The contrarian approach

Rashesh Shah, Chairman and CEO, Edelweiss Financial Services Limited

For Rashesh Shah, Michael Lewis’ book, The New New Thing, symbolises what his firm, Edelweiss Financial Services Limited (Edelweiss), was all about when he set it up in 1995 – the next big idea. His business idea stemmed from his experience of working with newly emerging entrepreneurial companies like Infosys, Bharat Forge and United Phosphorus during his early professional days as a MBA fresher from IIM, Ahmedabad in ICICI. These first generation entrepreneurs were accessing the markets for their capital requirements and sought high quality investment banking advice. Shah says, “I realised that players in the capital markets of that time displayed limited understanding and had restricted access to the possibilities that could emerge in this new, liberalising and globalising environment.” Therein, he saw the opportunity to build an investment bank. Today, Edelweiss has grown in to a Rs. 1,650 crore publicly listed company, with a diversified business interest in the financial services sector.

Four things matter, especially in our kind of business. Values, respecting and managing risk, building scale – both in terms of financial and human capital and having a bifocal approach, which means getting the long term right but accompanied by a maniacal focus on short term execution.

Shah’s focus on innovation and his strategy to expand into related markets has been a key differentiator for Edelweiss. He says, “Four things matter, especially in our kind of business. Values, respecting and managing risk, building scale – both in terms of financial and human capital, and having a bifocal approach, which means getting the long term right but accompanied by a maniacal focus on short term execution.”

He has served on the Boards of various companies and public institutions. He has in the past served on the executive committee of the National Stock Exchange and currently, is the chairman of the Capital Market Committee of FICCI.

Testing the entrepreneurial spirit

When he decided to begin his entrepreneurial journey in 1995, unfortunately the market dipped, interest rates shot up and the early impact of lowering duties began to show on industry. And things worsened with the onset of the Asian crisis. Shah’s initial idea was to start a new age investment bank, which would help fast growing companies raise capital by accessing the public markets. “Those days, the rules set by the market regulator, Securities and Exchange Board of India (SEBI) mandated that a ‘Category I’ merchant banking firm (those that were allowed to handle initial public offerings) have a minimum capital of Rs. 10 million,” says Shah. But both Shah and Venkat Ramaswamy, co-founder of Edelweiss, who came from professional backgrounds, could not fund it themselves. Shah’s father decided to mortgage his house and lend them the money.

However, by the time the mortgage came through, SEBI had changed its guidelines and the minimum mandated capital requirement was now Rs. 50 million. This was something the newly formed firm could not afford and its business model had to be changed even before it started operations.

It was also a time when several new companies were looking at raising risk capital. “Since most of them were small or startups, their capital requirements were small and it couldn’t have come from IPOs,” says Shah. It would come from venture funds, private equity funds or high net worth investors. It needed an approach to investment banking that was then new to India. “This suited us fine. All the more so because the firm could not have managed IPOs any way, given the new minimum paid up capital requirements,” shares Shah. Edelweiss soon started catering as an investment banking firm for technology and Internet firms. During this period, Edelweiss closed private equity deals like Grey Cell, Daksh (bought by IBM and other investors), Rediff.com and one of Infosys’ first acquisitions, IQ Financial.

Growth strategy

Starting operations as an investment bank, Edelweiss today has grown into a diversified financial services group in India. It has six main businesses – credit, capital markets, commodities, asset management, housing finance and life insurance. “This diversification stems from a strategy to move into adjacent spaces, which not only expands the revenue base but also de-risks the company from cyclical downturns in any one segment of the financial services industry,” shares Shah. In 2001, it started the institutional equities business by taking over a small broking firm. Shah says, “By 2007, we had expanded our business substantially and were looking at getting into other areas of financial services like credit and life insurance. These areas required capital and an IPO was the logical choice,” says Shah.

Edelweiss’ strategy is to also become a bridge between savers of capital and users of capital, by channelising savings into investments. The company currently has 296 offices in over 150 cities pan India with 2,650 employees. The move into adjacent spaces is a constant effort to address an ever-bigger pool of savings, which Edelweiss can help channelising it. From wholesale capital markets, a segment that addresses about four per cent of financial savings, the company moved into retail capital markets and doubled its addressable savings pool.

With the recent move into life insurance, through a joint venture with Tokio Marine Holdings Inc. of Japan, the company has now increased the addressable share of savings. “Between capital markets, asset management and insurance, Edelweiss can now address 30 per cent of the savings pool. Through its credit and housing finance businesses, the company is following a similar strategy on the capital usage side,” shares Shah.

Against the tide

Edelweiss launched every new line of business when the market conditions were adverse. While competitors and peers were scaling back operations, Edelweiss actively invested. Shah believes that investing during a downturn has several advantages – it is easier to find quality talent, it also gives the company time to test its business model and assumptions. This helps the company to be ready with a tested platform by the time the market cycle turns. For instance, Edelweiss started its broking operations by acquiring Rooshnil Securities in 2001. This was just when the dotcom and technology powered bull run was ending. The next two years were tough as markets went through a prolonged period of stagnation. But during this time, Edelweiss invested in setting up one of the largest research teams in the country, while simultaneously investing in systems, processes and technologies. “When the market cycle turned in 2004-05, we emerged as one of the strongest brokerage houses in the country and is the largest Indian institutional brokerage house,” says Shah.

This strategy to expand into adjacent spaces has also reduced the company’s dependence on the capital market related business, which was the main revenue driver in the initial years. Today, capital markets contribute only about one-fourth of the revenues down from about 60 per cent in 2007. This has insulated company from cyclical downturns.

Going forward

In all these moves, Edelweiss’ goals have been clearly outlined by Shah. In businesses where the total revenue pool or addressable market is of a medium size like the wholesale capital markets, Edelweiss wants to be the leader. In businesses where the revenue pool or addressable market size is huge like housing finance, asset management, retail capital markets and life insurance, his goal is to build scale and capture significant market share over the next few years. Most importantly, Shah aims to do this by protecting the company’s bottom line in near term without compromising on his long-term aspirations.


ON A LIGHT NOTE

How do you unwind?
I used to play tennis earlier. In the last few years, I have taken up running. Having run a few half-marathons, I am now training to run a full marathon. Reading has always been a constant source of relaxation, inspiration and entertainment.

What is the best advice you have ever received and from whom?
During my days at ICICI, I was fortunate to work with some of India’s finest entrepreneurs from whom I learnt a lot. It would be difficult to single out one lesson or a piece of advice.

How has your management style evolved?
Each stage of our growth has thrown up different challenges, making us adapt. When we started the business, a lot of management focus used to be on getting a product right. This later on changed to focusing on businesses. At this stage of our organisational evolution, much of the focus is on getting the organisational systems, processes, technologies and leadership training right so that we build a management team capable of leading the company to the next stage of its growth.