"Never Run Out Of Cash"

With the media reporting “up for sale” to the hilt, even getting meetings with lenders started becoming tough. I knew the chairman of a bank very well but was finding it difficult to get an appointment as he was genuinely busy. His secretary told me he is not available. I knew I had to get him somehow. It was around 7 in the evening, I went to his office and instead of approaching his secretary, I went and sat in his car. Since I knew the driver, he couldn’t say “no” to me. When the chairman got in the car he was surprised to see me. He blurted in Tamil, “Vaidya, inga enna pannara nee? (What are you doing?)” I replied, “Sir, please sit. I want to talk.” From his office to his home, I explained to him the context of why I needed funds for growth and disbursals. He said it would be difficult to lend me such a huge sum as it would need the managing committee’s (MC) approval. The MC was to meet in six days and I had to log in a proposal before the meeting. Luckily, I knew the bank’s DGM, so I called him up, and also put our guy on the job that very night to get the proposal ready. We managed to log our proposal in the system and on the 25th day we had the money!

A large private sector bank (not the one I was associated with) sanctioned a loan of Rs.50 crore, when our application was for Rs.300 crore! That too at 13.5% for one year and only if we gave priority sector loans as lien! That was too bitter a pill to swallow, we declined it. Another bank sanctioned Rs.300 crore, but for only a year. Our lending though was for a longer tenure. I thought to myself who knows what the funding lines and liquidity will look a year from now if we did not get an investor. I was clear that I won’t take an asset-liability mismatch risk because I know what kills an organisation is not lack of profitability, it is drying up of liquidity! So, I asked the treasury team not to go ahead. They were devastated for they had worked hard on the deal. We didn’t grow that quarter, had to cut disbursals and even withdrew line of credit to wholesale borrowers. But this discipline of not taking asset-liability mismatches was key to our success at a later date when things got tough. “Never run out of cash” is a line I have kept close to my chest.

But I knew I had to find a more sustainable way of sourcing funds and that adventurism wouldn’t work all the time. That’s when we created a “business model” when we first sealed a deal with a public sector bank. I knew we had the capability to originate, collect, and manage a loan, so I approached the bank and told them you have a problem lending to our company but you shouldn’t have a problem lending to a genuine borrower. So, we would originate the loan and pass it on to the bank…it was a refinancing model. The bank saw merit in the approach and we ended up selling a Rs.300 crore loan book to the bank. In hindsight, it was one of the best decisions that we had taken in the business as we managed to raise Rs.2,000 crore in cash through such an arrangement by March 2012.

But the bigger problem of arranging a buyer and to conclude a buyout was still to be fixed.

I knew I had to find a permanent solution to this quandary. I had already held multiple rounds of talks (many rejections) with about 15 PE investors. It was sometime in January 2012, I woke up at 4 AM, and was pacing around, I called my secretary early morning and asked her to book a flight ticket to Delhi despite having no meetings there. I just wanted to get out of Mumbai that day. I was hoping to make some headway with a PE player in Delhi, whom I had met earlier and talks had been positive. On reaching Delhi, I texted him, but he replied that he was unavailable as he was attending a conference. Through the day, I tried to see if I could get a foot in his door. It was nearing 5 pm and realising that I wouldn’t be able to meet him, I got to the airport. I had checked-in and even cleared security, when I took a last chance and texted him again. He texted me back that we could meet at 7.30 pm in Gurgaon. I was more than delighted, I tore my boarding card in happiness. Now the security wouldn’t let me out of the airport! I cajoled and made my way out, and rushed to Gurgaon. He was a warm host and served me sandwiches for dinner at his office. We had a lengthy discussion and I told him of a similar securitisation deal with another bank. He was interested and was looking close to doing the deal. We had begun to talk what valuation might work for them or the sellers and whether I will co-invest. I flew back hoping things would now work out. 

A few days later, I was on another trip to Delhi, looking to seal a similar securitisation deal with a Delhi-based bank on 7th March 2012. Call it serendipity or luck, the person sitting next to me on my return flight turned out to be a gentleman by the name of Narendra Ostawal from Warburg Pincus. In two hours we went over the model, I told him what I was looking for and that I had held discussions with many firms. As things turned out, Ostawal and the India co-head Vishal Mahadevia came and met me a few days later. I told the Warburg team that the existing promoter was seeking a higher price, a premium to-the-then traded price of Rs.100-120. I assured them that the model we are building is so unique, they will get their desired return and more even if they pay a big premium. Thankfully, they thought the same way and were not finicky, and believed in the numbers. We had developed a unique algorithm-based lending model between 2010 and 2012, and we were super bullish that we could build a Rs.25,000-crore loan book in five to six years from scratch if only they could spare the money that I needed! 

