India's capital markets are hotter than ever. What is prompting this issuance and is it sustainable?

The increasing use of capital markets by India inc is in part due to the growing trend of offshore M&A from India and re-emergence of capex for catering to the growing local demand. India is home to some world-class companies and they are increasingly looking offshore to diversify their portfolios. So far this year, Indian companies have announced 47 overseas acquisitions, worth about $2.2 billion.

This compares to the record $3.7 billion or so for foreign acquisitions in 2005 and thus far 2006 is shaping up to be another record year for offshore M&A from India. Many of these M&A transactions need to be financed and thus many are being funded in the capital markets, both domestic and international.

Indian issuance continues to be a regular feature of the capital markets and with continued strong investor interest in India; these transactions receive strong sponsorship both at home and overseas. This was underlined by a recent IPO where Citigroup was a joint bookrunner for Reliance Petroleum and raised approximately $31 billion in demand.

Also last week Citigroup was joint bookrunner on the largest Indian block trade to date for Indian Oil Corporation's ONGC sell down. Clearly, the momentum is still there, and, we do not see it diminishing anytime soon. So far in 2006, Indian companies have raised about $7.7 billion from equity issuances compared to $14 billion in 2005

India offshore bond issuers seem to be increasingly turning to the yen market. What is the reason for this?

Japanese interest rates remain close to zero and thus for Indian companies who pay withholding tax, it can be cost effective to pay tax on coupons in yen where interest rates are near zero. Also there is an efficient yen/dollar swap market making it cost effective to swap proceeds from yen to dollars if required.

There is also renewed interest from Japanese investors looking for alternative fixed income product from Asia and issuance from the likes of Reliance Industries in March via a euroyen issue and a samurai from the Export Import Bank of India in February underlined this. The dollar market though remains the preferred choice for size but yen is an increasingly viable funding tool for Indian companies who want to raise cost effective capital.

How would you like to see India's local bond market develop further?

India's local corporate bond market is one of Asia's largest. But size is not everything. Issuance is concentrated around a handful of big issuers and investors are crying out for greater diversity. We would like to see a wider spread of issuers both onshore and from international names. Some of the world's biggest borrowers should also be assessing their options in this local market but there are still plenty of regulations in place.

Regulators have done a fine job in helping develop the market but perhaps the time is right to ease issuance restrictions and make it easier for foreign companies to issue in rupees and even swap the proceeds if required.

Most local currency markets around the world allow this and it can help the development by offering greater choice to investors. Major fixed income investors are increasingly looking at Indian rupee bonds too and as far as I am concerned, the more of this the better, as it will help improve liquidity and the secondary trading of paper.

How important is India to Citigroup on the investment banking side?

India is one of Citigroup's most important markets in Asia-Pacific. India is home to some of the world's leading companies, and, as discussed above, they regularly need advice and financing solutions. We do not give out country revenue numbers but I can tell you that India is one of Citigroup's biggest investment banking businesses in Asia.

We have grown the India business organically, by investing in people and distribution linkages. Citigroup's banking relationships across the country are second to none. We opened our first office in 1902 and have a customer base of over 1,000 large corporates, 22,000 SMEs and over 5.5m retail customers. Citigroup is committed to India.

This local presence ensures we have an active dialogue with Indian companies. Thus, when Indian companies want investment banking advice ranging from anything from M&A services to financing solutions, Citigroup is a natural partner. We don't fly in bankers from Hong Kong. We are here day in, day out, on the ground.

Also thanks to Citigroup's global presence, we have the widest product suite in India, which means solutions can be offered in debt, equity or advisory in the local or offshore markets. A local presence with a global platform is how I like to view Citigroup's Corporate and Investment Banking franchise in India. We are increasingly looking and feeling like a local house with the global capabilities that comes with the Citigroup franchise.

What areas of growth do you envisage in the coming years in Indian investment banking?

As India continues to expand overseas, advisory work and international and domestic financing will continue to expand. Yet besides traditional investment banking activities, new areas such as commodities, distressed assets, leveraged finance and private equity will experience big growth in the years ahead.

The SME sector also offers huge opportunities and this is a key focus area for Citigroup. These entrepreneurial companies have the potential to be the Tata's and Reliance's of tomorrow. It is a crucial part of our business to work with these SMEs to help them develop and grow, as they are the next generation of companies that will maintain the Indian growth story.

You have grown your Indian investment banking business organically. Other banks have grown via JVs in India. What approach works best?

I don't think one size fits all and different banks have, as you said, taken different approaches. It is worth noting however that some banks are also now pulling out of these JVs and are looking at the organic approach, which is the route we chose. I do not really want to comment on rival's JVs but I will give you some views on our experience.

Organic growth has given us the ability to recruit, train and develop the highest caliber professionals to serve our clients. We have been in India for over 100 years and employ over 15,000 people in India. Citigroup in India has the relationships, and, the global investment banking platform to offer client solutions. It was a tough decision to make to grow organically but we had the relationships, and, we had the infrastructure so it seemed natural to build on that rather than buying someone and integrating them.

The results so far speak for themselves. Our Indian investment banking franchise is stronger than ever, thanks to the integrated corporate and investment banking model. We are a leader in the league tables and our pipeline is fuller than ever. This is not a business to rest on your laurels and we will never be complacent. But I doubt we could have achieved as much as we have, if we had taken the JV approach.