Growing opportunities in e-commerce, a rising stock market and an optimistic economic outlook have also helped the number of UHNIs in India grow 17 per cent in FY15 as well. The number of families with net assets (excluding residence) of more than 25 crore ($3.7 million) was around 1,37,100 in August 2015 against 1,17,000 a year ago7. India now has 2,083 ultra high networth individuals, with more than $50 million ( 333 crore) net wealth, 3 per cent higher than in 2014.
For the first time in 2015, India had more billionaires than any other country outside the US and China, according to an annual list by Shanghai-based luxury publishing group Hurun. Fall in wealth among Russians and Britons and a bump in the value of the stock market helped push India’s richest into the top three for the first time in the rankings. There are now ninety seven Indian billionaires compared to ninety three Russians who are worth at least $1 billion8 ( 6, 673 crore).
The momentum, and the consequent spike in wealth creation, is likely to continue with India mopping up both foreign investment and maintaining a steady infusion of venture capital and private equity into businesses. India continues to be one of the most attractive countries for investment — it has often been called one of the few bright spots for the global economy.
Few countries are undergoing such a vast transformation when it comes to wealth — although the data is rife with contradictions. Even as it is one of the fastest-growing wealth crucibles for the world, India records the lowest average wealth of the countries9 polled. The dichotomous truth of a still-poor nation forging rich people at a pace quicker than any other country, despite having one of the highest income inequalities anywhere in the world, has given being rich a shape-shifting, multi-hued range of connotations.
The winds of change were kicking up a silver dust that, as it settled, would give IIFL Wealth a fertile ground of possibilities. But were there other forces as well — this time, outside of India — that were changing the landscape of the wealth management industry decisively?
Chapter 3
The perfect storm
Through much of 2008, Amit Shah, IIFL Wealth’s co-founder and executive director, saw the world around him crumble from his office in Manhattan’s mid-town area, just off 44th Street. Shah had worked in New York for around four years by then, having moved to the city in early 2004 to expand Kotak Mahindra’s offshore division.
He had a ringside view of the frenzy of the global bull market in his early years in New York. Young analysts were making million-dollar bonuses amid high-voltage optimism that was shaping consumption and moulding attitudes to risk. ‘Within a year of being there, I could buy a house without having any credit history in that country and get a loan for up to 80 per cent of my house’s value. NINJA loans, essentially loans given to people without an income or a job, were common,’ Shah recalls.
Soon enough, in the implosion of the global financial markets set off by marquee financial institutions, large parts of the investment banking industry, the biggest insurance company, the largest mortgage lender and two of the largest commercial banks in the United States alone, were swept away. These companies filing for bankruptcy or being on the block for sale led to what is now referred to as the Great Recession, a spiral into an economic slowdown that even as this book goes to print nearly eight years later, large parts of the global economy hasn’t fully recovered from. For example, the global economic crisis is considered to have played a key role in the historic ‘Brexit’ referendum in June 2016, as well. Brexit refers to Britain’s exit from the European Union.
In the United States, in 2008, the crisis triggered the most severe economic downturn since the Great Depression of the 1930s.
But this time it would go beyond its borders.
The onset of the global credit crunch began from early 2007 in the United States with more than thirty sub-prime mortgage lenders filing for bankruptcy by the middle of that year. All through 2007, there was a growing sense that something was rotten in the United States’ financial system and that its careless binge of easy credit, low interest rates and complex loan products wasn’t going to end well.
By August 2007, when Northern Rock, a British bank, approached the Bank of England for emergency funding, it became evident that America’s problems weren’t going to be limited to the country; at risk was the global financial industry. Yet, things unravelled faster than most people were prepared for. By October 2008, the malaise had infected some of the United States’ biggest and most respected banks and financial institutions.
Lehman Brothers, one of the world’s largest securities firms, with more than 25,000 employees at that time filed for bankruptcy. Investment bank Bear Stearns was acquired by JP Morgan Chase, and Merrill Lynch, the nation’s largest brokerage, was sold to Bank of America. Other consequences followed: IndyMac bank collapsed, and the US government took control of Fannie Mae and Freddie Mac.
The United States Federal Reserve, the country’s central bank, cut its fund rate and discounts. Central banks of many other developed economies, mostly across Europe, cut rates to help their banks as well. Governments marched in to fix the slide to keep more banks from going under and further deepening the crisis. The US government came out with The Emergency Economic Stabilisation Act of 2008, essentially sanctioning $700 billion ( 46,71,450 crore) to purchase distressed assets from banks. Other governments unleashed various bailout packages to keep afloat; in some cases, private banks were nationalised. It was a world on edge.
The waves of destruction, the tides of scepticism
For Amit Shah, apart from perceiving the gloom and doom from outside were doubts and anxieties within. An oft-repeated investor maxim — and one that I have heard nearly two dozen times through interviews for the book — is that nobody can time the market. Clearly, he and his co-founders, Bhagat and Yatin Shah, hadn’t been able to time their entrepreneurial innings well.
