a great learning experience – the workload was relatively lower. The main trading institutions were Unit Trust of India (UTI), Life Insurance Corporation (LIC), General Insurance Corporation (which used to be known as Reinsurance Corporation) and New India Assurance which was headed by GS Patel; MJ Pherwani also used to be there. RS Bhatt was then the chairman of UTI. I used to manage quite a few stocks in which institutions were interested but without taking positions. They were, by and large, interested in 40-50 stocks. Those days, we had the open outcry system and the jobbers would inform you of the number of shares available in a particular scrip and I could make offers – that is how trading took place. It was a very exciting time because in a very short time – by 1972 – we were among the top two or three firms on the BSE.

The competition those days was Harkisondass Lakshmidass (which went spectacularly bust), Jamnadas Morarjee (a stock-broking firm headed by the late Mahendra Kampani) to some extent and a few other brokers. As a young guy, competing with established players was a big thrill for me.

In 1971, Grindlays Bank began what was called the first merchant banking office in India. Those days, getting an underwriting proposal of Rs five lakh was a tough job; moreover Grindlays liked to do most of the underwriting themselves and pass only a little to others. So there was a craze to blindly underwrite anything you were offered. Today, you first create demand through marketing and only underwrite for the period of risk – that is the way it is done the world over. Those days, it was blind underwriting for X amount at a fixed price. It was a high-risk business. When I did underwriting, I used to sub-underwrite my exposure. I didn’t want to take risks – it was not my cup of tea.

But specialised merchant banking businesses became a fashion and most brokerage firms started separate entities, mainly as a way to attract good people to join the business. In 1974, I asked Shitin Desai to join me, at that time he wasn’t quite sure what he wanted to do. We started the merchant banking firm with a capital of Rs five lakh. At the same time, in 1971-72, we began to act as a deposit-collecting agent for Indian companies. That was also a major business those days. We used to distribute the business to hundreds and thousands of brokers all over the country and collect a management commission from the company. We were selective about the kind of companies that we raised deposits for. We learnt some good lessons from GS Patel (former UTI chairman) in particular. He had a very high level of integrity and he always said, “You should be prepared for a CBI inquiry if you are doing business with me and you must be prepared for investigation. So when I give orders, I will myself order an inquiry into it.” That created a different kind of discipline in us, compared to what was going on in the market. In 1973-74, my father began to reduce his work at the firm. He was always interested in philanthropy and I will always cherish his thoughts and ideas.

The years 1975-76 were again tough, because the government ordered a freeze on dividends (and it caused the market to tumble). In 1975, when oil prices began to rise, I began to dream about overseas operations. I took the help of a very nice gentleman called Sorab Pochkhanawala at the Central Bank of India, in charge of international operations. With his references, I met about 40 banks in London, France, Germany and the Middle East over a 20-day period.

ML: What was the idea in meeting them?

HK: I wasn’t quite sure. I knew there would be a link someday and I just went and told all of them that I wanted to represent them in India. Of the 40 banks that I met, only two showed interest. One was Midland Bank and the other was Dresdner Bank. Midland Bank agreed to work on a transaction basis and gave us some offers to fund shipping, etc., but it didn’t quite work out. Those days, Rs50,000 or Rs100,000 was a big sum, especially when there were no emails, and telephone calls and faxes were expensive. So I began to feel that I was ignoring the real bread-and-butter business and wasting my time. Then, in 1978, Air India wanted funding and Dresdner Bank participated in the consortium; we represented Dresdner Bank and were short-listed, but someone else beat us. But that transaction helped build a friendship. Then, in 1981-82, I convinced them that it would reduce their costs if they let me represent them in India instead of having a branch here. In 1983, they finally agreed to let me represent them and that is how our international business started. My relationship with Merrill Lynch began around the same time, but the story actually goes back to 1975. I had joined the board of Kirloskar Cummins as one of its youngest directors.
 
ML: How old were you then?

