What Really Happened at Aditya Birla Money
Image: Vikas Khot
umar Mangalam Birla was upset. The news he had received in late September 2010 from the 18th Floor of the Indiabulls Centre in Mumbai was distinctly downbeat. The Mumbai-headquartered Aditya Birla Money had lost Rs. 103 crore on its Options Maxima strategy.
Babuji, as Kumar Mangalam is called inside the group, had two choices. He could let the loss trickle down to the investors, or he could pay investors back.
Apart from high-net worth individuals, the word was out that the scheme that had lost money also had some big names from the financial services industry, including a CEO of one of the largest private sector banks in the country.
A spokesperson of Birla said that these rumours are baseless and refused to talk on this due to the client confidentiality clause with their investors. Birla bit the bullet and Aditya Birla Nuvo (ABN), the parent company of Aditya Birla Money, paid the investors. The loss was recorded on ABN’s books.
Missing the Beat
This wasn’t in the Aditya Birla Money script. In 2008, Kumar Mangalam Birla had told Economic Times that he should be either in the top three slots in every business or he should be very profitable. The financial business has three main divisions: Insurance, mutual funds and broking.
Nuvo also plans to infuse Rs. 300 crore into Aditya Birla Finance, a non-banking financial company (NBFC), to increase its net worth and expansion plans. The Aditya Birla group (Birla group) wants to enter the banking sector through this NBFC. And perhaps this too must have played a part in investor’s losses being made good. Such an event reflects badly on a group seeking a banking license.
These losses are significant for Aditya Birla Money.
The firm had posted an income of Rs. 38 crore for the July-September quarter of the year ending March 2011 and a net profit of Rs. 1.5 crore. For March 2010, Aditya Birla Money had a total income of Rs. 112.37 crore with net profits of Rs. 12.68 crore.
The Rs. 103 crore hit that ABN has taken is equivalent to more than two years of Aditya Birla Money’s profits. Incurring such a large capital loss in a financially conservative Aditya Birla Group is almost akin to getting hit for a last ball six in a match against Pakistan.
Ajay Srinivasan, who heads Birla’s financial services foray, and his second-in-command, Pankaj Razdan, found out the true extent of Kumar Birla’s feelings. Soon after the loss, they tried to meet him to explain what had happened. Word has it that Birla didn’t grant them an audience. Instead, they had to meet Santrupt Mishra, the director for group HR for a major dressing down, says an insider.
The jury is now out on whether this setback will lead to more shake-up inside Birla’s financial arm. Insiders say that even before this current setback, Kumar Birla had begun making senior-level reshuffles across various parts of his financial empire, preferring to replace the current incumbents with old Birla loyalists.
In 2007, Birla handpicked Ajay Srinivasan, who was then with Prudential Corporation Asia in Singapore, to head the financial businesses of the Aditya Birla Group. Since 2002, Birla’s financial services business had lost momentum. In 2002, its star fund manager Bharat Shah had moved on to ASK Raymond James and charge for all of financial services went to S.K. Mitra. Then on July 7, 2007, S.K. Mitra was told that his performance was not up to the mark and he was given a hefty severance pack and asked to move on. Birla finance business employees say that before Mitra was out of the building, they were told that Ajay Srinivasan was taking charge of the financial services group.
When Srinivasan took over in 2007, he had to build a business that was losing market share both in the insurance as well as the asset management side. Insurance had a market share of 5 percent and the assets under management (AUM) of Birla Sun Life Mutual Fund stood at Rs. 23,000 crore, making it the seventh largest mutual fund. There was no broking arm and Srinivasan felt that this was one piece that was lacking, so he had to scout for an existing company that could give him access to this business. Since Kumar Birla wanted to be among the top three players in these segments, Srinivasan had a very tough task at hand.
Srinivasan and his second-in-command Pankaj Razdan brought new vigour to the operations, primarily by introducing the go-getting culture of the ICICI group. Insiders say that close to 70 people who had at some point worked with the ICICI group joined Srinivasan and Razdan’s team. Their dynamism and aggression didn’t quite go down well with many of the old-timers inside the Birla finance business though.
To be fair, Srinivasan did get things moving. Between 2008 and 2010, the insurance business has grown by 15 percent annually. It generated profits of Rs. 20 crore for the first time for the July-September quarter of the year ending March 2011, but new business premium has fallen by 12 percent. Chances are that growth may not come through for the year ending March 2011, as the Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) have changed the way insurance schemes or unit-linked insurance plans (ULIPS) work — and that will dent profitability severely.
The revenue of the financial services business has increased by 45 percent in the last one year. Yet, Srinivasan isn’t anywhere close to achieving Birla’s targets. Birla hasn’t reached the top three positions in any of the businesses and profitability isn’t very robust either. Also, close to 80 percent of the assets of the Birla Mutual Fund are related to liquid, cash or debt-related funds. These schemes earn a meagre 15 basis points (0.15 percent) as asset management fees. Other funds that have substantial assets in equity earn around 1 percent as management fees.
So, to get a piece of the equity action, in September 2008 Srinivasan recruited Vivek Kanwar from ICICI Bank to head Birla Sun Life Distribution. Kanwar had been a general manager at ICICI Bank, with the retail liability group, and his responsibilities included handling high net worth individuals and institutional clients. In September 2009, Kanwar became the head of Aditya Birla Money, the broking arm of Birla Financials.