Mumbai: The government may dilute disinvestment rules to make merchant bankers more enthusiastic about pitching to manage asset-sale plans that are key to raising the money that’s needed to meet deficit-paring targets.
Discussions are on to revise a critical clause on the so-called conflict of interest in the existing divestment norms that comes in the way of investment bankers seeking mandates to manage the sale of shares in public sector units (PSUs), according to four persons familiar with the matter.
Current norms stipulate that bankers handling PSU floats cannot take up any issue by a private firm in the same sector till the sale is completed. This disqualifies many investment bankers from bidding for the disinvestment mandates and delaying the divestment process.
The government plans to raise around Rs 40,000 crore by selling stakes in at least six state-owned firms in fiscal 2012—Indian Oil Corp. Ltd, Steel Authority of India Ltd (SAIL), Hindustan Copper Ltd, Power Finance Corp. Ltd, Oil and Natural Gas Corp. Ltd and National Buildings Construction Corp. Ltd (NBCC).
The clause had been introduced after allegations of conflict of interest surfaced when bankers to a follow-on public offer (FPO) of state-owned SAIL took up a similar assignment from Tata Steel Ltd in January.
This disqualified bankers with share-sale mandates from private firms in a particular sector from bidding for the divestment issues of PSUs in the same industry.
The bankers are required under this to certify that there is no such conflict of interest. There also has to be a six-month gap between working on asset-sale mandates and floats by non-state companies in the same industry unless the banks gets government consent.
These rules have been keeping investment bankers away from bidding for PSU floats as they earn more fees from the private sector. According to many of them, it does not make business sense to forfeit higher fees just to top the league table.
As a result of this, the government is finding it difficult to get investment bankers to hawk PSU issues.
According to the persons quoted earlier in the story, there have been several rounds of discussions on the norms with merchant bankers, including one on Wednesday, and the government will soon revisit them to ensure that the asset-sale plan does not suffer.
None of the officials wanted to be identified as the issue is sensitive and the discussions are are yet to be completed.
“Some merchant bankers want more clarity on the norms while others want an enabling clause related to reporting and disclosure of the issuances being handled by them,” said a disinvestment ministry official. “It’s too early to comment whether the rules will be changed.”
A finance ministry official said:“The question is more about disclosure on conflict of interest than the nature of conflict of interest. We just want the bankers to disclose clearly about the mandates from private sector firms that they may already have while bidding for a PSU float.”
“Even with a conflict of interest, a merchant banker can be awarded a PSU share sale mandate if the inter-ministerial group is convinced that the private sector transaction will not affect the PSU issue,” he added.
The immediate spur for the review is investment bankers’ lack of interest in managing the NBCC float in which the government wants to sell a 10% stake.
At least 10 top investment bankers in India already have mandates from non-state companies that are engaged in similar businesses as that of NBCC.
Three of the four officials said that the request for proposal for NBCC has not received the sufficient number of bids from merchant bankers.
On Wednesday evening, the government extended the deadline for the submission of proposals bidding for the NBCC issue, till 10 June.
“Construction and real estate sector is vast and in such cases the possibilities of merchant bankers having mandates from several companies is high,” said another finance ministry official. “The merchant bankers have come up with certain suggestions and have asked for more time to get clarity on the conflict of interest clauses before submitting their bids for NBCC.”
Most bankers are working on mandates from a number of private sector firms in the same space such as Jain Infraprojects Ltd, Madhucon Infra Ltd, Emaar MGF Land Ltd, NKG Infrastructure Ltd, Sahara Prime City Ltd and Lodha Developers Ltd among others.
“Two bankers may be appointed for the NBCC issue, which is relatively small,” said yet another person who is not part of the finance ministry. “The government may revise the rules in such a way that at least for not-so-large public issues, the conflict of interest clause is not triggered.”
The rules may vary according to the size of issuances or according to parameters that may more clearly differentiate between PSUs and private firms.
In the past, the deadline for submission of proposals from merchant bankers was extended in the case of Hindustan Copper as well. The issue did not receive too many bids before the extension and is yet to be launched.
The FPO of SAIL was originally slated for January, but due to the conflict of interest clause the government has had to delay it. Private sector rival Tata Steel instead got the advantage of good market conditions and comfortably managed to raise money through its FPO.
SAIL has lost 21.81%, or Rs 16,439.8 crore, of its market capitalization on the Bombay Stock Exchange since January.
Merchant bankers that may not be eligible for the NBCC mandate as per the current rules include SBI Capital Markets Ltd, Enam Securities Ltd, Morgan Stanley India, IDBI Capital Market Services Ltd, Kotak Mahindra Capital Co. Ltd, JM Financial Consultants Pvt. Ltd, ICICI Securities Ltd, Edelweiss Capital Ltd, Citigroup, UBS, JPMorgan, Deutsche Bank, HSBC, Credit Suisse and RBS among others.