February 2000: on a wintry morning in London, four gentlemen get into a huddle at the headquarters of Mittal Steel (now Arcelor-Mittal), the world's largest steel manufacturer. It's biting cold outside, but inside an air of warm optimism prevails. Sameer Gehlaut and Saurabh Mittal, two of the co-founders of Indian stock broking upstart Indiabulls Financial Services Ltd (IBFSL), are in the last lap of negotiations for angel funding from steel baron Lakshmi N. Mittal (no relation to Saurabh Mittal). Present at the meeting are Mittal's son, Aditya Mittal, then Vice Chairman on the board of directors of LNM Holdings, and Rishi Khosla, Mittal's fund manager. The three promoters of Indiabulls (the third is Rajiv Rattan), all alumni of IIT Delhi, had mandated a Mumbai-based investment bank, Avendus Advisors, to scout around for an investor. Gaurav Deepak, co-founder of Avendus, stumbles upon Khosla, who is sniffing for potential growth stories across the globe. Aditya Mittal and Gehlaut, from Mumbai, begin negotiations on the phone. Mittal obviously liked what he heard. The numbers-an investment of $1 million at Rs 5 per share-are agreed upon telephonically. The deal is signed in London.

"It was pure gut feel that made us invest in Indiabulls. We backed the individual after we were confident about his business plans (e-trade broking) and execution capabilities," says Khosla. Adds Sameer Gehlaut, the "individual" Khosla is talking about, and the Founder & Chairman of the Indiabulls group: "Mittal saab came in as an angel investor in Indiabulls perhaps after seeing the success of similar business models in the us, of firms like Charles Schwab and E-Trade."

The Early Days

It's an investment Mittal won't forget in a hurry. For one, it was his first in India. More importantly, it's yielded him returns of a phenomenal 100 times. 'Of all our global investments, Indiabulls has given us the highest return," beams Khosla. Mittal was back seven years later to put more money into the Indiabulls group. The difference? He was now investing at not Rs 5 per share but at Rs 531 per share (via an issue of global depository receipts, or GDRs). Mittal today has a net worth of Rs 1,200 crore in the group by virtue of LNM India Internet Ventures' 1.85 per cent in flagship IBFSL and 1.60 per cent in a recently de-merged property developer, IBREL. In addition, the global metals magnate has committed Rs 120 crore to a multi-project special economic zone (SEZ) that IBREL is putting up at Raigad in Maharashtra.

Mittal is just one investor-albeit the one with the highest profile -for whom Indiabulls has created mind-boggling wealth. Others like hedge fund giant Farallon, which invested $1.5 million at Rs 25 per share in 2004 (just before the company's initial public offering, or IPO), and Transatlantic Corporation, a fund that is promoted by Madrid-based Harish Fabiani, which put in $2 million along with Mittal, are just two other financial investors that made a killing in a relatively short span of time. Prominent foreign institutional investors (FIIs) like Deutsche Bank, Citigroup, Merrill Lynch, Goldman Sachs, Morgan Stanley and Fidelity have also picked up stakes in the two listed companies. And of course, along with these financial investors, the promoters themselves have raked in the moolah. Consider: Since listing on the stock exchanges in September 2004 at a price of Rs 25, Indiabulls has appreciated some 60 times. Two years ago, the group's market cap was a little under Rs 3,000 crore. Today, the net worth of the three founders itself, by virtue of their collective 27 per cent holding in Indiabulls Financial Services and 24 per cent holding in Indiabulls Real Estate, is two times that figure. The group's market cap as of last fortnight? Rs 29,000 crore, which pitchforks it into the top 20 business conglomerates in India, by market value.

Banga is hopeful of receiving nearly Rs 1,100 crore worth of rent by next year from the commercial space at Jupiter and Elphinstone mills in Mumbai Gagan Banga CEO/Indiabulls Credit Services

Beyond Broking

Gehlaut is now set to create more value by taking the securities business out of IBFSL and spinning it off into a separate company, Indiabulls Securities Ltd (ISL). IBFSL will focus on businesses like personal loans, loans against property, home loans, lending to small & medium enterprises and used commercial vehicle loans. "The consumer finance business is 10 times the size of broking. If corporate growth is expected at 15 per cent, financial services will grow at 30 per cent. And in the next 10 years we will grow 10 times in the consumer finance business from $3 billion to $30 billion (in market cap)," says Gehlaut, who after working with petroleum and energy giant Halliburton in the us came to India to start a mining and earth moving business. In October 1999, along with Rattan and Mittal, Gehlaut started Indiabulls after acquiring a Delhi brokerage.

