Mumbai: In a bid to win business and also to cement relationships, top-tier investment banks (i-banks) operating in the country have started offering their services for free to public sector undertakings (PSUs), according to several senior bankers from both domestic and foreign banks.
While some banks are using this as a way to establish relationships with government circles, others are also seeing this as a way to move up the so-called league tables as well as connect with foreign institutional investors who are major buyers of state-run companies’ equities.
Investment banking league tables rank banks on their level of involvement in specific types of transactions. There are rankings for investment advisers of mergers and acquisitions (M&A) deals, initial public offerings (IPOs) as well as fixed income offerings, and often used for bragging rights as well as competitive analysis within the banking world.
Building relationships: Uday Kotak, executive vice-chairman and managing director of Kotak Mahindra Group. The firm was among those which quoted zero fee for managing the PowerGrid share issue.
Investment bankers charge between 150 and 300 basis points of the size of the IPO for private firms. This means for a Rs1,000 crore public issue, the fees could usually be between Rs15 crore and Rs30 crore.
The Rs3,000 crore IPO of state-owned power transmitter Power Grid Corp. of India Ltd (PowerGrid), which listed on Indian bourses in early October, is one such case where investment bankers offered their services for free. Bankers who had participated in the beauty parade (a trade term for the bid process for an IPO mandate) said the lead mangers—Kotak Mahindra Capital Co. Ltd, Citigroup Global Markets India Pvt. Ltd and Enam Securities Pvt. Ltd—had all qu-oted zero fee for their service.
Falguni Nayar, managing director of the investment banking division at Kotak Mahindra Capital, confirmed that her firm had indeed quoted zero fees for managing the PowerGrid issue.
“Most foreign investment banks that operate in India do this (zero fee) for PSU clients,” she said. “We lost Oil India Ltd’s (OIL) IPO mandate simply because our competitors quoted zero fee, while we did not. We quote the lowest possible fee just to beat competition,” Nayar added.
Ravi Kapoor, MD and head of equity capital markets at Citigroup, however, denied having provided any such no-fee service to PSU companies. Investment banking executives at Enam Securities were not available for comments, while PowerGrid executives declined to comment.
A senior investment banker with a domestic firm, who does not wish to be identified, however, said that the mandate for managing PowerGrid issue was handed out few months ahead of that of OIL. “The Oil India mandate was given around mid-July, months after that of PowerGrid,” he said.
OIL is expected to have its public float in February. The state-owned oil company, which reported a profit after tax of Rs1,640 crore in its 2007 financial year, has named Citibank, Morgan Stanley and HSBC Ltd as managers of its proposed public issue.
The fees paid by an issuer (the company going public) to investment bankers, lawyers and the registrar, who partner it for the IPO, is in the public domain from the date of filing the draft red herring prospectus to the closing date of the issue. Such expenses are listed under “material contracts and documents” in the prospectus. Once the issue is closed, this information is no longer available to the public.
An i-bank has to incur many expenses, including that of travel, accommodation and others, while taking the role of a lead manager of a public issue. Says the head of investment banking at a large foreign brokerage in India, who also didn’t want to be identified: “There are many such expenses. Now that some banks are willing to incur them out of their pocket, it is unlikely that any state-owned company planning a public float in the future will be interested in paying for investment banking services.”
According to the managing director of a large domestic bank, which did not participate in the PowerGrid float, zero fee is now standard practice for almost all public floats of government-run companies.
“Investment bankers had charged 6 basis points (of the size of the issue) fee for handling the Oil & Natural Gas Corp. Ltd public issue in March 2004 and 2 basis points for the IPO of NTPC Ltd,” said the executive who didn’t want to be identified.
“Now, it has come down to zero. This is because the government firms, under the law, are required to appoint the lowest bidder. At zero fee, you can’t lose the mandate to a lower quote,” he added.