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I-bankers to charge more, ramp up staff

I-bankers to charge more, ramp up staff
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First Published: Sun, Apr 11 2010. 09 43 PM IST

Graphic: Yogesh Kumar / Mint
Graphic: Yogesh Kumar / Mint
Updated: Sun, Apr 11 2010. 09 43 PM IST
Mumbai: Investment banks are set to reap a windfall as they prepare to charge higher fees and ramp up their teams to raise the $35 billion (around Rs1.6 trillion) that Indian firms plan to mobilize from the capital markets this fiscal year.
The targeted amount is the highest that Indian entities have ever raised from primary market investors in a year.
At least three top investment bankers said they would strengthen their team count by 10-15%. Fees could be raised by at least 25% because of the record demand for tapping the markets. Merchant banks typically charge 2-3% of the issue size in large public offers.
“If the demand picks up according to the expectation, the fees could be increased by 25-50%,” said A. Murugappan, executive director, ICICI Securities Ltd.
“For issues worth over Rs1,000 crore, the negotiations are likely to happen on the upper end of the commission structure as the demand from the issuers may be higher due to healthy market conditions now,” he added.
Primary market issuances fell after the Bombay Stock Exchange Sensex plunged from its peak of 21,208 points in early 2008 to 8,160.4 on 9 March 2009. Average merchant banking fees over the past two years also fell in line with it. The Sensex has since bounced back, driven by inflows of foreign institutional investment, and closed on Friday at 17,933.14 points.
Graphic: Yogesh Kumar / Mint
According to Bloomberg league tables, in calendar year 2007, one of the best years for initial public offerings (IPOs), the top three merchant banks in India earned an average of 2% of the issue size as fees.
Kotak Mahindra Capital Co. Ltd earned 1.91% on 18 deals totalling Rs5,600 crore, while Enam Financial Consultants Pvt. Ltd earned an average 2.12% on 20 deals totalling Rs4,700 crore. Merrill Lynch earned an average of 2.1% as fees on eight deals worth Rs3,600 crore.
For calendar 2009, the top two bankers earned less than 0.6% as fees. Kotak Mahindra Capital, which led the Bloomberg league table with six IPO deals totalling Rs4,100 crore, earned a fee of 0.59%. Enam Securities, with four deals worth Rs3,600, earned an average fee of 0.55% of the issue.
Morgan Stanley earned 0.99% on four deals totalling Rs3,000 crore.
But merchant bankers say the trend is set to reverse as fundraising is expected to accelerate in fiscal 2011 and companies, especially mid-level ones that had shelved plans to tap the markets, again look to public issues.
“They do not want to keep any stone unturned this time and would negotiate with investment bankers, virtually at any price, to raise money from the market,” said a senior executive at a large foreign investment banking firm on condition of anonymity.
Investment bankers typically get some headroom to charge higher fees from mid-level and small firms because they have to exert greater effort in marketing them than larger ones.
“Mid-size company deals will be done at higher fees as the competition (among investment banks) is not as high at this level compared to what it is with public issues of bigger companies,” said Rajagopal A., managing director, investment banking, UBS Securities India Pvt. Ltd.
At the upper end, where promoters are better placed to bargain because there could be as many as eight top bankers battling for the same deal, there is not much upside in terms of fees per deal although the overall pie is likely to be bigger, Rajagopal said.
S. Subramanian, head of investment banking at Enam Securities, denies any movement towards an increase in fees for big-ticket deals.
“Fees are (a) question of (the) quality of the company, brand name, the market and the competition among investment banks. I don’t see a big difference in fees,” he said.
Nonetheless, investment banks are set to strengthen the headcount of key teams to deal with the expected spike in business.
“We made a number of key MD (managing director)-level hires at a time when others were rightsizing. Our build-out continues across the businesses, including investment banking, equities and research,” said Tarun Kataria, MD and head (global banking and markets), Hongkong and Shanghai Banking Corp. Ltd (India).
It brought three MDs on board last year and plans to add up to three more in its securities business. It is also looking at senior MDs for the investment banking business. The company has increased its overall management team by 10-15%.
While most merchant banks have teams with an average strength of 25-30 people, Kotak Mahindra Capital has one of the biggest investment banking teams with about 75 members; Bank of America-Merill Lynch has about 35.
The teams will likely be increased by 10-15% from the current average size, said Murugappan of ICICI Securities, indicating that merchant banks could add five to seven people to their investment banking headcount.
Sapna Agarwal contributed to this story.
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First Published: Sun, Apr 11 2010. 09 43 PM IST