Mumbai: In a bid to ensure higher retail participation in the share sales of public sector units (PSUs), the government has decided to offer commissions to brokers.
It will also start paying investment bankers handling such public issues.
While the new rules for brokers’ commissions will start with the initial public offering, or IPO, of Satluj Jal Vidyut Nigam Ltd (SJVNL) that hits the market on Thursday, the zero commission system for investment bankers will be scrapped by Coal India Ltd’s IPO, expected in July.
“Retail participation has been poor in the past issues. We have decided to pay a commission of 35 basis points for retail and 15 basis points for HNIs (high networth individuals) to ensure higher participation,” said Sidhartha Pradhan, joint secretary in the disinvestment department in the ministry of finance.
This means, for every Rs100 worth of allotment of shares to retail investors, a broker will get 35 paise.
Retail response has been poor in the case of the past few large public issues of state-owned firms. While NTPC Ltd’s follow-on offer was barely 16% subscribed by retail investors, Rural Electrification Corp. Ltd gathered 25% subscription from them. The public issue of NMDC Ltd was 21% subscribed by retail buyers.
Typically, 35% of a public float is kept for retail investors and another 15% for HNIs.
The brokerage will be first paid by the appointed book running lead managers of public issues and on successful completion of the share sale the managers will be reimbursed by the government.
Currently, the government does not bear the brokerage expenses incurred by the investment bankers who handle such issues. Expectedly, these bankers do not show much enthusiasm to sell shares to the retail investors through brokers. This should change once commissions are paid to brokers.
“This will encourage brokers to sell IPOs of public sector companies,” said Girish Dev, executive director and chief executive, Networth Stock Broking Ltd, a Mumbai-based retail brokerage.
“The lead managers typically pay between 10 and 20 paise for private issues. But on PSU issues, they pay nothing. Now the brokers will have an incentive to sell,” Dev said.
The government wants to raise Rs40,000 crore through share sales in 7-8 state-owned firms in the current fiscal—the biggest and most ambitious target in the history of the disinvestment programme that started in 1992.
After SJVNL, Engineers India Ltd will enter the market with a Rs1,100 crore public issue. “We will not have any issues in May. EIL will hit markets in June. This will be followed by Coal India in July, the largest ever float in the Indian capital market,” Pradhan said.
According to him, Hindustan Copper Ltd, Steel Authority of India Ltd, Power Grid Corp. of India Ltd and Indian Oil Corp. Ltd have got cabinet approval for public issues this year.
“There is a large pipeline of issues and it would have been difficult to work without incentives,” said Prashant Shetty, managing director, IDFC-SSKI Ltd, the bank handling the SJVNL IPO.
Pradhan said the zero-fee system has been abolished as it is inconsistent with the contracts law. “A new bidding system with 70% emphasis on technical expertise and 30% on financial parameters will be in place, starting from the Coal India issue,” he added.
Currently, the government selects investment bankers on the basis of financial bids. In almost all cases, the lowest bid quoted by the lead banker has been zero. This is because share sales of state-owned companies gives them access to people in government and boosts their image.
Under the new norms, the lead banker will be judged on a scale of 1-100 on the basis of technical parameters such as past experience in handling public issues, research capabilities, distribution strength.
Once the technically best equipped bankers are shortlisted, the lowest fee quoted would be shared equally by all investment bankers mandated to sell a particular issue.
Atul Mehra, co-CEO, JM Financial Consultants Pvt. Ltd, said: “We would have been happier if it was based on 100% technical expertise. They have said, 70% technical and 30% financial, so the 30% pain remains.”
Some brokers also said the changes may not be enough to push the issues to retail investors. Dinesh Thakkar, chairman and managing director, Angel Broking Ltd, is one of them. “The cost of selling shares to retail investors is very high. One needs at least 200 bps (commission) to create a dedicated sales channel. This doesn’t mean I am asking for so much commission. But with 35 bps, I will not be able to create or set up a dedicated sales team,” he said.
He said he would not be able to increase the subscription substantially or even proportionately. “Brokers will be happy to make the additional commission with no extra efforts.”
Raamdeo Agrawal, managing director of Motilal Oswal Financial Services Ltd, a listed brokerage, said the measures will help, but the key to the success of share sales of state-owned firms will be listing gains. “The government needs to offer huge discounts for retail investors if these moves have to bear fruit.” According to Agrawal, even a 50% discount for retail investor won’t be too much.