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Photographs by Sanjit Kundu

Interview

“You will see blood on the Street”
Hemendra Kothari of DSP Blackrock Investment Managers believes a shakeout in the broking industry is imminent

V Keshavdev

Sitting in his plush 10th floor office overlooking the Arabian Sea, Hemendra Kothari comes through as someone who is unperturbed by the going-ons on the Street. But a few minutes into the conversation, his despondency becomes evident. As chairman of the third-largest asset management house in the country, Kothari believes the issue of governance deficit has now hit the ceiling and the onus is on the government to gets its act together. Coming back to business, Kothari is convinced the broking industry will have to go through a pincer before things get any better. But, more importantly, he says the need of the hour is to welcome foreign investment rather than stifle it. And, despite the odds, Kothari believes manifold opportunities lie ahead for his asset management business. 

 

You have been in the industry for the past 40 years. Is the current scenario the worst that you have ever seen in India? 

Bad periods don’t continue indefinitely. India’s plus point is that it has a cost problem, not a demand problem. But the fear is that if the slowdown continues for long, we don’t have room for further stimulus. As far as interest rates are concerned, I don’t think hiking rates alone can curb inflation. The Reserve Bank of India is also clear about where the money should not be spent, which they have followed in their policy actions. More importantly, the government has to cut down on unnecessary expenditure. There is hardly any capex happening in the manufacturing and infrastructure space. If we are not spending money on expansion, then, the concern is whether supply will be able to keep up with demand in the future. I hope that this is a temporary blip and that growth will pick up again. It is very important that our credit rating does not deteriorate any further because Indian corporates today are relying very heavily on foreign borrowings. So, we can’t afford to have a deterioration in our rating. 

That risk is very much upon us, given the state of the fiscal deficit and stubborn crude prices …

I am surprised that we have cut fuel prices instead of passing on the increase to end users. The burden is coming on PSUs, despite the fact that they have taken money from outside shareholders. We have to ensure that we don’t do anything to hurt the interests of investors. Our energy needs are increasing, and we are encouraging oil consumption by reducing the cost of oil. This kind of populist measure won’t help us in the long run. Now is the time to take a tough stance or else, later on, we will have to take even more unpalatable decisions. The other aspect is that the government should really gets its act together soon. 

Who bites the bullet first, is it the government or corporates?

I believe government spending should be more focused in the right areas. The rest should be left to the private sector. I don’t think we have the capacity now to create debt financing anymore. We need foreign capital to come in, either through debt or equity. There is this great fallacy that money is sloshing around, waiting to enter. But the reality is that a majority of investors have parked themselves in the US Treasury where there is very little return. So, at a time when investors are risk-averse, you have to make them feel wanted. What is the big deal about allowing higher FDI limits in insurance or aviation? Being a nationalist means looking after the interest of the nation as a whole. The interest of the nation is best served if we create a congenial environment for foreign investment and give an assurance to corporates that the government will take the right steps to kickstart the economy.  

Against such a backdrop, are you happy that you have exited the investment banking business?

I am personally lucky that I exited at the right time. Opportunity came knocking at the right time and I took a decision. The two years, 2005 and 2006, were excellent. So, the real question could also be: did I exit too early? In certain circumstances, you take a decision, and once you have taken a decision there is no looking back. 

But the broking business today is completely stressed out…

Unfortunately, the whole scenario has changed over the past few years as margins have been squeezed in the middle of shrinking business. I believe broking houses will have to tighten their belts.  

Do you see domestic broking houses surviving the storm?

I think local firms stand a better chance because they have a diversified client base and their cost base is comparatively lower. They have better maneuverability and take decisions a lot faster than multinationals. However, in the interim, you will find blood on the street as some players will have to take  hard decisions. 

What would be the right business model for a broking firm today?

I think everybody will have to play to their own strengths and weaknesses, but they need to avoid doing too many things because that will increase their cost burden. Some view this situation as a good time to enter and hire good quality people. If they have the strength to withstand the tough period ahead, then they could be right in their thinking. However, what is more challenging for the business is the shrinking investor population. The number of investors has gone down over the past 20 years to less than 14 million. This means we have not reached out to investors outside major cities. We need to think about how we can come up with cost effective ways for investors to invest.  

Given that you are in the asset management business, isn’t that piece of statistic unnerving?

We require at least 50 million, if not 100 million, investors in the capital market. We have to multiply from where we are today. I think there is fantastic scope in the fund management business. But that depends also on your practices in the capital market, your image, and how good your corporate governance is. 

What gives you the confidence that this could change in the future?

People like me do not hold a one or two-year view — we are in for the long haul. So, this is a phase we have to go through. Having said that, I feel the mutual fund industry has largely become dependent on large corporations and banks for business, especially on the fixed income side. In India, fixed income on the retail side has not grown. One of the reasons is that the secondary market for corporate bonds is not viable. We need to see how banks can securitise good quality loans. Besides, a majority of government securities are parked with banks. So, when domestic corporates need credit in tough times, there is no one to lend. Hence, we need to diversify the country risk. We require more international bond issues so that more foreign investors, too, can subscribe, instead of loading everything on domestic banks. You can issue rupee bonds internationally and distribute them properly. The whole theory is that, if you have liabilities, they should be distributed equally.  

Do you see fixed income as an asset class finding more favour with the public?

Yes. Fixed deposits of banks were always a favourite with the public because of the simplicity of investment. A mutual fund can also become a simplistic way of investing, provided funds come out with bond issues and not just open-ended schemes.  

So, what is your view on equity as an asset class?

Indian investors are wiser than their counterparts elsewhere. They have not been investing for the past six months. When the Sensex was at 19,000-20,000, they were sellers. When the market comes down, they will come forward. If it doesn’t come down, they will wait.  

Do you see the markets going back to 2008-09 levels?

It’s been a double whammy for foreign investors. If they have been hit by currency depreciation, the fall in the markets has compounded the situation. So, they have to think twice before entering the markets. If they think the rupee is going to grow stronger and the macro environment improving, they will start investing.

 

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