Has India become a bigger part of Asian investment bank's wallet share in terms of fees?

Jhaveri: The Indian market has grown considerably. If you look at the investment banking fee income wallet this year versus last year, it's safe to assume it has grown by 40% to 50%. The increases are primarily from the public equity markets and the M&A business. Critically, there has been more cross-border M&A, both inward and outbound - in the latter case with Indian companies finally realizing their global aspirations.

The latter trend is being driven by the fact that over the past six to seven years, there has been a huge deleveraging of corporate India and companies are now running at capacity - and meanwhile the cost of money is cheap. Indian companies thus have capital and are able to fulfill their aspirations via outward M&A. So M&A definitely represents a bigger amount of fee income.

If you look at the amount of capital raised from the equity capital market, the volumes show a major increase from last year.

Is the equity capital market side being driven by government divestments?

On the volume side, yes, but on the fee side no - since the fees on the government side tend to be much lower. But if you take the money raised on the public capital market this year, it's $8 billion to $9 billion. So even if you take $3 billion to $4 billion out from government sales, you're still talking about a significant chunk coming from the private markets.

The convertible bond market also seems to be vibrant. Is that another factor?

Last year Indian companies raised $100 million from the convertible bond market. This year it is in excess of $1.5 billion. That's being driven by interest rates - five year yields for Indian companies went as low as 3%. And in the first half of the year, some companies saw their stock market valuations go up 150%. So it was a great time to raise equity-linked bonds. The convertible market was hot and Indian companies were getting five year money practically for free. And since convertibles had mainly been coming from Taiwan, investors were keen to get something different and diversify into Indian names.

Towards the middle of last year sentiment really changed on India. What do you think drove that positive sentiment change?

Sentiment is such a difficult thing to call. If you look at the reverse, sentiment changed again dramatically, and for the worse, in May. Nothing changed fundamentally about the economy - except the fact that you had a new government. But it's really difficult to answer the question about last year. The same investors who were not willing to buy when the index was at 4,000, were pouring money in at 5,500-6,000 only six months later. Sentiment tends to be a self-fulfilling prophecy that suddenly takes wings of its own.

What may have been the trigger for the change of sentiment last year might have been manufacturing. In the first half of the year, Indian industry came into its own for the first time in six or seven years. You had growth, profitability, and capacity utilization.

The other two factors were infrastructure spending on roads, and retail credit. The penetration level of retail credit in India is tiny, but the low cost of money has really driven growth in this area. The banks saw this huge opportunity to diversify their portfolios away from corporate lending and took it. The demographics really play to this trend, with 40% or so of the population below 30 years old. That is a huge demographic in terms of spending.

There has been some big improvement in India's roads. What is the situation with the power sector?

The new electricity bill is a huge plus, but execution on that has not even begun. Private sector investment into power needs to take off, and that includes foreign private investment into power. That has not taken off and frankly the whole Dabhol situation has held that back.

Will the Indian government continue with reform and privatization?

The answer is yes. But privatization can be done in different ways. Taking large public sector companies and selling control - I don't see that happening. But you can sell a percentage of the company in the public market and that will raise money for the government. There are different ways to skin a cat. The government has to play a tight balancing act with its coalition partners but the budget deficit is going to continue to drive divestment.

Is India's long term growth rate now 7%?

There has been a bit of a setback this year with the monsoon and its impact on the agricultural sector, but I think 6-7% is not a problem now.

What's your view on the Reserve Bank of India coming out with new bank ownership guidelines on whether foreign strategic buyers can own local banks? It seems very confusing.

The finance minister made some recent comments on this. It was pointed out that these were not really guidelines. It was a draft and is a work in progress. The RBI has obviously got a lot of feedback and will sit down with the government to discuss this. The government is alive to the fact that foreign capital is needed. The previous finance minister had said foreign banks could own up to 74%, and I personally believe this is possible. This is a work in progress and in releasing the draft the RBI has raised some valid concerns about Indian ownership of banks.

Are you bullish that theinvestment banking fee wallet will go up in 2005?

Obviously, it is not going to go up 50% two years running. But my sense is it could go up 25% next year, barring the unforeseen.

In that respect, I feel Citgroup's business is well placed. This has been a great year for us. We have executed key M&A transactions for Flextronics, IBM, Infosys, Wipro and ONGC as well as led equity deals such as the convertibles for Tata Motors, Indian Hotels, Zee Telefilms and the placement of the $207 million Warburg Pincus stake in Bharti Televentures. We have also executed 16 fixed income transactions including a $300 million bond for IDBI and a $300 million bond for Export Import Bank of India.