HK: I was 27 or 28 and the average age on the board was close to 80 years. Just before me, Sharad Pawar’s brother who runs Sakal newspaper also joined the board; both of us reduced the average age of the board significantly. Soon I was on the boards of Kirloskar Pneumatic, Kirloskar Oils and Kirloskar Cummins. I had met the great SL Kirloskar (SLK) only once in my life, when I went to watch a Davis Cup tennis match. I met him there and spoke about my ideas on various aspects of finance. In a fortnight, I received a call requesting me to join the board. I was excited because Kirloskar was a big name those days and I learnt a lot from SLK. Those days, he used to say that the Planning Commission should be dismantled – it was a very radical idea. He was extremely enterprising and it was great to learn from him; he also encouraged everybody on the board to speak freely about things. I also came in contact with people like Neelkanth Kalyani (of Bharat Forge) and listening to him and others on the board was a great learning experience.

That was the time when I began to travel all over India to meet people and companies. Then, in 1978-79, we created or invented a product called ‘Working Capital Debentures’ for companies who needed funds. We created a formula whereby debentures could be issued against 20% of corporate assets. A lot of companies raised money on that basis in 1978. On the other hand, UTI was getting a lot of money from investors and was hungry for good-quality debt. That was a turning point for us in merchant banking and we started getting a lot of business from known and unknown companies from all over India and also from multinationals. We also started opening representative offices in other cities. So we now had the deposit business, we had debentures and we also went into initial public offerings (IPOs). My first IPO was a complete failure – that was in 1973.

ML: Which one was this? And why did it fail?

HK: It is not really worth talking about. It was a Rs nine lakh issue for a company called Bhopal Toughened Glass, which made glass for car windscreens. We had seen the factory, but it was a new company and there were management problems. So the issue failed. I had underwritten a portion of the issue and had to pay Rs50,000, which was a lot of money those days. It was an important lesson for us to do more research and not get into situations based on hearsay. We learnt to do ‘due diligence’ when the concept was not even known.

That is why, even when we began to do correspondent banking with Dresdner Bank, I insisted that our people be sent for training to Frankfurt. The money that we got from Dresdner was not much, but the advantage was that we got to learn the business. I myself went first – I was in Frankfurt for a month to understand different kinds of banking. Then came our tie-up with the French bank BFCE (Banque de Franaise Commerce Exterieur), which had a completely different way of working. They drive a hard bargain; moreover one part of the business – the export credit business – was an arm of the government. In 1984, we tied up with Merrill Lynch. The issue at that time was whether I could have tie-ups with many different people. But long before that, when I had been to New York in 1976 for a board meeting of Kirloskar Cummins, I wanted to meet the three best brokerage houses in the US. Those days, brokerage firms did what was known as merchant banking but it was more of a lending business. Investment banking, as we know it today, began only in the late 1970s.

So I met Goldman Sachs, who clearly said that they had no interest in India. I then met John M Hennessey of First Boston – who later became chairman – he said he was interested. He asked when I planned to be in London. I said, ‘tomorrow’; so he arranged a meeting with the head of Europe. I said, “Let’s shake hands and start working together” and we established an equation. I was also supposed to meet Merrill Lynch during that visit, but it did not happen because the person I was supposed to meet never bothered to turn up. I often remind them of how our relationship almost never happened (laughs).

We started doing business with First Boston, but in less than a year, it was in serious trouble overseas and the people who I had interacted with left – it later became Credit Suisse First Boston. So I wondered if I would have to spend a few hundred thousand rupees again to build new relationships – so I just kept quiet for two or three years after 1978. After 1982, I began to re-explore tie-ups because I believed that India would open up someday – or at least that is what I hoped would happen. In the early 1980s, I saw countries like Argentina and Brazil opening up; in the East, even countries like Thailand and Korea opened up and I thought India will have no choice but to follow suit.

ML: So you seem to have had a long wait before India began to open up, right?

HK: No, even India did open up a little for the government sector. In fact, we were involved in many firsts in this opening-up process. For instance, IDBI (Industrial Development Bank of India, was the largest development finance institution then) raised its first bonds in Germany. Around 1987, Swiss Banking Corporation (SBC) also came to me and I began to represent it in the capital market business. Later, SBC merged with Union Bank of Switzerland (UBS). A year or two after I started doing business with them, SBC also bought over Warburg and acquired an investment bank.

