Mumbai: India’s divestment plan may not find too many hawkers if the government continues with its policy of awarding share-sale mandates to merchant bankers quoting near-zero commissions.
India’s top domestic merchant bankers have decided to boycott those public issues in which they are required to pay out of their own pockets. At least six bankers confirmed this but none was willing to be named, considering the sensitivity of the issue.
So far, local bankers have been aggressively bidding for share-sale mandates under the divestment ministry. Floats of state-owned firms are mostly larger than those of private companies, and handling such large issues enhances the ranking of a banker on the league table—higher the rank on the table, better the prospects of bagging large issuances in the future.
“The race for the league table is over unless the commission structure is changed,” one of the bankers said.
The government plans to raise around Rs 40,000 crore by selling stake in at least five state-owned firms in fiscal 2012-Indian Oil Corp. Ltd, Steel Authority of India Ltd (SAIL), Hindustan Copper Ltd, Power Finance Corp. Ltd and Oil and Natural Gas Corp. Ltd.
At present, once a bank qualifies in the technical bid, it is selected for managing a public float if it quotes the lowest commission in the commercial bidding. The lowest bidder is named the lead banker for an issue and other qualified bankers from the technical round are required to follow the lead banker. The commission received from the government is shared by all.
In fiscal 2011, the government raised Rs 22,762.96 crore by divesting stake in six firms. Bankers said they had to spend Rs 2-5 crore for each issue.
“Recently they (the government) said the merchant bankers can’t handle similar issues simultaneously. We don’t have any income from PSU (public sector unit) issues and, on top of that, we are forced to forgo issues from others,” said the head of investment banking at a large domestic firm that has handled several large PSU issues in fiscal 2011. “Why should we handle any PSU issue?”
Current rules say that bankers who handle PSU floats cannot take up any issue by a private firm in the same sector till the float is completed. The move followed allegations of conflict of interest when bankers to a follow-on public offering (FPO) of state-owned steel maker SAIL took up an FPO assignment from Tata Steel Ltd in January.
The government took an undertaking from investment banks such as Kotak Mahindra Capital Co. Ltd, Deutsche Equities India Pvt. Ltd, HSBC Securities and Capital Markets (India) Pvt. Ltd, and SBI Capital Markets Ltd to not take up any assignment from any private steel firm till the SAIL issue was completed. It later appointed two more bankers for the SAIL issue, which is expected to be launched before the end of the first quarter.
“Earlier, the fees earned from private sector assignments would compensate for the lower fees from government mandates. But this is not the case any more,” pointed out one executives from an investment bank involved in the SAIL issue.
ICICI Securities Ltd, the investment banking arm of ICICI Ltd, India’s largest private lender, is in the process of formulating a new strategy in a week. “The idea is to only go after assignments that are fee-positive,” an ICICI Securities executive said. “It doesn’t make sense to pitch for a cent fee assignments any more.”
Another large domestic investment bank circulated an internal note in April, saying the firm will not handle any public issue for which it would have to pay from its pocket.
An official at a mid-sized domestic investment banking firm in Mumbai cited two critical issues hurting them.
“Many a time, PSU issues get delayed and merchant bankers get stuck as till the issues hit the market, they cannot pitch for any other public issue by private firms in the same sector,” he said. “So, we not only end up paying our own money to handle a PSU float, but also sacrifice the commission from private floats.”
The government has tweaked bidding rules for merchant bankers several times last year. Originally, almost all expenses were required to be borne by the merchant bankers for any PSU share sale. They were so desperate in their race to the league table that they didn’t mind handling such issues for free. The rules were changed in 2010 with the government offering 35 paise brokerage for every retail application and 30 paise for institutional ones.
Apart from this, the government pays for corporate advertisements.
All other expenses such as printing costs, book-building charges, listing fees, filing prospectus with the capital market regulator, charges levied by the exchanges, costs for road shows, stamp duty, etc. are borne by the bankers.
Foreign investment bankers enjoy an edge over domestic bankers when it comes to handling public issues for free. While handling such floats, they aggressively push overseas investors to subscribe through participatory notes —an offshore derivative instrument used for investments in domestic stock markets by foreign investors.
They are issued by registered foreign institutional investors (FIIs) and sub-accounts in India for facilitating investments by their foreign clients in Indian shares.
Participatory note investors pay fees to these bankers for investing in Indian equities and this compensates for the expenses the foreign bankers incur for handling the floats.
Domestic investment bankers do not have an access to participatory note investors. With their reach regarding retail investors, they are preferred by the government for PSU share sales.
Deutsche Equities India Pvt. Ltd sold all the participatory notes while handling the Rs 15,000 crore initial public offering of Coal India Ltd, the largest domestic initial public offering ever, in October last year, said one of the domestic bankers who was part of the Coal India issue along with Deutsche Equities India.
Mint could not independently verify this.