With them, I felt there was a real chance of a deal. So I trusted them and told them the issue facing FCH. “There is this one big issue we have,” I revealed. I was accounting for sell-down income upfront, which should ideally be booked over the life of the loan. Basically, when we were originating and selling loans, we were booking the interest rate differential as profit. Secondly, there were businesses, which I accepted were loss making, but said these would turn around over time. The outcome could have been different and the deal could have fallen through but that was not to be. 

I also assured the Warburg team that there could be ups and downs in the business, but they would not see our company slipping an inch on corporate governance. I knew for an investor sitting in London and the US, this would always be a worry. What I liked about the deal was WP’s trust is us… they agreed on a tentative price first even before doing the due diligence. They agreed to pay Rs.162 a share, a significant premium over the-then prevailing market price. 

The way Kishore Biyani conducted himself during the buyout was exemplary. He never interfered or asked me which PEs I was meeting. Our understanding was that if I could bring anyone to the table, he would seal the deal. He’s a man of few words. He moved in an uncomplicated and graceful way to close the deal. 

It was a big moment for me. It was much later after the deal that Deepak Parekh revealed that they had called him for a reference check and he had told them: “See what he has built at ICICI. If you want to back one person in the country, back him.” What also made the moment special was KV Kamath’s touching gesture when we met. I told him that I had finally managed to emerge from the shadows by getting the backing of PE giant Warburg Pincus. That’s when Mr Kamath did the unexpected – he got up, removed the blue tie that he was wearing, folded it, gave it me and gave me a light hug and a pat on the back. Since then, till date, I sparingly wear it…lest it fades…it means a lot to me. 

They say the last mile is the longest…in our case we had to get approvals from FIPB for FDI, RBI Forex department, RBI inspection department, the Forward Markets Commission, and each had dependencies on each other. We had a deadline of September 30 under some approval conditions, and the funds were received on 29th September 2012! It was that close. 

It was a new beginning as Capital First was born… in less than two years we had a new brand, new set of shareholders, new board, and new retail businesses. A moment that I will cherish as the team had a great time picking and choosing the final look and feel of what was to be their institution…

Amidst all the chaos, we had hired over 800 people! We had super leaders Apul Nayyar, Pankaj Sanklecha, Adrian Andrade, Ashok Shinkar, Shailesh Shirali and others in the top 25, many of whom had left jobs with cushy multinationals to join us. They did a great job. Other wonderful and talented teammates such as Nihal Desai joined a few months later. It was a tricky situation – you don’t get backing if you don’t have a team or proof of concept, and you can’t hire a team if you don’t get a good backing, for what do you do with people without a financial backing. Somehow, we made the two meet by taking our chances because we believed it was possible. 

All my senior people are entrepreneurs in their own way, and it is not a cliché to say that. Because they have stock and stock option ownership, they act entrepreneurial, take decisions, and face the impact of their decisions in the form of performance of the company and their personal worth. That’s entrepreneurship. In my mind, the ability to take decisions and face the impact of those decisions is entrepreneurship. People can have large stakes and have no authority, or little stake and high authority. 

I don’t claim I have built a great institution yet. But what we have built cannot be stopped now. There are no pressing challenges now …there’s equity backing, a long list of investors, credit quality is great, and funds are flowing. Capital First just crossed the Rs.5,000 crore m-cap mark -- from just Rs.790 crore on March 31, 2012, the financial year prior to the deal. We are 1,400 employees strong…we have a loan book of Rs.16,000 crore of which retail is over Rs.13,000 crore, which was just Rs.90 crore five years back…we have 2.2 million customers. What was a seed concept is now a reality. It’s a joy that’s difficult to express.

I believe entrepreneurship is all in the mind. People can have a small stake and feel completely committed and some can have a majority stake and still feel aloof. Entrepreneurs have no choice, they can’t quit. Hence, I feel failure can’t be a part of an entrepreneur’s DNA. A lot of people are dependent on you - your employees, your investors, your family and, more importantly, your own hopes and aspirations, and the next generation of aspiring entrepreneurs.

I am not chasing money, and as a family we don’t believe in inheritance. I want to build a unique institution in a unique space. It’s not one man’s job for sure and the whole team, which believes in the vision, builds it. And as Stevie Wonder’s beautiful song goes so does mine:

Like a long lonely stream

I keep runnin’ towards a dream

Movin’ on, movin’ on 

This is the third of a three-part series. You can read the first part here and the second part here.