A single statistic should help put Uday Kotak’s success in perspective. In 1986, when he started his business,
he borrowed money from family and friends to collect the Rs 30 lakh that he put into the company.If you had been a friend of Uday Kotak’s during that period and if you had enough faith in him to have invested in his business, then you would be a very rich man today.
If you had put Rs 1 lakh into Uday’s business, your stake would be worth Rs 100 crore today.
Not bad going, eh?
There are great financial success stories in America and Europe. The great names of finance – Rothschild, J.P. Morgan, Goldman Sachs, etc. – were all individuals who went into financial services of one kind or another and created empires that have outlasted them.
But try as I might, I cannot think of a single parallel outside of Europe and America that matches what Uday Kotak has achieved in the Indian financial market. Almost by definition, there are no such stories in the world of high finance in Africa. China has a State-controlled economy. And in the rest of Asia, it’s the international firms that dominate the finance markets.
Only in India, do we have a Uday Kotak, a man who came out of nowhere and in less than two decades, not only made a massive fortune but also created a financial brand that will probably outlast him just as J.P.Morgan has outlasted Pierpont Morgan.
It is something that Uday is understandably proud of. As he told Anand Mahindra, an early investor in his business, ‘ Let’s put our names into the company. All the great financial houses – the Morgans, the Rothschilds and the others – are known by the names of their founders. Let’s show people that we care enough about this business to put our names on it.’
Mahindra agreed and today, his stake in the business (owned personally, not through Mahindra and Mahindra) is worth hundreds of crores. But even he must never have imagined that, in under twenty years, Uday’s company would have a market cap of Rs 6,700 crore or that he would run the third-largest private sector bank in India.
Cricket and calculus
Uday describes his background as middle class. But his family was – by any standards – comfortably upper-middle class. They were traditional Gujarati cotton traders who diversified into other commodities.
When Uday was born, they all lived together in a large house in Babulnath (next to the temple) where sixty family members shared a single kitchen. Then, Uday’s father and uncle moved out to Laburnum Road, a sleepy, leafy Gujarati-dominated area just off Hughes Road. (Kotak Kunj on Hughes Road belongs to another branch of the same family.) Though the family were of the right background to have sent their son to Cathedral, Campion or any of the other top schools of the 1960s, they chose a rather obscure institution called Hindi Vidya Bhavan on Marine Drive because the school had been inaugurated by Morarji Desai and the Kotaks believed in its nationalist principles.
When he was at school,Uday discovered that he had two great talents. The first was cricket – he eventually became captain of the school team and went on to play in the Kanga League when he joined college.
But it was the second talent that was to determine the course of his life. He wasn’t just good at math, he seemed to have a special relationship with figures. Numbers spoke to him. He could look at a sum and suddenly it made more sense to him than it did to any of his classmates.
He did well enough in school to get into Sydenham for a fouryear B.Com course. In the first year, he was among the top students in Bombay University. But by the third year, he had hit his stride. He topped the university, a feat he was to repeat in his final year.
The logical thing for him to have done was to join the family business, but he decided that he wanted an MBA first. He applied to only one school – Bajaj in Bombay – and naturally, he was selected at once. He enjoyed Bajaj, he says. He played competitive cricket, he topped his class.
And oh yes, he nearly died.
Brush with death
It happened this way. In September 1979, he was playing cricket in the Kanga League, thwacked the ball and went for a run. He doesn’t remember how, but presumably a fielder threw the ball back to the stumps and somehow, it hit Uday on the head.
He crumpled into an unconscious heap on the pitch and was rushed to hospital. The doctors told his parents that he had had a brain hemorrhage and that there was no hope. Nevertheless, they operated instantly.
Looking back, he says, it was the decision to operate within two hours of the injury that saved his life. Had they waited, there would certainly be no Kotak Mahindra today.
Against the odds, Uday survived, but because he took a while to recover from the operation, he missed a semester at Bajaj. Finding himself with nothing to do during this period, he began going to the office of the family business in the Navsari building in the Fort.
It was not a happy experience, though he says that it was a huge lesson for him. ‘ For every decision, I had to deal with fourteen family members and the one thing it taught me was to never do business with family.We have 5,000 employees at Kotak today and not one of them is related to me.’
By the time he was finally finished with Bajaj, he decided to give the cotton business a miss and was all set to join Hindustan Lever. Naturally, his father was appalled. He consulted other family members, all of whom had been impressed by Uday’s financial skills, and they agreed to give him an office space of 300 square feet within the Navsari building premises. Uday was now free to do his own thing though it was understood that his operation was still a branch of the larger family business.
This was fine with Uday because by now, his astute financial brain had sensed a huge opportunity.
Opportunity comes calling
In those days, remembers Uday, banks gave depositors a 6 per cent return on their money. But if a company went to the same bank to borrow funds, the banks charged an interest of 16.5 per cent.