Analysts tracking the group expect these three companies to rack up total sales of roughly Rs 3,600 crore by the year ending March 2008, with profits of around Rs 1,500 crore and a net worth of a little over Rs 10,000 crore. That would be a mind-boggling growth of 228 per cent in profits (at the group level) over the previous year. Significantly, broking, the business that Indiabulls started out with, will account for just 10 per cent of revenues.

That's not bad going at all for an eight-year-young upstart. "We were extremely lucky to be at the forefront of the India growth story. We did not have much clarity when we started with the broking business. However, as we went about penetrating the retail market, we realised there was huge untapped potential in the consumer finance and real estate businesses," says the 34-year-old Gehlaut. In real estate, IBREL has put together a land bank of 4,000 acres, at an acquisition cost of over Rs 2,250 crore. That makes it the country's third-largest property developer, after DLF and Unitech-again, not bad for a company that came into being only six months ago.

The real estate push also gives Indiabulls an opportunity to diversify into another sunrise sector, that of organised retailing. Here, the promoters are exploring formats like hypermarkets and multiplex-cum-mall, and are busy acquiring properties for this purpose. Gehlaut has earmarked Rs 1,500 crore for this project, and has been busy acquiring land via auctions in cities like Madurai, Jodhpur, Hyderabad, Agra and Kanpur. "Financial services, real estate and retail are the key sectors for growth that will deliver double-digit growth over the next 20 years. Retail is a missing piece in our pie and we are seeing it as a definite business option as the sector coincides with the real estate story," says Rattan, the 35-year-old CFO of the group, who worked as an operations manager for Schlumberger before co-founding Indiabulls.

Shah is aiming to make the portfolio management segment account for 20 per cent of Indiabulls' securities business Divyesh Shah CEO/Indiabulls Securities

To be sure, though, it isn't just retail that's on the drawing board of Indiabulls's corporate office in South Mumbai (the company will soon move to the top three floors of the 25-storey commercial complex it is developing in central Mumbai on the land where Jupiter Mills once stood; Indiabulls had acquired the mill for Rs 400 crore). Last fortnight, the top brass revealed to BT a clutch of proposed ventures. These include plugging gaps in the financial services portfolio. A foray into life insurance via a wholly-owned subsidiary (although a foreign partner is also being mulled), a mutual fund, and a credit cards business are on the cards. Regulatory approvals are pending for all these ventures. Indiabulls is also keen to merge with an existing bank by swapping shares, rather than applying for a new licence or throwing its hat into the ring whenever a bank is put under moratorium by the Reserve Bank-the company had earlier unsuccessfully bid for United Western Bank.

Outside of financial services, Indiabulls will be one of the many firms keen to redevelop the slum of Dharavi. It also has telecom in its sights-it has applied for licenses for 22 circles, although operating these circles will be a strategic partner. For its Nashik SEZ, Indiabulls has also lined up a 500 mw power plant. For all these new ventures, the group will invest a little over Rs 4,500 crore over the next couple of years.

Battling Blemishes

Such aggression, such risk-taking, such haste haven't been heard of in a long time-certainly not from an eight-year-young wannabe mega-corp. Are Gehlaut and company for real, and are they here to stay? These are questions that sections of the market have been pondering for some time now. Competitors who've been around for decades privately wonder how Indiabulls has been able to grow at such a heady pace; others can't hide their awe about the group's marquee of investors. Blame it on envy or competitive rivalry, but most of Indiabulls' competitors in the broking space have few kind words for them-all of them in anonymous whispers, needless to say. The charges range from an expertise in "managing the environment" to trading with investor money, without their knowledge. Says the promoter of a Mumbai brokerage: "At times they've got away with murder (figuratively, of course) courtesy their financial muscle power and close proximity to 10 Janpath (the residence of Sonia Gandhi, President of the Congress party and Chairperson of the ruling UPA)." Adds a fund manager: "Corporate governance levels are very low at the group. I wouldn't touch the stocks with a barge pole."

Reinforcing such theories are a couple of facts: Market regulator, the Securities & Exchange Board of India (Sebi), came after Indiabulls not once, not twice but three times. This, argue detractors, is evidence of the malpractices taking place at the group. However, on all three occasions, Indiabulls emerged unscathed, getting away with just a rap on the knuckles (see Run-ins with Sebi). In fact, during last year's IPO scam, when Sebi ordered a ban on Indiabulls for allegedly trying to corner shares during allotment, the order was dust-binned in less than 24 hours. The company top brass was apparently able to convince Sebi that the IPO shares heaped in their accounts were those of clients. As one market man points out: "The day after the order was passed the doors of Sebi were opened as early as 6:30 in the morning for them." This proves that their connections with people in power are adequate to override the regulators, say the Indiabulls baiters. Others explain that most of the capital raised by the broking firm was used to fund market operators-a decidedly risky business but one that's paid rich dividends. Rajesh Boghani, a dealer with the Mumbai-based Parag Parikh Financial Advisors, says: "Funding trading activity in the market was the key reason for Indiabulls to do well. It is a risky business and they managed to excel in it."

