BNP Paribas
As India becomes an increasingly attractive environment for foreign investors, demand for securities services is more competitive than it has ever been. Subsequently companies are seeking to become expert in varying products in order to differentiate themselves from their competitors. International banks are entering into partnerships with domestic institutions as a means of breaking into the local market. This is encouraging the growth of infrastructure on the ground.
All international banks want a slice of the cake. The biggest challenge is to differentiate your product from your competitors and try and win clients that way
Although India was not immune to the financial crisis, stability in the region continues to return. The country had the second highest growth in the world among major economies with 6.5% for 2009, according to the World Bank figures. This has helped to attract companies looking to expand their footprint in Asia. Custody services have benefited from this trend as new players have entered the Indian market.
In March 2010, BNP Paribas Securities Services (BNP Paribas SS) was granted a custody licence by the country’s regulator, the Securities and Exchange Board of India (Sebi). This allows the company to provide local custody services in addition to the listed derivatives clearing services it already provides from Mumbai.
Since March it has been training staff and ensuring all global IT systems are adapted effectively to the Indian market. Pierre-Alexandre Thome, head of BNP Paribas SS in Mumbai, explains that client demand has driven the extension to the custody market.
“We have had queries from our present clients looking to invest into India so we wanted to optimise on the potential opportunities. We expect to end the year with three internal clients,” Thome says.
He adds that BNP Paribas SS’s objective for the next one to three years is to leverage on the bank’s global custody operations in order to obtain significant revenues within the Indian market. It also hopes to attract a sizeable number of external foreign clients, a feat Thome believes is achievable.
As part of its strategic development in India, BNP Paribas SS also partnered with Sundaram Business Services (SBS) at the beginning of 2009 and is now operating two joint ventures from Chennai. Sundaram BNP Paribas Fund Services delivers fund administration and fund services to Indian asset managers and institutional investors.
BNP Paribas Sundaram Global Securities Operations provides transaction processing and middle-office operations, a platform to support Asia-based BNP Paribas SS locations. The joint venture, 49% owned by BNP Paribas SS and 51% owned by SBS, adds to an existing strategic partnership between the two groups established in 2005.
Thome says the joint-venture between the two companies brought together BNP Paribas SS’s global capabilities and technology and SBS’s local expertise and knowledge. “BNP Paribas SS has enjoyed a successful relationship with SBS for a few years now, so it was almost an evolutionary move. The two separate entities filled each other’s gaps where they needed filling and the move has proved very successful, resulting in pleasing revenues,” Thome says.
He adds that the BNP Paribas group views the Indian market as one of the most exciting and rapidly developing markets in the world with substantial growth potential. He hopes the new custody operations will enhance this further.
BNP Paribas SS is a relative latecomer to the Indian custody market. At present there are around 16 registered custodians in India, although not all are active. Most global names are on the ground including the big name players such as JP Morgan, HSBC, Citi, Deutsche Bank and Standard Chartered Bank (SCB). They all service the foreign investor sector.
As India benefits from growing interest in emerging markets, foreign investment is one of the most significant drivers behind developing market infrastructure in the country.
Net inflows from foreign institutional investors (FIIs) in the financial year 2009-10 amounted to $24.6 billion, according to data from the regulatory authority Sebi. In the first week of November 2010, daily net equity inflows from FIIs amounted to an average of $711.8 million a day.
There are also encouraging signs that the market infrastructure is developing. International central securities depositary (ICSD) Clearstream is planning to roll out settlement services for clients across India shortly, in synchronisation with other emerging markets, as interest grows in the country.
While Clearstream is active in Russia and China already as an international central securities depositary (ICSD), India has not been previously connected to the network as it is a very tightly regulated market, explains Mark Gem, head of network management and a member of Clearstream International’s executive board.
The India link is still in development as Clearstream evaluates which solution to offer clients. The current accounts structure in discussion would recognise Clearstream as a global custodian in the technical but not the commercial sense, notes Gem.
“We are satisfied that this is a viable structure to proceed to due diligence which is what we’re now doing together with the authorities and business partners locally,” he notes. Gem says the Indian regulatory regime is highly complex and that the due diligence on the structure will as a result be complex and long.
