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Life of a Merchant Banker

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Sunit Joshi
Mr. Sunit Joshi, Executive Vice President, Capital Markets Group, SBI Capital Markets speaks about the role of merchant banking in the Indian capital market.


Sunit Joshi heads the Capital Markets Group in SBI Capital Markets Ltd. He is a qualified Chartered Accountant and has over 30 years of varied experience - especially in commercial and International Banking with State Bank of India (SBI). After joining SBI Capital Markets in early 2010, he has overseen several public equity offerings and Rights Issues/QIPs, apart from various other capital market related transactions - including advisories.

This interview was conducted by students from SIMSREE Finance Forum (Sydenham Institute of Management Studies Research & Entrepreneurship Education).

What is the future outlook of the Indian Equity Markets in this fiscal year?

As you know, predicting the stock markets is like crystal ball gazing, but going by the GDP growth of over 8.5 percent so far for the current year and the estimate of around 9 percent for the next financial year, the trend should be positive.  India’s growth story is not only intact but also robust.  Inflation is a concern and this is one of the major reasons why stock markets are weak right now.  As you know, stock markets really don’t work on logic, but are more sentiment driven, and at present the sentiments are weak.  Major reasons for our equity markets being in the present state are inflation and also governance issues, which have been cropping up for the past few months - like the CWG imbroglio, the 2G spectrum allocation controversy, the bank loans problem that surfaced in November 2010, etc.  On top of this, there have been some negative global cues - the euro crisis that has gradually subsided, and now the Middle East turmoil is pushing the crude prices to higher levels.  These events are affecting the markets. But let me clarify that the equity markets are not completely tanking, and the Sensex is not falling below 17,500 points.  It fell below 18,000 to around 17,600, and has again bounced back. 

Going forward, from June onwards, I can’t say for sure, but I do foresee a bright future.  Markets can’t remain bleak forever; new issues have to come out and there is appetite from retail as well as institutional investors.  The secondary market activity will also continue to grow.  FIIs have withdrawn funds from our equity markets in January and February 2011.  But unless there are great opportunities elsewhere, they will return. While the FII outflows have not been very high, this does affect the sentiments and FII inflows/outflows continue to drive the state of equity markets in India.

Which sectors, according to you, would outperform this year?

Growth driven sectors - such as infrastructure would definitely be on a high, considering the Government’s continuing thrust on building infrastructure.  Pharma is a high growth sector with potential for higher returns. Even the financial services sector stocks - especially the Public Sector (PSUs) Banks, whose stocks are quoting at quite low Price to Book (P/B) Value of close to 1 or just a little above 1, have good growth potential. Ideally, these stocks should command a much higher price, as was the case until the middle of November 2010.

How do you see the IPO and M&A scene developing in 2011?

M&As are likely to happen in sectors where there is higher competition.  A couple of deals that have taken place recently include iGATE’s acquisition of Patni Computers in the IT space.  We recently saw Jindal Steel picking up majority stake in Ispat. In Pharma sector, Reckitt Benckiser took over Paras Pharma.  Most recently, British Petroleum has picked up 30 percent stake in Reliance Industries Ltd.  The BP-RIL deal is a big positive signal for the markets - amid the generally poor performance of stock markets.  So, these are positive events that have happened.  The Cairn-Vedanta Deal has been stuck for the past few months because of the ONGC royalty payment issue.  M&As will continue to happen, and wherever you have more competition, it is easier for the industry to consolidate - with some promoters opting to go out after making a decent return on what they had originally invested.

Talking about the next financial year, what do you think would be the preferred instrument for corporates for fundraising? Would it be debt or equity?

We hope the corporate bond market picks up.  Going forward, bonds should substitute loans to a greater extent. But there isn’t any substitute for equity.  Because if one is setting up a large project, the lenders would provide loans to cover only a part of the project cost and the promoter has to bring in the equity.  This need to raise capital would drive equity issues and the activity should pick up again in the next fiscal (2010-11).

Corporate Debt (i.e. bond) market is not picking up for a few reasons: a) the investor in these instruments has no direct control and b) the instrument is not liquid.  There needs to be someone who makes the market, i.e. someone buys and also sells these bonds - by offering two-way quotes.   As for control, an investor in bonds is also a lender effectively, but when a bank lends by way of loan, it has greater control on the day-to-day activities of the borrower company.  The bank providing loans obtains regular MIS data and documents every month, it verifies the business place or plant.  But an investor in bonds has no control on the day-to-day activities of the borrower company.  Although these instruments are rated by rating agencies, people do not entirely go by such ratings.  The major investors for corporate bonds are still banks.  Institutions like Provident Funds have limitations on how much they can invest in corporate bonds. Similarly, Insurance Companies and Pension Funds also have limitations on investing in corporate bonds. Banks are already in the business of lending to the corporate, and it all depends upon the banks to decide whether it is more beneficial to lend through bonds or by way of loans.  Banks often feel that, from control point of view, it is advisable to lend via the loans route.  So, there is some disconnect here.  But, the bonds market is gradually developing and we see a good future for this market. 

Also, more FII investments are coming into corporate bonds.  There is a cap on their investments too, but that is yet to be reached.  Since interest rates on bonds are high as compared to international interest rates, they can invest, and hold till maturity if they can’t sell the bonds due to lack of liquidity in the bonds market, If they can hedge the currency risk properly or the Rupee does not depreciate much, the 9-10 percent interest on such instruments can yield very good returns.  Even though the FIIs are still not investing in bonds as much as in equities, they are slowly coming in.  FIIs prefer equity and last calendar year’s figures stand at $29 billion of net inflows in equities, whereas in debt markets it was less than $10 billion.  Retail participation can also be encouraged and the market should be made more liquid. There is appetite from both institutional and retail investors for fixed income securities and many bonds are also listed, but in the absence of liquidity, there are not many active buyers in the secondary market.  It is a vicious cycle that needs to be broken.

SEBI has expressed reservations on investment bankers quoting near-zero fees to bag divestment issuance. How do you view this issue?

First of all, let me clarify that SEBI has not expressed any reservations or concerns on this aspect.  In government mandates the issue size is usually very large and the investment bank gets good league table rankings.  The disinvestment public offerings are complex transactions and also greatly improve the reputation and credentials of the merchant bankers associated with such large and prestigious transactions, which is helpful in securing other business.  Also, in terms of experience, such transactions have a lot of value.  A merchant banker in these issues deals with the PSU itself, the administrative ministry of the government controlling the PSU and also the Disinvestment Department.  So, you are actually dealing with three different entities, whereas in most other issues in the private sector, you are dealing with only the issuer company or additionally the private equity investor.  This provides the merchant banker with a different learning and perspective.  In any case, who Is benefitting from the low fees? Since it is the PSU concerned and the owner, i.e. the government that are benefitting, we do not see any issue with the near-zero fees.  Obviously, this does not happen in the case of private sector’s public issues.  

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