Meanwhile, I had kept in touch with Merrill Lynch and in 1984 they started showing some interest in a partnership – so we shook hands and decided to work on a transaction basis and develop a partnership, subject to all approvals. The first transaction we did was the India Fund. That was a turning point for me. The India Fund was conceived as a show of strength during the time of Indira Gandhi, but it took two years and was finally launched in 1986. We raised $150 million of government-guaranteed money at some ridiculous spread of 25 basis points. We didn’t make any money, but it was successful and we could prove that India could raise money abroad even when everybody was sceptical about whether we could pull it off. We then did other work for ONGC. By then we ourselves had done nearly 60 international transactions with various overseas partners.

ML: Was this India Fund meant for UTI?

HK: Yes; it was an Indian fund listed in London for 65 million pound sterling, which was raised to 75 million pound sterling. MJ Pherwani was then the chairman and it was a very successful fund. In 1987 we did a US fund called the India Growth Fund for UTI. That gave us a lot of exposure both to international markets and domestically. We had to explain the meaning of things like price-earnings multiples, the advantage in raising equity instead of debt as well as the concept of LIBOR – all that was a laborious exercise. We were told that there would be no tax advantage to starting the fund, so we had to work at getting around that too. We met SS Thakur at the RBI; he was a very wise man of high integrity who pointed out that we could do it because it would fall under the tax exemption treaties since UTI’s payouts are called dividends.  

As for the overseas investors, they wanted a lot of research – not merely on India’s economic situation but on individual companies. At that time, it was very difficult even for me to understand the need to spend such a large amount of money on researching individual companies for one India Fund. But we did it and became the first brokerage house to start corporate research and economic research. All this was a quick learning exercise for us.

India began to open up in 1991 and, in 1992, I started talking to Merrill Lynch about the partnership. In 1993, we signed a MoU and it took another year to sign the agreement on what we hoped to acheive. In 1995 they came to India.

ML: Did Merrill Lynch see business potential in India after economic liberalisation?

HK: No, in fact, they were not very keen and weren’t sure how to work out the valuation for our partnership. They signed up mainly because of my friendship and association with them. Then they had a difficult time deciding whether to take a minority stake or whether they should start something on their own. I explained to them that it makes no sense to start competing with each other after having worked together for so many years. I told them that a 40% stake works in India – not more than that.

My partnership lasted because I operated on the logic that as long as I have financial interest and a majority holding under the Companies Act, the number of board memberships did not matter. We also agreed that all decisions have to be unanimous – if one of us did not agree about something, we will not do it. As for the board memberships – at one time, they had more directors and at another time we had more directors; after a while we did not bother about the numbers. In the intervening years, I have seen four changes in the chairmanship, but I am still around – it is an institutional relationship.

Then, when the time was right, I took a decision about what I wanted to do and I sold my stake – except in the asset management company. I have two daughters and there is a 9-year gap between them. The younger one was at Wharton but she doesn’t want to be in finance and is studying fashion merchandising in New York. The older one was also at Wharton, then worked for two years at Merrill Lynch; she enjoyed it and even saved some money, but said she doesn’t want to be in investment banking ever and that it was not for her. She worked for a while in the fund management business and likes it. She then went off to Harvard for her MBA and has now returned. She was interested in fund management and anyway I didn’t want to sell that part of the business. So Merrill Lynch and I divided our economic interest, which was roughly 40:60 in fund management. Although I told them that I want to exit from DSP Merrill Lynch investment banking, they wanted me to retain a small stake of 10% since they think I add value and want me to stay on. In any case, I have too many friends here, as well as long-term employees and clients so I think it makes sense to continue as we are.

ML: You have just announced the tie-up with Blackrock, so you are not really dissociating yourself entirely, right?

