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‘India doesn’t have a meaningful bond market’

‘India doesn’t have a meaningful bond market’

Arup Ganguly is the founder/managing partner of London-based KNG Securities LLP, the independent fixed income specialist dealing in a range of products across fixed income, convertible bond and debt capital. Ganguly’s market experience, spanning almost 25 years, has been a key factor in his success. His activities in the international banking sector together with his involvement in global charitable initiative Sewa Day have made him well known amongst the Indian diaspora.
Established in 2003, KNG combines the global experience of its principles with a personal, unbiased and client-based approach to provide a first-class service to its institutional client base.
In a straight-from-the-shoulder interview with Pankaj Adhikari, Ganguly speaks about the current economic scenario, how India could develop bond market and provides tips to young professionals.

Q: Please tell us about your journey from a topnotch professional to an entrepreneur.

After graduating in Economics from London, I joined General Electric in its graduate training program. After two years, I was approached by Goldman Sachs to work in its management accounting and information group. Later Goldman sent me to the Cayman Islands to help set up its offshore trust business. Thereafter, I returned to the London office to join the convertible bond trading desk as director in sales and research. While at GS, I was a founder of the Asian Professional Network.

Arup Ganguly: extraordinary enterpreneur

When I left GS after working for 11 years, I decided to do something independently —something smaller that I could shape and mould myself. Hence, I set up my own firm, KNG Securities with two partners in 2003.
Since then we have grown from just three persons to a 30-people team. KNG has now established itself as a reputed broker and advisor in fixed income instruments and debt finance. From an Indian perspective, KNG was instrumental in the growth of the FCCB market and continues to be one of the main secondary liquidity providers.

Q: What type of work environment would you prefer and why?

Having worked in both large and small work environments, I prefer smaller platform. As a small team, we are more reactive to changes in client focus and the markets. Team communication is easier and one is free to choose areas of interest and impact.

Q: What are the macro issues impacting business sectors in relation to fixed income i.e. government bonds and corporate bonds and also convertible bonds?

From a business point of view, increased regulation and technological advances are putting immense pressure on large investment banks to reduce risk and downsize. I believe the banking industry will move away from the ‘big is beautiful, megabank structures’ established in the 1990s to a platform made up of smaller firms like ours. We are going back to a pre-big bang world.
As far as the bond market is concerned, investors would like to see more issuance. After the 2008 debacle, issuance levels have been reduced. Many issuers (the ones that didn’t fold up under the pressure of debt) had to restructure their debt. As a result, investor demand has been greater for companies who have a proven track record for successfully servicing debt. Unfortunately, many of these “better” companies have not needed to come to market as they are sufficiently funded.
India’s bond market is fledging, compared to other similar size nations. The total size of the Indian bond market is anywhere from $300-400 billion in total (based on anecdotal evidence; accurate figures are hard to come by). The US bond market, in comparison, stands at around $35 trillion. Moreover, Indian corporates have issued very little foreign currency debt. The FCCB market was used by many mid-caps to raise USD debt from 2005 onwards. Unfortunately, a combination of over-indebtedness and the fall in the INR has all but closed the FCCB market down.
As a result, Indian mid-caps have almost become pariahs for international investors. The Indian government has never issued a foreign currency sovereign bond with the government non-INR issuance being restricted to a few large banks and PSUs. The RBI is averse to foreign debt issuance. While a careful approach to managing the national debt is appreciated, the total abstinence toward foreign currency borrowing is short sighted. Now, with the INR at near all-time low, is the time to borrow internationally. It’s not the time to be shy.

Q: How does the quality of management impact the company performance in relation to corporate finance?

Quality of management is very crucial. For a firm like ours, our ability to connect with the right issuers is paramount. Given our track record and history at bigger firms, the management network of corporate connections has been critical in our success.

Q: Lately we’ve seen rally in emerging markets particularly China and India. This rally is fuelled by foreign institutional investor (FII). How attractive is the bond market in India where prevailing interest rate is higher than many developed countries?

The Indian bond market is not a topic of conversation for the reasons given below.

Q: Eurozone has not come out of recession yet and in the US, Fed is gradually withdrawing quantitative easing (QE) and Bank of Japan is expanding its asset buying program. The fall in oil price is also indicative of slack demand. Your comments on overall economic scenario…

The Eurozone economies are under pressure to perform with only the UK showing signs of recovery this year. The face-off with Russia hasn’t helped. Socio-political risk remains high.
The Asian economies, while growing (actually what is the real growth rate/consumption power given high inflation in most of the large Asian economies?) are growing below expectation due to inefficient capital markets, bureaucratic barriers, corruption etc. Moreover, for foreign investors to gain exposure to the “growth” economies is extremely difficult. Vis-à-vis India, the fall in oil prices should be sending the INR and the BSE into a rally but it isn’t? These indices tell us that the world does not believe that enough is being done to fix the problems in India’s economy.
My greatest fear, though, is that we haven’t really dealt with the problems that led to 2008 i.e over indebtedness. Have we just swept the problems under the rug via QE etc? Indeed, several European banks failed the most recent stress tests.
Will 2008 continue to be an overhang on markets for the foreseeable future?
….of course, the markets will no doubt prove me wrong by showing resilience in 2015!
Q: Inflation is moderating in India and there’s a possibility of interest rate cut by RBI going forward which will result in higher price of bond…
As mentioned earlier, India doesn’t have a meaningful bond market; so to talk about interest rates and price impact is not particularly interesting to large institutional investors. The more interesting chat should be about how we develop the bond market through liberalising measures. I hope that the present government will be looking to create a more mature capital market.

Q: How would you advise young professionals in this field?

The industry is going through some fundamental changes because of the 2008 financial crisis. The industry is downsizing. So firstly, young professionals must ask themselves what society and the planet need from them over the next 20-30 years? Does the world need more financiers/bankers or can your abilities be better used elsewhere?
To ask the same question from another angle, how’re you going to get paid over the next 20-30 years? If you still want to be a banker, don’t be driven just by the money. Focus first on which part of the bank you would like to work in (research, sales, trading, M&A?). Focus on becoming the best in what you do.

Q: What is your organizational initiative on corporate social responsibility?

I am the founding chairman of the global volunteering charity, Sewa Day. I started this with a small group of individuals five years ago. This year, I’m proud to say, we had 100,000 volunteers who took part in Sewa Day in 25 countries. Through Sewa Day we hope to promote community cohesion, peace and harmony in the world.
Sewa Day has received support of PM David Cameron, HRH the Prince of Wales, London Mayor Boris Johnson and UNESCO. Sewa Day was also invited to be the official representative of the UK Hindu community during the Queen’s Jubilee celebrations in 2012.

This article appeared in www.theindiandiaspora.com


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