The Indian wealthy are certainly not as philanthropic as their American counterparts, said HDFC’s Keki Mistry. ‘I don’t think that sense of giving back to society is as pronounced in India,’ he tells me.
That view sits uncomfortably with many of those I interviewed, who said that it was an unfair, unequal comparison.
India is a society where wealth is only beginning to be created while in economies such as the United States, the largest philanthropic organisations like The Rockefeller Foundation, The Andrew W Mellon Foundation and Ford Foundation are already several generations old. Yet, by the size of annual endowments, The Bill and Melinda Gates Foundation, founded by the first-generation founder of Microsoft was the largest24.
Many also said that traditional Indian business houses have always had what we can call the marwari model of charity, where family patriarchs would nourish temples, healthcare centres and schools in the villages they belonged to, or in the community around their manufacturing plants.
Several wealth managers I spoke to were cynical about the American model of philanthropy that seems prompted by the country’s wealth tax regime. By transferring their wealth to foundations, the rich and their descendants can bypass capital gains taxes, estate taxes and gift taxes that a transfer would otherwise mandate. Tax incentives for the wealthy had led to charitable giving in the United States totaling almost $457 billion ( 30, 51,868 crore) in 2014, a 9.3 per cent rise over the previous year, according to the Atlas of Giving website.
The cynicism behind American philanthropy was brought back to attention with the high-profile announcement in December 2015 by Facebook founder Mark Zuckerberg and his wife Priscilla Chan’s pledge to give 99 per cent of their Facebook shares during their lifetime for charitable purposes.
Whether the comparison to American business owners is justified or not, there is no doubt that the chatter has pushed into the consciousness of the wealthy in India.
Girish Venkataraman, CEO of IIFL Wealth’s Trustee Services, that drafts wills and trusts for the company’s clients, said that most of his clients weren’t looking to be Warren Buffetts and Bill Gates. They are slowly beginning to see philanthropy as a vehicle for personal fulfillment. It can give them something meaningful to engage with as well as an opportunity to leave a legacy.
There are families that have begun to say that they want to funnel a part of their wealth into philanthropy but only after having taken care of their children’s needs. Yet, even with the many people with whom these discussions have happened, Venkataraman says, it’s a mixed bag. The vibes have been strong but it would be difficult to estimate the percentage of people who will eventually become significant donors.
As worrying as some find the still-evolving pace of change when it comes to building a culture of giving, there are others who say the media focus has made “celebrity philanthropy” the real motivation for giving.
Giving seems to have become another branding and imaging exercise. ‘People want to be known as somebody who is doing charity,’ says Mistry, who believes that charity should be done in a manner that your right hand doesn’t know what your left hand is doing. Talking about it and “milking” publicity from it was defeating the purpose, according to him.
Satija concurs saying he has been in conversations where the entrepreneur or professional wanted to use their funds to “buy” a ticket into the advisory board, and use it as a public relations exercise and networking opportunity to be in an exclusive group.
It is clear that judgments are made on the motivations and objectives that shape someone’s philanthropic urge: Whether it is a publicity stunt, a personal branding masterstroke, a tax-saving route or a smart lobbying exercise that actually furthers business interests.
Others may dismiss such cynicism, arguing that every pull factor towards philanthropy is justified. No matter what, it’s good for more people to talk about the causes they fund and the organisations they donate to because it brings them to public attention. It also inspires others.
We stand at an interesting juncture. In the very least, it marks a distinct break from the past. Wealth creators and wealth managers are part of a larger ecosystem that is still defining itself. In turn, they are actually determining the shape that this universe will eventually take.
Part 3
House Of Wealth
Chapter 8
Shedding the past, wearing the future
Raghav Bahl, founder of the Network18 media group, calls the events of the last few days of May 2014 a “life-threatening” experience. Bahl is being dramatic, of course; not that drama is out of place in describing one of the biggest and most-watched media acquisition deals in India so far.
On 29 May, 2014, Reliance Industries Ltd (RIL) took complete control of Network18 Media and Investment Ltd — the company Bahl had founded in 1993 — which ran media properties such as CNBC TV-18, CNN-IBN, IBN7, Firstpost, Forbes India and the History Channel India. RIL acquired majority control of Network18 Media & Investments and TV18 Broadcast (TV18).
The news had shocked the media industry. It had also led to a stream of high-profile editorial and management exits from the Network18 and TV18 group. In media interviews after the deal, Bahl asserted the buyout wasn’t hostile or unexpected, industry watchers say it was unlikely Bahl had anticipated that RIL would convert the debentures it had bought in Network18’s promoter group to equity so soon. In early 2012, RIL had bought these debentures to fund Network18’s acquisition of Hyderabad-based Eenadu TV (ETV) with the option of converting them into shares at any time within the next ten years.
With the takeover, Bahl walked out of the company he had founded and managed with a reported 700 crore ($105 million)— it is this that he calls nearly “life threatening”.