When the three of them had left their jobs in Kotak in January 2008, global capital markets were at their peak. While there were hints of trouble brewing in the US economy, nobody believed the domino would topple so calamitously. Even as they were crafting their business model and starting off in early 2008, the world of financial services was dramatically changing.
IIFL Wealth launched its US operations on 15 October, 2008, exactly a month after Lehman Brothers filed for bankruptcy. The turbulence of the global markets didn’t seem at first to be a promising time frame for growth.
Much of the world, including top economists, central bank governors and government ministries, had not anticipated the severity of the crisis or the consequences it left the world to deal with. A study in February 2013 by the United States Government Accountability Office said that the 2008 financial crisis cost the US economy more than $22 trillion (in lost output and a decline in unemployment and household wealth). That is eleven times the annual $2-trillion ( 13,34,700 crore) size of the Indian economy, the world’s seventh largest10.
Amit Shah recalled the surge of scepticism around him at that time. Even as giants such as Lehman, Merrill and Bear Stearns had sunk, or were left gasping for breath, many felt Shah and his co-founders were downright foolhardy, or worse, delusional, to position a new brand nobody knew at all in the US.
At a time when people were slashing costs, curbing expansions and conserving capital, people couldn’t believe an upstart venture was spending money to get a business up. Especially a business in which they were trying to convince wealthy institutions and family offices, spooked by the financial mayhem, to give a group of young, unknown men in their early 30s their money to invest.
It seemed like an ambitious shot in the dark. Actually, Shah says, many considered it a sure bid at failure — an extravagant, ill-thought-out experiment.
‘If you were living in the US in 2008, you thought the world had come to an end. Friends and former colleagues from the industry were laughing at us, they thought we had gone nuts; that we were trying to sell India at a time when the world’s most stable economy, the United
States, was coming apart,’ Shah says.
What kept Shah going was the fact that he was on a flight to India every two weeks or so, only to return to the US detoxed from the pall of doom that pervaded that country through 2008-09. India, on the other hand, had escaped largely unscathed from the global crisis. ‘There was a huge difference in the body language of people in India and the United States at that time. In India, it was pretty much business-as-usual,’ he tells me.
Of luck and origins
Meanwhile, in Mumbai, the young IIFL Wealth team was in the manic throes of building a new wealth management franchise. Nirmal Jain, the founder and chairman of IIFL Holdings, had built a financial services group that by 2008 included brokerage, a Non-Banking Financial Company (NBFC), commodity trade and an equity research business. He had been excited about the wealth management vertical ever since Yatin Shah had first been introduced to him in late 2007. Meetings with Bhagat followed within weeks.
At the time, the three co-founders worked in Kotak Wealth Management, the private banking vertical of Kotak Mahindra Bank. They had built a reputation for being aggressive go-getters. Bhagat and Yatin Shah alone handled a majority of the bank’s western region wealth business.
Jain was quick to catch onto the opportunity these aspiring entrepreneurs presented: A stand-alone wealth management firm that would be able to advise the growing number of the affluent in India. It was a valuable adjunct to his existing businesses, considering India Infoline already had brokerage, distribution and equity research services that would be key to servicing wealthy clients.
Most of all, what caught his attention was that they were clearly entrepreneurial. They were already doing well in their jobs but had made it clear to him that they weren’t interested in coming on board as senior employees, where success would be tied to bonuses and incentives. He appreciated their motivation to create wealth for themselves — something he felt he could relate to, having left a job with Hindustan Unilever Limited to start India Infoline when he was twenty eight years old. Jain founded India Infoline in 1995, as an equity research venture — the company now has a market capitalisation of roughly $1 billion ( 6,700 crore).
Son of a small business owner in Mumbai, nothing about his family background or early years could have forecast Jain’s success: neither during his training as a chartered accountant nor later as a student at IIM Ahmedabad in the late 1980s, could he have imagined he would create the kind of wealth he has.
It was an ambition he saw mirrored in the IIFL Wealth founders.
Within forty days of the first meeting with Jain, they had sealed the deal. IIFL Wealth would be incorporated within the larger India Infoline group as an independent subsidiary. The India Infoline group would have 76 per cent of the stake to begin with (that gradually reduced to 66 per cent with performance-driven employee stock options). The rest would be divvied up between the three co-founders and other employees.
The unique formula would give the young founders a ready-made technology and research platform that would have otherwise taken them several months to build and an entrepreneurial opportunity that would allow them to build a solid business.
The seemingly poor timing of their starting out and which had threatened to spoil the party of the great deal they had inked with Jain would prove to be a blessing in disguise.
For IIFL Wealth, the treacherous implosion of the global financial system, in fact, created a perfect storm of opportunity. Its worries about how business would grow as the financial world around it collapsed would prove to be just that — worries. It might even be the reason for their success. With the strong ripples of the wealth effect setting in, the whirlpool the financial industry would find itself wrapped in would present to them a very specific set of circumstances: One they couldn’t have imagined scripting any better.
