Mumbai: A growing number of firms seeking to raise money from investors are asking their investment bankers not to work with rivals so as to avoid conflicts of interest, a move that could potentially push up investment banking fees.
Soon after public sector steel maker Steel Authority of India Ltd (SAIL) asked four bulge-bracket investment banks (i-banks) whether also working on a follow-on public offer (FPO) by competitor Tata Steel Ltd would lead to a conflict of interest, at least two other companies, who have planned initial public offerings (IPOs) in 2011, have demanded exclusivity from i-banks, two bankers involved with the share offers said.
Low-cost passenger carrier IndiGo, run by InterGlobe General Aviation Pvt. Ltd, and mobile phone tower operator Viom Networks Ltd have asked their chosen i-bankers to disassociate with rivals till their public offers are complete, a process that usually takes six-eight months.
“We have been asked not to work with other tower companies till the IPO is complete,” said one of the two bankers involved in Viom’s public offer.
Viom is a joint venture between Quippo Telecom Infrastructure Ltd and the infrastructure arm of Tata Teleservices Ltd, and owns 37,000 towers. Viom director Sunil Kanoria refused comment.
“When we are bringing the story to the market, there should not be a conflict of interest,” said the banker quoted earlier.
Another i-banker involved with the IndiGo IPO confirmed the exclusivity demand. IndiGo plans to raise $500 million (Rs 2,275 crore), the largest for an Indian airline, beating rival Jet Airways (India) Ltd’s Rs1,500 crore public offer in February 2005.
IndiGo president Aditya Ghosh did not respond to calls and text messages to his mobile phone. A senior IndiGo executive said that the airline is still in the process of finalizing the strategy for its IPO. “There will be an exclusivity clause for investment banks,” he confirmed.
“We cannot have two issues (of rival companies) at the same time because, ultimately, investors will have to choose,” informed the banker involved with the Indigo IPO.
Mint had reported earlier this month that SAIL had asked SBI Capital Markets Ltd, HSBC Securities and Capital Markets (India) Pvt. Ltd, Kotak Mahindra Capital Co. Ltd and Deutsche Equities India Pvt. Ltd whether there were conflict of interest issues since they were also handling a share issue by Tata Steel.
Tata Steel’s Rs 3,477 crore FPO issue closed on 21 January. SAIL is yet to select its bankers.
Indian regulations are sensitive to conflicts of interests in new capital issues though the issue of exclusivity is not specifically dealt with.
The Securities and Exchange Board of India (Merchant Bankers) Regulations, 1992, say, “A merchant banker shall make appropriate disclosures to the client of its possible source or potential areas of conflict of duties and interest while acting as a merchant banker, which would impair its ability to render fair, objective and unbiased services.”
“A merchant banker shall put in place a mechanism to resolve any conflict of interest situation that may arise in the conduct of its business or where any conflict of interest arises, shall take reasonable steps to resolve the same in an equitable manner,” the regulations say.
“It is not the issue of sharing insider information, but the risk lies in the transaction timelines,” said another i-banker, who was denied one of the two public offers because of conflict of interest concerns.
He added that some i-banks already have a conflict resolution process in place, whereby different teams are given different mandates when the same bank has mandates from rivals in the same sector.
This is not the first time an airline company had asked for an exclusivity clause from its bankers. Jet Airways had also signed an exclusivity for a year with its i-banks before its IPO. Deutsche, HSBC, UBS Securities India Pvt. Ltd, Citigroup Global Markets India Pvt. Ltd, DSP Merrill Lynch Ltd and Kotak Mahindra were the six bankers to the issue.
“Some of IndiGo’s rival airlines are also planning to time their IPO around the same time,” said an adviser to the airline industry. He declined to be identified even though he is not advising IndiGo.
Some i-bankers complain that there is no monetary incentive to sign exclusivity agreements with issuers. “Globally, i-banks receive fees equal to 6-7% of the offer size, but in India banks get 2% of the offer size,” said one i-banker.
“It is the investors who subscribe to the issues, so how does it matter which i-bank is selling it?” asked a fourth i-banker who is opposed to exclusivity clauses. “Each company has to be sold differently.”
Aveek Datta also contributed to this story.