‘I am not exaggerating when I say I was shell-shocked the first few weeks,’ says Bahl, adding that when the money came in, it took him some time to come to grips with his “new circumstances”. His mind was abuzz.
Did he really not have to worry about the ups and downs of the stock market anymore and the value of the collateral he had borrowed against? Did he not have to watch the ticker on the television screen all day long? Would he really not go to work the next day? In fact, did he really not need to work another day in his life?
‘My father was a Rajasthan-cadre IAS officer. As a first generation entrepreneur, you become accustomed to being in debt because if you have to grow, you need capital and that’s the one thing you don’t have. I was in debt continuously, leveraging capital against capital to invest back into the company and increasing the value of that capital. That’s how I lived for twenty five years. I never knew what it felt like to have wealth; in fact, my debt ensured I had negative wealth. And suddenly, one fine day, my debt was gone and I had unleveraged capital, Bahl says.
When the transaction happened, Bahl was a little over fifty years old. There were several options ahead of him about how he could live his life after exiting the company he had run for more than two decades, and about what he could do with the huge bounty of personal wealth he now had.
Bahl briefly toyed with the idea of going slow — of taking control of his financial investments, taxation and legal requirements on his own, spending the greater part of the day playing golf, writing more prolifically and running his own blog. ‘Friends said I should buy a villa in the Bahamas and spend a couple of years travelling around the world,’ he recalls.
Going slow or sitting easy doesn’t come naturally to entrepreneurs and within a few days, he decided he had to be in the thick of the action building something from the ground up again. The semi-retired, leisurely life just wasn’t the right fit for him, he told me in his office in a modern high-rise adjacent to Noida’s bustling Film City, that houses the studios and offices of India’s top broadcasters. His old Network18 office is less than a kilometre away.
That sentiment sealed his wealth management decision: He parked a substantial portion of the wealth that he and his wife Ritu Kapur, who wa
s also a director at Network18, got from the Reliance deal in a protected place that could take care of their lifestyle, future emergencies and be a tidy corpus for their family. ‘I didn’t want to walk into hell’s mouth again, especially after getting this opportunity to insulate my family from financial risk,’ he said.
In the colourful, stylish offices of Quintillion Media — the digital media venture he eventually founded — and where I met him last summer, Bahl seemed to be in the happy throes of being hands-on and knee-deep in running a new media venture. He wouldn’t divulge exact numbers but a “large” part of their wealth will be used as capital to grow Quintillion Media, which he co-runs with his wife.
Since it was founded in mid-2014, Quintillion Media has launched The Quint, a digital news platform, and has also made equity investments in digital media community ventures such as Sheroes, an online careers community for women and YouthKiAwaaz, a crowd-sourced online news and views platform.
Apart from “having something worthwhile to do” and having been in debt and financial turmoil through much of being in charge at Network18, Bahl said he also wanted to test himself to see what he could do with a venture for which he did not need to depend on external capital. That is, if he still had the appetite and hunger to multiply his wealth and build a business without suffering through the long phases of a financial crunch.
Since our conversation last May, Bahl has expanded his ambitions even further. In April this year, Qunitillion Media tied up with Bloomberg Media, the New York-based media group, and one of the world’s best known business news brands, to launch a co-branded television channel and an online portal. Both will be called BloombergQuint. Clearly, Bahl is gunning to script yet another success story in the area he knows best — the business of business news.
Is his appetite for growth typical of the first-generation wealthy, especially entrepreneurs, in India? And, what role are these new wealthy playing in the evolution of the wealth management industry itself?
The origins of wealth management
In the developed markets of the West, wealth management and its more exalted specialisation, private banking, began as a segment of the financial services, mainly to cater to the financial and investment needs of the rich. Globally, $20.3 trillion ( 13,55,644 crore) in assets are managed by the organised private banking industry, according to recent data by Scorpio Partnership25.
The genesis of the earliest private banks go back nearly 250 years and can be traced to the cross-border trade in continental Europe at that time. The birthplace was Switzerland. The first private bankers were essentially traders who soon realised that there was money to be made in managing the wealth of those they traded with.
What exactly is wealth management? The term is widely used by a range of financial advisors, brokers and private bankers to encapsulate a variety of services that often confuse and distort the definition. Essentially, wealth managers are aggregators of products and services that are related to the management of their clients’ assets: They can point their clients to products and investment ideas that can grow, protect or maintain their gains. The better a firm is able to aggregate the services, the more relevant it is to the client.
The Financial Times lexicon defines wealth management as a practice that, in its broadest sense, describes the combining of personal investment management, financial advisory and planning disciplines directly for the benefit of high net worth clients.
In the narrowest sense, wealth managers help clients construct an entire investment portfolio and advise on how to prepare for present and future financial needs.
They also help clients make decisions on the wider aspect of asset allocation as well as selection of individual investments. Services also include tax planning, legal advice and an analysis of governance issues that can impact the assets of large families and rich individuals.
Clients can also look to their managers for banking investments, real estate management, credit services and advice on constructing and facilitating their philanthropic initiatives.