Despite the rocky and rough first couple of years, coming alive amid the global financial system’s most bloodied phase and capturing a unique window of opportunity in the timeline of India’s history would make possible the ambitious plans they had gone to Jain with.
The foundation of their rapid success would also be their ability to work with, and understand, a new customer segment — India’s new wealthy.
It’s an exciting group of people — entrepreneurs, professionals and business owners — who are changing the way wealth is built, managed and perceived in India.
Their anxieties, blind spots and motivations are useful reading, not just for an ambitious, entrepreneurial company but for anyone interested in a rapidly-transforming country.
What I found interesting when discussing wealth with the entrepreneurs, professionals and promoters interviewed for this book, was that their thoughts around their riches wasn’t limited to ideas of work and success; personal triggers such as life motivation, family goals and childhood upbringing have a huge impact on how people react to their bounty.
Part 2
Breaking New Ground
Chapter 4
Shh, I’m rich!
As a country, India has a complicated relationship with wealth. Through much of the nearly seventy years of our nationhood, we have lived on the wholesomeness and worthy goal of having just enough. A craving and indulgence for wealth was neither encouraged nor possible in an economic philosophy built on the idea of socialism and where the government controlled and regulated private enterprise.
It has been a country where the vast population was poor with a minor middle class, an extremely tiny portion wealthy, with rigid lines dividing them all. Mobility across these different segments was limited. Since lines were not porous, attitudes within each group — and towards each other — were more fixed and unyielding.
An adjective constantly used for modern India is aspirational. There is a greater sanction for and encouragement to people wanting more. Even within a steadily expanding middle-class that now stands at about 24 million adults (according to the 2015 Credit Suisse report that used wealth as a filter, not income), attitudes to wealth have changed. The ones that do use consumption as a metric peg the middle-class at more than 200 million people.
The emergence of the new wealthy lies within the context of a larger transformation: Many of the first-generation rich have come from within the large swathe of the “middle-middle class.” Their attitude is therefore a combination of their past perceptions as outsiders to affluence, and their changed reality of insiders looking in.
Yet, for the rapid rise in affluence, talking money doesn’t come easily to many of India’s new, first-generation rich. The conventional notion of the nouveau riche, essentially someone coming into a lot of money and perceived to be ostentatious or lacking in good taste by their visible demonstration of it, doesn’t always hold true if I think about several of the people I’ve met — generally, as well as in the course of writing this book.
Enough first-generation wealth creators interviewed went to great lengths to dismiss the fortunes they had built as being a mere by-product of their success. They seemed to consciously downplay the reality of their abundance as the focus of the conversation.
Several baulked at the idea of being interviewed for this book because it would classify them as rich; others repeatedly said that they didn’t consider themselves to be extraordinarily “loaded” and that I would be better off speaking to others who have built bigger fortunes. Many were happy to help the research by talking candidly but requested not to be quoted.
Nearly half of the interviewees said “making money” has never been a motivation or driver for them; the other half said that while money in the bank might be a metric to tabulate achievement with, it was by no means the only one. The heady rush of building a company, and the validation gained from having crafted smart solutions and seeing ideas come alive, is the prime force, most assert. In fact, the phrase “creating value” was touted much more as a metric for success than creating wealth.
The careful tweaking of the context and the discomfort in discussing wealth was surprising. At
various points of the conversation, I wondered if these were rehearsed responses meant to sound “correct”? Was there also a mild delusion at play when people who I knew had upwards of 50 crore ($7.5 million) in investable surplus considered themselves “not-wealthy”?
The studied cleverness of reticence
In an article for The New York Times, American economist and columnist Paul Krugman said the American public neither had a good sense of whom the rich are nor how much money they made. Because the truly-wealthy were far removed from an average person’s life, a regular American had no idea how unequal their society had become. The real-wealthy are smart enough to keep off from media coverage of their riches. If this was a smart strategy for the Americans, did a wealthy Indian consider this to be true as well?11
The interview process — my primary source of gathering insights and experiences for this book — isn’t always a foolproof microscope for understanding someone. At its core, even in the most frank conversations, interviewees self-select the personal biases and motivations revealed.
Sometimes, this self-selection is directed towards the self, not as a means to obfuscate or hide but to reinforce the principles and ideas those interviewed want to be associated with. The subjects of this book are successful people adept at communicating effectively. Much of their self-consciousness around being rich might be genuinely felt but in interviews there isn’t a way to know how truly authentic someone has chosen to be.
To negotiate around this limitation, and test the assumptions I had arrived at through my interactions, I followed up the interviews with a survey of nearly sixty wealthy clients. I let them keep their names concealed, with the hope that the privacy would lead to more honest answers. The respondents were asked for other personal details: age, city, industries they worked in, whether they were first-generation entrepreneurs or professionals and how much they had in investable wealth, to build a character sketch.
The Wealth Wallahs Page 3