HK: Well, the Blackrock tie-up is mainly an extension of the merger between Merrill Lynch and Blackrock overseas. But I had to negotiate on what they are going to give me – the training, the revenue sharing, etc. In this business, you don’t get anything unless you ask for it. But it is taking time because I want a long-term successful partnership; they are great guys and Larry Fink is one of the gurus of risk management. The deal took place in a nice way, my people wanted me to do the tie-up and, in any case, if you are able to partner with the best, then why not? I have not been spending much time on the fund management business because I have been too involved in investment banking, I now intend to spend a little more time there. I am not very keen on the where-to-invest aspect. I am more interested in returns, professional management, compliance and high ethical standards. I am not interested in being number one in performance – it is enough if we are in the top quartile and giving good returns on a continuous basis. Blackrock’s presence will help us raise money abroad. In any case, we are managing over $2.5 to $3 billion on a sub-advisory basis; we are also managing over Rs22,000 crore in India today and we can grow to four or five times that level. For me, the question is: do I want to continue doing this all my life? May be not. A very wise man, Christopher Reeves, who was the chairman of Merrill Lynch Europe, Middle East and Africa, and unfortunately passed away just two months ago, told me, “What do you want from life at 60? Think about it. Do you want more money?” I said, no. He said, “The question you must ask is what is driving you.” 

ML: So what do you plan to do next?

HK: What is driving me today is the desire to create something different. I have a professionally managed fund and I think I have done my bit for the long-term health of the business. So I may remain the chairman and continue to guide DSPML, but as far as my time is concerned, I will spend equal, if not more, time on philanthropy. I am setting up a foundation – which is already almost in place; only some legal formalities need to be completed. I am particularly keen on two things. We run a hospital called the DS Kothari Hospital, which is not managed well. We also have an institute that I talked about earlier, which offers boarding and lodging to 45 students. I want to develop that into a college. There is also a school at Nashik, where over 2,000 poor girls are getting free education. It is run by an NGO and was started with help from my father. I visited it six months ago and talked to them about expanding it to 3,000 students and starting another co-ed school there. I am also keen on environment conservation. When I travel for my interest in wildlife, I find that people cut forests and kill animals because they are so poor and do not have jobs. So I am looking at creating jobs for them. You cannot create industry there, so I want to start a skills-training centre and link it to the cities.

I also have a sanatorium at Deolali near Nashik. There are 18 blocks on nearly 10 acres of land; it was built for patients of tuberculosis to go there to recuperate. Today, that is not required, so I want to convert that into holiday homes with proper modern bungalows for middle-class people. We plan to charge only Rs6,500 per month for middle-class families to be able to go there for a vacation. I also want to create old-age homes, especially for people whose children are not in India. My wife wanted me to do it and I would love to develop it in her memory.

My idea in setting up a foundation is to create NGOs or help existing foundations to create sustainable models of working. I want to create the skill-training centres near the forest reserves. I enjoy going to the forests and you must give something back to what you enjoy. I am creating a nucleus of people to work on this without increasing administrative costs too much. But we will have a strong advisory board. I also don’t want to spread myself too thin, so I will focus on health, education and conservation. I have persuaded a former banker from Merrill Lynch, who wanted to start an NGO, to work for me. I am an organisation builder, and I want to bring that skill to my philanthropy and also work with other NGOs and corporates.

Giving is more difficult than earning; many people talk about giving, but it is not easy when you have worked hard to earn what you have. So I have earmarked Rs100 crore for specific projects and charities and have put this in my Will in case I am not able to do it in my lifetime or something happens to me suddenly.
 

ML: India has always had a tradition of giving; why do you think it has reduced or vanished in the past few decades?

HK: Well, I am now thinking aloud. If you look at our economic history, it is only in the past 10 years that people have started creating assets. They had no opportunities and were busy growing. In 1996-97, we again suffered a slow down – the real boom began only after 2000 and, for the past seven to eight years, we have seen real prosperity. So it will happen in India as well. The people who have made money are young and they are beginning to think about giving back to society. You have to touch their hearts at the right time. But the government also has to cooperate – especially in education. Politicians have turned it into a business – they must assist philanthropic investment in education by offering tax breaks.