Kotak's next move

Bill Gates, Co-founder, Microsoft. Born October 28, 1955
Paul Allen, Co-founder, Microsoft: Born January 21, 1953
Steve Ballmer, CEO, Microsoft. Born March 24, 1956
Steve Jobs, Co-founder, Apple Computer. Born February 24, 1955
Eric Schmidt, former CEO, Novell, current CEO, Google. Born April 27, 1955
Bill Joy, Co-founder, Sun Microsystems. Born November 8, 1954
Uday Kotak, Founder, Kotak Mahindra Group. Born March 15, 1959

Age: 50

Founded Kotak Mahindra Finance in: 1985

First business: Bill discounting

New business on the anvil: Multi-commodity exchange

Best known as: Deal maker, banker

Role models: No role models

Life philosophy: “If what you create does not outlive you, then you have failed”

Little known fact: Used to be a cricketer and played the sitar

What’s an Indian wunderkind in financial services doing on a list of Silicon Valley luminaries? After all, there’s not much to compare—certainly not on a scale of achievement, or size, or value. For crying out loud, they’re from totally different sectors, to start with.

If there is a correlation, it’s in the decade of birth. As Malcom Gladwell theorises in his book Outliers, there might just be an age-related pattern that explains why a select few are more successful than most regular folk. Many of the Valley’s software tycoons were born in the mid-fifties. Success, argues Gladwell, may have less to do with individual merit and more to do with people who seized opportunities that presented themselves and—more importantly—“ who happened to come of age at a time when that extraordinary effort was rewarded by the rest of society.”

Their success was not just of their own making. It was a product of the world in which they grew up.

Now that’s a line that’s been resounding in Kotak’s head ever since he finished reading Outliers recently. That he was born in the same decade as the computer legends is coincidental. Kotak’s short point is that after spending 24 years building a solid platform in financial services, with businesses that range from broking, investment banking and mutual funds to insurance, commercial banking and private equity, he’s ideally placed to take the next big leap in the years ahead. He is—to borrow the title of another Gladwell tome—at a tipping point, along with the Indian economy and the financial services sector.

“India today has the ability to define world history. We as people of our generation are at the best point of time in that history. As Gladwell points out in Outliers, those who were the overachievers (in information technology) were at the right age, right time, and took the opportunity. We happen to be in the best country in the world as it looks today. We happen to be in a sector which, at this point of time, plays a crucial role in making this history for India. If you play yourself in a prudent manner, simply and humbly, this is the best place on earth,” says Kotak.

Perhaps financial market mavens of the likes of Vallabh Bhansali (who co-founded Enam Securities in 1984, a year before Kotak took the plunge), Rakesh Jhunjhunwala, Motilal Owsal and Raamdeo Agrawal would enjoy similar pride of place if one had to identify successful entrepreneurs on Dalal Street that belong to the same generation and who are well placed to ride the opportunity at hand.

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Yet, what sets Kotak apart is his sheer breath of offerings—with a bank at the forefront— which puts him in a great position to appeal to both the saver (which Indians are traditionally) and the investor (which Indians are slowly but surely transforming into). “I’m genuinely a believer that we have the best financial model anywhere on earth,” claims Kotak.

To be sure, that financial model keeps developing new prongs every year. If it was asset reconstruction or private equity in the recent past, the current year will present the 50-year-old entrepreneur with his latest challenge—a national multi-commodity exchange, which will be the country’s fifth.

The group will pick up a stake, as an anchor investor, in the Ahmedabad Commodity Exchange, which will serve as a platform for a national multi-commodity rollout. There’s clearly a huge opportunity here, what with average monthly turnover on the Indian commodity exchanges standing at a whopping $100 billion (roughly Rs 4,80,000 crore), and with one player (MCX) ruling the roost (with close to a 90 per cent market share).

The bigger challenge for Kotak, however, is to make the next leap on the back of the solid base he’s built. For instance, he needs to scale up the bank, which today ranks fifth in terms of deposits and fourth in number of branches amongst the new generation private sector banks (as per data available for the year ended March 31, 2009).

The core of Kotak How the founder spotted talent, poached it and gave it opportunity to grow.

Gaurang Shah, Managing Director, Kotak Mahindra Old Mutual Life Insurance Poached from: Garden Vareli Group, a textiles firm, which also had an NBFC arm Joined in: 1996 Done what: Started out with car finance, was part of the team that integrated Kotak’s asset lending businesses before the conversion into a bank. Spent two years in the bank before heading life insurance

Falguni Nayar, Managing Director, Kotak Mahindra Capital Co. Poached from: AF Ferguson Joined in: 1993 Done what: Initially headed the M&A team, went on to open the London and US institutional equities offices for Kotak. Returned to India in 2001 and now heads the investment banking and institutional equities businesses

Shanti Ekambaram, Group Head-Wholesale Banking Poached from: Bank of Nova Scotia Joined in: 1991 Done what: Set up the M&A and FII advisory desk, heading investment banking, moved into wholesale banking after conversion into a bank

