Goldman Sachs Finds It Slow Going in India

In India, economic expansion drove mergers and stock offerings to records last year. For Goldman Sachs (GS), which is ramping up to take advantage of the boom, progress can be slow and profit from deals elusive.

Chief Executive Officer Lloyd C. Blankfein has said that Goldman wants "to be Goldman Sachs in more places." That hasn't been easy in India. The firm doesn't have licenses needed to trade currencies and underwrite government bonds. Companies in India are reluctant to pay for advice on mergers. Banks accept tiny fees for taking state enterprises public because they want to build goodwill with the government and advance in deal rankings. Goldman's first share sale in the country this year may be a $1.3 billion offering from state-owned Power Finance, expected in May, for which it will split a token fee of 1 rupee (2¢) with three other banks, according to two people with knowledge of the matter. The bank also agreed in the past year to manage a share sale for state-owned Power Grid Corp. of India for about 4¢ in fees. "It's a hugely competitive market," says Manisha Girotra, CEO of UBS's (UBS) India operations. "Everyone is here because the promise is huge."

To boost business, Goldman Sachs appointed Sonjoy Chatterjee, 42, as chairman of India operations in March. Chatterjee, who joined last June as co-CEO from ICICI Bank, the nation's second-largest lender, is the first Indian-born banker to lead the firm in the country since it ended a venture with Kotak Mahindra Bank in 2006. Vijay Karnani, a 13-year Goldman Sachs veteran, was promoted to co-CEO along with Chatterjee.

In rankings for the past 12 months, Goldman Sachs has climbed to No. 2 in mergers and acquisitions and to 13th in arranging local equity sales, according to data compiled by Bloomberg. That compares with ninth place in advising on M&A involving Indian companies and 16th in equity underwriting in the country in the four years starting Apr. 1, 2006, just after the company ended its partnership with Kotak Mahindra, Bloomberg data show.

The company's advance was helped by its role advising Reliance Industries, headed by billionaire Mukesh Ambani, which sold stakes in 23 oil and gas areas in India to BP in February for $7.2 billion. The relationship could lead to more M&A work for Goldman Sachs: Reliance was India's most acquisitive company last year, with nine deals totaling $2.2 billion, Bloomberg data show.

Freeman & Co., a New York research firm, estimates that total investment banking fees in India were about $1 billion last year, one-fifth of the $4.9 billion for China. Goldman Sachs's annual revenue in India from all of its businesses is about $100 million, according to a Mar. 21 report by Guy Moszkowski and Steven J. Chubak, Bank of America analysts. That's a quarter of a percent of the firm's $39.2 billion in revenue worldwide last year.

Goldman Sachs is the only major foreign securities firm in India without either a commercial-banking license, needed to engage in currency transactions, or a permit to underwrite government bonds. Executives at Goldman Sachs told the Bank of America analysts last month that the firm applied for a license and expects to receive one in three to six months, according to the report. Edward Naylor, a spokesman for Goldman Sachs in Hong Kong, declined to comment, as did Chatterjee.

India is among the emerging markets that Goldman Sachs is targeting as the firm faces more restrictive rules in the U.S. and Europe on how it can deploy capital. The bank aims to double revenue from Asia outside Japan "over the next few years," to $10 billion, the Bank of America analysts wrote. The firm's annual filing with the Securities and Exchange Commission showed that Asia accounted for 21 percent of pretax earnings and 18 percent of revenue in 2010. It doesn't disclose revenue or profit from India. "Both GDP growth and the relative fiscal stability of many growth countries are trends that could drive revenue opportunities across all of our businesses," Blankfein said at a November investor conference in New York.

Goldman Sachs agreed to buy Mumbai-based Benchmark Asset Management, a provider of mutual funds and exchange-traded funds, last month. Terms weren't disclosed. Assets managed by mutual funds more than tripled, to 6.8 trillion rupees in the five years ended Dec. 31, according to the Association of Mutual Funds of India.

For Chatterjee the trick will be to persuade local companies to pay for advisory work when rival firms are willing to sacrifice fees to gain market share. "Indian clients are very cost-sensitive when it comes to fees," says Joel Perlman, president of London-based Copal Partners, which provides research for investment banks and private-equity firms. "The fee percentage in India is going to remain relatively small."

The bottom line: Goldman Sachs may have had revenue of about $100 million in India last year, a quarter of a percent of its global total.

    Before it's here, it's on the Bloomberg Terminal.