Mumbai: A muted primary market and shrinking deal volumes are encouraging investment banks (i-banks) to operate on wafer-thin margins. They are flocking to manage the initial public offerings (IPOs) that are hitting the markets to stay relevant in the league tables that reflect i-banks’ stature in the market.
Companies are not unhappy with this either as they feel if more i-banks handle a float, it will help them get retail investors. Typically, 35% of an IPO is reserved for retail investors, but barring a very few—Credit Analysis and Research Ltd (CARE Ltd) is one of them—most public issues have failed to attract retail investors this year.
Fourteen i-banks managed Bharti Infratel Ltd’s IPO that raised Rs.4,118 crore this month. CARE Ltd’s Rs.750 crore issue, also this month, was handled by six i-bankers—the same number that had managed Coal India Ltd’s Rs.15,200 crore IPO in 2010, the biggest public issue in India.
BSE, Asia’s oldest stock exchange, has appointed 14 banks to manage its proposed Rs.5,500 crore public float.
“In a good market, everything sells. But IPO market has been muted for a while. In such a scenario, the issuer wants to hedge adequately to ensure success,” said Ajay Saraf, executive director at ICICI Securities Ltd. “More number of bankers bring in a lot of specialization as some of them will be good with HNIs (high networth individuals), while some others with FIIs (foreign institutional investors).”
Another domestic i-banker, on condition of anonymity, pointed out that Bharti Infratel was a large transaction and four i-banks were taken on only to ensure retail participation. Bharti Infratel’s issue was subscribed 1.3 times, but the retail portion did not get even one-fifth subscription.
One more reason for hiring more i-bankers is the shrinkage in the IPO window. An issue now closes in three days, with retail investors getting one more day to subscribe. “More the number of hands, quicker the work gets done,” Saraf said.
The appointment of more bankers also means a cut in fees, but they don’t mind as their primary objective is reviving the market. Typically, around 1-1.5% of the size of an issue is given as fees. As the number of bankers rise, the share drops proportionately.
I-bankers have been managing share sales as part of the government’s divestment programme virtually free for the access and bragging rights. This trend seems to be spilling over to the private sector issues.
“What really matters to them (i-bankers) is being a part of as many deals as possible and, more importantly, being a part of large issues,” said Kalyanaraman P.R., managing director of Centrum Capital Ltd. “Companies have been sceptical about the success of their issues and this is why they are appointing more and more bankers. Larger number of bankers ensure wider reach and reduce risks of failure.”
Vishal Kampani, head of institutional securities business at JM Financial Ltd, said, “Primary market has been difficult lately. We have managed to stay afloat in a tough market due to our merger and acquisition and private equity business.”
If large issues go through successfully, the market will revive, said Saraf of ICICI Securities. “Market revival is something that they want to ensure through success of large issues.”
I-bankers expect companies planning to enter the primary market to continue to appoint a large number of bankers for big public issues until sentiment revives.
The departure from the old norm—a few i-bankers, including a couple of foreign ones, being enough for an issue to be successful—is nothing but a reflection of market sentiment, said an i-banker who didn’t want to be named. “The latest trend shows the desperation of both the issuers and the banks.”
There is a large and well-knit broker network across India, which every bank can tap to sell an issue, but there is a lack of confidence and that is why the bankers are working in a larger group. This to some extent ensures the success of the issue as well as the position of the bankers on the league table even if that means compromising on commission, the banker quoted earlier said.
In the calendar year 2012, 24 IPOs hit the market compared with 38 in 2011. However, the quantum of money raised is higher—Rs.6,953 crore against Rs.6,128.50 crore. Bharti Infratel alone accounts for almost two-thirds of the money raised.