Goldman Sachs Board Meeting in Laggard India Closes BRIC Cycle

Goldman Sachs Group Inc. (GS) directors converge on India this week for their first meeting in the nation, where economic growth is headed for a three-year-low and the pace of reforms has disappointed the firm’s analysts.

Chairman and Chief Executive Officer Lloyd C. Blankfein is leading a three-day meeting in Mumbai and New Delhi, India’s business and government capitals. The gathering completes trips by the New York-based firm’s board to all of the so-called BRIC nations -- Brazil, Russia, India and China -- whose rapid economic expansion has made them a priority for investment.

“What India has failed to do is to live up to rising expectations,” Goldman Sachs Asset Management Chairman Jim O’Neill, who coined the term BRICs a decade ago, said in an e- mailed response to questions yesterday. “The occasional stated desires for 10-percent-plus growth cannot be met without much bigger reforms.”

Blankfein, 57, and the rest of the board will host dinners for government officials and heads of the nation’s biggest conglomerates, including Mukesh Ambani, chairman of Reliance Industries Ltd. and India’s richest man, a person with knowledge of the event said, declining to be named as the matter is confidential. Tata Group Chairman Ratan Tata, Tata Sons Ltd. Deputy Chairman Cyrus Mistry and Kumar Mangalam Birla, who controls Hindalco Industries Ltd. (HNDL), are on the guest-list for an event in Mumbai tonight, the person said.

Dinners will be hosted in Mumbai and Delhi, with venues including the luxury Taj hotels owned by Tata Group, the person said. The 109-year-old Taj Mahal Palace & Tower in Mumbai was one of the sites of a three-day terrorist attack that killed 166 people in 2008.

Worst Year

Goldman Sachs, the fifth-biggest U.S. bank by assets, has climbed 40 percent in New York Stock Exchange composite trading this year after dropping 46 percent in 2011, its worst year for profit since 2008. The average estimate of 28 analysts surveyed by Bloomberg is for earnings per share to more than double to $11.45 this year from last year’s $4.51 a share.

The 12-member board’s meeting comes two weeks after former derivatives salesman Greg Smith wrote an opinion piece in the New York Times that blamed Blankfein and President Gary D. Cohn, both members of the board, for presiding over a deterioration in the firm’s culture. Blankfein and Cohn said most employees disagree with Smith’s assertion that the firm rips off clients in pursuit of profit and said they would investigate his claims.

Edward Naylor, a spokesman for Goldman Sachs in Hong Kong, declined to comment on the events.

‘Disappointing’ Elections

A week before the meetings, Goldman Sachs raised its outlook for India’s equity market to neutral, or market weight, from the equivalent of a sell rating. That compares with the firm’s overweight ratings for China and Indonesia.

“Expectations for government reforms to be passed this year have deteriorated,” the bank’s equity strategists wrote in the March 22 note to clients. The proposed federal budget for the next fiscal year was a “play-it-safe” move by the government, and results of state elections in the northern state of Uttar Pradesh were a “disappointment,” they said.

The 30-member BSE India Sensitive Index (SHCOMP), or Sensex, has climbed 11 percent this year, after dropping 25 percent in 2011. China’s Shanghai Stock Exchange Composite Index has risen 3.9 percent in 2012 after declining 22 percent last year.

The Lowest BRIC

India’s economy probably grew 6.9 percent in the year ending March 31, or at the slowest pace since 2009, Finance Minister Pranab Mukherjee said this month. China’s growth slowed to 9.2 percent in 2011, government data show. India’s economic expansion may accelerate to 7.2 percent in the new fiscal year, while China will grow 8.6 percent in 2012, according to Goldman Sachs forecasts.

“India’s demographics are so strong that this gives the country the chance to potentially grow at rates of 10 percent and above for the next 10-20 years, more than China and many others,” O’Neill wrote. “However, without boosting productivity, it will have no chance.”

Based on a calculation of variables for growth and productivity, “India’s is easily the lowest of the four BRIC countries, considerably below Russia and way behind Brazil and China,” he said.

The only member of Goldman Sachs’s board from a BRIC country is Indian-born Lakshmi Mittal, the 61-year-old CEO of Luxembourg-based ArcelorMittal (MT), the world’s biggest steelmaker. Mittal, who joined the Goldman Sachs board in June 2008, is worth $20.3 billion, according to the Bloomberg Billionaires Index.

