Goldman Sachs re-negotiates Indian JV

US investment bank set to increase stake in Kotak Mahindra Capital and Kotak Securities.

Goldman Sachs is said to be close to finalizing an agreement with the Kotak group that will give it equal status in its two Indian joint ventures. The move follows a sharp up-tick in deal volumes on the subcontinent, which has made India one of the most important investment banking markets in Asia.

This growth has co-incided with a regular review period for the two joint ventures, which were first established in 1995. At this point Goldman took a 25% stake in Kotak Mahindra Capital, an investment banking joint venture and 25% in Kotak Securities, a broking joint venture. The remaining 75% in both JV's was held by Kotak Mahindra Finance, founded in 1985 by Uday Kotak, one of India's most high profile entrepreneurs and king deal maker.

Since then Goldman has passed through two review periods - in 1999 and 2003 - without increasing its stake. At both points the US investment bank is said to have felt the strike price it needed to pay to increase its stake was not justified by the business opportunities in India at that time.

In 2003 the review period was shortened to two years and since then much has changed. In 2004, Indian companies raised $10 billion through the equity markets, more than the whole of the previous nine years combined. A similar pattern has unfolded in 2005, with more deals from India during the first five months of the year than China.

Similarly broking volumes have shot through the roof and bankers now predict a large increase in both in-bound and out-bound M&A, as Fortune 500 companies discover India and local companies develop global footprints.

It is not certain how much Goldman will pay to increase its stake in the two joint ventures. In 1995 it is believed to have paid $14 million for its 25% stake in Kotak Mahindra and a similar figure for Kotak Securities.

An agreement between the two entities on the securities side is said to have now been formulated. Goldman will increase its stake to 50%, while Kotak will ring fence the powerful retail broking arm in which Goldman has never had a global business.

An agreement on the investment banking side is expected shortly, but has lagged the securities side because of the complications created by Kotak's increasingly dominant commercial banking interests. In 2003, Uday Kotak consolidated all of his financial empire under the umbrella of Kotak Mahindra Bank, which is listed on the Bombay and National Stock Exchanges.

News that Goldman is set to become an equal partner with Kotak may come as a surprise in India, where many bankers thought the US investment bank was on the verge of walking away from both joint ventures and setting up with a new partner. However, the market soundings it had been making with other entities now look like negotiating leverage with Kotak.

It remains uncertain what the joint ventures will be called once a new agreement is finalized. But if Australia and China are good precedents, then Goldman will insist on its name appearing prominently and probably first. This will come a blow to its local rivals who have long mocked its lack of brand name among Indian clients.

Moves to sort out the Indian business mark a logical next step for Goldman now that it has finalized its JV's in Australia and China, where it respectively operates Goldman Sachs JBWere and Goldman Sachs Gao Hua.

Indeed, India is becoming increasingly important to Goldman's own internal operations since the group has just spent $30 million establishing a services centre in Bangalore. About 700 to 800 Goldman employees are expected to be based there by the end of the year, making it one of the firm's biggest offices worldwide.

Foreign investment banks currently operate three JV's in India. Alongside Goldman, rivals Merrill Lynch and Morgan Stanley both have joint ventures that were established around the same time - DSP Merrill Lynch and JM Morgan Stanley.

Some question whether these couplings have much of a future as India becomes an ever more critical market for investment banks to master. A full analysis of Indian investment banking - its profit potential and viability of the JV structure - is the cover story of the July issue of FinanceAsia magazine, published tomorrow. For additional copies, please contact Naveet Singh at [email protected].