In the meantime, another huge crisis loomed — this time the Enron scandal, which saw the Texas-based energy-trading giant, and once America’s seventh biggest company, file for bankruptcy in December 2001. This followed months of revelations that showed the company had borrowed heavily, was poorly audited and had kept its investors misinformed. This put a spanner in Amit’s plans.
Several large American banks were accused of having participated in Enron’s accounting mess. Along with Merrill Lynch, JP Morgan Chase and Credit Suisse First Boston, Citigroup was also mentioned in a lawsuit filed by the shareholders of Enron. In June 2005, Citibank would agree to pay $2 billion in damages.
In late 2001, as Amit was planning his transfer to Mumbai with Citi, the company announced a global hiring and transfer freeze. His plans were nixed but he remained desperate to shift to Mumbai. A chance to do that came up with Kotak in the second half of 2002, as it began hiring for its in-house wealth management business, leading up to the launch of the retail bank in 2003. Amit joined in November 2002 and moved to Mumbai. He couldn’t have known it then but it would prove to be the beginning of his IIFL Wealth journey.
It would also place the three founders together for the first time.
Yatin would soon join the same office a month later, in December 2002. Amit and he struck an easy friendship. Within a year, by the end of 2003, Amit was offered a posting in New York to expand Kotak Mahindra’s offshore business, a dream move to the world’s most exciting financial centre. As he waited for his US visa to come through — which came through only in April 2004 — he transitioned his clients to Yatin.
Amit also spent two intense months working with Karan to integrate Kotak Securities — the bigger wealth management unit in the Kotak Mahindra Group and where Karan worked — with the in-house wealth management unit where both Yatin and Amit were employed.
Kotak had commissioned McKinsey & Co, the global consulting major, to help this integration. Amit represented the bank’s in-house wealth division while Karan was Kotak Securities’ representative. It would be the first time the two would meet and work together.
New York proved to be a huge learning experience. ‘Half of the investors didn’t even know where India was on the map,’ he recalls.
India wasn’t the most exciting emerging market destination at that time. The first 80 per cent of their presentation to clients, Amit remembers, used to be on introducing India, and extolling its virtues as an exciting investment destination.
Things started looking up gradually. In 2006-07, Amit and his three-member team got top-notch institutions as investors. By early 2008, when he would eventually quit to start IIFL Wealth, he had raised a book of roughly around $300-400 million ( 2,011-2,681 crore). It was an experience that would prove to be critical to the success of IIFL Wealth, which currently has assets of $4 billion ( 2,680 crore) from key institutions and HNI relationships globally.
Since a large part of this book deals with what is happening in India, and examines the forces that changed the dynamics of the industry here, many of the firm’s international experiences may not find their way into the book. Amit’s role in anchoring IIFLW internationally is crucial. The fact that he leads the country’s global business might not place him in the everyday incidents described in some sections of the book but his voice is well-represented in the larger issues of strategy and positioning — that has evolved with the contribution of the three founders.
Chapter 15
Alchemy of ambition
All through 2006 and 2007, Yatin and Karan built a reputation of being formidable relationship managers, with each of them bringing in and managing a large share of the western region’s wealth business.
Their personal growth had been accelerated by the fact that Kotak Mahindra itself grew exponentially in the mid-2000s with a twenty times increase in its market capitalisation within five years.
Karan eventually headed the Mumbai office from April 2007 till January 2008. By then, they were raking in compensation they wouldn’t have imagined even two or three years ago. Karan reckons he had wiped off the personal ignominy of being in the lowest salary percentile of his IIM Bangalore batch by leaping into the highest percentile across his batch mates in India within five years. Yet, dissatisfaction was creeping in.
The steadily growing salary package and bonus incentive were not enough for ambitious, young professionals like them — high on the confidence that their successes had given them. ‘We felt we deserved more. We wanted recognition for building a business, creating something,’ he elaborates.
It wasn’t about the money, the founders assert. By themselves, their salaries were fine. What rankled was that they didn’t seem fairly linked to their business success. It made them realise that they needed to move from being employees to owners to really benefit from the upside of this growth. It was something Karan and Yatin talked about often.
They knew Kotak wouldn’t be able to satisfy their need for higher stakes, higher returns and greater recognition. It wasn’t even fair for us to expect that, the duo say. By then, Kotak had become a very large organisation and the entrepreneurial zeal had to be offset by a more stringent, process-driven approach.
Their senior colleagues couldn’t understand their restlessness, especially since Kotak’s wealth business had grown so spectacularly and they had grown equally impressively with it.
Personal ambitions aside, Karan says, there seemed to be a wide schism between them and their senior colleagues, apart in age by six to ten years, on their ability to take risks and the very notion of self-fulfillment. It was a generational difference — one that is more evident today than it was in 2007.
Successful young professionals now look beyond their organisations when hunting for growth. They experiment more and are usually more willing to tradeoff stability for risk.
In contrast, Karan says, many of their senior colleagues had graduated from management and engineering colleges in the early 1990s to the mid-1990s. They credited their growth to the organisations they worked in. A stronger sense of loyalty and indebtedness flowed from that.