Shah says Indiabulls entered the arena of retail broking in an aggressive fashion when competition was low, and that's contributed to their success Rashesh Shah CEO & Managing Director/Edelweiss Securities

In case you're wondering how such blue-blooded investors agreed to invest in an ostensibly dubious firm, the detractors point to some hanky-panky here too. Saurabh Mittal, the promoter based in the US, is a partner and portfolio manager at Noonday Asset Management in the US. Before that, Mittal had joined Farallon in 2001 (after co-founding Indiabulls), the same hedge fund that today has an exposure of Rs 365 crore in the group. Mittal may no longer be with Farallon, but Noonday manages its money. Dalal Street veterans question the ethics of a promoter also being a manager of the funds that find their way into the same company.

The Indiabulls top brass attributes such perceptions-that's all they might be as there's little evidence of any malpractice-to resentment amongst sections of the broking community, many of whom have been at it for decades and are still smaller than the Johnny-come-lately. Gehlaut is exasperated by such aspersions and goes on to systematically decimate each of the charges. Let's start with the political connections. "If we had those kind of links, why then are our licences for starting new businesses (such as insurance, credit cards, mutual fund) still pending with different regulators? Why was our bid for United Western Bank rejected (IDBI eventually got it)? Fact is people envy us for what we are today. They haven't been able to achieve what we have done in just seven-eight years," thunders the usually soft-spoken Gehlaut.

Let's move on to the run-ins with Sebi. Consider the first one, during the penny stock scandal of 2005, when micro-cap stocks in the B2, S and Z categories were rigged up to ridiculous levels. Sebi came down on Indiabulls, amongst other brokerages, for contributing to the increase in turnover in a few penny stocks. This in turn could be construed as price manipulation by these brokerages. Indiabulls' defence has been that it is not possible to keep a tab on such rogue clients, and the contribution to turnover from such stocks was a minuscule part of total turnover. However, since that scandal Indiabulls decided not to trade ever in such stocks; today they restrict themselves only to the large and mid-caps in the A and B1 groups.

Road Ahead

Clearly, Gehlaut believes in being proactive in protecting the firm, with the benefit of hindsight. Consider, for instance, the charge of playing around with the portfolio of retail investors without their knowledge. No action was taken against Indiabulls but the dirt has stuck. Now, to counter such negative perceptions, the company records every single call that comes into its 400 broking branches nationwide. "Some 6,000 lines are recorded and archived daily. It's an expensive solution, which costs Rs 10 lakh per day," says Gagan Banga, CEO, Indiabulls Credit Services. Shrugs Gehlaut. "Broking is a thankless business." With new ventures likes consumer finance and real estate, broking has been relegated to the backburner. But he says he won't let go of it, and the leadership status that he claims, with a 6 per cent market share. "It's close to our hearts, it would be bad for the morale of the army if we lose on our home turf," adds the Chairman.

Baliga believes that Indiabulls' impressive back office operations provide them with an edge over other brokerages Ambareesh Baliga Vice President/Karvy Stock Broking

In the IPO scam, Indiabulls officials explain that they arranged meetings in Kolkata between Sebi officials and 230 of the 559 clients from which it had received credits in its accounts. They also claim to have taken them to the residences of 30-40 of the clients. As for Mittal and the Farallon connection, Rattan and Gehlaut rubbish the link, although agreeing that Mittal's presence in the US financial markets provides a huge leg-up when it comes to raising funds from international investors.

The clamour in some nooks of Dalal Street not withstanding, there are those who admire Indiabulls for the fire in their belly, their entrepreneurial skills and their execution capabilities. Says Rashesh Shah, CEO & Managing Director, Edelweiss Securities, a Mumbai-based investment bank: "They entered the market when competition in retail broking was low. Retail broking is a high-risk, high-reward segment and they were aggressive in tapping that sector. Remember this was at a time when small players were shutting shop as they couldn't come to terms with the sea change in the broking environment following the closure of regional stock exchanges, the abolition of badla (an indigenous form of carry-forward trading) and the introduction of screen-based trading. They saw the opportunity and capitalised by investing heavily in setting up e-broking facilities and that has paid off." Adds Ambareesh Baliga, Vice President, Karvy Stock Broking: "Since the beginning they had strong system and processes in place. Their impressive back office operations provide them with an edge over other brokerages."

