By Heather Timmons Published: April 13, 2007 MUMBAI: The Indian financial capital has been invaded by Wall Street. From Nariman Point, the traditional banking district on the southern end of the island city, to Bandra Kurla complex, the mammoth new business center just beyond the airport and the northern slums, Mumbai is under siege. Foreign investment banks and brokerage firms are jostling for office space and bidding for employees. "The mood is very bullish," said K. Balakrishnan, a managing director and India chief executive at the investment bank Lazard. With economic growth running at an annual pace of more than 8 percent, the attraction of investing in India is obvious. Yet the long-term prospects for deal-making are more murky. The notoriously volatile Indian equity markets could turn down sharply, crushing consumer and corporate confidence, damping Indian companies' appetite for overseas acquisitions and domestic investors' hunger for investment products. And the slow changes to the layers of Indian regulations may stall. Some clouds have already formed. Vodafone's recently announced acquisition of the Indian cellphone company Hutchison Essar has come under intense regulatory scrutiny. For the moment, however, Indian deal-making is robust. There were $39 billion in announced deals in India during the first quarter of 2007, said the accounting firm Grant Thornton, thanks mainly to the overseas ambitions of Indian companies. Bankers here say they expect dozens more cross-border deals in 2007 as Indian pharmaceutical companies expand or put themselves up for sale, conglomerates become more focused and technology companies grow. The growing wealth in India is just as enticing to Wall Street. Forbes magazine designates India as the second biggest home of Asian billionaires, behind China, and it is seen as one of the world's fastest breeders of millionaires. These numbers are attracting private banks and fund managers. Since last year, Indians have been allowed to invest as much as $50,000 a year in foreign stocks. And the domestic fund business has been booming. "We're building a full-service Goldman Sachs presence here," said L. Brooks Entwistle, Goldman Sachs' chief executive in India, in an interview at the Belvedere, a private club in Mumbai that is a regular banker haunt. Entwistle moved to Mumbai from New York in February 2006 to expand the business, and Goldman has 75 bankers on the ground now, in addition to thousands of back-office personnel. Investment banks are no longer weighing putting money into expanding in India against the resources they are devoting to China, top executives say. "Now every bank says that you have to do both," said Vedika Bhandarkar, managing director and head of investment banking at JPMorgan India. JPMorgan has about 275 bankers in India and is adding to that number, in addition to thousands of back-office employees. Morgan Stanley said it would develop a full investment banking operation in India. Credit Suisse will reopen its India brokerage business. Merrill Lynch plans to double its private banking business. Lehman Brothers and Goldman Sachs have bolstered previously announced expansion plans with a series of high-profile hires. The banks that have long been in India, like Citigroup, HSBC and ABN AMRO, are adding bankers and money managers. Still, Indian investment banking fees have been tiny so far. Investment banks earned just over $400 million last year on India mergers, according to Dealogic. By comparison, banks earned twice that in deal fees just from the private equity firm Kohlberg Kravis Roberts in 2006. To make things more difficult, the rush of new players is driving salaries in India to levels of New York and Hong Kong. An analyst with just a few years of experience may command over $100,000 a year, managers say, and poaching among banks is fierce. Finding new fund managers is particularly difficult. "Everyone here gets a call a week" from a global investment bank offering a job, said Manish Gunwani, a vice president with Brics Securities, a four-year-old brokerage firm in Mumbai. Brics is planning to expand into investment banking, possibly through a deal with a small foreign bank. Brics is recruiting MBA graduates from outside the financial services industry, from conglomerates like Hindustan Lever and the drug company Dr. Reddy's Laboratories, Gunwani said. "Major investment banks can't afford not to own an India piece," Gunwani said, but "at this valuation, India is not uncharted territory." This is not the first time that Wall Street has come to India. In the mid-1990s, there was a "lemming-like" deluge of foreign bank investment in India that "ended in tears," said Dominic Price, JPMorgan's managing director and senior country officer for India and Sri Lanka. Several banks beat a hasty retreat from India, shutting offices and pulling management back to Hong Kong or elsewhere in Asia after business slowed and regulatory changes increased capital requirements. Many who did not pull out entirely were content to let their businesses in India remain unchanged until the last year and a half, when they began ramping up again. There is still a "lot of hard work to be done" on fixing infrastructure, regulation and reducing corruption, Price said. "The easy money has been made, and it wasn't as easy as people thought." Opportunities in India make it difficult for foreign banks to resist investing resources. "The sheer demographics of the market just propel you to think of the future," said Romesh Sobti, ABN AMRO's country head in India. One-quarter of the world's youth live in India, and half the Indian population is below age 25, he said. Still, equity deals are "very hotly contested and margins are very, very thin," Sobti said. "There are no free lunches here." Wall Street managers in India say they are content to build their businesses. "Fees are coming, but now the real way to make money is advise, finance and invest," said Entwistle, of Goldman Sachs. The large number of relatively small, but fast-growing, internationally ambitious Indian companies require "life-cycle banking," he said. Life-cycle banking requires bankers to provide advice and capital, sometimes taking equity stakes along the way, in the hopes of reaping large fees and profits when the more mature companies go public or do big-ticket deals down the road. The relative boom in India deals in late 2006 and early 2007 was a result of a few big-ticket transactions, including Tata Steel's acquisition of Corus Group. Still, bankers say they are confident that the deal flow will continue this year. For one, there are 120 companies in India with a market capitalization of more than $1 billion, said Raj Balakrishnan, director of investment banking and mergers and acquisitions at DSP Merrill Lynch. In December 2005, Merrill Lynch took 90 percent control of a decade-old joint venture with DSP Consultants, and now has 400 India banking employees. "You can never be positive, but the long-term trend is there," he said.