How seven traders are changing the Indian corporate bond market

Seldom do men and women in the bond market make it to front pages for the right reasons. Occasionally, news of an obscene bonus payout receives flitting attention. But in a market that is less followed, though far bigger in size, than stocks, there are untold stories of how little-known and reclusive people have taken big calls, shown risk appetite and collaborated as well as crossed swords to make money.

ET profiles seven traders redefining the bond game: AK Mittal (AK Capital), Nipa Sheth (Trust Capital), Baman Mehta (Darashaw), Shashikant Rathi (Axis Bank), Rakesh Singh (HDFC Bank), Nirav Dalal (YES Bank) and Sudershan Sharma (ICICI Bank). Together they represent a fascinating story: A few high-street banks displaying sudden aggression, brokerages emerging as big investors, old players in the market fine tuning strategies and the league table race never slowing down. Such stories stay within dealing rooms, thanks to the complexities of the bond market and the comparatively less flamboyant nature of the characters. But, a languid stock market has pushed corporates and banks to float bonds. Here's a story of how the Indian corporate bond market is slowly changing.

The young trader never met Jeetubhai in the five years he spent at the bank's bond desk. Someone from Jeetubhai's office would occasionally drop by after the dealing hours and request him to buy a bond with a promise that the security would be bought back at a decent premium. The man never broke his promise.

For the trader (now working for a fund house), it was pointless to think what kind of a bond it was, the price it was trading at, how interest rates were moving, and whether there was a risk that the paper could be downgraded - the usual stuff dealers check before putting money.

Here, the call was not on the bond: it was on Jeetubhai, the broker with an amazing clout in small, little known banks in Gujarat. It was a given that before 'parking' the bond with the trader's bank, another willing buyer - may be a co-operative bank in Ahmedabad, who would not ask too many questions have been lined up to buy the bond.

It was a quid pro quo that worked like a well-oiled machine: a trader fearing he would miss his bonus due to a few wrong calls would get a helping hand from a broker; such favours were not forgotten and when the market improved he would find a way to offer some cosy deals to the broker. In an opaque market where no one knew the 'right' price of a corporate bond, the world the Mumbai money market outside was clueless about the existence of such transactions.

A CHANGING TURF

Even after a decade, few outsiders understand the mechanics and intrigue of the market that has multiplied in size, turned ruthlessly competitive and more transparent. (In the last five years, more than Rs 7 lakh crore bonds were issued and placed with investors as against less than Rs 90,000 crore raised through equity offerings.) Jeetubhai and his men still knock on the doors of banks in Rajkot and Ahmedabad to cut deals, but they have been left behind by new players in a turf that is changing dramatically.




New firms are flexing their muscles, a few brokers have transformed into proprietary investors and counter-parties and many old intermediaries ran out of money and enthusiasm; there is a display of a sudden aggression by some and a few high-street banks are changing tack to play the game by buying out entire bond issues with ticket sizes that were unthinkable few years ago. And there are reclusive men and women behind the deals and the firms they either built or represent.

Nipa Sheth is one such face that not many outside the banking districts of Nariman Point and Bandra-Kurla may be familiar with. Rarely photographed and never interviewed by the media, Trust Capital - the firm she runs - occupies the third position in the bond league table, after ICICI and Axis (two of India's largest private sector banks), for arranging funds corporates and banks.

Very few know that Nipa also runs what possibly is the largest debt portfolio management scheme. A chartered accountant, who honed her skills in the turbulent stock markets between 1992 and 1997, Nipa set up her bond shop a little after 2000 when the great bond party (that shadowed the plunge in interest rates) was about to begin.

"What exactly are you writing?" she asked when ET called her up. She is in a business where a great contact book is as crucial as distribution and brokerage. Her source of funds are banks which charge an interest that's higher than the return on bonds that Trust may be buying for a short duration before selling them off to provident funds, corporates, wealthy individuals, and charity trusts. She can't afford to hold the bond for more than a few days (even hours) and have to quickly spot willing buyers.

THE NEW & OLD FACES

The three-way bond game entails bidding for a mandate, underwriting the issue, taking in on your books if no ready investors are around and then selling them off to other investors. The dog-eat-dog battle for mandates often pushes down the arranger's fee to rock bottom levels, but the players have no choice to play the game. "Somewhere the league table becomes important. Unless you are in the top 5 or 10, PSU issuers will not touch you," she said. Most bond guys know that this is where cultivating issuers (who give you the initial advisory business, albeit with low fee) as well as investors (who help you make money by buying the bonds) come handy.