Fee Pool

Foreign investment banking firms have found India a tough environment in which to do business. The fee pool in India, which includes money made by all competitors from takeover advice, stock and bond underwriting and loan syndications, fell 25 percent last year to $810 million, according to data from New York-based research firm Freeman & Co. That compares with $4.31 billion in mainland China and $1.47 billion in Brazil, the Freeman data show.

Goldman Sachs ranked No. 7 in managing share sales and No. 2 in mergers and acquisitions in India last year, according to data compiled by Bloomberg. Average fees for arranging local share sales in India in 2011 were 1.4 percent, compared with 5.4 percent in China, the data show.

Last year, Goldman Sachs was among four banks that earned a fee of 25 paise, or a quarter of one rupee, for managing a 45.8 billion rupee share sale ($900 million) by state-owned Power Finance Corp. (POWF)

Local Management

Goldman Sachs, which generated 60 percent of its worldwide revenue from trading last year, in April received approval from India’s central bank to become a primary dealer, allowing it to underwrite government bonds.

The firm hasn’t received a commercial banking license in India more than two years after applying, making it the only large U.S. bank except Morgan Stanley (MS) not to have one. The license would let the firm earn fees from currency-related transactions and trading of interest-rate products.

“In the long term, management continues to view China and the emerging markets in general as GS’s largest growth opportunity,” Jeffery Harte and his research team at Sandler O’Neill & Partners LP in the U.S. wrote in a March 13 research note after meeting with Goldman Sachs executives.

Goldman Sachs became the last foreign bank in India to hire a local at the helm when Sonjoy Chatterjee joined in 2010 from ICICI Bank Ltd. (ICICIBC), the country’s second-biggest lender. He replaced L. Brooks Entwistle, a U.S. citizen who moved to Singapore in 2011 after five years running Goldman Sachs’s business in India.

Principal Investments

The company hasn’t disclosed any single principal investments in India as large as its holding in Industrial & Commercial Bank of China Ltd., which has generated more than $3 billion of gains for Goldman Sachs since 2006, according to company reports.

Goldman Sachs’s investments in the country include last year’s $200 million purchase of a majority stake in closely held ReNew Wind Power Pvt., a Mumbai-based power producer; a $138 million stake in Mahindra & Mahindra Ltd. (MM), announced in 2008, and a $172 million holding in Sigma Electric Manufacturing Corp. that dates from 2007. Goldman Sachs doesn’t disclose the gains or losses on those positions separately.

The firm has also expanded its asset management business in India. A year ago, it agreed to buy Benchmark Asset Management Co., India’s largest provider of index-tracking funds, for an undisclosed amount. Goldman Sachs had already set up its own mutual-fund business in India in 2008. Worldwide, investment management generated $5.03 billion in revenue in 2011, 17 percent of the company’s total.

‘Too Many Firms’

Foreign banks including Nomura Holdings Inc. and Bank of America Corp. have cut jobs in India, even as domestic companies HDFC Bank Ltd. (HDFCB) and India Infoline Ltd. set up investment banking operations, betting that the country’s growth rates of more than 6 percent will translate into more deals and revenues.

“Right now the outlook is obviously not looking great,” Uday Kotak, founder of Kotak Mahindra Bank Ltd. (KMB), said of investment banking in an interview in December. “We are going to see significant capacity reduction in the sector,” said Kotak, who was Goldman Sachs’s partner in a banking joint venture until 2006.

“There are too many firms and too many people per firm,” Kotak said. “Over the last few years, India was the high- fashion country around the world. Every global player wanted to be in India without really analyzing the size of the revenue pool.”

Most of Goldman Sachs’s employees in India work in the firm’s technology and support center in Bangalore, the company’s third-biggest office by number of employees. Its Mumbai headcount has tripled since 2006 to about 150 people.

‘Moderated Our Pace’

Cohn said China, India and Brazil were the places where Goldman Sachs was hiring the fastest. Earlier this year, after Goldman Sachs eliminated 2,400 jobs worldwide to contend with a revenue decline, executives indicated that the pace of hiring in so-called growth markets, such as the BRIC countries, would slow.

“Given the environment we’ve moderated our pace of investment, but we’re still investing,” Chief Financial Officer David A. Viniar said on a conference call with investors and analysts in January. “We continue to think that the growth markets are going to be a great place of growth for Goldman Sachs.”

To contact the reporters on this story: Ruth David in Mumbai at rdavid9@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

To contact the editors responsible for this story: Philip Lagerkranser at lagerkranser@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net

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