Jaimin Bhatt, Group Chief Financial Officer Poached from: T. Thomas' Indus Ventures Joined in: 1995 Done what: Initial years in proprietary investments of KMFL, the primary dealership and investment banking before becoming CFO in 2002

K.V.S Manian, Group Head-Retail Liabilities & Branch Banking Poached from: Nelco and Premier Group Joined in: 1994 Done what: Started with compliance and other operations at KMCC, moved on to corporate finance in KMFL, and then to the Asset Finance Division in KMFL as Chief Operating Officer, then involved with the licensing and setting up of the bank and moved into the current role after the conversion into a bank

S. Narayan, Managing Director, Kotak Securities Poached from: Was a practising Chartered Accountant Joined in: 1990 Done what: Handled accounting and finance before moving on to set up the retail broking venture in KS

As Kotak aspires to transform a nation of savers into investors-cum-savers, does he have the adequate penetration to reach out to them? “Uday’s strategies have paid off well. The challenge for him now is to take the business into the next big league and get more trust of corporates and retail investors by penetrating into rural areas,” points out Hemendra Kothari, former Chairman, DSP Merrill Lynch.

Kothari, who has battled Kotak for many a mandate in the past, is quick to acknowledge his growth. “Uday has been smart at identifying business opportunities right from the time he started out in the bill discounting and then moved onto lending business, which was highly profitable in those days,” adds Kothari. Indeed, in many ways, Kotak’s evolution mirrors that of the Indian capital and financial markets. When opportunities presented themselves, he was quick to grab them. Forays into segments like asset management and insurance coincided with liberalisation in these areas. When markets were restricted, he spotted prospects amidst the constraints.

He’s been doing this ever since he started out in 1985, a time when joining the family business of cotton trading would have seemed the natural thing to do. Instead, Kotak trained his sights on the financial markets. The opportunities, though, were limited. Kotak stumbled upon an ingenious business when he bumped into a batch mate (from JBIMS), who had joined Tata consumer electronics company Nelco.

The company borrowed funds at 16.5 per cent from banks, which were raising funds through public deposits at 6 per cent. If the banks were raking in a 10.5 per cent spread, there might just be scope for a man in the middle, thought Kotak, thereby kick-starting the business of bill discounting. He convinced his family friends to refinance these bills of exchange as they were only taking risk on the corporates. So he would take money from them at 12 per cent through the bill of exchange and in turn lend to companies like Nelco at interest of 16 per cent.

One of his many corporate clients was Mahindra Ugine, promoted by Harish Mahindra of the Mahindra & Mahindra (M&M) Group. Harish’s son, Anand, had just returned from Harvard Business School and joined the company as general manager and would often interact with Kotak for business. At Kotak’s wedding ceremony in 1985, the junior Mahindra got to know about his plans to start a finance company.

When Kotak got back from his honeymoon, Mahindra made him an offer he couldn’t refuse: Cash of Rs 4 lakh on the nail for a 10 per cent stake in Kotak’s company, christened Kotak Mahindra Finance Ltd (KMFL). There is no written agreement about this deal; it works—and how—the only way Kotak knows: On trust. Today, the group’s listed entity, Kotak Mahindra Bank (KMB), has a market value of close to Rs 20,000 crore (Mahindra has since reduced his stake to 3 per cent).

“Uday had the foresight to predict the changing landscape of India’s financial markets. He remained focussed on what he wanted to do in his career,” recalls Keshub Mahindra, Chairman of the M&M Group, and uncle of Anand. By the late ’80s, Kotak was quick to spot prospects in car finance—where rates were as high as 30 per cent. Kotak’s proposition: You borrow from me, I will deliver the car instantly—without a waiting period, without premium. To ensure this, Kotak did what other financiers weren’t doing: He booked cars himself.

Such gambits driven by common sense and innovation would be trademarks of virtually every business Kotak forayed into. “Uday’s youth, passion and vision for the future helped him break into the big league in the ’80s and early ’90s,” says Adi Godrej, Chairman, Godrej Group. Along the way the financier evolved into a deal maker par excellence. One of the first big transactions Kotak cut enabled him to become a world-class investment bank with a marquee name on the door.

The two deputies

Dipak Gupta, Executive Director, is known to be the second-incommand. He came on board in 1992 from AF Ferguson’s Calcutta office. Has the enviable distinction of having run each and every business in the group.

Jayaram, also Executive Director, came on board in 1990, took on the responsibility of setting up the car finance business, ran the brokerage (when it was a JV with Goldman), then took on a broader role of seeding new businesses; also took charge of wealth management and international operations.

In the early ’90s, Kotak made a trip to the Goldman office on Wall Street where he met Mark Evans, who was to head the just-opened Hong Kong office. A year later, Kotak caught up with two Goldman Partners, Jon Corzine and Hank Paulson (before both went on to head Goldman), over dinner. Both wanted to know more about India; Kotak promptly invited them over. That’s when the seeds of a collaboration were sown, reminisces Kotak.