Their generation — those who started working at the turn of the century in India — had a greater degree of self-confidence, buoyed by the expansion of opportunities in India.
Their ability to leave high-growth jobs came from this distinction, this facility for risk and the urge to be recognised as creators. More importantly, the three founders had started to believe that the industry had a place for a firm that only wanted to focus on wealth management. It was no longer a strategic adjunct, like for banks.
Genesis
The potential for a specialised wealth management offering was something Karan and Yatin spoke about often, as did Yatin and Amit who was in New York then. They recognised that there was a great opportunity for them to build a pure-play wealth management firm distinct from the offerings of banks.
Although not close friends, Karan and Yatin had developed a healthy respect for each other, first as highly competitive peers and then during the six months that Yatin reported to Karan, who was heading Kotak’s western region. But, by then they knew that whatever they did next, it would be together. Amit and Yatin had become buddies. Even though they had worked together very briefly at Kotak, they spoke on the phone virtually every week.
They weren’t quite sure how to go about it. They had to consider two options: Should they go out alone and start their own brand with angel funding from a few clients, or did it make more sense to partner with an established firm?
It was around that time that Donald D’Souza, who had till recently worked with Kotak Investment Bank, and had moved to IIFL Holdings (then India Infoline) to set up their investment banking division, reached out to Yatin. IIFL was interested in setting up a wealth business. D’Souza and Yatin had worked on a few transactions at Kotak. He introduced Yatin to the company’s founder, Nirmal Jain.
Jain, as I mentioned earlier, was a first-generation financial services entrepr
eneur, a chartered accountant and IIM Ahmedabad graduate, who had founded India Infoline in October 1995 with R Venkatraman.
The duo had a rough ride, starting first as Probity Research (the name was later changed to India Infoline), a company that provided research on the Indian economy, business, industries and companies. They soon acquired clients such as McKinsey & Co, the Tata Group, State Bank of India and CRISIL that paid for these reports. To take advantage of the internet, Probity Research took a counter-intuitive risk: It uploaded all its research reports for free on the newly created indiainfoline.com.
In 2000, they launched an online trading portal called 5paisa.com, allowing investors to trade on its platform for a flat fee of 0.05 per cent. These were the days of the dotcom craze and Intel had invested in the venture. The high was short-lived. The company would have to tweak and change its business focus repeatedly to survive.
In the chaos following the 2001 dotcom bust, it tied up with ICICI Prudential Life Insurance to become a corporate agent for insurance. During 2002-2003 — with the Ketan Parekh stock market scam and dotcom bust — survival, not growth, became the focus. India Infoline used the downtime to create Trader Terminal, its propreitary trading technology that is still in use. Things started looking up again for Jain and Venkataraman.
In 2005, their company received a commodities licence. That year, it also listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) in April 2005, raising 93 crore ($13.8 million).
Two years later, in 2007, Jain made a bold move, luring the top four people of the institutional brokerage firm CLSA, led by the firm’s well-celebrated rainmaker, Bharat Parajia, to join India Infoline. The offer was a consolidated package of 44-crore ($6.5 million)that included a hefty sign-on bonus as well as a collective stake of 15 per cent for the quartet in India Infoline.
So significant was this news, owing to CLSA India’s sharp growth from the late 1990s to the early 2000s that India Infoline’s share price went up by 30 per cent in a single trading session on 25 May, 2007. It was the day the company announced that Parajia, along with H Nemkumar (country head of CLSA India), Vasudev Jagannath (head of sales, CLSA India) and Aniruddha Dange (head of research, CLSA India ) would be joining India Infoline.
Bringing on a core, senior team on board from a successful industry peer would give Jain the confidence to try this again — with the founders of IIFL Wealth.
In his first meeting with Jain, held at India Infoline’s office in Mumbai’s Goregaon in September 2007, and which lasted more than an hour and a half, Yatin knew instinctively that India Infoline could be a partner to the idea they had been nurturing. Naturally given to optimism, he says he was fascinated and impressed with Jain’s self-scripted success story: What he had achieved coming from a middle-class background, much like his.
‘He was giving us a similar opportunity to do that in wealth,’ he says. Karan, however, never having heard about India Infoline wasn’t convinced. ‘My first reaction was a “no”, to be honest,’ he says.
The company might have done extremely well as a financial services firm but because more than 60 per cent of their business at the time came from broking; their DNA was in retail, he felt. It was a very different mindset from servicing the wealth segment they had in mind. Some people he spoke to questioned whether IIFL — a lesser known brand then — could win the trust that lies at the heart of wealth management.
Karan remained keen to start up independently. Raising 25 crore ($3.7 million) of capital to get the business going wouldn’t be a challenge for them — it could have easily come from within their network of clients.
Yatin kept up the conversation with Jain, meeting him soon after their first discussion. Convinced that this would work out, he coaxed Karan, telling him that they were on to a “100-crore idea”; that joining hands with India Infoline would enable them to mount their offering on a bigger scale, right from the starting line.
