The eight-member team of investment bankers managing the initial public offering (IPO) of real estate developer DLF Ltd, in what is set to be India’s largest share sale starting on Monday, is pulling out all the stops to get investors to subscribe to the 175 million shares on offer.
Sub-brokers of the banks are openly dangling a Rs75 cash incentive to every person who applies, encouraging more people to subscribe, a practice the stock markets regulator does not allow. Under the Sebi Disclosure and Investor Protection guidelines, such incentives or pass-backs are barred. “We are not aware of such an incentive from our sub-broker. We have over 8,000 primary market sub-brokers across the country who are empanelled with us. In our all communications with them, we tell them not to share their commission with the investors,” says Rohit Singh, associate director, JM Financial Ltd. The firm is one of the brokerages marketing the issue.
Sub-brokers of different brokerages such as JM Financial are offering a cash incentive of Rs75 per application, irrespective of how many shares are applied for. For the DLF issue, investors have to apply for a minimum of 10 shares in the price band of Rs500-550 a share, or at least Rs5,500, assuming the upper end of the price band. A cash payment or pass-back of Rs75 gives them an instant return of 1.36%.
“In the grey market, there is a Rs30-40 premium. So, it’s an opportunity to make money,” says Bhavesh Sheth, a sub-broker marketing the DLF issue.
Such high commissions are being paid out even when the retail investors do not have to pay the full amount at the time of application. DLF, which has reserved 5.2 crore shares for retail investors, has already given an option to retail investors to pay up only Rs150 per share at the time of applying. The balance will have to be paid by the investors once they are allotted shares.
One of the incentives that is pushing sub-brokers to hand out the cash is the high commissions being given out by the merchant bankers. Unlike the norm of paying a commission of 0.2-0.4% of the value of shares allotted to the retail clients, brokers in the DLF issue are being offered an upfront commission of Rs200-500 per application. While the issuer pays the fees to the merchant bankers, the IPO broker’s commission is decided by the merchant bankers and this, in turn, can vary among the bankers.
While DLF’s offer document says commissions for the merchant bankers would be decided after fixing the IPO price, people with knowledge of the issue said fees would be around Rs150 crore ($37 million), or 1.5%, with it likely to go up later.
“With eight bankers involved in the issue, there is a cut-throat competition among the bankers to outbid each other in showing up good performance by getting maximum applications,” says a merchant banker, who is not involved with the issue, but did not wish to be identified. “Since the fees are huge, there’s nothing wrong in throwing in this kind of money, and it is not a losing proposition,” says another banker associated with the issue on condition of anonymity.
Kotak Mahindra Capital Co. Ltd, DSP Merrill Lynch Ltd, Citigroup Global Markets India Pte Ltd, Deutsche Bank India Pvt. Ltd, ICICI Securities, Lehman Brothers, UBS Securities India Pvt. Ltd, and SBI Capital Market Ltd are book runners and managers to the issue.
People familiar with the situation say the institutional order book for the issue is fully covered, with several orders of $200-500 million and strong interest from domestic fund managers. But many Indian retail investors have been worried of a slowdown in India’s property market.
Rising interest rates and sky-high property prices have slowed home sales, and there is less demand for space in malls and shopping complexes.
Last year, when Reliance Petroleum brought out a Rs2,800 crore IPO with the help of nine merchant bankers, similar pass-backs were being offered. Besides the upfront cash, if investor got allotments of 200 shares or more, they got an additional 0.25% of the application money.
M.C. Govardhana Rangan of Reuters contributed to thisstory.