Trust's fierce competitor has been AK Capital, lead by AK Mittal - also a chartered accountant, who relocated to Mumbai towards late '90s. Unassuming and humble, Mittal, always dressed in a white shirt and black trouser, is known for his fabulous reach in banks and PSUs. "He's a great PR who is friendly with the DGM as well as the chairman of the bank...Like Trust, he is strong in the primary as well as in the secondary market," said an investment manager with an insurance firm. Traditionally, a combination of brokerage and large prop book (where the broker holds its own investments) lend an edge as the market can't figure out whether the person calling from the firm is giving a buy/sell order on behalf of clients or firm. Trust has been associated with more than 37% of debt issues last year while AK (which is within the first 10 in the league table) has been involved in 28% of issuances. Banks and institutional bond houses may occasionally scoff at them for their so called aggressive style and cut throat ways, but it's impossible to ignore their presence.

The BIG BOYs

"Our focus is different. We deal with top corporates. Big deals are relationship entry products," said Rana Kapoor, founder and CEO of YES Bank. The private bank surprised the market this year when it took large exposures to bond deals. The questions his rivals are asking are: Is YES moving too fast? Will it find an avenue to exit the positions at a profit? The man taking the calls is Nirav Dalal, who heads the debt capital market division at YES. Dalal refused to talk, but his boss Kapoor scotched such speculation. "The bonds are held in our trading book and most of it get sold...For us it's a great relationship break through product with the best of Corporate India," he said.

The country's most valuable lender, HDFC Bank, too has been stunning the market with mega deals (like the Rs 1,500-crore Hindalco issue in April) ever since it took a decision to step into investment banking. As a powerful institution, HDFC Bank has been using a slice of its large balance sheet to aggressively big for bond mandates and underwriting issues. "We do not have a strategy to buy out, but we do pick up residual positions. During the Hindalco issue, the market was looking for a benchmark. After this, there were similar issuances.... It's our strategy to advise clients raise cheaper fund," said Rakesh Singh, the man spearheading the deals. Rakesh, who has worked with Rothschild and Morgan Stanley, said that in doing these deals the bank is not driven by interest rate views.

In the second-largest bank ICICI, with its vast treasury, innovative products and bold calls, the approach is different. In March 2011, when Tata Steel floated the first perpetual bond (a paper with no maturity date), Sudershan Sharma, general manger, proprietary trading book of ICICI, was excited. It was a call the bank never regretted. "I sensed the rich yield it was offering. Our all in cost bid was 15 basis points lower," said Sharma, a person who is closely watched in the bond market for his aggressive style. The deal set the stage for more perpetual offerings. Another Sudershan's call that foxed his peers last September was his bullish view on Air India's Rs 5,500-crore bond issue, a large portion of which was picked up ICICI. But it was an investment that the bank had to wait longer than it thought it would take to sell down.

THE NEXT PHASE

Will the big banks make life difficult for Trust and AK? Where will it leave Darashaw, the oldest intermediary and one of the most conservative firms with 86-year-old history that began with selling Imperial Bank papers to Nizam of Hyderabad and other princely states. At fifth position in the league table, Darashaw has the largest credit limit from banks. "Business has not grown dramatically since 2007-08 as there has been no major significant development in the markets. Proprietary positions have been rather flat since the past five years," said Baman Mehta whose grandfather set up the firm. Today it's run by Baman and his brother Dara. A quintessential Bombay Parsi, Baman has been handling bonds since he was in high school. "We realised the issuer wanted to raise large amounts fast while the market yet had to be educated and investors, which included mutual funds, banks and retirement benefit funds, took time to invest which led us to create this role and fulfill the needs for both the issue and these investors," said Baman who drives a Getz and occasionally borrows his bother Dara's Porsche.

Brokers, armed with their survival instinct, know that big banks can't push them out. "The entry of big firms will deepen the corporate bond market...I would rather prefer a smaller share of a large market than a bigger share of a smaller market," said Nipa Mehta. Banks and primary dealers cannot beat brokers understanding of mid corporates (a segment that large banks do not focus on), relationships with pension funds and flexibility of approach.

The entry of HDFC Bank and ICICI is a sign that more banks may join the game in coming days. Spreads will be thinner, sweet heart deals will be fewer, and more and more high net worth individuals will bet on bonds. It's a market that's slowly entering the next orbit. Many calls will backfire, some will be bruised in the league table rush, slower players will be tempted to scale up quickly, and others, waiting in the wings, will interpret every dip in the interest rate heralding the start of another bond party. "Even with zero fees, we have to be a part of the game. Else, we will lose touch with the market," said Shashikant Rathi, a seasoned bond market man, who heads the desk at Axis, the debt market's original bull. "You have to ride the cycle," said Rathi who learnt the ropes as a corporate bond dealer at the erstwhile UTI mutual fund. "After all, you can't always make money."