Here's an interesting story about a British bank called Natwest. Natwest invested Rs.40 cr for a 20% stake in an Indian bank in 1995. Less then 3 yrs later Natwest got involved in a major scandal of interest options, a complicated derivatives product it did not fully understand.
Natwest revealed a £90 mn loss after investigations by authorities, deeply eroding the confidence of its investors and shareholders. By that time the Rs.40 cr investment in the Indian bank (20% stake) had grown to Rs.260 cr.
As a part of its larger strategy to pull out of equity investments in Asia they decided to get out of their investment in the Indian bank taking in a cool profit of Rs.220 cr.
The lesson to be learnt here is that complicated derivatives instruments not only destroy wealth but it also makes you lose sight of the potential monster gains one could make in the future by just a simple buy and hold investment strategy.
The bank in which Natwest had invested was none other than HDFC Bank and their 20% stake would be worth... hold your breath.... a massive Rs.140000 cr today. Perhaps Mr @SandeepParekh can have a chat with Mr Puri and Mr Parekh about this story over a few drinks some day. :))