Mrugank Paranjape, head of direct securities services for Deutsche Bank in Southern Asia, says the Indian market is competitive, particularly in the area of foreign investment, with many big custodians actively competing for business.
But there may be more than enough work for all as the country is attracting many offshore investors wanting to put money into emerging domestic funds, including mutual funds. “All international banks want a slice of the cake. The biggest challenge is to differentiate your product from your competitors and try and win clients that way,” Paranjape comments.
The mutual fund business is especially lucrative for securities services providers, given its rapid growth. The domestic mutual fund industry was worth $2,242 billion in 2009-10, an increase of 84% over the previous year, according to Sebi. FIIs still make up a small part of that business, but it is increasing with the rise in foreign investment. In 2009 FFIs and non-resident Indians contributed 5.5% to net mutual fund assets, according to Sebi.
Competition for mandates is particularly fierce because once awarded companies tend to continue working with the same institution. Paranjape says it is extremely difficult to switch mandates in India. It is very rare for companies to change custodian once they have made their initial choice.
As a result global banks such as Deutsche Bank are cultivating areas of the market in order to stay ahead of the game. For Paranjape, developing the Indian mutual fund business, and attracting private equity clients, has been of the greatest focus over the past two years.
Paranjape notes that Deutsche Bank has an approximately 27% market share in the mutual funds custody business and around $135 billion of assets under custody in India.
SCB has also established its own area of market share. In August 2007 the bank entered into a strategic partnership with Securities Trading Corporation of India (STCI), acquiring a 49% stake in UTI Securities, an Indian brokerage house.
Prakash Guptan, head of investor and intermediaries’ transaction banking for SCB in India, says the acquisition enabled the bank to grow its equity capital and broking business. Consequently SCB now holds a market share of around 12% in equity capital broking. It also has approximately $54 billion of assets under custody in India.
The bank is building on its Indian business through another acquisition, after entering into a deal in April to acquire Barclays Bank’s African custody business. The agreement is expected to be completed by the end of the year.
SCB in India will benefit from the African acquisition as it includes direct custody capabilities from Mauritius. According to Guptan, over 40% of capital flows in the fund market into the Indian market come from Mauritius. This includes hedge funds and family offices that are registered in Mauritius and seek to invest into India due to its rapid growth opportunities.
“Having capabilities in Mauritius will mean that investors who want to come into India can now do so directly through us. We will now be able to cross-sell India custody services,” Guptan says. He believes the Barclays acquisition will differentiate SCB significantly from other players.
In May 2010, the bank also launched its first-ever Indian depositary receipt (IDR) offering. SCB issued R240 million ($5.38 million) worth of IDRs with every 10 representing one share of Standard Chartered. The IDRs were allocated at R104 ($2.33) each. Guptan says the IDR offering was an “anchor investor” portion of a $588 million IDR issuance by the bank.
The issue of IDRs are the first of its kind for India. Like American or global depositary receipts, where Indian companies are able to raise resources overseas, IDRs enable foreign companies to do the same in India.
The issuance of IDRs is not the only initiative being used as a driving force for investment into the country. An increasing amount of investors are now seeking to apply for initial public offerings (IPOs) into India through the application supported by blocked amount (Asba) route.
The Asba facility was initiated by SEBI in 2008 and has recently gained pace as the economy takes adantage of the general recovery from the global recession. The Asba facility allows an investor to apply for public issues by using the blocked amount facility. The funds leave the investors’ bank account only when shares are allocated, explains Ravikanth Konteti, head of JP Morgan Worldwide Securities Services in India. The company holds around $60 billion of assets under custody in India.
According to Konteti, 50% of qualified institutional buyers have invested using the Asba route. “This recent movement has clearly brought efficiency to the market place. Funds remain in the investors account and the reduced hand-offs between various market participants enables a much shorter timeline for completion of a public issue,” Konteti says.
India’s progress is not likely to slow any time soon. If securities services providers specialising in new products continue to enter the market and develop as they have over recent months, then they will continue to foster growth in India’s financial markets.
Source: ICFA