Terms such as wealth manager, financial advisor and private bankers often overlap, it’s important to understand the difference between these categories. They each have similar offerings: Including guiding clients on certain investment products with the goal of generating high returns.
Usually, wealth managers and financial advisors don’t offer credit to their clients. In that sense, private banking is an enhanced offering that can encompass wealth management, but wealth management firms cannot provide clients with private banking services.
For decades, Swiss private banks were considered the pinnacle of private banking. Famous Swiss private banks such as Lombard Odier, Mirabau, Pictet and La Roche came up in the eighteenth and nineteenth centuries. They consolidated their positions of strength in the twentieth century, aided by Switzerland’s political-economic advantages of neutrality, stability and peace.
The Swiss private banks’ operations were built around a high premium on privacy: They were storehouses 26 of global wealth, much of which had found its way into the picturesque vistas of Switzerland to escape the ambit of tax codes in the countries in which this wealth had been created.
Doing this called for a shroud of secrecy and discretion, a complicit silence on the colour of money stashed in Switzerland. Ill-gotten gains from dictatorships, drug cartels and money that went to fund terrorist activities were kept secure in the vaults of these banks. Tax evaders from across the world who flouted taxation and currency convertibility norms also found their way to these banks.
Because the core benefit they offered their clients was being “saved” from their incomes and gains being taxed, they had already helped “earn” for their clients. In this era, the main expectation a client had was preservation, and safety from the risk of disclosure and the onus of taxes.
Money that found its way into Swiss banks wasn’t to be churned, or invested in new ventures. More often than not, it was money for life: Kept in a safe place where it could safely — and sustainably — multiply and be available for future generations. Because the business was structured around this, private bankers did not need to hardsell for business.27
This was in contrast to the next era of wealth management personified by the brash ambition and enthusiastic product pushing by private bankers. Because this coincided with the global bull run of the capital markets, the role of wealth managers and private bankers morphed into becoming creators and growers of wealth, and not just preservers of it.
Wealth management became more active, a high-energy chase for the highest returns possible. Many of the excesses — exuberance, greed, nonchalance for compliance and risk — crept into the game during this time. It also led to the emergence of mega-successful private bankers who managed large corpuses of assets for their individual clients. Firms such as JP Morgan, Credit Suisse, Deutsche Bank, Pictet and UBS were stalwarts of the era.
The global financial crisis of 2008 would eventually temper both the raging optimism of the latter phase and put immense pressure on the ultra-discreet Swiss model of private banking in the form of regulations forcing greater disclosure. Powerful economic blocks such as the United States and European Union began to stress on tax evasion.
In fact, it was only as recently as 2014 that Pictet and Lombard Odier, the two largest Swiss private banks, declared their financial results for the first time in over 200-years. Geneva-based Pictet Group was founded in 1805 and the Lombard Odier Group in 1796.
India’s rapidly exploding wealth has injected dynamism into the private wealth management industry although organised wealth management is still a tiny, fragmented market.
Estimates suggest that private bankers in India only managed, at most, $50 billion ( 3 lakh crore) in assets, estimated to be less than five per cent of the size of the overall Indian market28. India also has a huge number of independent financial advisors. But there are few estimates on how many are actually active as well as the total size of the wealth they manage
.
There are some certifications but a large number of independent advisors are outside the ambit of audit and inquiry with few certifications needed for somebody wanting to become a financial advisor.
What is unique about the Indian wealth management space, similar to much of Asia as well, is that private banks as a whole are new to the region unlike in Europe where the largest private banks have been in business for hundreds of years. Also, in a huge departure from the way the European private banks came up in the eighteenth and nineteenth centuries, Asia’s private banking industry evolved from either retail banks or brokerage firms. Both are very different in their genetic makeup from the secrecy-ridden culture of the Swiss private banks.
Would it be the right match for a newly emerging class of wealthy?
Chapter 9
Great expectations
Much as Bahl re-invested a part of his wealth in a new business venture to relive the thrill of enterprise and to create more wealth, India’s new wealthy aren’t happy just sitting on the wealth they have created. Much of the accelerated pace of new wealth in India has come from individual business ownership. First-generation entrepreneurs have injected a great deal of dynamism into the industry and, in many ways, are changing how it works. It’s a defining quality of the wealth management industry in India.
This isn’t true only for India. Entrepreneurs are the most important high-net-worth segment across Asia because in emerging economies, first-generation wealth creation is largely driven by the opportunities entrepreneurs have tapped into to build companies and subsequently wealth.
As a customer segment, first-generation wealthy entrepreneurs have not only expanded the size of the wealth management market but they are also rewriting the rules of the game.
First, serving entrepreneurs requires a special focus because they usually have more complex requirements than say a wealthy corporate executive or self-employed professionals such as lawyers or doctors. Entrepreneurs often seek advice on both their business and personal wealth needs. Since most had earned the money themselves, they are also more involved in managing it. They want to listen, understand and participate in decision-making.
The Wealth Wallahs Page 9