We will close MF, microfinance buyouts by December-end, says Essel Finance

With more than two decades of hands-on experience in banking, asset management and i-banking, across banks and financial companies such as Reliance Capital, ICICI Bank, Lloyds Finance and Dhanlaxmi Bank, Amitabh Chaturvedi is now building a new financial powerhouse in Mumbai. The managing director of Essel Finance Management LLP, a part of the Essel Group, discusses at length his plans, business models and new avenues for expansion, with Ashish K Tiwari and Anto T Joseph.

Given the overall business environment in India, do you think global players are likely to make investments here?
What we see in the last one year is that there is a huge improvement as far as 'Brand India' is concerned. Earlier this month, we were in London participating in a summit by Global Alliance Partners. From our meetings with people there from different nationalities, we could clearly sense that there was a huge excitement about India in the area of exploring partnerships or setting up a shop here. For instance, we met a gentleman from a gold mining company having mines in Ireland. Given the fact that India is a big consumer of gold, he was keen on exploring a long-term contract, equity participation as well as possibilities of some firm buying their gold mines or the mining product thereof. So overall, I can say there is huge positivity about India. However, I think it would take another year or two, if not more, for money to start flowing into the market. While it is unlikely that we will overtake China in the next 5-10 years, I don't see a reason for global players not to establish presence in the Indian market. Among potential areas of interest are sectors like power, financial services and defence.

Is the excitement seen after the new government was elected in May 2014 still palpable?
The financial services segment was one industry that saw huge level of excitement immediately after the formation of the new government. That's because this industry calls for capital investments and one could see very quick results unlike the manufacturing sector that has a long gestation period. The asset management business saw good participation from foreign companies either investing directly or giving a mandate to Indian fund houses for managing their money. This was clearly reflected in the way the stock market performed thereafter. Linked with the asset management segment is the broking industry which led to significant activity in the area of margin financing. This was followed by the India consumption story, as a result of which, we saw huge amounts of money from non-banking financial companies (NBFCs), micro-finance companies, housing finance companies, banks, etc., getting into the hands of the end consumers, primarily retail and small and medium enterprises segment (SME). This was reflected in the books of micro-finance companies that saw a significant jump in lending activities – from Rs 100 crore to Rs 300 crore – in a year or so. Corporate sector lending continues to be a big issue for a lot of financial institutions. So it's this 80-20 situation wherein there is huge excitement in the retail category, which is 20%, and very little or no action in the corporate segment that constitutes 80% of the lending market.

Insurance sector hasn't seen much activity...
Yes, it is because the insurance sector is also linked with either stock market or risk coverage there. As a result, we haven't seen any new player in this industry. Besides, even volumes haven't jumped up in this space. My sense is that there will be a change in volumes post January, i.e., the last quarter of the current fiscal. On the industry part, I'd say between 2000 to 2006 India witnessed a good number of global financial services players – HDFC Standard Life, ICICI Prudential, Birla Sun Life etc. – starting business or getting into a joint venture in India. However, thereafter i.e., 2006 to 2014, we haven't seen any new big joint venture – no more partnerships or joint ventures. My view is that we will see some action in this space with new partnerships and joint ventures getting inked. So players like Wells Fargo, Santander Bank, Capital International, etc., will now look to enter India because they now believe India is the story for the next 20 years. I think, you may see a foreign financial services giant doing a JV and Essel could very well be one of their equal JV prospects. I say this because we can give them reach, visibility, good governance, multiple industry exposure, etc. This is likely to bring in a huge amount of capital and lead to deeper penetration of mutual funds, insurance, broking, micro-finance, etc. Overall, last one year was a planning phase. Next two to three years, you should see giants come into India.

But aren't the insurance sector JVs going through a tough time? There seem to some instances in the market about companies having trouble and looking to exit their respective partnerships.
One or two insurance companies exiting cannot be seen as a sign of weakness. There are JVs that are bleeding or making some profits, but there is also a change in the mindset happening. This could be because of the regulator or capital compulsion, as a result of which you will not see a nationalised or an Indian bank doing an insurance JV now. It is true that there could be entities looking to exit, one needs to understand that insurance is a long-gestation business requiring huge amount of capital. If a business can sustain the first seven to eight years, I think they will be able to make decent money. Players who entered the market with a short-term (four or five years) view will witness some turbulence. I think either an Indian company will take over some of these troubled players or an international giant will acquire them to foray into the Indian market. So public sector banks having joint venture in an insurance company will exit owing to regulatory compulsion.

Will Essel Finance look at acquiring any of the insurance JVs currently looking to exit?
We certainly can. One of the things we have decided is that we will not start a life insurance business because it's a capital intensive business with a long gestation period. I could possibly set up 15 other businesses by using the capital required to start a life insurance venture. But if something is available in the life insurance space, where phase one of the insurance company is over, we certainly can look at it. As far as general insurance is concerned, it being an annual business model, we will not get into that business.

How is your expansion plan taking shape at Essel Finance?
I'd say we have completed phase one in terms of whatever we'd planned two years ago. We have established Essel Finance as a key market player with the potential to be among top five or seven companies in India over the next five years or so.

