Goldman Sachs opts out of India JV

After long negotiations with Kotak to try and increase its stake, Goldman decides to go it alone instead.
Goldman Sachs announced yesterday (March 16) that it is dissolving its decade long partnership with the Kotak group. The announcement comes after what is believed to have been lengthy negotiations to restore some equilibrium to the partnership in which Goldman only owned 25% of an investment banking and securities joint venture.

In an announcement, the US investment bank said that Kotak Mahindra Bank will pay Rs1.2 billion ($27.1 million) for its 25% stake in Kotak Securities and Rs2.1 billion ($47.5 million) for its 25% stake in Kotak Mahindra Capital Company.

Kotak Mahindra's shares rose 6.4% yesterday, suggesting the market welcomed the removal of uncertainty about the state of the JV.

Goldman will now set up a wholly-owned Indian investment banking and securities firm once it has received all the requisite permissions and licenses. The new operation will also include principal investing, asset management and real estate.

Brooks Entwistle, Goldman's new India CEO says that, ôIn the first couple of years weÆd like to put $1 billion to work."

And he adds, "The Indian market represents tremendous growth and opportunity. Now, more than ever, there is a compelling case for us to build an onshore presence which is fully integrated with our global businesses."

Ahead of the formal split, Goldman and Kotak have entered into a business cooperation agreement for a period of up to one year. This is intended to ensure that existing mandates and clients are appropriately handled, as well as provide the necessary time for Goldman to get all necessary permissions.

As per Indian laws, an erstwhile domestic joint venture partner has the power to block the entry of the foreign player. For example, plans by the worldÆs largest cement manufacturer, Holcim to enter India have been thwarted many times by a minority stake it holds in an Indian entity. However, Goldman has announced that Kotak will provide all necessary consents for it to go it alone.

Goldman's move follows a similar step by Merrill Lynch last year. The latter paid its joint venture partner Hemendra Kothari $500mn (and relinquished controlling interest in DSP Mutual Fund to Kothari) to acquire control of its Indian investment banking joint venture, DSP Merrill Lynch.

Morgan Stanley now remains the last of the troika to continue operating in a joint venture with the JM Financial group, though rumours suggest that founder Nimesh Kampani is willing to strike a deal.