RIL wades into financial services with DE Shaw

Reliance Industries (RIL), India's biggest company by market capitalisation, and DE Shaw group, a global investment and technology development player, on Sunday announced an agreement to establish a joint venture to build a "leading financial services business" in India.

"The DE Shaw group is a natural partner for Reliance. Together, we look forward to participating in the growing Indian financial services sector," Mukesh Ambani, the chairman and managing director of RIL, said in a statement issued jointly by the companies.

The partners, however, were not forthcoming on details of the venture, such as stake holding and areas of interest.

This is Ambani's second major investment in a sector where his younger brother, Anil Ambani, has a presence, since the scrapping of their non-compete agreement in May 2010. The brothers had entered into that agreement during a family settlement in 2005.

Earlier, RIL had entered the broadband telephony business through subsidiary Reliance Infotel Ltd, which is slated to launch operations by the year-end. Reliance Infotel won a licence to roll out broadband wireless services in 22 circles for Rs12,847.77 crore.

But will Mukesh Ambani enter all the areas of financial services business that his younger brother is present in?
"He wouldn't compete in all the businesses," says Abizer Diwanji, executive director at audit and consulting firm KPMG. The JV may exclude retail broking, wealth management and asset management.

Knowing Ambani's penchant for building gargantuan projects, it is unlikely that his foray into the financial sphere will be limited to private equity, hedge funds and funding distressed businesses and other areas that D E Shaw has made a mark in.

Started in 1988, DE Shaw had approximately $20 billion in aggregate investment capital as of March 1, through offices in North America, Europe, the Middle East, and Asia. It has expertise in financial segments that are slated to open up and offer a huge potential in India, in line with a maturing economy boasting a steady GDP growth of 8-9%.

DE Shaw is not new to India, having begun operations here about "fifteen years ago," said Lou Salkind, a member of the DE Shaw group's executive committee.

Starting with a small presence in 1996, focused on information technology, it currently spans a wide range of investment activities and has a roster of 700 employees in its Hyderabad, Gurgaon (Delhi) and Mumbai offices.

"We believe this joint venture allows us to apply to the Indian markets our historical success in investment management and market-making, and that strengthening our presence in India and deepening our relationship with Reliance benefits our business globally," Salkind said.

The joint venture will incorporate DE Shaw's "investment and technology expertise" with Reliance's "operational knowledge and extensive presence across India" to offer a "comprehensive array of financial services" to the Indian marketplace, the statement said.

Ambani's close confidante Manoj Modi is said to have led the negotiations for the Indian side.

DE Shaw is widely recognised as a pioneer in identifying underpriced and overpriced securities, to manage various forms of portfolio risk, and to reduce the cost of transacting in various financial instruments.

RIL may use this expertise to predict and act on commodity and currency futures, which can impact a company of RIL's size in a big way.

"Niche businesses such as wholesale debt financing, mezzanine financing and equity financing are nascent in India, but can become very large in the future," said Diwanji.

"World over, debt business is larger than equity and DE Shaw has the expertise to offer innovative and alternative solutions."

"This joint venture will draw upon the core competencies of both firms to develop a platform that can serve the growing needs of Indian companies and individuals," said Anil Chawla, a managing director and head of the DE Shaw group's private equity activities in India.

RIL with cash profits of Rs27,933 crore, or $6.2 billion, needs to urgently deploy cash in new areas.

Lalit Jalan, CEO of Reliance Infrastructure, part of the Anil Ambani-led group, summed up the mood in the group in a recent conversation. Asked about impending competition from RIL in the coal-powered electricity generation business, he pointed to the group's telecom foray. "Reliance Infotel's entry will only mean one more player in the sector," he said, pointing to established players such as Bharti Airtel, Vodafone, Tatas and Birlas.

But what is Ambani's ambition in the financial services business?
"Mukesh wants to set up a bank," an analyst told DNA on the condition of anonymity. "The strategy (JV) is towards it."

With the RBI stipulating sound financial experience and a good record from corporates, the joint venture could be a way to demonstrate the group's capability to build a financial services business before applying for a banking licence.