Cautious, but Aggressive

In many ways Indiabulls is a business house that's pretty much atypical from the rest of the crowd (although Gehlaut quips: "We are the crowd; the only difference is that we are more efficient.") For instance, the promoters don't like putting big-ticket numbers in terms of investments for their proposed ventures; they don't talk about acquisitions or joint venture partners, preferring to build rather than buy (although in insurance there's a view that a partner may be needed, and in a proposed foray into institutional broking an acquisition may be considered); and they're not taken in by the other flavour of the season-going international is not a priority, staying focussed on the domestic consumption-oriented growth story is.

When Mittal first heard out the plans of the Indiabulls' promoters in 2000, he was impressed enough to make his first investment in the company Aditya Mittal CFO/Arcelor-Mittal

Couple the group's aggression with the India growth story, and you have a business group that's aiming for leadership status in each of its ventures; and one that believes in setting new standards and benchmarks. In insurance, for instance (where A.K. Shukla, a former Chairman of Life Insurance Corporation, has been roped in to head the foray), the plan is to break even in three years, something no private sector player has been able to do since the sector was opened up eight years ago. As Rattan points out: "Our advantage will be our low operating costs, as we will be targeting the same customer in the securities business for our life insurance business." And also for mutual funds. "By the fiscal year-end we will have 1 million customers in the securities business. If we can penetrate 30-40 per cent of that customer base with our new mutual fund products, then on day zero I will have a customer base of 3-4 lakh in the urban and semi-urban regions of the country," adds Gehlaut.

The aggression, insists Gehlaut, is tempered with conservatism. "We take calculated risks. Being cautious (about capital) doesn't mean we can't be aggressive," he points out. That attitude can be illustrated with the group's approach to retail. It's starting small, with a rollout of small formats in a few cities. "If those stores make profits we will scale up. If they don't we will not hesitate to back out of the retail project," says the Chairman. Adds Khosla (L.N. Mittal's fund manager quoted earlier): "So far the group has diversified successfully, but if a project isn't going to be viable, they won't hesitate to book losses."

Caution, however, doesn't involve any compromise with speed. Standing atop the 25-storey Jupiter Mills commercial complex that's under development, Gehlaut takes in a bird's eye view of the frenetic construction activity that's under way in Central Mumbai. A few kilometres towards the suburb is another one of his properties, Elphinstone Mills, where IBREL will put up Mumbai's tallest tower with all of 65-storeys. But Gehlaut is quick to focus on how fast work is taking place at Jupiter Mills. He points to an adjoining mill where a retail project is under way. Both mills were acquired at the same time, and it's clear that the IBREL project has made rapid progress. Completion is scheduled for April 2008. "By the next calendar year we will start receiving nearly Rs 1,100 crore of rent from the 3.5 million square feet of commercial space from the two mills (Jupiter and Elphinstone) in Mumbai," says Banga, one of the group's first employees. Knight Frank, a Mumbai-based real estate consultancy, has valued the 3.5 million sq. ft of land at Rs 7,700 crore. Indiabulls had purchase the two mills for Rs 1,100 crore. That's just the real estate activity under way in Mumbai. "In the next 24-36 months we will be ready with 50,000 apartments in Delhi and Chennai," adds Banga. Says Nirmal Jain, Chairman & Managing Director, India Infoline, a Mumbai brokerage that started roughly around the same time Indiabulls did: "Along with their ability to raise capital, Indiabulls' master stroke was to enter the real estate business at the right time."

As Indiabulls moves into larger-scale, high-growth areas, the mother business of securities isn't being given the short shrift. Divyesh Shah, CEO, ISL (the to-be-soon demerged securities firm), says a portfolio management scheme (PMS) is on the cards. For this, ISL's base of six lakh customers along with its 400 offices in 200 cities will provide it with a head start. A foray into institutional broking might just take off too. "We want PMS to account for 20 per cent of our securities business, which will grow by 40 per cent in the next two years. For our institutional business we may take the inorganic route," adds Shah. "When we began we were clear that we couldn't beat the Merrill Lynchs and Morgan Stanleys of the world (in institutional broking), which is why we went retail." Heady profits, a beefed-up net worth and the confidence that cash in the bank brings may have convinced the founders of Indiabulls that they are ready for the main stage. Now, all they've got to do is stay out of trouble. And stay in the money