Something about this spread did not sound right to Uday. Obviously, the banks were making too much money. And just as obviously, there was money to be made by anybody who could find a way of reducing this spread.
It was around this time that he met somebody who handled finance for Nelco, the Tata electronics company. Nelco needed working capital and Uday thought that this presented an opportunity. He spoke to associates and friends and asked if they would be willing to lend money to Nelco. He assured them a return that was higher than the 6 per cent the banks were giving. And he told Nelco that the interest would be lower than the bank rate. ‘ It worked,’ he says, ‘ because we were dealing with a Tata company. Everybody I spoke to was willing to lend to a Tata company because the deposit was risk-free.’
From these relatively straightforward transactions, Uday advanced into bill discounting, using the same principles. Next, he spotted another opportunity. In the early 1980s, many foreign banks with huge international assets had opened shop in India. Because of government regulations, these banks did not actually have that much money for their Indian operations. On the other hand, some of the older foreign banks – Standard & Chartered, for instance – had lots of cash and needed to find some use for it. So, Uday moved into arranging financing for the newer European banks. ‘I didn’t have to do much,’ he recalls, ‘it was all a question of getting a bill and getting the bank to put its chhaapa (stamp) on it.’
But it was a profitable business and he was soon making a few lakhs a year, which wasn’t bad for a young man just out of business school.He sensed that he needed to expand and doubled his staff from three to six. The problem was that the size of the office remained the same, so he hit on an ingenious solution: ‘We doubled the working area by cutting all the desks in half.’
The Mahindra magic
When he looks back on his life, Uday Kotak thinks that 1985 was probably one of the most significant years. That was when, on the advice of a friend and mentor, Sidney Pinto of Grindlays, he decided to start a professional business of his own. That was also the year he met his wife, Pallavi. It was practically love at first sight: they married within months. And it was the year that Anand Mahindra, whom he dealt with while arranging funds for Mahindra Ugine, told him that he would invest in any business that Uday wanted to start.
‘ Anand had just come back from business school in the US and he understood that the financial services revolution was certain to hit India. In early 1986, when the business took shape, Anand put four or five lakh into the company and his father agreed to be the chairman. We had an investment of Rs 30 lakh and I cast around desperately for investors and borrowed money to be able to buy my own stake,’ Uday remembers. ‘ And with Anand on board, we were able to call the company Kotak Mahindra like Goldman Sachs or one of the other big Western firms that I admired. And let’s be honest. The Kotak name meant nothing. But the addition of Mahindra gave the company instant credibility.’
Despite these auspicious beginnings,Uday didn’t move out of Navsari building till 1988 when, at the urging of Anand’s father, Harish, he bought offices in Nariman Bhavan at Nariman Point. ‘ It was a big decision but looking back, it was crucial for us to have scaled up. We were making money from bill discounting. I had bought a stock market card and we were into equipment leasing which was a popular tax shelter,’ he remembers.
In 1989-90, Citibank launched the car financing business in India. In those days, you had to wait six months or so if you wanted a car unless you were willing to pay a premium. Kotak entered the business but offered an added plus. Kotak Mahindra would buy many cars in its own name, so if you went to the company for a car loan, not only would you get financing but you would also get the car on the spot.
After that, the successes kept coming. At Anil Ambani’s wedding, Uday ran into a friend who had a fixed deposit distribution business that he wanted to get rid of. Uday bought it off him for around Rs 50 lakh and got an 800 square feet office in Dalal Street as part of the deal. In 1991, Kotak Mahindra got into merchant banking and the profits were good.
In December 1991, the company went public and Uday felt he was on the road to creating the financial services institution he had always dreamt of.
The unsung story
In 1993, Uday went international. At a Euromoney conference in Delhi, he met people from Goldman Sachs and in his own words, ‘I just chipkoed to them.’ Goldman Sachs liked what they saw and Uday became friends with senior partner Hank Paulson. Two years later, Goldman Sachs signed a JV with Kotak for banking and securities.At around the same time,Mahindra and Mahindra launched a JV with Ford, so it was convenient for Kotak Mahindra to do its own JV with Ford Motor Credit, the company’s car financing arm.
‘ All this was important for me,’ says Uday, ‘ because till then I had no idea how global financial businesses were managed. Dealing with Goldman Sachs helped me learn how to run a financial business. It also taught me that things were changing very quickly in India – especially after the reforms – and that the old ways of doing business were dead.We had to adopt global norms.’
In 1998, he launched the Kotak Mutual Fund, which he saw as a logical extension in the financial services sector. By then, he had already done something unusual. But because he had done it so quietly, nobody really noticed.
Uday Kotak had become a press baron.
It was never his intention originally to buy Business Standard, he says. Like everybody else, he thought it was a damn good paper and was distressed when he realized that its owners, Kolkata’s ABP Group, did not have the money to run it properly. ‘ At that stage,’ he remembers, ‘ BS was losing Rs 1.5 crore a month and there was a very real sense that ABP would be bankrupted by the losses. Aveek and Arup Sarkar came to me and said that they were desperate for a buyer.’