Shah’s “100-crore idea” pitch has become IIFL Wealth’s oft-repeated origin story.
The decision eventually boiled down to the fact that they knew the opportunity would not wait forever. Waiting for the regulatory approvals required to start-up a completely new entity, creating a proprietary technology platform and getting the balance sheet in place was a time-consuming affair.
With India Infoline, the founders say, they could do in five years what it would take them ten years to do alone. With an equity research and sales team, and an NBFC, India Infoline offered advantages that were difficult to immediately create from the ground up. Without these arms, a wealth firm’s value to their clients would be limited38. It would eventually limit their growth. It was important to be able to create an institution that was bigger than three people.
Besides, financial investors had nothing to offer other than capital, Karan began to realise, from examples of wealth management firms started by professional private bankers much like them. Raising funds alone was not going to be enough.
Neither was this sufficient to build a full-fledged platform, nor did it include any incremental benefits such as research, broking and access to capital to offer clients credit. By already diluting majority equity early on, the room to raise more funding would be compromised; yet, without capital, the size of the business would remain “boutique-ish”.
Poised on the horns of a dilemma, Jain’s quick thinking, fast decision-making and a no-holds-barred risk-taking attitude began to appeal to Karan as well. He first met him in October 2007, and in their third discussion, a couple of weeks later, Bharat Parajia also joined in.
The young professionals laid out their ambitions frankly. They might become an offshoot of a larger entity if they came on board but the philosophy and mechanics of their partnership should be constructed on a simple foundation — that they wanted to be entrepreneurs of the new business, not its managers. They wanted both: An opportunity to create wealth for themselves and the satisfaction of being recognised for what they would build.
Jain could relate to the frank speak, having started India Infoline when he was twenty eight years old, as he could to the aspirational, middle-class backgrounds of both Karan and Yatin.
In fact, what they had in common was a tactical commercial sense, seeded in by the small-business environments they grew up in. None of them were plugged into any of the powerful old boys’ networks or had access to the kind of family money that opened doors.
It was a promising bet as the young duo had domain expertise, passion, entrepreneurial zeal and age on their side.
Jain got back to them within two days with a simple formula — 66 per cent stake owned by India Infoline, and the remaining 34 per cent with employees. Of this, 24 per cent was allotted as common stock and the remaining was kept for performance-driven options. He also promised them full management control.
That he had recently concluded the CLSA deal, displaying the willingness to share ownership to build something larger seemed to suggest that he was eager to follow a model of professional entrepreneurship.
With the deal verbally struck, Karan and Yatin called Amit in New York. His experience of managing international business and regulatory systems would be critical for setting up their offshore unit.
Without giving him too many details, they flew him to Mumbai, business class from New York. Once he agreed to be on board, however, they bought him an economy ticket for the return leg! His life changed the fastest, Karan tells me with a laugh.
They also invited five junior colleauges from Kotak to join the new venture — Jiten Surtani, Himadri Chatterjee, Sandeep Jethwani, Kuber Bhalla and Dhawal Kothari — all of whom, other than Dhawal, have stayed with the firm. Each of them had worked with either Yatin and Karan as sales ‘cubs’ or management recruits with a couple of years of experience.
Surtani was the first to get involved, as early as November 2007. He helped draft the MoU between Jain and what would be the new subsidiary. Today, he is one of the firm’s most prolific relation
ship managers, handling approximately 5,000 crores in assets.
They also recruited a new group of people to complete the early team. Japhia Walker, Pankaj Fitkariwala, Prashast Seth and Pravin Somani joined them from other companies.
The three founders made another crucial decision — to identify Karan as their CEO. His leadership was well established and it wasn’t a decision they dwelled on or debated, the Shahs tell me.
Nearly as promptly, they divvied up their equity ownership as well — Karan had 5.86 per cent, Yatin 3.95 per cent, and Amit 3.5 per cent. It was a pretty scientific way of settling equity and valuation, the trio laugh heartily at the memory. More seriously, it was driven by shared trust, they say.
This spontaneous decision-making offers an interesting insight into the world of entrepeneurship, and also into the nature of the team at the backbone of the enterprise.
In the kind of private equity transacations like the one IIFL Wealth went through with General Atlantic in 2015, valuations are carefully arrived at on the basis of market potential, past balance sheets and a whole set of other business metrics that feed a complex algorithm.
In hindsight, however, most companies are really forged on a heady combination: A leap of faith generously tossed in the excitement of an idea.
When issues such as equity stakes and partnership contracts are getting drawn up, families, friends and well-wishers often come armed with doubts and scepticism. Karan remembered friends who questioned whether the 76-24 per cent ownership structure with IIFL was really such a good model. Considering that the parent company owned such a large majority stake, were the IIFL Wealth founders’ wrong to believe they would have the freedom founders enjoy?
If you’re reporting to the board of a listed company from the very beginning, how much decision-making do you really have? The founders assert they weren’t anxious about being edged out of the decision-making, confident as they were of the domain expertise, client relationships and ideas for growth they each had.
The Wealth Wallahs Page 15