I suppose it was only a matter of time. The parting of ways between Nimesh Kampani's JM Financial and Morgan Stanley does not come as a surprise. Merrill gained control of DSP in December 2005, buying up 50% of promoter Hemendra Kothari's stake. (Kothari continues as Chairman, though). Kotak Mahindra and Goldman Sachs broke up in March 2006, with Kotak buying out Goldman's equity stakes in two JVs. And now this.
Morgan Stanley will gain control of the institutional broking joint venture by buying JM's equity holding for $445 mn. JM Financial will have the investment banking arm to itself by buying Morgan's equity stake for a nominal sum of $20 mn.
Why have the big international firms decided to go their own way? Because the Indian market is big enough now to get their full attention. When Merrill, Goldman and Morgan first entered the market, investment banking and institutional broking were still quite small. Investment banking was mainly about placement of equities for Indian firms. That required distribution capability. The market volumes did not quite justify investment in distribution by the international majors. Besides, local firms had the relationships, they could open doors.
Now India has happened. Institutional broking is booming. It is dominated by the international customers- FIIs- with whom the big investment banks have long-standing relationships. They don't need Indian firms to hold their hands.
Investment banking is also taking off and it too has a big international component- overseas acquisitions, ADR/GDR issues, advisory services to foreign firms wanting to enter India. The international firms have by now established relationships with Indian firms. They don't need a local partner.
For foreign firms entering an emerging market, there is a mismatch between the business potential and top management time. The market is often too small to justify top management time. When a firm enters on its own, time is required because regulatory problems can seriously harm a firm's reputation. It is better, therefore, to come in as a junior partner to a trustworthy local firm. You get to know the market and you establish relationships without having to spend too much effort.Once the market reaches a certain size, the business potential justifies an independent venture. Clearly, the Indian market has reached that point.
Is this finis for Indian firms? Not at all. They will not be big in institutional broking but they are well positioned to capture the burgeoning retail market. Not just for broking but for wealth management and distribution of financial products. So, we will see the market segment itself. Institutional broking and international investment banking mandates will be dominated by international firms. Local firms will loom large in domestic investment banking and retail broking. There is room for both as India grows and grows.
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Kampani's ideas are excellent and will real fruits.
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