By then, ABP had spun BS off into a separate company but was still responsible for its losses. The idea was to find a rich man who would buy the new company. ‘We went to all the usual names, the Ambanis, the Wadias, the Tatas, etc., and nobody was willing to buy it.’
As the desperate search yielded no results, Uday recalls, the Sarkars seemed ready to give up. ‘ Arup Sarkar told me in so many words that he could not afford to keep BS going. As no buyer had been found, they were simply going to close the paper down.’
Uday thought about it. The problem, as he saw it, was not that BS was a bad product – far from it. The problem was that there was an economic downturn and a big project like BS could not survive with small-time capital and financially strapped owners. ‘I did a quick calculation. I believed that if I put Rs 20 crore into the paper, we could turn it around. The cost of acquisition was virtually zero. The Sarkars were so desperate that they were ready to give the paper up for nothing. I can’t remember how much we paid but it was only a crore or so. Kotak Mahindra was flush with funds – some from the Goldman Sachs JV – so it seemed like a risk worth taking.’
He was wrong about one thing, he says, but right about the other.He was convinced that BS could only survive if T.N. Ninan, the paper’s highly regarded editor, agreed to run the business. ‘ In the media business, you have to let journalists run the show because they understand what to do. If you interfere, try and impose management on them, or act as though you’re some great press baron, you can never make a success of a media business,’ he says. ‘ So, I removed myself from the actual running. T. Thomas,who got along with Ninan, chaired the board, and Ninan proved to be as talented a manager as he is an editor. It is because of Ninan that the paper makes profits today.’
So, what did he get wrong? ‘I was too optimistic. The downturn lasted longer than I had expected. I ended up spending Rs 40 crore, not Rs 20 crore as I had thought.And we took on new investors from Great Eastern Shipping, who put in another Rs 20 crore. So, we spent Rs 60 crore, three times what I had planned. But,’ he says, ‘it was worth it because it’s not just a profitable paper, it’s also a very good paper.’
And, to his lasting credit, he pulled it off without ever letting the power of being a press baron go to his head.
Riding out the storm
The rest of the Kotak story reads like a list of successes. Once Uday had a certain critical mass, he just kept expanding. By the end of the 1990s, he was one of the most respected names in Indian finance and nearly every big deal came to his firm. Businessmen sought him out for financial advice and any foreigner seeking to invest big money in India rang his doorbell before proceeding further.
There was just one nervous moment. In 1997, as finance companies mushroomed all over India, Uday had an epiphany. He called in his senior managers and told them, ‘I am willing to bet that in one year’s time, 99 per cent of these finance companies will go bust. I want you to stop going out and looking for business. In fact, I want to shrink our lending by 50 per cent.’
It was a strange thing to say – but it was also the right thing to do.As credit was squeezed, the financial sector faced its biggestever crisis. Most finance companies did go bust, but Kotak rode out the storm. ‘I told my people not to focus on return on equity but to just focus on equity. In other words, keep your capital in place,’ he says. ‘ That’s why we survived that phase with our net worth intact. We took a hit of Rs 100 crore in bad debts but by then, we were strong enough to manage.’
What made him do it? ‘I think there are two sides to my personality. At one level, I like scaling up and I want to expand. But I am also a very conservative and cautious person. There is this constant conflict between these two contradictory personality traits. In this case, the conservative part of me won out. I kept thinking that if UTI was in trouble, the government would bail it out. But nobody was going to bail Kotak out. So, that paranoia probably saved us.’
Kotak is now into insurance and has massively expanded in banking. A branding exercise has concluded that the single name Kotak should be emphasized so that people are not confused by various Kotak companies. It seems to have worked. If, during his first decade, Uday Kotak won the confidence of India’s top businessmen, he seems to have used the second decade to win the faith of India’s consumers, who flock to his bank and his insurance company.
He is still only forty-six and has much of his working life ahead of him. His empire will surely grow as financial services assume a more central place in our economy. Did he ever imagine, I ask, that his skill with figures would leItad him to this position?
‘ It’s not the thing with numbers,’ he replies. ‘ There are many people who are much better with figures than I am, even in my own company. Whatever I have achieved is due to three things. One: concentrate on substance not form. Two: believe in a value system, not just in profits. And three: recognize the importance of process over creativity. Because Indians are a creative people, we rely on discretion and instinct. But when you’re building an institution, there is no substitute for process. That’s what all my dealings with foreign companies have taught me.’
Is that his greatest success? That he could have been a multimillionaire, global financial wizard and deal-maker. But that he chose to create an institution instead?
‘ Yes, if what you create cannot outlive you, then I think, you have failed.’
(Picture courtesy Hindustan Times)