You'd earlier mentioned about getting into the white label ATM business. What is the progress on that?
The Reserve Bank of India has said that the licensing window is closed with six to seven licenses allotted already. However, apart from Tata's Indicash (with over 5,000 ATMs), none have really done anything on the ground level. Other license holders have probably not launched their business because this is a capital intensive business and requires investment to the tune of Rs 2.5 lakh to Rs 3 lakh per ATM. And until the ATM reaches a volume of 80 transactions per ATM per day, it incurs losses. Hence, the company will have to ramp up the volume at the earliest possible. We are very keen on this space and feel it's a last mile connectivity for any financial institution. So be it a payment bank, small bank, nationalised bank, a money transfer service provider, etc., ultimately, somebody has to give money to the consumer and the only place available is either a branch or an ATM. Essel has the financial power and capability to run the business and should be given the license (either acquire an existing one or a new license) to run the network. We are well-equipped to run an ATM network in a much more cost-effective manner than any other nationalised or private bank in the country. In fact, we have already worked out a very unique model with an ATM manufacturer being a JV partner. This apart, our own network of premises by Zee Learn, Dish TV and ItzCash can be used to set up the new generation ATM that don't really require the kind of space existing ATMs are housed into. Current response from RBI is to wait for the license window to open, so we will have to just wait and watch.

What are your immediate plans for expanding business and adding new verticals?
We have three specific companies in mind as takeover targets – in the space of mutual fund, micro-finance and digital payments. We have told them about our interest in picking up majority stake in their companies. We will pick up 60% stakes in two companies to start with and increase the shareholding gradually. We should be in a position to close the acquisition in mutual fund and micro-finance companies by December-end. Regulatory approvals will come by February-March and by early next fiscal, we should be able to start these businesses under a new name. By the same time, we should have also received licence for a housing finance company. So launching these three businesses by April 2016 is our immediate priority for now.

How much will you invest for setting up the three new businesses?
For mutual fund and micro-finance, we could look at investing anything between Rs 85 crore to Rs 90 crore. This will give us a majority stake with our branding as both businesses will carry the Essel Finance name. For the housing finance business, it's a never-ending story. If we infuse Rs 100 crore, we will be able to create a book of Rs 900 crore.

For the housing finance business, who will be your target segment?
ill you also look to fund buyers of affordable houses developed by Essel Group companies?
The housing finance company will target the affordable housing segment where housing units will be priced between Rs 35 lakh and Rs 40 lakh. These projects will be in the outskirts of the top 10 cities. In that process, we may look at group companies as well. They are separate verticals constructing affordable houses and I will have the comfort level that these houses will actually get built and projects will be completed in time.

You are raising a new real estate fund. What is the size of the corpus and by when will you close the fund raise?
We have a Rs 210 crore AIF-I for investing in the real estate sector. Money has been raised and deployed already. We are now doing Fund-II, for which an application has been made to the Securities and Exchange Board of India (Sebi) and we should have the approvals in place by January. We plan to raise Rs 300 crore in Fund-II by mid-February 2016. The fund's life-cycle will be four years extended by another four years. Our fund follows the pure-debt model and has nothing to do with equity, mezzanine funding or profit sharing models. I, as an investor, will tell the developer to create a secured non-convertible debenture (NCD) to which my fund will subscribe to. And against Rs 100 worth of NCD, there is security worth Rs 250 attached to the NCD. Irrespective of whether the developer is able to sell any apartment or not, the developer will have to pay me interest on a monthly / quarterly basis. In case of any payment default, I have the right to sell the developer's unsold inventory at half the price.

How is the internal rate of returns (IRR) scenario with real estate funds of late?
Investing in real estate is very risky and that is why the reward is in terms of IRR of over 22%. If it wasn't so risky, the IRRs will be just around 13% to 14%. Having said that, there certainly is some correction that's started to happen in the interest rates associated with real estate funds. For instance, in Fund-I we had an average IRR of 22.75%. However, in the case of Fund-II, I don't think average IRR will cross 22%. So in the real estate category, there is 1% reduction in the cost of borrowing for developers. In fact, we have already communicated to our investors that IRRs in fund-II will be sub-22%. The corpus for this fund will be raised only from domestic high networth individuals (HNIs) contributing Rs 1 crore and above. Our sweet-spot for this fund will be Rs 30 crore to Rs 40 crore, and through these placements, we are confident of generating an IRR of 22-23%. We have very strong valuation and documentation process and if are able to monitor the developers cash-flow, we can very confidently generate the said IRRs.

Is there any change in the management fee and carry percentage as well?
In our Fund-I it was 1.5% plus 20% carry. However, that is set to change based on feedback from investors about carry charges in a fixed income product. Accordingly, in the case of Fund-II, we have made it a fixed fee of 2.25% with no carry. If I am able to generate 22% for investors, there will be a deduction of 2.25% and the balance 19.5% plus some other expenses, say 19% will go back to the investors. Now that we have been given pass-through by the government, we don't deduct any tax. As a result, the investors have the freedom to do their tax planning.