“They were keen because India was at an early stage of development and it didn’t make sense for them to come on their own,” says Kotak. In 1996, Goldman entered into two JVs with Kotak—for investment banking and broking—providing him with much-needed capital for growth. These were the first JVs Goldman got into anywhere in the world.

The Deal Maker
As the Kotak-Goldman alliance blossomed, the consummate deal maker came to the fore, taking on the two other dyed-in-the-wool I-bankers, Hemendra Kothari and Nimesh Kampani. Besides advising the cream of India Inc., Kotak also struck some brilliant deals for his own benefit, which when you look back seem truly visionary. Consider, for instance, an investment—worth just a few crores—made in telecom, along with Hutchison and the Hindujas, when the sector was a fledgling.

A series of consolidation exercises in the sector over the past decade eventually resulted in the Kotak Group holding an 8.33 per cent stake in Hutchison Essar (now Vodafone Essar). When Kotak eventually did cash out, he did so in style, picking up a little over a thousand crore for parting with his stake. Says Asim Ghosh, former Managing Director, Vodafone Essar, and now on the board of KMB. “In the 11 years that I have known Uday, the one thing that I have concluded is that here is a risktaking visionary who is grounded in reality and runs a conservative and solid balance sheet.”

Add to that a sense of timing, and a conviction to go against the grain. At a time when the probability of an Indian business being gobbled up by a foreign partner seemed higher than the reverse happening, Kotak bought out Goldman Sach’s 25 per cent holding in his two JVs for Rs 333 crore. Around the same time, in contrast, Kothari was cashing out of DSP Merrill Lynch.

For a man who’s pretty much seen and done it all, the challenge as he enters his 25th year in business (in November) is two-fold. The first is to scale up. The second is to build an institution that will last.

Let’s start with scale, which is an imperative if Kotak has to compete with the Goldman Sachs and BoA-Merrill Lynchs of the world, which will be increasingly depending on India in the years ahead. Kotak Mahindra Bank can either resort to furious organic growth, or it can acquire another bank.

Both are unlikely options—the first won’t happen because that’s not the group’s style (growth without value is meaningless, is the common refrain amongst the top team); the second option is improbable simply because there aren’t too many acquisition targets out there. But there is a third route, says Kotak. “To build an integrated financial institution that has a bank, an insurance arm, a mutual fund, all of it.”

At the heart of this model is Kotak’s belief that the transition of the Indian saver into an investor has begun. So the key opportunity—and challenge—in the years ahead is to be in a position to serve the customer’s savings as well as investing needs. What’s more, Kotak contends the fact that he became a bank last works to his advantage (visà-vis competing banks and financial services outfits who are trying something similar).

Kotak calls this a shirshaasana, using the analogy of the yoga posture in which the body is inverted. “We understand the investor’s psyche,” he points out. “Institutions need to provide the right mix to the investor, be it debt, commodities, or equity. In fact, disservice is meted out to customers when banks just keep the customers’ money in savings accounts.”

That task of pampering the saver will keep Kotak and his A team busy in the years to come. But will that be enough to keep the bill discounter who morphed into a deal maker who morphed into a banker going? The way Kotak sees it, the individual today at the group is becoming less significant in favour of the institution. It’s here that the team Kotak has built assumes significance—people who’ve been with him virtually from the beginning and who keep finding new opportunities for personal growth as the organisation keeps adding new arms.

“It’s a place that gives you freedom to be a professional and an entrepreneur in your own right. Once you take up a business, then it’s your baby completely,” says group CFO Jaimin Bhatt, who came on board 14 years ago. Dipak Gupta, Executive Director & Head of HR, KMB, believes that it’s the complementary skills set of these professionals that has been the binding factor. “We have all kinds of people— the Brahmas who are business creators and innovators, the Vishnus who are the maintainers who grow the business, and the Maheshwars who challenge every thing,” explains Gupta.

In the ’90s, Kotak was known for his penchant to poach, but these days attracting bright and energetic talent may be a challenge—not just because of the increasing competition but because people may be wary of breaking through in a business dominated by old hands. Are such fears misplaced? Vikram Sud, a Citi banker of 20 years who joined the group as COO recently, thinks so.

“The fear of being accepted in a team that was around for so many years did come to my mind. But it hasn’t been difficult so far,” grins Sud, whose mandate is to introduce banking services such as cash management and centralise the back-office operations. Other prominent “outsiders” to join up include Subrat Pani in credit cards (he came from ICICI Bank) and Aruna Rao (from Polaris), who heads technology.

Kotak has a simple explanation for people not leaving the firm. “If we like people, we do what we can to be with them for a long time.” He gives the example of Head of I-banking Falguni Nayar, who came on board in 1993. In 1995 her husband Sanjay Nayar was posted to London by Citi. Falguni tagged along—and set up Kotak’s London office.

A few years later, Sanjay was posted to New York. Falguni went along—and set up Kotak’s New York outpost. Recently, Sanjay left Citi to head private equity firm Kohlberg Kravis Roberts’ (KKR’s) Indian operations. That would suit Kotak just fine. He’s after all in the best country in the world and would want Falguni—and indeed all his other key people—to be in the right place. At the right time.